badr elddin ibrahim, central bank of sudan, the challenges and opportunities of islamic microfinance
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mitProf. Badr El Din A. Ibrahim
The Challenge & Opportunities of
Islamic Microfinance
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What is Islamic (interest-free) Microfinance?
Islamic development philosophy: Diffusion of development benefits, equitable income distribution
Private investment in Islam is of a dualistic nature, benefiting the investor & the community / investment provides the basic needs first. Islamic interest-free MF builds on Shariah principles. Interest (on saving & lending) is prohibited. Investment is made with mainly sales-based, partnership & leasing formulae.
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Merits of interest-free (Islamic) MicrofinanceIt considers treatment of poverty as part of its social responsibilities
It does not need strong guaranteesThe Islamic formulae have no harmful financial burdens in cases of loss, Partnership does not leave the partner with debts, nor does it obligate him to pay in the case of a loss.
the Islamic MF is less difficult for customers to recover debts in cases of failure by granting a grace period without additional financial charges.
Islamic MF operates via a No. of financing formulae which suit the targeted group / the type of projects (Ijara, Murabaha, Musharaka).
It includes Zakat, Wagf, Qard Hassan which can complement (but not replacing) the Islamic microfinance in providing housing & necessities.
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the rate of return from Musharaka is greater than interest for both partners.
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Opportunities in breaching the gap in Islamic MF & tapping into the potential market (The case of African )In 16 states of Sub-Saharan Africa (out of 47) Muslim population are 50%+/53% (582 mill./out of 1097) estimated Muslims in Africa.
A scope for the same in Zambia, Uganda, Malawi, Ghana & Ethiopia.
Many African countries have interest-free activities e,g. Botswana, Kenya, Gambia, Guinea, Niger, Nigeria, S. Africa, Mauritius, Senegal & Tanzania.
Slow interest-free MF market penetration in SSA. There are some interest-free practices in Africa (Murabaha & leasing),
Regulatory frameworks for interest-free finance in Ethiopia & Tanzania.
Three are interest-free MFIs in some African states such as Ethiopia.
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Challenges in expanding the reach or scaling up Islamic MFIslamic MF experiences were short lived / not integrated into the financial system. Lack of a workable Islamic MF model worldwide.
Models act as charity funds, no sign of market-orientation & outreach
Most have limited outreach, and are perhaps not sustainable.
No support by the governmental regulatory framework.
Training of Islamic MF providers & awareness for potential clients.
No need for a stringent Interest-free MF system, i.e. interest-free model in non-Muslim states needs to be a "business" not "religious" model.
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The suitable mechanisms/avenues to introduce interest-free MF in a mixed & pure interest-based financing system?
1. Separate Branches (preferable; commonly used)
2. Separate Windows, 3. Wholesaling with Interest-Free MFIs
(preferable, needs Apex)4. Partnership Between MF Funders &
the Interest-Free MF Providers5. Separate Affiliate Company of the
Interest-Based MFI. A regulatory framework/or special financing policies are required.