Islamic Micro/Rural Finance Manager
Islamic Microfinance is a new emerging market in the field of Islamic Finance, so there is an immediate need to have a comprehensive Education, Training, Market Study and Awareness on this subject. Al-Huda CIBE humbly offers a Specialized Comprehensive Certificate Program on Islamic Microfinance on Distance Learning basis. It is highly structured, interactive and innovatively designed Program with an interactive methodology under the auspicious supervision to a panel of Academicians, Shariah Scholars and professionals to ensure high quality material.
The aim of the course is to provide educational facilities and trainings to the people who cannot leave their homes and jobs with an additional opportunity for their educational uplift under Islamic financial system Certified Islamic Microfinance Manager program comprises of two modules, each having two months duration. Strong tutorial support is an integral part of the distance education system. The material provided by the tutorial sessions will help the students to update their knowledge according to the latest terms and concepts globally used in Islamic Microfinance.
Further information, please visit http://www.ifbtc.org/en/education/pgd/islamicmicrofinance/
Saturday, November 21, 2009
Monday, November 16, 2009
Qatar - Islamic Finance
Islamic Finance Opportunity In Qatar - What do you think?
The rapid development of the Islamic finance and Islamic banking industry, not only in the Middle East but across the globe, has produced new Shariah compliant products and structures, which have in turn resulted in an estimated growth in demand for Islamic financial services of 15% - 20% per annum. This trend has increased the number of Islamic banking and financial institutions, and a wider variety of Islamic financial services products and instruments ranging from basic deposit products, investment accounts, equity funds, capital-protected funds, Islamic bonds, Islamic hedge funds and Islamic swap equivalents.
Islamic finance and Islamic banking is a regulated activity within the QFC. The QFC Regulatory Authority has developed a rulebook governing the activities of licensed companies providing Islamic financial services. These rules allow for either wholly Islamic finance and Islamic banking institutions or Islamic windows for conventional financial institutions. The QFC Regulatory Authority is a member of the Accounting and Auditing Organisation for Islamic Financial Institutions, based in Bahrain, and the Islamic Financial Services Board, based in Kuala Lumpur.
The objective of the QFC is to enable the growth of financial services in Qatar and in the wider region, by attracting international financial institutions and multi-national corporates to establish business operations in a "best-in-class" international environment, and to participate in a long-term and mutually beneficial partnership with Qatar. Given the growth of Islamic finance and Islamic banking due to the increasing demand for Islamic financial services, the QFC welcomes applications from qualifying companies wishing to contribute towards Qatar's success
The rapid development of the Islamic finance and Islamic banking industry, not only in the Middle East but across the globe, has produced new Shariah compliant products and structures, which have in turn resulted in an estimated growth in demand for Islamic financial services of 15% - 20% per annum. This trend has increased the number of Islamic banking and financial institutions, and a wider variety of Islamic financial services products and instruments ranging from basic deposit products, investment accounts, equity funds, capital-protected funds, Islamic bonds, Islamic hedge funds and Islamic swap equivalents.
Islamic finance and Islamic banking is a regulated activity within the QFC. The QFC Regulatory Authority has developed a rulebook governing the activities of licensed companies providing Islamic financial services. These rules allow for either wholly Islamic finance and Islamic banking institutions or Islamic windows for conventional financial institutions. The QFC Regulatory Authority is a member of the Accounting and Auditing Organisation for Islamic Financial Institutions, based in Bahrain, and the Islamic Financial Services Board, based in Kuala Lumpur.
The objective of the QFC is to enable the growth of financial services in Qatar and in the wider region, by attracting international financial institutions and multi-national corporates to establish business operations in a "best-in-class" international environment, and to participate in a long-term and mutually beneficial partnership with Qatar. Given the growth of Islamic finance and Islamic banking due to the increasing demand for Islamic financial services, the QFC welcomes applications from qualifying companies wishing to contribute towards Qatar's success
Saturday, November 14, 2009
Islamic way of micro credit the best way to help the poor
This Is Finding On How To Help The Poor
A leading practitioner of Micro Financing in India has strongly advocated the Interest free micro credit or equity financing as the best and the most appropriate method for the country’s poor in enabling them to stand on their own feet.
Vijay Mahajan, chairman, Basix, a micro finance company, said that his company was soon coming out with a pilot project based on the interest free or equity finance.
Vijay Mahajan, a product of IIT and IIM and Princeton University, was speaking at the inaugural session of a five day orientation and training camp on Interest Free Mirco Financing organized by the Human Welfare Foundation in Hyderabad.
“You call it Islamic finance or Shariah compliant finance, it is equity finance in which the investor and the entrepreneur share both the profit and the loss, good fortune and misfortune. Mirco equity fianance is the right way to do it”, he said.
Basix, launched in 1996 has so far provided loans worth Rs 2000 crore to 12 lakh poor household in several states, at an interest rate of 24% and presently has an outstanding of Rs 580 crore with a rate of recovery of 99.1%, he said.
But realizing the tremendous potential in the equity financing, the company was getting ready to launch its new product either in Hyderabad or Chennai soon. “Islamic finance is more equitable for the poor”, he said.
“Interest free finance does not mean only charity. It makes sound business sense. After all, what is venture capital? It is nothing but the equity finance at a large scale and the same has to be brought into the micro finance. It is more equitable specially for the poor people”, he said.
But sounding a word of caution, he said that the interest free credit system can work effectively in small community, where every body knows the other and which is based on Iman or honesty. “The enterprise should be sustainable to ensure that both the investor and the entrepreneur benefit from it”.
In his inaugural presentation Prof A K Siddique Hasan, secretary, Human Welfare Foundation, New Delh,i said that the interest free micro credit was part of the Vision 2016 prepared by the Foundation for the socio-economic development of the poorer sections of the society. The vision includes setting up super specialty and specialty hospitals, clinics, medical aid, schools, scholarships, and empowerment of women, he said.
“This is an ambitious vision and we would like to implement it by 2016 at an estimated cost of Rs 5000 crore”, Prof Siddique Hasan told this correspondent.
Pointing out that Islamic Banking was accepted even by the World Bank, Prof Hasan said that the system was being adopted in several countries across the world.
Pointing out that Muslims in India spend an amount of Rs 12000 crore towards Zakat or obligatory charity every year and there was six lakh acres of Waqf land in the country, Prof Hasan said that the proper and collective use of Zakat and the Waqf could solve all the problems of Muslim community in the country. He said that the Foundation had plans to put in place a network of five hundred micro credit institutions to extend interest free credit to the poor in the country
The camp was being attended by 70 delegates and experts from all over the country.
A leading practitioner of Micro Financing in India has strongly advocated the Interest free micro credit or equity financing as the best and the most appropriate method for the country’s poor in enabling them to stand on their own feet.
Vijay Mahajan, chairman, Basix, a micro finance company, said that his company was soon coming out with a pilot project based on the interest free or equity finance.
Vijay Mahajan, a product of IIT and IIM and Princeton University, was speaking at the inaugural session of a five day orientation and training camp on Interest Free Mirco Financing organized by the Human Welfare Foundation in Hyderabad.
“You call it Islamic finance or Shariah compliant finance, it is equity finance in which the investor and the entrepreneur share both the profit and the loss, good fortune and misfortune. Mirco equity fianance is the right way to do it”, he said.
Basix, launched in 1996 has so far provided loans worth Rs 2000 crore to 12 lakh poor household in several states, at an interest rate of 24% and presently has an outstanding of Rs 580 crore with a rate of recovery of 99.1%, he said.
But realizing the tremendous potential in the equity financing, the company was getting ready to launch its new product either in Hyderabad or Chennai soon. “Islamic finance is more equitable for the poor”, he said.
“Interest free finance does not mean only charity. It makes sound business sense. After all, what is venture capital? It is nothing but the equity finance at a large scale and the same has to be brought into the micro finance. It is more equitable specially for the poor people”, he said.
But sounding a word of caution, he said that the interest free credit system can work effectively in small community, where every body knows the other and which is based on Iman or honesty. “The enterprise should be sustainable to ensure that both the investor and the entrepreneur benefit from it”.
In his inaugural presentation Prof A K Siddique Hasan, secretary, Human Welfare Foundation, New Delh,i said that the interest free micro credit was part of the Vision 2016 prepared by the Foundation for the socio-economic development of the poorer sections of the society. The vision includes setting up super specialty and specialty hospitals, clinics, medical aid, schools, scholarships, and empowerment of women, he said.
“This is an ambitious vision and we would like to implement it by 2016 at an estimated cost of Rs 5000 crore”, Prof Siddique Hasan told this correspondent.
Pointing out that Islamic Banking was accepted even by the World Bank, Prof Hasan said that the system was being adopted in several countries across the world.
Pointing out that Muslims in India spend an amount of Rs 12000 crore towards Zakat or obligatory charity every year and there was six lakh acres of Waqf land in the country, Prof Hasan said that the proper and collective use of Zakat and the Waqf could solve all the problems of Muslim community in the country. He said that the Foundation had plans to put in place a network of five hundred micro credit institutions to extend interest free credit to the poor in the country
The camp was being attended by 70 delegates and experts from all over the country.
Thursday, November 12, 2009
Alhuda opens first Islamic Microfinance helpdesk in Pakistan
Do you think this will help to burst Micro Islamic Finance?
Islamic Micro-finance helpdesk is established by Alhuda – Centre of Islamic Banking and Economics (CIBE) for the objective to provide the technical and Shariah guidance to the local and international micro-finance institutions in the conversion process of micro-finance structure into Shariah compliance micro-finance.
This helpdesk will perform the services of Islamic financial product development, research, technical assistance, training & education and Shariah. Mr. Zubair Mughal (CEO) Alhuda CIBE said, Islamic Micro-finance is the most effective tool for the poverty alleviation from the society. He also said that Islamic Micro-finance is not only to reduce the poverty but also generate a pleasant change in the society and it will provide the better living standards for the poor.
Through Islamic Micro-finance, necessary goods, equipment and machinery is provided to the clients instead of just money lending to run up the business at micro level. The 40% population of Pakistan is living below the poverty line and the indicator is still positive day by day, it is very important for us to control the rising indicator of poverty and I recommend that Islamic Micro-finance is the most effective tool to achieve the goals.
There are so many Islamic Micro-finance institutions in practice in all over the world for the poverty alleviation and economic welfare including Sudan, Egypt, Syria, Indonesia and Malaysia. He also emphasized the government to support the Islamic micro-finance institutions for the poverty alleviation in Pakistan
Islamic Micro-finance helpdesk is established by Alhuda – Centre of Islamic Banking and Economics (CIBE) for the objective to provide the technical and Shariah guidance to the local and international micro-finance institutions in the conversion process of micro-finance structure into Shariah compliance micro-finance.
This helpdesk will perform the services of Islamic financial product development, research, technical assistance, training & education and Shariah. Mr. Zubair Mughal (CEO) Alhuda CIBE said, Islamic Micro-finance is the most effective tool for the poverty alleviation from the society. He also said that Islamic Micro-finance is not only to reduce the poverty but also generate a pleasant change in the society and it will provide the better living standards for the poor.
Through Islamic Micro-finance, necessary goods, equipment and machinery is provided to the clients instead of just money lending to run up the business at micro level. The 40% population of Pakistan is living below the poverty line and the indicator is still positive day by day, it is very important for us to control the rising indicator of poverty and I recommend that Islamic Micro-finance is the most effective tool to achieve the goals.
There are so many Islamic Micro-finance institutions in practice in all over the world for the poverty alleviation and economic welfare including Sudan, Egypt, Syria, Indonesia and Malaysia. He also emphasized the government to support the Islamic micro-finance institutions for the poverty alleviation in Pakistan
Wednesday, November 11, 2009
2010 - Can profits become larger in Islamic micro-finance
This is What tye Thought in Year 2007
As Islamic lenders rapidly expand in developing countries, their potential to profit while helping the poor is huge, bankers said on Wednesday.
About 35 percent of the world's 1.2 billion Muslims are poor, creating a large market for micro-finance -- the lending of small sums of money, the bankers told a conference on the role of Islamic finance in development.
"The existing micro-finance institutions that are working in a non-Islamic way are extremely profitable," Mohammad Zubair, senior economist at the Islamic Development Bank (IDB), told Reuters on the sidelines of the conference in Bahrain.
"They are making a rate of return in excess of 20 percent on the equity of the institution."
Made famous by Nobel Peace Prize winner and micro-finance expert Muhammad Yunus, the practice involves offering small amounts of credit to entrepreneurs, often in emerging economies, who do not normally have access to regular bank loans.
Buoyed by growing demand from Muslims for investments that comply with their beliefs, Islamic financial institutions are expanding rapidly, often in poorer regions where many citizens are overlooked by banks.
Several Gulf Islamic lenders have said they are interested in expanding in Indonesia, Sudan, North Africa, Jordan, Syria, India and China. Some banks have already made the move.
"It's expanding ... in areas that were traditionally underserviced by financial institutions, so that's improving access to credit," the International Monetary Fund's Ghiath Shabsigh said.
Islamic finance bans the receipt of interest, and loans are typically backed by physical assets.
While Islamic financial instruments may not be better suited to the poor than conventional ones, Shabsigh said their presence diversifies ways of raising cash, which boosts development.
"You are diversifying the range of instruments, that's good for financial markets and development in general," he said.
The Saudi-based IDB said it had launched "very successful" pilot micro-finance programmes in several developing countries, but was currently working with central banks to try to ease regulations that threaten to stifle the industry.
"Micro-finance is really at the local level and cannot expect to meet the reporting requirements of large banks, which increases the transaction costs," Zubair said.
CHARITY BILLIONS
The IDB said it was also in talks with Muslim states to standardise and regulate the collection of zakat -- about 2.5 percent of disposable income Muslims must give to the poor every year by Islamic law.
Shi'ite Muslims are also required to pay a 20 percent tax called khums, while some rich Muslims donate land or money in the form of endowments, known as awqaf.
he total sums could be huge, and be used for investments whose profits benefit the poor, the IDB said.
"Zakat and awqaf is currently done on an individual basis. The capacity for mobilising these resources is huge. We're talking hundreds of billions of dollars a year," said Amadou Cisse, IDB vice president of operations.
As Islamic lenders rapidly expand in developing countries, their potential to profit while helping the poor is huge, bankers said on Wednesday.
About 35 percent of the world's 1.2 billion Muslims are poor, creating a large market for micro-finance -- the lending of small sums of money, the bankers told a conference on the role of Islamic finance in development.
"The existing micro-finance institutions that are working in a non-Islamic way are extremely profitable," Mohammad Zubair, senior economist at the Islamic Development Bank (IDB), told Reuters on the sidelines of the conference in Bahrain.
"They are making a rate of return in excess of 20 percent on the equity of the institution."
Made famous by Nobel Peace Prize winner and micro-finance expert Muhammad Yunus, the practice involves offering small amounts of credit to entrepreneurs, often in emerging economies, who do not normally have access to regular bank loans.
Buoyed by growing demand from Muslims for investments that comply with their beliefs, Islamic financial institutions are expanding rapidly, often in poorer regions where many citizens are overlooked by banks.
Several Gulf Islamic lenders have said they are interested in expanding in Indonesia, Sudan, North Africa, Jordan, Syria, India and China. Some banks have already made the move.
"It's expanding ... in areas that were traditionally underserviced by financial institutions, so that's improving access to credit," the International Monetary Fund's Ghiath Shabsigh said.
Islamic finance bans the receipt of interest, and loans are typically backed by physical assets.
While Islamic financial instruments may not be better suited to the poor than conventional ones, Shabsigh said their presence diversifies ways of raising cash, which boosts development.
"You are diversifying the range of instruments, that's good for financial markets and development in general," he said.
The Saudi-based IDB said it had launched "very successful" pilot micro-finance programmes in several developing countries, but was currently working with central banks to try to ease regulations that threaten to stifle the industry.
"Micro-finance is really at the local level and cannot expect to meet the reporting requirements of large banks, which increases the transaction costs," Zubair said.
CHARITY BILLIONS
The IDB said it was also in talks with Muslim states to standardise and regulate the collection of zakat -- about 2.5 percent of disposable income Muslims must give to the poor every year by Islamic law.
Shi'ite Muslims are also required to pay a 20 percent tax called khums, while some rich Muslims donate land or money in the form of endowments, known as awqaf.
he total sums could be huge, and be used for investments whose profits benefit the poor, the IDB said.
"Zakat and awqaf is currently done on an individual basis. The capacity for mobilising these resources is huge. We're talking hundreds of billions of dollars a year," said Amadou Cisse, IDB vice president of operations.
Can Islamic Finance go micro?
Let Discuss About This.
With more than half-a-trillion dollars in assets and an annual growth rate that has outpaced conventional banks’ by nearly 50 percent, the Islamic finance industry is already making waves among investment fund managers. And this not only applies to the Muslim world: The Banker magazine recently named the United Kingdom to its list of the top 15 countries managing Sharia-compliant assets.
The new CGAP Publication Islamic Microfinance: An Emerging Market Niche, argues that the Islamic finance industry, with its unprecedented popularity and growth, may be well-placed to address a critical need in microfinance: reaching the some 72 percent of people in Muslim-majority countries who do not use formal financial services.
Much of that gap owes to unmet demand for products that comply with Islamic law, or Sharia, according to Aamir A. Rehman, former Global Head of Strategy with HSBC Amanah.
“Sharia compliance can help microfinance institutions reach a large number of Muslims who prefer Sharia-compliant forms of financial activity,” says Rehman. But he also adds that microfinance is “a fantastic opportunity for Islamic finance to reflect its core values and mission.” of supporting the underprivileged.
This “win-win” situation is stimulating greater discussion between microfinance practitioners and practitioners of Islamic finance, who seek to draw upon the experience of a highly professionalized microfinance industry while acknowledging that there may be no turn-key solutions for Islamic financial services directed to poorer customers.
(Photo credit: Pauline Häbel) Syarifah Hubaidah and her twin sister Syarifah Habibah run a small tailor shop with financial aid of the BPRS. Aceh Province, Indonesia.Indeed, some Islamic financial institutions are adapting their own innovative products and methodologies to reach the “unbanked,” a trend that could ultimately enrich the entire microfinance industry, says CGAP Lead Microfinance Specialist Xavier Reille.
“Reaching these millions of ‘unbanked’ people is a critical challenge for microfinance practitioners, and the more innovation and resources we bring to the challenge the better,” Reille explains.
Still, the promise of Islamic microfinance far exceeds its performance to date. According to a wide-ranging CGAP survey of 125 institutions in 19 Muslim countries, Islamic microfinance providers—institutions that offer Sharia-compliant products—reach only 300,000 clients, one-third of them in Bangladesh alone. Another 80,000 clients bank through a network of Indonesian cooperatives.
Most microfinance providers are still weak institutions operating on a small scale, says Reille; this is one reason why Sharia-compliant products represent barely one percent of the total market for microfinance.
The other reasons are predictable: designing affordable products, building sound institutions, improving efficiency, and managing risk—all critical components of a sustainable business model. Islamic microfinance has not yet to prove itself as a large sale business.
Also complicating matters for Islamic microfinance institutions is the question of authenticity. Although many institutions rely on Sharia Supervisory Boards, or SSBs, to deem their products “Islamic,” there is no single standard for applying this judgment. Where individual countries, like Jordan and Kuwait, have established some regulatory oversight of SSBs, this is limited to the composition and competence of the boards, not to the jurisprudence itself.
In other words, the question of what exactly makes these institutions and their products “Islamic” remains unanswered—a fact that has kept demand in check among potential Muslim clients. Rehman points out that microfinance practitioners must find a way to work with Islamic scholars to “address skepticism about the Sharia authenticity of products.”
For its part, the Islamic finance industry “needs to adapt its product set and operating models—not fundamentally, since the basic structures are already there—to meet the needs of the poor, the target clients of microfinance.”
With more than half-a-trillion dollars in assets and an annual growth rate that has outpaced conventional banks’ by nearly 50 percent, the Islamic finance industry is already making waves among investment fund managers. And this not only applies to the Muslim world: The Banker magazine recently named the United Kingdom to its list of the top 15 countries managing Sharia-compliant assets.
The new CGAP Publication Islamic Microfinance: An Emerging Market Niche, argues that the Islamic finance industry, with its unprecedented popularity and growth, may be well-placed to address a critical need in microfinance: reaching the some 72 percent of people in Muslim-majority countries who do not use formal financial services.
Much of that gap owes to unmet demand for products that comply with Islamic law, or Sharia, according to Aamir A. Rehman, former Global Head of Strategy with HSBC Amanah.
“Sharia compliance can help microfinance institutions reach a large number of Muslims who prefer Sharia-compliant forms of financial activity,” says Rehman. But he also adds that microfinance is “a fantastic opportunity for Islamic finance to reflect its core values and mission.” of supporting the underprivileged.
This “win-win” situation is stimulating greater discussion between microfinance practitioners and practitioners of Islamic finance, who seek to draw upon the experience of a highly professionalized microfinance industry while acknowledging that there may be no turn-key solutions for Islamic financial services directed to poorer customers.
(Photo credit: Pauline Häbel) Syarifah Hubaidah and her twin sister Syarifah Habibah run a small tailor shop with financial aid of the BPRS. Aceh Province, Indonesia.Indeed, some Islamic financial institutions are adapting their own innovative products and methodologies to reach the “unbanked,” a trend that could ultimately enrich the entire microfinance industry, says CGAP Lead Microfinance Specialist Xavier Reille.
“Reaching these millions of ‘unbanked’ people is a critical challenge for microfinance practitioners, and the more innovation and resources we bring to the challenge the better,” Reille explains.
Still, the promise of Islamic microfinance far exceeds its performance to date. According to a wide-ranging CGAP survey of 125 institutions in 19 Muslim countries, Islamic microfinance providers—institutions that offer Sharia-compliant products—reach only 300,000 clients, one-third of them in Bangladesh alone. Another 80,000 clients bank through a network of Indonesian cooperatives.
Most microfinance providers are still weak institutions operating on a small scale, says Reille; this is one reason why Sharia-compliant products represent barely one percent of the total market for microfinance.
The other reasons are predictable: designing affordable products, building sound institutions, improving efficiency, and managing risk—all critical components of a sustainable business model. Islamic microfinance has not yet to prove itself as a large sale business.
Also complicating matters for Islamic microfinance institutions is the question of authenticity. Although many institutions rely on Sharia Supervisory Boards, or SSBs, to deem their products “Islamic,” there is no single standard for applying this judgment. Where individual countries, like Jordan and Kuwait, have established some regulatory oversight of SSBs, this is limited to the composition and competence of the boards, not to the jurisprudence itself.
In other words, the question of what exactly makes these institutions and their products “Islamic” remains unanswered—a fact that has kept demand in check among potential Muslim clients. Rehman points out that microfinance practitioners must find a way to work with Islamic scholars to “address skepticism about the Sharia authenticity of products.”
For its part, the Islamic finance industry “needs to adapt its product set and operating models—not fundamentally, since the basic structures are already there—to meet the needs of the poor, the target clients of microfinance.”
Facts you need to know about an Islamic Microfinance Model
Here's Opinion From The Expert
Most economic development projects focus on grandiose infrastructure or industrial projects. While jobs are a necessary outcome the process of empowering individual producers to become economically self sufficient is usually not a part of the equation. In the process we end up with large ventures that may provide jobs to thousands in the local population but only tangentially. In other words, an oil refinery which requires skilled labour will only hire workers that have experience or that have the capacity to be trained for work in the refinery. Or we give people their fish but don’t teach them to fish themselves.
What is Microfinance?
Microfinance is usually defined as the provision of financial services and products to those whose low economic standing excludes them from conventional financial institutions or programs. These can include microcredit, small scale venture capital, savings, and some forms insurance. Access to each of these services is provided on a micro-scale allowing those with severely limited financial means to participate.
Theoretically, the main point of departure for microfinance from conventional credit/finance systems comes from the concept of joint liability. In this concept a group of individuals form an association to apply for financing. Members of these small groups are trained regarding the basic elements of the financing and the requirements they will have to fulfil in order to continue to have access to funding.
Financings are disbursed to individuals within the group after they are approved by other members in the group. Repayment of the financing (a loan in this example) is a joint responsibility on all of the group’s members. In other words they share the risk. If one defaults, the entire group’s members suffer. It’s a rudimentary but effective credit scoring mechanism that may mean a temporary suspension from the program and therefore no access to financing for the group or other penalties. In most cases, microfinance programs are structured to give credit up to a maximum amount and require repayment within a short time period – usually a few weeks or at most a few months.
How Microfinance changed development
When the first modern microfinance experiments were being conducted in the 1960s and 1970s, the dominant development programs focused on a particular aspect toward which donor resources could be directed. For example, a farmer needing seeds to plant for produce was given seeds for cash crops or he was given loans at interest rates below market to lessen the financial burden of repayment. But what was not happening was the grass roots support of people who aspired to be self sufficient but did not have a ready business idea or skill/craft.
What Dr. Muhammad Yunus of Bangladesh started in the mid to late 1970s was to focus on people who generally did not have the means to fund a new business or craft. Inspired by the terrible Bangladesh famine of 1974, he made a loan of $27 to a group of 42 families enabling them to create small items for sale without the heavy burdens of repaying moneylenders who charged exorbitant rates of interest.
This effort gave individuals and families the financial fuel they needed to stand on their own feet without the repressive burden of repaying moneylenders beyond their means. Borrowers used loan proceeds to buy raw materials to manufacture products for sale in the market; purchase livestock to sell milk/eggs; or open small shops.
The World Bank now estimates that there are over 7000 microfinance institutions, serving some 16 million poor people in developing countries. The total cash turnover of MFIs world-wide is estimated at US$2.5 billion and the potential for new growth is outstanding. The Microcredit Summit estimates that US$21.6 billion is needed to provide microfinance to 100 million of the world's poorest families.
Other estimates tell us that worldwide, there are 13 million microcredit borrowers, with USD 7 billion in outstanding loans, and generating repayment rates of 97 percent; growing at a rate of 30 percent annual growth. Despite all this less than 18% of the world’s poorest households have access to financial services (Grameen Foundation USA).
Similarities between IF and Microfinance
So we now return to where we started – where is Islamic finance in the world of microfinance? If Islamic finance is growing so rapidly all over the world why don’t we hear about it more in microfinance circles? After all, both systems advocate entrepreneurship and risk taking through partnership finance. They are also forms of finance which represent unconventional solutions to financial needs, focusing on cash-poor but promising business activities. And most importantly, both Islamic finance and microfinance theoretically start from egalitarian approaches as they are open to all customers with different and sometimes coinciding needs without setting any apparent restriction to different categories of clientele.
But it’s interesting to note that Islamic Finance principles are still not widely adopted by conventional microfinance and microcredit institutions. According to Dr. Abbas Mirakhor, Executive Director of the IMF:
"[An] important function of Islamic finance that is seldom noted … is the ability of Islamic finance to provide the vehicle for financial and economic empowerment … to convert dead capital into income generating assets to financially and economically empower the poor..."
Of note in this regard is a theoretical framework for a mudarabah based microfinance program which was advanced by Atif Raza in the Summer 2005 issue of Islamica Magazine. (see related links)
Why this state of affairs?
Why has Islamic finance not been seen more widely in the micro-finance field?
According to Mayadeh al-Zoghbi, a microfinance professional ??, Islamic finance principles are difficult to implement on a profit and loss sharing basis in rural settings. They require long-term involvement by the microfinance institutions (MFI) in the form of technical/business assistance which raises the cost of implementation.
In addition, there is too much uncertainty in profit/loss sharing models for MFIs to be able to understand and predict their present and future cash flows. Therefore, in microfinance too, as in the world of high finance, Islamic debt and leasing instruments dominate.
For example, the Hodeida Microfinance Programme in Yemen based its endeavours on a Murabaha model citing its ease of use. A case study of the program cited that the use of Murabaha “eliminates the need for written records, often unavailable at the micro enterprise level or if available (20 percent of HMFP clients keep books), the client may be unwilling to share them.” Other reasons to prefer Murabaha over equity based financing methods are:
• a well-defined contract exists, with pre-defined amounts
• there is no opportunity for abuse on the part of the client through inaccurate or false record-keeping… i.e. falsely claiming losses where there were profits
• a fixed contract creates a less complicated process and a lower implementation cost to the institution
According to the United Nations Human Settlements Programme (UN Habitat), “Microfinance services, including some compliant with Islamic law (Shari’ah) in the Arab region, tend to be limited to credit for enterprise... The most commonly used Islamic transaction is one in which the MFI [microfinance institution] purchases goods at the request of the 'borrower' and then sells the goods to the 'borrower' for a fee to cover administrative costs, with repayments in instalments (Murabaha).”
My conversations with Ms. Al-Zoghbi and other microfinance professionals yielded few results for MFIs using Islamic finance. In fact, in addition to the Hodeida Programme in Yemen the only other bona fide attempts at applying Islamic finance to microfinance were limited to Akhuwat in Pakistan and the Mali-North Program.
Bridging the Gaps
In many ways, the world of microfinance has followed the conventional world in its use of Islamic debt based instruments to limit risk while being able to more easily anticipate returns.
While on the surface this is understandable, the curious part of the puzzle is that microfinance is already more structurally aligned to applying Islamic equity financing structures. As mentioned previously, microfinance programs are based on group sharing of risk and personal guarantee while maintenance of trust and honesty is tied to the availability of future funds.
This model should allow for the inclusion of a Musharaka based model, or in the least, a model of collective guarantee. MFIs which look to implement Islamic finance in their programs can also develop Mudarabah based programs on the contours proposed by Atif Raza Khan in a Summer 2005 issue of Islamica Magazine. In short, MFIs can find Islamic finance a natural fit in their programs – both debt and equity based.
Most economic development projects focus on grandiose infrastructure or industrial projects. While jobs are a necessary outcome the process of empowering individual producers to become economically self sufficient is usually not a part of the equation. In the process we end up with large ventures that may provide jobs to thousands in the local population but only tangentially. In other words, an oil refinery which requires skilled labour will only hire workers that have experience or that have the capacity to be trained for work in the refinery. Or we give people their fish but don’t teach them to fish themselves.
What is Microfinance?
Microfinance is usually defined as the provision of financial services and products to those whose low economic standing excludes them from conventional financial institutions or programs. These can include microcredit, small scale venture capital, savings, and some forms insurance. Access to each of these services is provided on a micro-scale allowing those with severely limited financial means to participate.
Theoretically, the main point of departure for microfinance from conventional credit/finance systems comes from the concept of joint liability. In this concept a group of individuals form an association to apply for financing. Members of these small groups are trained regarding the basic elements of the financing and the requirements they will have to fulfil in order to continue to have access to funding.
Financings are disbursed to individuals within the group after they are approved by other members in the group. Repayment of the financing (a loan in this example) is a joint responsibility on all of the group’s members. In other words they share the risk. If one defaults, the entire group’s members suffer. It’s a rudimentary but effective credit scoring mechanism that may mean a temporary suspension from the program and therefore no access to financing for the group or other penalties. In most cases, microfinance programs are structured to give credit up to a maximum amount and require repayment within a short time period – usually a few weeks or at most a few months.
How Microfinance changed development
When the first modern microfinance experiments were being conducted in the 1960s and 1970s, the dominant development programs focused on a particular aspect toward which donor resources could be directed. For example, a farmer needing seeds to plant for produce was given seeds for cash crops or he was given loans at interest rates below market to lessen the financial burden of repayment. But what was not happening was the grass roots support of people who aspired to be self sufficient but did not have a ready business idea or skill/craft.
What Dr. Muhammad Yunus of Bangladesh started in the mid to late 1970s was to focus on people who generally did not have the means to fund a new business or craft. Inspired by the terrible Bangladesh famine of 1974, he made a loan of $27 to a group of 42 families enabling them to create small items for sale without the heavy burdens of repaying moneylenders who charged exorbitant rates of interest.
This effort gave individuals and families the financial fuel they needed to stand on their own feet without the repressive burden of repaying moneylenders beyond their means. Borrowers used loan proceeds to buy raw materials to manufacture products for sale in the market; purchase livestock to sell milk/eggs; or open small shops.
The World Bank now estimates that there are over 7000 microfinance institutions, serving some 16 million poor people in developing countries. The total cash turnover of MFIs world-wide is estimated at US$2.5 billion and the potential for new growth is outstanding. The Microcredit Summit estimates that US$21.6 billion is needed to provide microfinance to 100 million of the world's poorest families.
Other estimates tell us that worldwide, there are 13 million microcredit borrowers, with USD 7 billion in outstanding loans, and generating repayment rates of 97 percent; growing at a rate of 30 percent annual growth. Despite all this less than 18% of the world’s poorest households have access to financial services (Grameen Foundation USA).
Similarities between IF and Microfinance
So we now return to where we started – where is Islamic finance in the world of microfinance? If Islamic finance is growing so rapidly all over the world why don’t we hear about it more in microfinance circles? After all, both systems advocate entrepreneurship and risk taking through partnership finance. They are also forms of finance which represent unconventional solutions to financial needs, focusing on cash-poor but promising business activities. And most importantly, both Islamic finance and microfinance theoretically start from egalitarian approaches as they are open to all customers with different and sometimes coinciding needs without setting any apparent restriction to different categories of clientele.
But it’s interesting to note that Islamic Finance principles are still not widely adopted by conventional microfinance and microcredit institutions. According to Dr. Abbas Mirakhor, Executive Director of the IMF:
"[An] important function of Islamic finance that is seldom noted … is the ability of Islamic finance to provide the vehicle for financial and economic empowerment … to convert dead capital into income generating assets to financially and economically empower the poor..."
Of note in this regard is a theoretical framework for a mudarabah based microfinance program which was advanced by Atif Raza in the Summer 2005 issue of Islamica Magazine. (see related links)
Why this state of affairs?
Why has Islamic finance not been seen more widely in the micro-finance field?
According to Mayadeh al-Zoghbi, a microfinance professional ??, Islamic finance principles are difficult to implement on a profit and loss sharing basis in rural settings. They require long-term involvement by the microfinance institutions (MFI) in the form of technical/business assistance which raises the cost of implementation.
In addition, there is too much uncertainty in profit/loss sharing models for MFIs to be able to understand and predict their present and future cash flows. Therefore, in microfinance too, as in the world of high finance, Islamic debt and leasing instruments dominate.
For example, the Hodeida Microfinance Programme in Yemen based its endeavours on a Murabaha model citing its ease of use. A case study of the program cited that the use of Murabaha “eliminates the need for written records, often unavailable at the micro enterprise level or if available (20 percent of HMFP clients keep books), the client may be unwilling to share them.” Other reasons to prefer Murabaha over equity based financing methods are:
• a well-defined contract exists, with pre-defined amounts
• there is no opportunity for abuse on the part of the client through inaccurate or false record-keeping… i.e. falsely claiming losses where there were profits
• a fixed contract creates a less complicated process and a lower implementation cost to the institution
According to the United Nations Human Settlements Programme (UN Habitat), “Microfinance services, including some compliant with Islamic law (Shari’ah) in the Arab region, tend to be limited to credit for enterprise... The most commonly used Islamic transaction is one in which the MFI [microfinance institution] purchases goods at the request of the 'borrower' and then sells the goods to the 'borrower' for a fee to cover administrative costs, with repayments in instalments (Murabaha).”
My conversations with Ms. Al-Zoghbi and other microfinance professionals yielded few results for MFIs using Islamic finance. In fact, in addition to the Hodeida Programme in Yemen the only other bona fide attempts at applying Islamic finance to microfinance were limited to Akhuwat in Pakistan and the Mali-North Program.
Bridging the Gaps
In many ways, the world of microfinance has followed the conventional world in its use of Islamic debt based instruments to limit risk while being able to more easily anticipate returns.
While on the surface this is understandable, the curious part of the puzzle is that microfinance is already more structurally aligned to applying Islamic equity financing structures. As mentioned previously, microfinance programs are based on group sharing of risk and personal guarantee while maintenance of trust and honesty is tied to the availability of future funds.
This model should allow for the inclusion of a Musharaka based model, or in the least, a model of collective guarantee. MFIs which look to implement Islamic finance in their programs can also develop Mudarabah based programs on the contours proposed by Atif Raza Khan in a Summer 2005 issue of Islamica Magazine. In short, MFIs can find Islamic finance a natural fit in their programs – both debt and equity based.
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