MICRO FINANCING AS A TOOL OF POVERTY ALLEVIATION IN ISLAMIC PERSPECTIVE

Ausaf Ahmad
Presentation at

Akbar Peer Bhoy College Of Management

Mumbai August 28, 2008

In the name of Allah, The Most beneficent, The Most Merciful.

AN IRONY
It is estimated that it would require US $21 billions to provide micro finance to worlds poorest 100 million families. Ironically, only if worlds seven richest family got together, they could wipe out global poverty from their combined wealth.
Alas, the world does not go by Charity alone.

Wealth of an Arab Prince

A Car Mercedes SL 600 studded with diamonds, worth 4.5 million $ A ship worth 500 million dollars A personal Boeing 747 A palace worth 100 million dollars with 317 rooms and five kitchens. Four kitchens specializing in Arab, Lebanese, Continental and Asian cuisine

A world of Contradictions
Appalling oceans of poverty along with the islands of prosperity. Two billion people do not have access to clean and safe drinking water. Two billion people do not have access to electricity and drainage facilities.

WHY MICRO FINANCING?

Financial intermediation between savers and investors. Mismatch between the preferences of savers and investors. Problems of Moral Hazards Problems of Adverse Selection Problems of collateral and enough return Solutions: Specialized agencies Micro Financing

WHAT IS MICRO FINANCING?

Micro financing is a term used for providing financial services such as micro credit, micro saving and micro insurance to Poor people. Credit worthiness, Profitability and Bankable projects? [ Poor people do not have collaterals]. Poor people could be relied to repay the loans Market mechanism could be used productively to improve the economic conditions of the poor.

 Two billion people do not have access to electricity and drainage system Two billion people do not have access to clean drinking water

A SHORT HISTORY
1864 Wilhelm Raiffeisens German Village Experiment, Rural financing. 1900 Alphonse Desjardin, Quebec experiment. 1963 Mitghamr project 1970s Grameen Bank, Bangladesh International Institutions, NGOs, Multinational Banks.

What is an NGO?
A non governmental organization (NGO) is a legally constituted organization created by private persons or organizations with no participation or representation of any government. In the cases, in which NGOs are funded totally or partially by governments, NGOs maintain their non governmental status so far it excludes government representatives.
http:/Wikipedia.org/wiki/NGO

GRAMEEN BANK
Owned by the poor borrowers Esablished in 1976 in Jobra, Bangladesh Incorporated in 1983 by Special law No collateral, No Legal instruments, Only group or joint Liability. Responsibility of repayment with the individual borrower. 97% women borrowers.

GRAMEEN BANK
23000 branches, works in 75,000 villages, Total staff over 21,000 Total loans disbursement TK 310 billion. Repaid TK 277 billion, 33 billion outstanding. Recovery Rate 98.5 per cent. 100 percent loans financed from own deposits. Group of Five. All are denied credit if one defaults.

GRAMEEN BANK
Interest Rates: Fixed for Micro credit programs 11% Income generating loans 20% Housing loans 8% Student loans 5% Struggling Members Zero % Deposit rates 8.5 12%

GRAMEEN BANK
Housing loans, Micro enterprises loans, scholarships, Higher education loans, 17 companies in Grameen Network e.g. Grameen Phone, Telecom, communication, Cybernet, Software, IT Park, Information Highways, Udog, Knitwear, Textiles, Shiksha, Bayopar Vikas, Grameen Trust etc.

CRITIQUE OF GRAMEEN MODEL Usurious : high interest rates Exploitative Benefits large corporation

NEEDS FOR MICRO FINANCE IN INDIA

With 63000 branches of commercial banks, 14000 branches of regional rural banks and 100,000 branches of cooperative banks, banking is out of reach for millions. 75 million household depend on money lenders. 90 percent in Rural India have no access to institutional credit. Micro credit can change lives.

Limitations Of The Corporate Sector to Provide Islamic Finance

The organized corporate sector REQUIRES:
1. 2. 3. 4. Large Capital Large size of Market Favorable Political Climate Institutional and Legal Framework

Negative Mental block against Islamic banking is a big barrier against it in the Muslim Minority countries.

INTEREST FREE FINANCIAL INSTITUTIONS IN INDIA

More than 200 institutions, mostly loan societies and investment companies. Operating in the unorganized sector Misnomer to describe them as Islamic Banks Societies registered under Societies Act. Many remain unregistered. Different sources of funds Lack control and regulation due to absence of legal framework. Non Banking Financial Companies and Islamic Investment Companies.

Interest Free Financial Institution in India

1. Interest Free Credit Associations 2. Interest Free Financial Companies 3. Investment Funds

Interest Free Credit Associations

Mostly established in late 70 and 80s. Coincides with employment upsurge in the Gulf Concentrated in South India: Karnataka, kerala, AP and Chinnai. Motivation: Avoid Riba Registration: Charitable Societies or unregistered.

Interest Free Credit Associations II

Sources of Funds: Different for Charitable Societies, Cooperative Societies, Size of Capital involved: Difficult to tell Business Practices: Deposit taking - Providing Loans Leasing?

SWOT ANALYSIS OF IFCAs

Strength: Grass Root organizations Micro Financing Weakness: Unorganized Sector Lack of professionalism Lack of regulation (security) Opportunity: Mobilization of hidden resources Threat: Disintegration, competition, liquidation on legal grounds

Islamic Financial Companies

Al Ameen (Bangalore) Al Falah (Delhi) Al Mizan (Chinnai) Al Najeeb, (Bijnor, U.P.), Muslim Fund Al Idafa (Mumbai) First three have been closed by the RBI for non compliance

SPIRIT OF COOPERATION
Democratic Participation One person One vote Open membership Cooperative Education Cooperate with other organizations.

REMEDIES
Require Legal Framework Professionalism Transparency Accountability Productivity and Efficiency. Needs to be organized