Khan rehman, islamic microfinance .pdf

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<ul><li> 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</li></ul> <p> 2. </p> <ul><li>Islamic finance is an inclusive proposition </li></ul> <ul><li>Engaging the poor is not easy </li></ul> <ul><li>Industry has potential to lead and address the situation </li></ul> <ul><li>Next stages </li></ul> <p>Agenda 3. Islamic finance is more than financial contracts Industry is outcome of CSR and ethical principles </p> <ul><li>Fundamental tenants are derived from Shariah </li></ul> <ul><li><ul><li>Absence of interest-based transactions </li></ul></li></ul> <ul><li><ul><li>Avoidance of economic activity involving speculation </li></ul></li></ul> <ul><li><ul><li>Prohibition on production of goods and services which contradict the values of Islam </li></ul></li></ul> <ul><li>Concept is grounded in ethics and values </li></ul> <ul><li><ul><li>Principles akin to ethical investing</li></ul></li></ul> <ul><li><ul><li>Emphasis on risk-sharing and partnership contracts </li></ul></li></ul> <ul><li>Islamic finance offers an alternative paradigm</li></ul> <ul><li><ul><li>Asset-backed transactions with investments in real, durable assets </li></ul></li></ul> <ul><li><ul><li>Stability from linking financial services to the productive, real economy </li></ul></li></ul> <ul><li><ul><li>Credit and debt products are not encouraged </li></ul></li></ul> <ul><li><ul><li>Restrains consumer indebtedness </li></ul></li></ul> <ul><li>Islamic banking is community banking</li></ul> <ul><li><ul><li>Serving communities, not markets </li></ul></li></ul> <ul><li><ul><li>Open to all-faith clients </li></ul></li></ul> <ul><li><ul><li>Instruments of poverty-reduction are inherent part of Islamic finance zakat &amp; qard hasan channels </li></ul></li></ul> <p> 4. Industry has not yet reached full potential Islamic finance has not forgotten the poor </p> <ul><li>Industry initially had to demonstrate commercial viability </li></ul> <ul><li><ul><li>First Islamic bank established in 1975 </li></ul></li></ul> <ul><li><ul><li>Initial market strategy focus on revenue-generating projects </li></ul></li></ul> <ul><li>Industry is young and gaining mainstream relevance</li></ul> <ul><li><ul><li>Industry-building infrastructure setup as recently as 1991 (AAO-IFI)</li></ul></li></ul> <ul><li><ul><li>Reputational risk management led to careful dealing with non-regulated charities industry </li></ul></li></ul> <ul><li>Industry is building stakeholder connectivity </li></ul> <ul><li><ul><li>State-controlled waqf and zakat institutions not proactively engaged with Islamic finance </li></ul></li></ul> <ul><li><ul><li>Regulatory hurdles imposing investment restrictions in government-owned institutions </li></ul></li></ul> <ul><li>Islamic banking develops link to economy </li></ul> <ul><li><ul><li>Robust banking system enables economic development </li></ul></li></ul> <ul><li><ul><li>Vehicle for financial and economic empowerment </li></ul></li></ul> <ul><li><ul><li>Deepening bankable population and unlocking dead capital </li></ul></li></ul> <ul><li>Responsibility of poor was sidelined for growth first </li></ul> <ul><li><ul><li>Industry began as MitGhamr Savings Associations(1963) </li></ul></li></ul> <ul><li><ul><li>Nile Delta experiment to mobilise local villager savings for local socio-economic development </li></ul></li></ul> <p> 5. </p> <ul><li>Islamic finance is an inclusive proposition </li></ul> <ul><li>Engaging the poor is not easy </li></ul> <ul><li>Industry has potential to lead and address the situation </li></ul> <ul><li>Next stages </li></ul> <p> 6. Bottom of Pyramid market carries additional responsibility Assisting the poor is a pillar of Islam </p> <ul><li>Engaging the poor requires balance between profitable and responsible lending </li></ul> <ul><li><ul><li>Lending enterprise needs to be wary of debt spiral </li></ul></li></ul> <ul><li><ul><li>Engagement programme must be self-sustaining </li></ul></li></ul> <ul><li>Bottom of Pyramid market has long been neglected</li></ul> <ul><li><ul><li>Market is well underserved half of planet live on less than $2 a day </li></ul></li></ul> <ul><li><ul><li>Islamic finance has ready moral and product framework to assist </li></ul></li></ul> <ul><li><ul><li>Islamic finance can unlock bankable wealth and enable trickle down effect</li></ul></li></ul> <p>Source: 1. HBS Bulletin March 2007 Lending profitably </p> <ul><li>Despite engagement of less privileged customers </li></ul> <ul><li>May not be responsible financing: </li></ul> <ul><li><ul><li>Sub-prime lending </li></ul></li></ul> <ul><li><ul><li>Debt consolidation companies </li></ul></li></ul> <p>Lending responsibly </p> <ul><li>Prevent over-indebtedness </li></ul> <ul><li>Microfinance is good example </li></ul> <ul><li><ul><li>Fiduciary business to uplift poor </li></ul></li></ul> <ul><li><ul><li>Affordable lending to enable sustainability </li></ul></li></ul> <p> 7. </p> <ul><li>Islamic finance is an inclusive proposition </li></ul> <ul><li>Engaging the poor is not easy </li></ul> <ul><li>Industry has potential to lead and address the situation </li></ul> <ul><li>Next stages </li></ul> <p> 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 </p> <ul><li>Industry needs to shift from Shariah-compliant to Shariah-based </li></ul> <ul><li><ul><li>Mindset of consumer debt is not in Islamic spirit </li></ul></li></ul> <ul><li><ul><li>Investment and debt for productive use is allowed </li></ul></li></ul> <ul><li><ul><li>Microfinance provides credit for the real economy </li></ul></li></ul> <ul><li>Microfinance fits need of Muslim communities </li></ul> <ul><li><ul><li>Muslim-countries in spectrum of poverty and underdeveloped social infrastructure </li></ul></li></ul> <ul><li><ul><li>Islamic microfinance will attract under-banked and underserved economically active poor </li></ul></li></ul> <ul><li>Islamic finance provides interest-free solutions for job creation </li></ul> <ul><li><ul><li>Musharaka/Mudaraba PLS arrangements </li></ul></li></ul> <ul><li><ul><li>Murabaha/Ijara commodity purchases </li></ul></li></ul> <p>Shariah-compliant products Shariah-based solutions Savings &amp; Investments Indebtedness </p> <ul><li>Income-sharing products </li></ul> <ul><li>Shift from debt-based product offering </li></ul> <ul><li>Letter of the law </li></ul> <ul><li>Replicating conventional credit service offering </li></ul> <p>x 10. Islamic finance is a platform to build microfinance</p> <ul><li><ul><li>Assist in building Islamic microfinance institutions with Islamic finance products </li></ul></li></ul> <ul><li><ul><li>Use charitable endowments as start-up, risk-free capital </li></ul></li></ul> <p>Industry can build commercial partnerships with Microfinance managers </p> <ul><li><ul><li>Create charitable funding channels for Microfinance institution </li></ul></li></ul> <ul><li><ul><li>Combine Islamic finance industry synergies and distribution assistance </li></ul></li></ul> <ul><li><ul><li>Bring capital market access via Islamic finance industry and match with efficient institutions </li></ul></li></ul> <ul><li><ul><li>Initiate joint ventures with successful, business-run enterprises </li></ul></li></ul> <ul><li><ul><li>Build scale and reach of Islamic microfinance managers </li></ul></li></ul> <ul><li><ul><li>Migrate successful models to other markets </li></ul></li></ul> <p>3 Philanthropic Commercial Partnership Organic 4 1 2 11. </p> <ul><li>Islamic finance is an inclusive proposition </li></ul> <ul><li>Engaging the poor is not easy </li></ul> <ul><li>Industry has potential to lead and address the situation </li></ul> <ul><li>Next stages </li></ul> <p> 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] </p>

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