What Is Islamic Microfinance? Making It A Sustainable Reality

What is Islamic Microfinance?
Making it a Sustainable Reality
Presenter
s
PART I: Rafi-uddin Shikoh
PART II: Atif R Khan
www.EthicaInstitute.com | www.DinarStandard.com
Agend
a
Presentation: 45 min
Q&A: 30 min
Agend
a
Section 1: Global Microfinance Context (Part 1)

Global Microfinance Drivers/ Opportunities
What is Microfinance?
Landscape key players
Impact & Challenges
Section 2a: 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
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 sub-prime mortgage lending)
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.
Global Microfinance Drivers

1. Addressing FINANCIAL EXCLUSION of low-income global population:
Globally 49 percent of adults have deposit accounts in formal financial institution*
19% of developed world adults do not have bank accounts

72% of adults in the developing world do not have accounts
Source: Financial Access 2010 Report, by CGAP and World Bank

1. Addressing FINANCIAL EXCLUSION of low-income global population:
Globally 49 percent of adults have deposit accounts in formal financial institution*
An estimated 72 percent of people living in Muslim-majority

countries do not use formal financial services
(CGAP Islamic Microfinance Note 2008)
Source: Financial Access 2010 Report, by CGAP and World Bank

2. Addressing needs of MICRO-ENTERPRISES:
Micro-enterprises have historically lacked access to

financial products and 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

1. FINANCIAL
EXCLUSION of lowincome global

population
2. Addressing
needs of MICROENTERPRISES
Unmet demand for finance is large, but the exact

number (or even a rough but credible number) has
been hard to pin down, with estimates ranging
from half a billion people to three billion.*
*Financial Access 2010 Report, by CGAP and World Bank
Microfinance services low
income groups (extreme
poor, moderately poormain clients), mostly not
served by commercial
banks.
Services offered are
Credit facilities, savings
account, money
transfers, remittances,
insurance and even
investment
1. Low-income population
2. Microenterprises
Pioneered the group-based
responsibility model but
other models exist*
* Other models: Village model; Coop; Self-help groups (SHGs)
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.
Top 100 Microfinance

Institutions in the
World: MIX 100 that
are profitable and top
performers in each of
three areas: outreach,
efficiency, and
transparency
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
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 aggressive selling of loans to often illiterate villagers,
followed by equally 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
of interest for Muslims
Agend
a
Section 1: Global Microfinance Context (Part 1)

Global Microfinance Drivers/ Opportunities
Landscape key players
Impact & Challenges
Section 2a: 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
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*.
Yet an estimated 72 percent of people living in Muslim-majority countries do

not 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
prefer Islamic ones and tend to switch over once Islamic products become
available. (CGAP Report 2008)
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
What is Islamic
Microfinance?
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 and social
goals. Both advocate financial inclusion. Both involve
participation by the poor. There are however, some
points of difference between the two. *
* Intro. to Islamic Microfinance, Mohammed Obaidullah, IIBF
What is Islamic
Microfinance?
Islamic Approach to Poverty Alleviation:*
1) Charity (Sadaqa) - Zakat, Sadaqa Jariya or Waqf (endowment/ trust)

2) Economic empowerment.
3) Debt avoidance: Muslims are also warned against the dangers of incurring heavy
debt. The Prophet Muhammad (peace be upon him) used to regularly supplicate
Allah, I seek refuge with You from sin and heavy debt. When someone remarked,
how often you seek refuge from heavy debt, he replied, when a man gets into
debt, he speaks and tells lies, and he makes a promise and breaks it (Bukhari and
Muslim). The best among you are those who are best in paying off debt (Muslim);
4) Cooperation: A hadith by the Prophet (peace be upon him) reinforces the principle of
cooperation and mutual assistance. Believers are to other believers like parts of a
structure that tighten and reinforce each other." (Al-Bukhari and Muslim)
5) Family cohesiveness: And covet not that whereby Allah has made some of you
excel others. Men shall have a share of that which they have earned, and women a
share of that which they have earned. And ask Allah of his bounty. Surely Allah has
the perfect knowledge of all things (4:32)
What is Islamic
Microfinance?
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.
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.
What is Islamic
Microfinance?
Forms of contracts
(to be discussed in detail in Part II of presentation)

A FRAMEWORK
Poverty Alleviation
Responsibility
Micro-credit
Micro-savings
Micro-transfer
Micro-insurance
Core Islamic
Financing contracts
Target Audience/
Need
Illustration: 2012 DinarStandard
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.
In a 2007 global survey on Islamic microfinance, CGAP collected
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 Shariacompliant products.
Landscape
The Consultative Group to Assist the Poor (CGAP), Deutsche Bank,
Islamic Development 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)
submitted their ideas for the award,
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
Landscape
Bangladesh Case Study: IBBL (Islami Bank Bangladesh Limited)

Introduced own version of microfinance: 'Rural Development Scheme
(RDS)' in 1995. Modeled after the Grameen Bank model except that
the scheme used Islamic modes of investment.
Effective rate after rebate is 20% per annum, which is a major
difference with typical MFIs. ASA, BRAC, BURO and many other MFIs
effectively charge 30% interest per annum.
IBBL one of the top 10 MFIs offering microfinance; IBBL reached
about 11,000 villages (about 13% of total Bangladesh villages); and
outstanding investments reached Taka 3752 million (USD 53.6
million).
Products: saving plans; financing plans; MicroTakaful
Issue in contract credibility Bai-muajjal (credit sale) Among
alternative modes, Mudharabah is fraught with practical problems
arising out of reluctance and/or inability among informal livelihood
enterprises for proper accounting of results.
Landscape
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 Chair
in Islamic Law and Finance at the Durham University, UK) at 8th International Conference on Islamic Economics and Finance
Opportunity
Operational Efficiency/ Risk Management
Opportunity for integrating Zakah and
Awqaf with for-profit Shariah-compliant
microfinance needs to be developed
Use of Qard hasan,
Introduction of micro-Takaful
Islamic Microfinance for all globally
Opportunity
Operational Efficiency/ Risk Management
Opportunity for integrating Zakah and
Awqaf with for-profit Shariah-compliant
microfinance needs to be developed
Use of Qard hasan,
Introduction of micro-Takaful
Islamic Microfinance for all globally
Business Media Research Advisory
Rafi-uddin Shikoh
E:
rafishikoh@dinarstandard.c
om
W:
advisory.dinarstandard.com
Questions
& Answers

What Is Islamic Microfinance? Making It A Sustainable Reality

Uploaded by

Copyright:

Available Formats

You might also like

What Is Islamic Microfinance? Making It A Sustainable Reality

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

What Is Islamic Microfinance? Making It A Sustainable Reality

Uploaded by

Copyright:

Available Formats

What is Islamic Microfinance?

Making it a Sustainable Reality

Section 1: Global Microfinance Context (Part 1)

Global Microfinance Drivers

Globally 49 percent of adults have deposit accounts in formal financial institution*

19% of developed world adults do not have bank accounts

Global Microfinance Drivers

Globally 49 percent of adults have deposit accounts in formal financial institution*

An estimated 72 percent of people living in Muslim-majority

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

Global Microfinance Drivers

Micro-enterprises have historically lacked access to

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

Global Microfinance Drivers

EXCLUSION of lowincome global

Unmet demand for finance is large, but the exact

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

Landscape: Key Players

Microfinance Information Exchange, Inc.

Landscape: Key Players

Top 100 Microfinance

Landscape: Key Players

Landscape: Key Players

680,458 Kiva lenders

Section 1: Global Microfinance Context (Part 1)

Key Islamic Microfinance

Yet an estimated 72 percent of people living in Muslim-majority countries do

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

Key Islamic Microfinance

Islamic microfinance has the

Microfinance and Islamic finance have much in

Islamic Approach to Poverty Alleviation:*

1) Charity (Sadaqa) - Zakat, Sadaqa Jariya or Waqf (endowment/ trust)

* Intro. to Islamic Microfinance, Mohammed Obaidullah, IIBF

Islamic Approach to Poverty Alleviation:*

Shariah approved activities: Muslims cannot profit from activities considered

* Intro. to Islamic Microfinance, Mohammed Obaidullah, IIBF

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

What is Islamic Microfinance?

Illustration: 2012 DinarStandard

Currently Islamic microfinance is concentrated in a few countries,

Bangladesh Case Study: IBBL (Islami Bank Bangladesh Limited)

Indonesia Report: Why is Growth of Islamic Microfinance Lower than

Business Media Research Advisory

You might also like