islamic microfinance: problems faced & their solution dr mohammed obaidullah islamic research...
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ISLAMIC MICROFINANCE:PROBLEMS FACED & THEIR SOLUTION
Dr Mohammed ObaidullahIslamic Research & Training Institute
Islamic Development Bank Group
9th Distance Learning Course in Islamic Finance, Spring 2009
PLAN OF PRESENTATION
Poverty & Exclusion in Islamic World
Islamic Microfinance Development:
Micro PerspectivesMeso PerspectivesMacro Perspectives
9th Distance Learning Course in Islamic Finance, Spring 2009
POVERTY IN ISLAMIC WORLD
Lowest Five among IDB member countries account for over half a billion (528 million) of the world’s poor (with incomes below $2 a day)
Lowest Ten account for over 600 million of the world’s poor.
Indonesia alone accounts for 129 million - over half of its population
9th Distance Learning Course in Islamic Finance, Spring 2009
EXCLUSION IN THE ISLAMIC WORLD
72 percent of people living in Muslim-majority countries do not use formal financial services (Honohon 2007).
In 31 countries two-third or more do not have access to formal financial services
In 21 countries three-fourth or more do not have access to formal financial services
In 17 of the member countries four-fifth or more of their adult population do not have access to formal financial services
9th Distance Learning Course in Islamic Finance, Spring 2009
WHAT THE POOR IN MUSLIM SOCIETIES NEED
Micro-credit Micro-equity Micro-savings Micro-transfers Micro-insurance
That do not violate their fundamental beliefs and cultures
9th Distance Learning Course in Islamic Finance, Spring 2009
WHAT THE POOR IN MUSLIM SOCIETIES NEED
Total estimated global outreach of IsMFI industry of only 380,000 customers that accounts for only one-half of one percent of total microfinance outreach.
Supply is very concentrated in a few countries, with Indonesia, Bangladesh, and Afghanistan accounting for 80 percent of global outreach.
Demand is strong. In Jordan, Algeria, and Syria, 20–40 percent of respondents cited religious reasons for not accessing conventional microloans. (CGAP Survey, 2008)
9th Distance Learning Course in Islamic Finance, Spring 2009
WHAT IS EXPECTED OF ISLAMIC MFIS
Poverty Alleviation Approach Based on
Charity Economic Empowerment Debt Avoidance Cooperation & Solidarity Family Cohesiveness Shariah Compliance of Contracts
9th Distance Learning Course in Islamic Finance, Spring 2009
MICRO PERSPECTIVES
Alternative Models1. Grameen Model2. Village Banking Model3. Credit Union Model4. SHG Model5. Rural Financial System
All models have been experimented with varying successes.
9th Distance Learning Course in Islamic Finance, Spring 2009
MICRO PERSPECTIVES
Diverse Organizational Structures: 1. Informal MF Providers2. Member-Based Organizations3. Non-Government Organizations4. Formal Financial Institutions5. Commercial Banks
Need to develop an integrated structure by establishing linkages
9th Distance Learning Course in Islamic Finance, Spring 2009
MICRO PERSPECTIVES
Lack of Product Diversification Need for a Financial Engineering
Approach to Product Development1. Deposit Products based on Mudaraba2. Range of Financing Products based
on Mudaraba, Musharaka (Diminishing), Murabaha (Istijrar), Salam (Value-Based), Ijara
3. Micro-Takaful
9th Distance Learning Course in Islamic Finance, Spring 2009
MICRO PERSPECTIVES
Poor Linkages with Banks and Capital Markets
Create Shariah Compliant1.Credit Guarantee Mechanism2.Securitization
9th Distance Learning Course in Islamic Finance, Spring 2009
MICRO PERSPECTIVES
Shariah Compliance1. Shariah Boards2. Fiqhi Issues3. Divergent Perceptions4. Confidence of Users
Collective Resolution of Shariah Issues
9th Distance Learning Course in Islamic Finance, Spring 2009
MESO PERSPECTIVES
Transparency and Information
High-quality auditors and rating agencies, credit bureaus, reliable information software - scarcely available to Islamic MFIs
Existing MF-specific agencies expand scope to include Islamic MF; or existing agencies for mainstream IFIs to absorb MF services; Proactive role of donors in development of Islamic MF rating
9th Distance Learning Course in Islamic Finance, Spring 2009
MESO PERSPECTIVESEducation and Training
Lack of trained manpower, handful of resource centers and education and training providers
Create a cadre of microfinance experts by imparting training to persons with diverse experiences such as, in banking, finance, investments, entrepreneurship development and community development
9th Distance Learning Course in Islamic Finance, Spring 2009
MESO PERSPECTIVES
Payment Systems
Only large Islamic FIs have access to electronic payment systems
MFIs working for the poor may work through the larger Islamic FIs by forging alliances with them
9th Distance Learning Course in Islamic Finance, Spring 2009
MESO PERSPECTIVES
Networking
No regional or global network exclusively for Islamic MF
Existing networks can expand their scope; New networks for Islamic MF can be created also covering zakah and awqaf organizations
9th Distance Learning Course in Islamic Finance, Spring 2009
MESO PERSPECTIVES
Technical Assistance
Voluntary giving is yet to be institutionalized in many member countries to ensure sustainability of benefits
Re-organize awqaf for all forms of technical assistance and capacity building
9th Distance Learning Course in Islamic Finance, Spring 2009
MACRO PERSPECTIVES
Role of Government
Governments perform poorly in direct provision of microfinance
Need for a policy environment that allows a range of MF providers to coexist and compete to offer higher-quality and lower-cost services to large numbers of poor clients.
9th Distance Learning Course in Islamic Finance, Spring 2009
MACRO PERSPECTIVES
Role of Government
Ensure macroeconomic stability Keep inflation in check Curb speculative forces in financial
markets Liberalize financial market rates Integrate awqaf and zakah in national
policy
9th Distance Learning Course in Islamic Finance, Spring 2009
THE WAY FORWARD
Concerted Efforts by ALL Stakeholders
Cooperatives-NGOs: Efficient management of community assets, Combine social and economic agenda effectively,
IFIs: Recognize MF with distinct risk-returns, undertake direct and indirect financing, linkage with grass-root NGOs, Facilitate capital market participation of MFIs
Awqaf: Preserve and develop community assets, undertake technical assistance
Government Agencies: Create supportive policy and regulatory environment for MFIs
9th Distance Learning Course in Islamic Finance, Spring 2009
THE WAY FORWARD
Proactive Role of Multilateral Development Institutions
Micro Level: Participate in equity, undertake refinancing, promote credit-guarantee and takaful
Meso Level: Develop knowledge base, undertake training of trainers, encourage networking, promote credit rating
Macro Level: Assist member countries to create supportive regulatory and policy environment
9th Distance Learning Course in Islamic Finance, Spring 2009
THANK YOU
9th Distance Learning Course in Islamic Finance, Spring 2009