Khan rehman, islamic microfinance .pdf

Download Khan rehman, islamic microfinance .pdf

Post on 29-Jan-2015

103 views

Category:

Economy & Finance

0 download

DESCRIPTION

 

TRANSCRIPT

  • 1. Financing the Poor: Towards an Islamic Microfinance An Islamic Finance Industry Perspective Iqbal Khan and Aamir A. Rehman Harvard Law School -14 April 2007

2.

  • Islamic finance is an inclusive proposition
  • Engaging the poor is not easy
  • Industry has potential to lead and address the situation
  • Next stages

Agenda 3. Islamic finance is more than financial contracts Industry is outcome of CSR and ethical principles

  • 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

4. Industry has not yet reached full potential Islamic finance has not forgotten the poor

  • 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

5.

  • Islamic finance is an inclusive proposition
  • Engaging the poor is not easy
  • Industry has potential to lead and address the situation
  • Next stages

6. Bottom of Pyramid market carries additional responsibility Assisting the poor is a pillar of Islam

  • 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 day
    • Islamic finance has ready moral and product framework to assist
    • Islamic finance can unlock bankable wealth and enable trickle down effect

Source: 1. HBS Bulletin March 2007 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

7.

  • Islamic finance is an inclusive proposition
  • Engaging the poor is not easy
  • Industry has potential to lead and address the situation
  • Next stages

8. Islamic microfinance is a complementary initiative to Islamic financeMicrofinance mission reflects part of Islamic ethos Microfinance Islamic finance Reaches previously under-banked population Focus on uplifting the poor Models advocate: - financial inclusion - entrepreneurship - risk-sharing through partnership financing Routed in Shariah-complianceFair access to capital Equitable Core concern New-market innovation Finance based on worthiness of ventures and assets, and not based on wealth Asset orientation 9. Microfinance fits the spirit of Shariah-based industry development Islamic microfinance supports industry morals and ground needs

  • 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 & Investments Indebtedness

  • Income-sharing products
  • Shift from debt-based product offering
  • Letter of the law
  • Replicating conventional credit service offering

x 10. Islamic finance is a platform to build microfinance

    • 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

    • 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

3 Philanthropic Commercial Partnership Organic 4 1 2 11.

  • Islamic finance is an inclusive proposition
  • Engaging the poor is not easy
  • Industry has potential to lead and address the situation
  • Next stages

12. Islamic microfinance requires combined efforts Create successful partnership formula Best-of-breed microfinance institutions Modest capital commitment Requires institutional will 13. Thank you [email_address]