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.