Islamic Microfinance – Innovations & Opportunities in Underdeveloped Countries

April 25, 2012Alhuda-CIBE TrainingsAvari Towers, Karachi

PRESENTED BYMohsin Adhi

Director Alfa Adhi Securities (Pvt) Ltd

Microfinance• Key Features– Lend to poor– Do not take security – Prefer saving over borrowing– Small short term loan– Cost converting interest rates– Group appraisal and guarantee– Prefer women customers over men

Microfinance

Riba (Haraam)

Need of Islamic Microfinance

• IN THE WORDS OF QURAN

• Who is he that will loan to Allah a beautiful loan, which Allah will double unto his credit and multiply many times? It is Allah that giveth (you) Want or plenty, and to Him shall be your return. (2:245)

• Allah has permitted trade and forbidden riba. (2:275)

• Allah will deprive riba of all blessing, but will give increase for deeds of charity: and Allah does not love the ungrateful and unjust. (2:276)

• O believers, fear Allah and forgo the interest that is owing, if you really believe. (2:278)

• If you do not, beware of war on the part of Allah and His Apostle. But if you repent, you shall keep our principal. Oppress none and no one will oppress you. (2:279)

• O Muslims, Do not devour riba, doubling and redoubling it and fear (the punishment) of Allah that you may be successful. (3:130)

• What you provide with the prospect of an increase through the property of (other) people, will have no increase with Allah; yet what you give in alms and charity, seeking the countenance of Allah, (will increase): it is these who will get a recompense multiplied. (30:39)

Islamic Microfinance

• Opportunities – Muslim population• 1.2 billion

• Stretching from Senegal to the Philippines

• Six regions (North Africa, Sub-Saharan Africa, the Middle East, Central Asia, South Asia, and Southeast Asia)

• Indonesia 129 million people are with incomes less than merely $2per day

• Bangladesh and Pakistan account for 122 million each followed by India at approximately 100 million Muslims below poverty line.

• According to survey conducted by Consultative Group to Assist the Poorest (CGAP) Islamic microfinance accounts for about 0.5% of global microfinance despite 1.2 billion Muslim population.

Two Approach of Islamic Microfinance

• Welfare Based Approach

• Institutional / Commercial Approach

Welfare Based Approach

SOURCE: Introduction to Islamic Microfinance (Mohammad Obaidullah)

Institutional / Commercial Approach

SOURCE: Introduction to Islamic Microfinance (Mohammad Obaidullah)

Ammanah Ikhtiar Malaysia Case Study

• Established in 1988

• 99% of customers are women

• In 1999, 8.5% of Malaysia population was under poverty line. But in 2004 it dropped to 5.7%.

• In 1988, 283 members of AIM were surveyed, 70% with significant increase in monthly household income from RM 142 to RM 220 per month.

• In 2005, AIM efficiency improved, as has been able to achieve 186% growth in monthly household income i.e. from RM 326 to RM 932.

Economic activities

• Production– Construction/building materials (concrete blocks) – Food (bakery, snack (nuts), fast food, traditional food– Agriculture– Furniture – Jewellery – Handicrafts (batik) – Fishing /fishing equipment – Cattle breeding (goat, cow) – Ceramic (traditional ceramic vase) – Manufacturing – Traditional medicine

• Trading– Cosmetics – Direct selling (dinnerware, mattresses, etc) – Jewellery (gold) – Electronics (oven) – Textiles and apparels – Grocery items – Newspapers – Stationeries – Scrap metal – Paint products – Cigarettes – Health products – Used cars

• Services – Grass cutting – Plumbing – Laundry – Car/motorcycle workshop – Welding – Sewing/tailoring – Café/food stall (burger)/drink stall (sugar cane, soy bean, roselle) – Wedding accessories rental – Barber/hair cut service – Babysitting – Food catering – Children nursery – Recycling products – Cobbler – Selling pre-paid card

Four Models of Microfinance

• Grameen Bank Model

• Village Bank Model

• Credit Union Model

• Self Help Groups

Grameen Bank Model

• Bangladesh based model• Pioneer of Micro financing• Intensive fieldwork required• Group based borrowing• Each member guarantee each other loan• Graduated financing which serve as collateral

as a tool to mitigate default risk

Village Bank Model

• Latin America and Africa • Implementing agency• Village bank• Performance based competition amongst

Village bank encourages savings, loan repayment and capital injections

• Jabal-al-Hoss Syria implemented this Model

Credit Union Model

• Mutuality • Non-profit financial cooperative owned and

controlled by its members• Membership based on common bond• Mobilize savings and provide loan for productive

activities• An apex body provide training and monitor their

financials• Sri Lanka & Baitul Maal wat Tamweel, Indonesia

Self Help Groups

• Originated in India• 10 to 15 members, homogenous in terms of

income • Pool members savings and use it for lending • External funds to supplement internal resources• Supported by NGO’s• Objective is to attain self sustainable institution

Activity

• Would you like to become entrepreneur?

• Would you like to invest in business generating halal income?

• Think of person who you know has skills but lack of funds.

• Would you like to support such person financially and share profit with him / her?

How NGO’s are doing it?

Al Khidmat Video

Proposed Model

Islamic Microfinance Management Company (IMMC)

• Listed• Operate like Mutual Funds as its units can be

traded accordingly• Attract investors who want to invest in small

business• Collaboration with NGO’s• Monitor financial performance

NGO’s Task List

• Identify low income bracket families

• Register them as members

• Train them

Advantages

• Halal income for investors• Poverty alleviation • Promote entrepreneurship • Facilitate home based industries• Facilitate savings of the new entrepreneurs • Objective is to attain self sustainable families

Why Islamic? Why not Conventional Microfinance?

• Opportunities for hereafter– Being Muslims Islamic Microfinance has more

chances of acceptability & adaptibility

– Other underdeveloped non-muslim nations can replicate this mode of finance

– Help promote religion

References• Allen & Overy LLP, Islamic Microfinance Report, 25 FEBRUARY 2009,

International Development Law Organization

• Kiran Siddiqi, Potential of Islamic Microfinance in Pakistan, 2008

• Mohammed Obaidullah, Introduction to Islamic Microfinance, IBF NET: The Islamic Business and Finance Network, 2008.

• Norma Md Saad, Selecting High-income Generating Activities for Micro-entrepreneurs: The Case Study of Amanah Ikhtiar Malaysia, International Journal of Humanities and Social Science, Vol. 1 No. 5; May 2011.

• Pakistan Microfinance Review 2010 (Annual Assessment of Industry), Pakistan Microfinance Network, Edited by Ali Shahrukh Pracha.