khan-rehman, islamic microfinance .pdf
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Financing the Poor: Towards an Islamic Microfinance
An Islamic Finance Industry Perspective
Iqbal Khan and Aamir A. Rehman
Harvard Law School - 14 April 2007
Financing the Poor: Towards an Islamic Microfinance | 2
I. Islamic finance is an inclusive proposition
II. Engaging the poor is not easy
III. Industry has potential to lead and address the situation
IV. Next stages
Agenda
Financing the Poor: Towards an Islamic Microfinance | 3
Industry is outcome of CSR and ethical principles
Islamic finance is more than financial contracts
Fundamental tenants are derived from Shariah
– Absence of interest-based transactions
– Avoidance of economic activity involving speculation
– Prohibition on production of goods and services which contradict the values of Islam
Concept is grounded in ethics and values
– Principles akin to ethical investing
– Emphasis on risk-sharing and partnership contracts
Islamic finance offers an alternative paradigm
– Asset-backed transactions with investments in real, durable assets
– Stability from linking financial services to the productive, real economy
– Credit and debt products are not encouraged
– Restrains consumer indebtedness
Islamic banking is community banking
– Serving communities, not markets
– Open to all-faith clients
– Instruments of poverty-reduction are inherent part of Islamic finance – zakat & qard hasan channels
Financing the Poor: Towards an Islamic Microfinance | 4
Islamic finance has not forgotten the poor
Industry has not yet reached full potential
Industry initially had to demonstrate commercial viability
– First Islamic bank established in 1975
– Initial market strategy focus on revenue-generating projects
Industry is young and gaining mainstream relevance
– Industry-building infrastructure setup as recently as 1991 (AAO-IFI)
– Reputational risk management led to careful dealing with non-regulated charities industry
Industry is building stakeholder connectivity
– State-controlled waqf and zakat institutions not proactively engaged with Islamic finance
– Regulatory hurdles imposing investment restrictions in government-owned institutions
Islamic banking develops link to economy
– Robust banking system enables economic development
– Vehicle for financial and economic empowerment
– Deepening bankable population and unlocking “dead capital”
Responsibility of poor was sidelined for growth first
– Industry began as MitGhamr Savings Associations (1963)
– Nile Delta experiment to mobilise local villager savings for local socio-economic development
Financing the Poor: Towards an Islamic Microfinance | 5
I. Islamic finance is an inclusive proposition
II. Engaging the poor is not easy
III. Industry has potential to lead and address the situation
IV. Next stages
Financing the Poor: Towards an Islamic Microfinance | 6
Assisting the poor is a pillar of Islam
Bottom of Pyramid market carries additional responsibility Engaging the poor requires balance between profitable and responsible lending
– Lending enterprise needs to be wary of debt spiral
– Engagement programme must be self-sustaining
Bottom of Pyramid market has long been neglected
– Market is well underserved – half of planet live on less than $2 a day¹
– Islamic finance has ready moral and product framework to assist
– Islamic finance can unlock bankable wealth and enable “trickle down” effect
Lending profitablyLending profitably
Despite engagement of less privileged customers
May not be responsible financing:
– Sub-prime lending
– Debt consolidation companies
Lending responsiblyLending responsibly
Prevent over-indebtedness
Microfinance is good example
– Fiduciary business to uplift poor
– Affordable lending to enable sustainability
Source: 1. HBS Bulletin March 2007
Financing the Poor: Towards an Islamic Microfinance | 7
I. Islamic finance is an inclusive proposition
II. Engaging the poor is not easy
III. Industry has potential to lead and address the situation
IV. Next stages
Financing the Poor: Towards an Islamic Microfinance | 8
Islamic microfinance is a complementary initiative to Islamic finance
Microfinance mission reflects part of Islamic ethos
MicrofinanceIslamic finance
Reaches previously under-banked population
Focus on uplifting the poor
Models advocate: - financial inclusion
- entrepreneurship
- risk-sharing through partnership financing
Routed in Shariah-compliance Fair access to capital
Equitable
Core concern
New-market innovation
Finance based on worthiness of ventures and assets, and not based on wealthAsset orientation
Financing the Poor: Towards an Islamic Microfinance | 9
Islamic microfinance supports industry morals and ground needs
Microfinance fits the spirit of Shariah-based industry development
Industry needs to shift from Shariah-compliant to Shariah-based
– Mindset of consumer debt is not in Islamic spirit
– Investment and debt for productive use is allowed
– Microfinance provides credit for the real economy
Microfinance fits need of Muslim communities
– Muslim-countries in spectrum of poverty and underdeveloped social infrastructure
– Islamic microfinance will attract under-banked and underserved “economically active” poor
Islamic finance provides interest-free solutions for job creation
– Musharaka/Mudaraba PLS arrangements
– Murabaha/Ijara commodity purchases
Shariah-compliant products
Shariah-based solutions
Savings &Investments
Indebtedness
x
Income-sharing products
Shift from debt-based product offering
Letter of the law
Replicating conventional credit service offering
Financing the Poor: Towards an Islamic Microfinance | 10
– Assist in building Islamic microfinance institutions with Islamic finance products
– Use charitable endowments as start-up, risk-free capital
Industry can build commercial partnerships with Microfinance managers
Islamic finance is a platform to build microfinance
3Philanthropic Commercial
Partnership
Organic
41
2
– Create charitable funding channels for Microfinance institution
– Combine Islamic finance industry synergies and distribution assistance
– Bring capital market access via Islamic finance industry and match with efficient institutions
– Initiate joint ventures with successful, business-run enterprises
– Build scale and reach of Islamic microfinance managers
– Migrate successful models to other markets
Financing the Poor: Towards an Islamic Microfinance | 11
I. Islamic finance is an inclusive proposition
II. Engaging the poor is not easy
III. Industry has potential to lead and address the situation
IV. Next stages
Financing the Poor: Towards an Islamic Microfinance | 12
Create successful partnership formula
Islamic microfinance requires combined efforts
Best-of-breed microfinance institutions
Modest capital commitment
Requires institutional will
Thank you
rehman@post.harvard.edu
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