What is Islamic Micro Finance

8/2/2019 What is Islamic Micro Finance

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What is Islamic Microfinance?Making it a Sustainable Reality


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Agenda

Presentation: 45 min

Q&A: 30 min

www.EthicaInstitute.com | www.DinarStandard.com


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Section 1: Global Microfinance Context (Part 1)

Global Microfinance Drivers/ Opportunities

What is Microfinance?

Landscape key players

Impact & Challenges

Agenda


What is Islamic Microfinance?

Key Islamic Microfinance drivers/ Opportunities

Landscape Key players/ geographies

Impact, Challenges & Opportunity

Section 2b: Islamic Microfinance -- Part 2 to be delivered at the next session

Islamic Microfinance core models

Islamic Microfinance structures


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Summary

MICROFINANCEBanking for the poor

Big need exists However poverty alleviation is too big a

promise; Industry is growing but showing signs of problems

(*primarily excess lending and aggressive collection; akin to


-

However many success stories, best practices developing and

growing. Problems should be removed.

Islamic Microfinance in infancy making finance accessible to

many low-income Muslims and with universal potential.


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Global Microfinance Drivers

1. Addressing FINANCIAL EXCLUSION of low-income global population:Globally 49 percent of adults have deposit accounts in formal financialinstitution*


Source: Financial Access 2010 Report, by CGAP and World Bank

19% of developed world adults do not have bank accounts

72% of adults in the developing world do not have accounts


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1. Addressing FINANCIAL EXCLUSION of low-income global population:Globally 49 percent of adults have deposit accounts in formal financialinstitution*


Source: Financial Access 2010 Report, by CGAP and World Bank

An estimated 72 percent of people living in Muslim-majority

countries do not use formal financial services(CGAP Islamic Microfinance Note 2008)


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2. Addressing needs of MICRO-ENTERPRISES:Micro-enterprises have historically lacked access to financial productsand services. Microfinance institutions have emerged to serve the

smallest of these enterprises, while banking institutions have typically

concentrated on large corporations.



Source: Access Finance, World Bank, JANUARY 2010 | ISSUE No. 30


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Unmet demand for finance is large, but the exact

2. Addressing needs ofMICRO-ENTERPRISES

1. FINANCIAL EXCLUSION oflow-income global population



num er or even a roug u cre e num er asbeen hard to pin down, with estimates ranging from

half a billion people to three billion.*

*Financial Access 2010 Report, by CGAP and World Bank


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Microfinance services low

income groups (extreme

poor, moderately poor-

main clients), mostly not

served by commercial

1. Low-income population

2. Microenterprises


banks.

Services offered are Credit

facilities, savings account,

money transfers,

remittances, insurance and

even investment


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Pioneered the group-basedresponsibility model but other

models exist*


* Other models: Village model; Coop; Self-help groups (SHGs)


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Landscape: Key Players

MIX Global 100 -- As a group, surveyed institutions

represented nearly 85 percent of the known pool of

microfinance borrowers, serving 72 million borrowers

with 37 billion USD in loans and holding 22 billion USD in

deposits from 67 million microfinance clients. (MIX 2010


Report)

Microfinance Information Exchange, Inc. access to

financial and social performance information, including

quarterly results, on more than 2,000 MFIs in the

developing world covering 92 million borrowers.


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Top 100 Microfinance

Institutions in the World:


and top performers in each

of three areas: outreach,

efficiency, and

transparency


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Impact

Poverty alleviation: Many studies indicate positive

impact over the last twenty years, as well as some

findings that suggest limited or negative impact.

Example:


Since Kiva was founded in 2005:

680,458 Kiva lenders

$279 million in loans

98.93% Repayment rate

Work with:

146 Field Partners 450 volunteers around the world

60 different countries


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Shortcomings

Social fallout: Family issues

High interest rates: Loan sharks, 30%, 40% even 60%+ Per year

Excessive lending/ over indebtedness: Major defaults in India

Aggressive debt collection: The past five years have seen the


aggress ve se ng o oans o o en era e v agers, o owe yequally aggressive debt collection. As a result, the past decade

witnessed more than 200,000 farm suicides in India. Reports Indias

leading rural journalist, The Hindus P. Sainath: Those who have

taken their lives were deep in debt.

Exclusion: Poorest of the poor; Self-exclusion due to prohibition ofinterest for Muslims


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Key Islamic Microfinance Drivers

Indonesia, Bangladesh, Pakistan, Nigeria and Egypt - account for over half a billion(528 million) of the worlds poor with incomes below $2 a day or national poverty

line.

Needs of the poor in Islamic countries are for the most part the same as the poor in

other societies approximately 44 percent of conventional microfinance clients

worldwide reside in Muslim majority countries*.


-use formal financial services (CGAP Report 2008)

A number of IFC-commissioned and other market studies suggest a strong demand

for Islamic microfinance products: Surveys in Jordan, Algeria, and Syria, for example,

revealed that 2040 percent of respondents cite religious reasons for not accessing

conventional microloans. (CGAP Report 2008)

There is also a category of Muslim clients who use conventional products but preferIslamic ones and tend to switch over once Islamic products become available. (CGAP

Report 2008)


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Key Islamic Microfinance Drivers

Islamic microfinance has the

potential to expand access to

finance to unprecedented levels


throughout the Muslim world.

CGAP Islamic Microfinance: An Emerging Market Niche, Aug 2008


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Microfinance and Islamic finance have much in common.

Both emphasize the good of society as a whole. Both advocate

entrepreneurship and risk sharing and believe that the poor

should take part in such activities. Both focus on developmental


an socia goa s. Bot a vocate inancia inc usion. Bot invo veparticipation by the poor. There are however, some points of

difference between the two. *

* Intro. to Islamic Microfinance, Mohammed Obaidullah, IIBF


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Islamic Approach to Poverty Alleviation:*6) Sharia Compliance of Finance Contracts: All contracts in Shariah must be free from certain

forbidden elements. A brief overview of relevant norms is provided below:

Freedom from Riba: Allah has permitted trade and forbidden riba. (2:275) Prohibition of

interest (riba) is the central tenet of the system. Conventional interest on loans or savings, as a

fixed return without sharing any risk, is considered unjust. Risk sharing: Because interest is

prohibited, suppliers of funds become investors instead of creditors. The provider of financial

capital and the entrepreneur share business risks in return for shares of the profit.


* Intro. to Islamic Microfinance, Mohammed Obaidullah, IIBF

Freedom from Gharar: The concept of gharar has been broadly defined by the Islamic scholars

in two ways. First, gharar implies uncertainty. Second, it implies deceit.

Shariah approved activities: Muslims cannot profit from activities considered immoral. For

example, investing in businesses dealing with alcohol, gambling, casinos, pornography, or

weapons of mass destruction is not allowed.


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Forms of contracts (to be discussed in detail in Part II of presentation)

Micro-credit

MURABAHA(Cost plus profit sale)

Micro-savings

MUDARABA-BASEDaccounts

Micro-transfer Micro-Insurance

TAKAFUL


IJARA(Leasing)

MUDARABA(investment partnership;

trustee profit sharing

MUSHARAKA(JV profit sharing)

QARD HASAN

MURABAHA-BASED termdeposit accounts


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Micro-credit

-


A FRAMEWORK

Core Islamic

Financing contracts

Poverty Alleviation

Responsibility


Micro-transfer

Micro-insurance Target Audience/

Need

Illustration: 2012 DinarStandard


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Islamic Microfinance: Landscape

Currently Islamic microfinance is concentrated in a few countries, with

Indonesia, Bangladesh, Pakistan and Afghanistan ranking in the top.

According to the 2008 Consultative Group to Assist the Poor (CGAP)

survey, Islamic microfinance accounts for about 0.5 per cent. of global

microfinance despite a global Muslim population of about 1.2 billion.


,information on over 125 institutions and contacted experts from 19

Muslim countries. The survey and a synthesis of other available data

revealed that Islamic microfinance has a total estimated global outreach

of only 380,000 customers.

CGAP survey identified that over 70 percent of the products offered are

Murabaha. Islamic MFIs generally offer only one or two Sharia-compliant

products.


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The Consultative Group to Assist the Poor (CGAP), Deutsche Bank, IslamicDevelopment Bank (IDB) and Grameen-Jameel partnered to address new

microfinance models with Shariah compliancy through an Islamic

Microfinance Award.

130 banks from 43 countries and Microfinance Institutions (MFIs)



Winner: Al Amal Microfinance Bank of Yemen (AMB)

Tameer Micro Finance Bank Ltd (TAMEER) - Pakistan

Tanzania eco Volunteerism (TeV) - Tanzania

Bina Insan Sejahtera Mandiri (BISMA) - Indonesia

Centre for Women Co-operative Development (CWCD) - Pakistan


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Indonesia Report: Why is Growth of Islamic Microfinance Lower than Conventional?* Out of 2200 some rural banks only 92 are Islamic but started in 1990s. Out of 40,000

microfinance cooperative, 3000 were Islamic (2003) 54.4% of respondents preferred

Islamic MFI rather than conventional MFI (45.6%).

Most of clients were Muslim and they preferred to choose Islamic MFIs, however in

reality they chose MFI based on economic (low interest rates, low collateral and size

of loan) and non-economic factors (such as quality of services variables easiness,



speed, nearness, method and loan officers profile).

BRI as a government supported entity has the biggest adoption. (conventional) BRI is

a biggest five MFIs in the world (Microcredit Year, 2005) in terms of clients and their

loans.

As the MFIs clients prefer Islamic MFI compared to conventional, the demand for

Islamic microfinance can be enhanced if the level of their economic and non-

economic factors can be brought to the levels of conventional MFIs.

* Paper presented by Dian Masyita (PhD research scholar in Islamic Finance, Durham University, UK), Habib Ahmed (Professor of Sharjah Chairin Islamic Law and Finance at the Durham University, UK) at 8th International Conference on Islamic Economics and Finance


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Islamic Microfinance: Opportunity

Operational Efficiency/ Risk Management

Opportunity for integrating Zakah and Awqaf with

for-profit Shariah-compliant microfinance needs to

be develo ed


Use of Qard hasan

Introduction of micro-Takaful

Islamic Microfinance for all globally


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Business Media Research Advisory


Rafi-uddin ShikohE: [email protected]

W: advisory.dinarstandard.com


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