financing the poor: towards an islamic microfinance an islamic finance industry perspective

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


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


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





IV. Next stages


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 profitably Despite engagement of less privileged customers

May not be responsible financing:

– Sub-prime lending

– Debt consolidation companies

Lending responsibly Prevent over-indebtedness

Microfinance is good example

– Fiduciary business to uplift poor

– Affordable lending to enable sustainability

Source: 1. HBS Bulletin March 2007





IV. Next stages


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


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 &InvestmentsIndebtedness

x

Income-sharing products

Shift from debt-based product offering

Letter of the law

Replicating conventional credit service offering


– 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

412

– 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





IV. Next stages


Create successful partnership formula

Islamic microfinance requires combined efforts

Best-of-breed microfinance institutions

Modest capital commitment

Requires institutional will

Thank you

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financing the poor: towards an islamic microfinance an islamic finance industry perspective

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