International Conference onIslamic Microfinance

CENTER OF ISLAMIC BANKING & ECNOMICS

By :

ISLAMIC MICROFINANCECHALEENGES AND OPPORTUNITIES

ISLAMIC FINANCE & MICRO FINANCEIslamic economic goals of;• equality, fairness, social solidarity through

risk sharing, property rights, and the sanctity of contracts; entrepreneurship, partnership, income generation through productive activity for poverty alleviation are consistent with elements of Micro Finance.

• A successful marriage of both in Islamic Microfinance should reinforce each other.

DISCONTENTS OF IF & MF IN PRACTICE• Islamic financial services industry has

shown little interest in MF and poverty alleviation aiming for Shariah compliance in form not in spirit.

• Conventional MF industry has shown inadequate interest in religious and cultural sensitivities; also largely excludes the poorest of the poor.

• Islamic MF for enhancing financial inclusion

ISLAMIC MICRO FINANCE EXPERIMENTS

• MENA: Sanadiq at Jabal al-Hoss, SYRIA• Mu’assasat Bayt Al-Mal in LEBANON• Hodeidah Program in YEMEN • IBBL, SIBL in BANGLADESH• Akhuwat in PAKISTAN• Manara in INDIA• FINCA in AFGHANISTAN• Amana Ikhtiar in MALAYSIA• BPRS, BMTs in INDONESIA• Azaouad Finance in NORTHERN MALI

Issues of Islamic Microfinance– Sustainability

– Most of the programs are not sustainable in Pakistan– Overall Operational and Financial Sustainability

records at 89% and 74%, respectively. – High interest rates eats up sustainability of clients

– Transparency– Flat interest rates, un-explained fees, hidden charges

– High Cost Debt Economy than Real Economy– Separates finance from real economy– Absence of cooperation when client loses

– Exclusion – Self-exclusion due to prohibition of interest– Poorest of the poor and Women in gender

segregated societies

Role of Islamic Microfinance– Developing social capital among clients and

MFI, instead of clients only – Meeting Demand For Islamic Microfinance– Promoting Entrepreneurship

• Debt not allowed in Islam as usual practice• Asset creation and entrepreneurship is

promoted – Transparency and Sanctity of Contracts

• Islamic values prevent violation of contract and require disclosure of full knowledge relating to financial transaction

– Regarding MFIs– Limited number of IMFIs (i.e. 4 – 6) – Limited resource base of IMFI– Ineligibility of collecting savings– Product concentration in Murabaha – Capacity building of MFI– Sharia advisory

– Regarding Islamic banks– Perception about microfinance as high risk area– Informal sector environment– Absence in rural areas– Absence of credit guarantee scheme

Issues for Islamic Microfinance

– Corporate Social Responsibility: Fard al Kafaya– Business case: Profits and high rate of recovery– Limitations: Informal sector/regulatory implications,

absence in rural areas– Possible Course of Action:

– Phase – I: » Linkage with MFIs [Mudaraba or Musharaka]

– Urban Operation through Islamic MF Division or Cell– Phase – II » Linkage continues» Extension of branches in rural areas

Recommendations

Thank You

CENTER OF ISLAMIC BANKING & ECNOMICS

Head Office: 192- Ahmad Block, New Garden Town , Lahore, Pakistan Ph: +92-42-35913096-8, 35858990, 38407850 Fax: +92 -42-35913056E-mail : info@alhudacibe.comWeb: http://www.alhudacibe.com