alhuda cibe -sharia principles presentation

Religiosity and threshold effect in social and financial performance of microfinance institutions

Mohammad Ashraful Mobin

SHARIA PRINCIPLES,OPERATIONAL MECHANISM AND MARKETING STRATEGY FOR ISLAMIC MICROFINANCE.

Presented by: Jaafar Mohammad

Islamic Microfinance

Micro finance has been defined As “ the provision of financial services to low- income people” the definition has two important aspects

- provision of financial services and; - low income people.

The target group has always been the low income people, commonly referred to as the un-bankable who traditionally have been excluded from the financial services due to their high risk and lack of collateral. SHARIA PRINCIPLES,

OPERATIONAL MECHANISM AND MARKETING STRATEGY FOR ISLAMIC MICRO FINANCE.

Religiosity and threshold effect in social and financial performance of microfinance institutions

Mohammad Ashraful Mobin

Islamic Microfinance• According to multiple market surveys, Muslim population

tend to have a high rate of rejection to conventional Micro-finance, hence impeding financial inclusion process.

• According to CGAP paper back in 2008, suggested that almost 40% potential micro-finance clients reject non sharia compliant loans.

• The rejection is mainly driven by religious factors mainly avoidance of Riba (Interest)

SHARIA PRINCIPLES,OPERATIONAL MECHANISM AND MARKETING STRATEGY FOR ISLAMIC MICRO FINANCE.

Islamic MicroFinanceMicro finance has been defined As “ the provision of financial services to low- income people” the definition has two important aspects - provision of financial services and; - low income people.

The target group has always been the low income people, commonly referred to as the unbankable who traditionally have been excluded from the financial services due to their high risk and lack of collateral.


Islamic Microfinance Muslim population proportionately rank high in global

poverty, with over half a billion living on under 2USD per day.

Many struggle to access liquidity, manage savings and expand their micro business.

Conventional micro finance assist the un-bankable or micro finance clients -female heads of house holds, pensioners, displaced persons, retrenched workers, small farmers and micro entrepreneurs- access funds and achieve their dreams, Islamic micro finance in addition to that, assist those who reject conventional micro loans, access funds through Sharia compliant means. SHARIA PRINCIPLES,


Islamic Microfinance

Islamic Micro finance can hence be understood as a provision of financial services to low income people in accordance with sharia principles.

The micro finance module has, to a great extent, the same objectives of sharia, which revolves on:

Reduction of poverty Team work Equity Social and economic empowerment


Sharia PrinciplesIntroduction Sharia is a body of legal framework within which public and

private life of Muslims is regulated Sharia has two primary sources and two secondary sources,

the primary sources are; - The holy Quran - The prophetic tradition (Al Sunnah) The secondary sources are: - The Ijma ( Juristic Consensus) - Qiyas ( Analogy)


The Sharia PrinciplesObjectives of Sharia. Scholars have enumerated five main objectives of Sharia

under which all issues rotate around. These are;

- Protection of Religion - Protection of life - Preservation of Intellect - Preservation of progeny - Protection of Property/ Wealth. The five objectives are summarized in one main objective of “perpetuating good and warding off evil”


Sharia Principles

Sharia has a defined body of rules and regulations relating to commercial transactions normally referred to as Fiqh al muamalat.

These rules are mainly derived from the main Sharia objective of property/ wealth preservation.

Sharia has developed means that assist in poverty reduction and alleviation:


Sharia Principles

Sharia has also advocated for fair trade and commerce and redistribution of wealth among people and has taken different measures which include:

positive measures:

- Income growth- Through work and proper spending - Distribution of income – acknowledging different

groups in zakat - Equal opportunities – by supporting profit sharing

Preventive measures: - Prevention of malpractices- Riba, hording, gambling

e.t.cSHARIA PRINCIPLES,


Sharia Principles

Corrective measures

- compulsory Zakat - Charity

There are specific Sharia principles that govern commercial transactions including micro-finance, which are;

Prohibition of Riba ( Interest): All form of interest is not allowed. This is because, Riba is mainly money paid for use of money, and which money is not a commodity from a Sharia point of view.


Sharia Principles

Business risk must be taken to justify any income. The principle is also known as al kharaaju bi dhaman.

Transactions must be free of excessive uncertainty or ambiguity also known as Gharar al faahish.

No Gambling (Maysir) is allowed, as it amounts to having ones property unjustly.

No exploitation. This can either be through lack of understanding of the market or misrepresentation of facts by parties.


Sharia Principles

•Prohibition of trading in unlawful goods or services.

•Its socially responsible. By working to minimize liabilities through hawala, al ibraa, extension of time for the distressed customer.


Operational mechanism

Islamic microfinance operates within clear Shariah contracts. These include:

Debt based contracts Equity based contracts

• The debt based contracts are:

- Qard hassan - Murabaha - Salam - Ijara


Operational mechanism Qard hassan: This is a kind of borrowing where there is no expectation from the lender other than receiving of his Principle amount. It is a benevolent loan. Qard Hassan is the second most used contract in financing Microfinance.

Murabaha: This is cost-plus mark up financing. Where a financial institution purchases an asset and sells it to the customer with a mark up.

According to CGAP survey, this is the most highly used contract. SHARIA PRINCIPLES,



Salam: This is a forward contract. An advance payment is made

against future delivery of commodity. Its mainly used in Agricultural context but its being extrapolated to other areas.

Ijara: This is a leasing contract where a financial institution leases

an asset to a client for a period of time and mostly, sells the asset thereafter to the customer at the end of the lease period.



Equity based contracts include: Mudharaba: This where a financial institution offers working capital and

the other party offers the work and management of the business. Profits are shared according to predetermined ratios. Any losses are bared entirely by the financial institution.

Musharaka: This is equity participation in a business venture in which

parties share profits and losses according to predetermined rations.



The above named contracts have their challenges in This is due to their inherent features.

The equity based contract always brings forward challenges related to Capital erosion, impairment and credit risk which can also be high if the customer is not managed properly.

The debt based contracts brings forward credit displacement risk and high operational costs due to their interactive operational nature mainly: Salam, Murabaha and Ijara, and erosion of capital incases of Qard hassan.



Multiple risk mitigation mechanism have been developed to ensure smooth running of business. These include:

Credit Guarantee by a third party other than the partners in equity based contracts.

Performance guarantee in Murabaha contracts.

Training and educating the customers in basic book keeping and accounting.


Marketing strategyWhat is marketing all about? Marketing is all about acquiring new customers and

retaining the existing ones. This is achieved through: Knowing your customer needs. Knowing your competitor. Knowing your business environment.

This three areas will help an institution identify, anticipate and satisfy customers’ needs profitably.

What to consider in a strategy:1. The kind of target market: New market Developing market Developed market


Marketing strategy By understanding the market type, the institution will

appreciate the level of potential demand.

2. The nature of the Institution: Microfinance institutions are not homogenous in nature and

have various goals and target group.

Islamic Microfinance need to develop creative marketing plans to enable them penetrate the markets and attract customers.


Marketing strategy

The marketing plan should work to ensure; Proper pricing Sustainability Innovation Prioritizing clients

There are two main challenges:

• Poor awareness- They customers are not aware of the institution. Poor understanding: they don’t know how it works and the

various products.


Marketing strategyThe way forward.

The Islamic microfinance should adopt an innovative way to address the marketing gap through:

Personalized interaction Sales promotions Direct marketing Advertisement


THE END

THANK YOU

Presented by: Jaafar Mohammad

AlHuda CIBE FZ LLE - U.A.EP: + 971 56 9286664, + 971 55 938 99 00

AlHuda Center of Islamic Banking & Economics - Pakistan

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