Presented byPresented by
Dr Mohammed ObaidullahDr Mohammed ObaidullahSenior Economist. Islamic Research & Training InstituteSenior Economist. Islamic Research & Training Institute
Islamic Development Bank GroupIslamic Development Bank GroupJeddah, Saudi ArabiaJeddah, Saudi Arabia
12th Course in Intermediate Islamic Economics, Fall 2010
Microfinance & Islamic Finance
Origin; Mission; Goals; StrategiesEthical Alternatives for Alleviation of Poverty
and Exploitation; Redistribution of Income & Wealth
Provision of Financial Services: Credit; Equity; Savings; Transfers; Insurance
Enterprise Development: Livelihood & Growth Enterprises
The Sustainability Argument & Mission-Drift12th Course in Intermediate Islamic
Economics, Fall 2010
Models of Islamic Microfinance
Models in Both Conventional & Islamic Domains:
Joint-Liability-Groups (JLG)Self-Help-Groups (SHG)Village-BanksCredit-UnionsROSCAsPawning
12th Course in Intermediate Islamic Economics, Fall 2010
Models of Islamic Microfinance
Uniquely Islamic Models: Qard Hasan FundsBaitul-Mal-wa-al-Tamweels (BMTs)Zakah FundsAwqaf-Based InstitutionsComposite Models
12th Course in Intermediate Islamic Economics, Fall 2010
IBF TRUSTIBF TRUST
ZAKAH FUNDZAKAH FUND
MONETARY ASSETS
WAQF
PHYSICAL ASSETS
MONETARY ASSETS
WAQF
PHYSICAL ASSETS
MICRO SAVINGSMICRO SAVINGS
MICRO TAKAFULMICRO TAKAFUL
TAMWEEL FOR PROFIT FINANCING
TAMWEEL FOR PROFIT FINANCING
SKILLS TRAININGSKILLS TRAINING
GUARANTEEGUARANTEE
SAFETY NETQARD HASANSAFETY NET
QARD HASAN
ECONOMICALLYINACTIVE
ECONOMICALLYACTIVE
A COMPOSITE ISLAMIC MICROFINANCE PROGRAM
12th Course in Intermediate Islamic Economics, Fall 2010
Issues in MicrofinanceRole of Charity
Use of Donor Funds - Zakah, Sadaqa, Awqaf - for Relief & Basic Needs Fulfillment (Encourage Dependency & Culture of Delinquency?)
Skill Improvement (Mismatch with Market Needs?)
Guarantees (Encourage Credit Indiscipline?)Start-up Equity (For Institutions Only?)Cost Absorption (Unfair Competition to Private
Capital?)12th Course in Intermediate Islamic
Economics, Fall 2010
Issues in MicrofinanceRole of CharityInsights from Important StudiesHashmi & Rosenberg(2006)Ajaz Khan (2008): Case of Islamic ReliefAscharya (2008): Case of BMTsHabib Ahmad (2008)IRTI (2008): Case of Rural Development
Scheme of IBBLHarper (2008): Case of Akhuwat
12th Course in Intermediate Islamic Economics, Fall 2010
Issues in MicrofinancePricing of Financing Products
Price-Cost-Profit Relationship in MicrofinanceTransparency in PricingPrice Ceilings
12th Course in Intermediate Islamic Economics, Fall 2010
Issues in MicrofinancePricing of Financing Products
Component
$100 Loan $1000 Loan
$100 Qard $1000 Qard
Financial Costs
10% 10% 0% 0%
Loan Loss 2% 2% 2% 2%
Operating Costs
50% 15% 50% 15%
Total Costs 62% 27% 52% 17%
12th Course in Intermediate Islamic Economics, Fall 2010
Issues in MicrofinancePricing of Financing Products
Total Cost is relatively FLAT with respect to Loan Size; Flatter in case of IsMFIs
What happens if Client is Charged a Fee (e.g. Islamic Pawning) that is Proportional to Loan Size or a Profit Rate as in case of For-Profit Mechanisms, such as, Murabaha, Ijara, Salam and Istisna ?
12th Course in Intermediate Islamic Economics, Fall 2010
Issues in MicrofinancePricing of Financing Products
12th Course in Intermediate Islamic Economics, Fall 2010
Loan Size
XX1
C1
C
R
R1
Issues in MicrofinancePricing of Financing ProductsMFIs would avoid below-break-even financing. The
problem would exist even in case of Qard where only actual costs may be recovered.
Alternatively, MFIs would charge a higher price for smaller loans (to the detriment of poorer clients); The break-even point would shift upwards to the left making smaller loans viable.
Use of charity funds would bring down the cost curve, resulting in a similar outcome without raising the price.
Is regulatory ceiling on price (max the mark-up rate on Murabaha) also a solution?
12th Course in Intermediate Islamic Economics, Fall 2010
Issues in MicrofinancePricing of Financing Products
12th Course in Intermediate Islamic Economics, Fall 2010
Loan Size
X
R
Issues in MicrofinanceDebt vs. EquityDebt should be AvoidedDebt is Computationally Simple; Less
Demanding; May Degenerate into an Addiction - Multiple Lending Led to Recent MF Crisis
Partnership-Based Structures Inherently More Robust; More Ethical & More Proactive to Client Needs
Complexity with Equity-Based FinancingEmpirical Studies: Lack of Product
Diversification in IsMF12th Course in Intermediate Islamic
Economics, Fall 2010
Issues in MicrofinanceWomen Only ApproachPros: More Honest; Responsible; Loyal; Caring
for Family; Less Resistant to Social ActionCons: Social Tensions; Misuse of Funds by
Husband; Lack of Business AcumenSmall increases in access to income may be at the cost of heavier
workloads for women, increased stress and their health. Without substitute care for small children, the elderly and disabled, and provision of services to reduce domestic work many programs reported adverse effects (Linda Mayoux, 2002)
Holistic Empowerment of Family; Not Women Alone
12th Course in Intermediate Islamic Economics, Fall 2010
Issues in MicrofinanceNew Products Case StudyIDB IsMF Program in Guinea
Mudharabah and Salam Financing: Over 75 PercentAssisting poor groups to establish around 2500 small
Mudaraba Funds (Average amount of US$11,000 per Fund) for promotion of Microenterprises in poor communities in most regions of Guinea
Salam Financing Contributed to Solve Issues of :o Marketing; َQuality & Competition through:o Establishment of Marketing companies; Training
Programs and Institutions & International contracts
12th Course in Intermediate Islamic Economics, Fall 2010
Issues in Microfinance New Products Case StudyIDB IsMF Program in Guinea
500 Women Working in Almond Treatment and Packing for Export
500 Women Working in Couscous Production and Packing for Export
500 Women Working In Oregano(zaatar) Treatment and Packing For Export
Production Marketed In Western Countries
12th Course in Intermediate Islamic Economics, Fall 2010
THANK YOUTHANK YOU
12th Course in Intermediate Islamic Economics, Fall 2010