what is islamic microfinance? making it a sustainable reality · • what is islamic microfinance?...

What is Islamic Microfinance?Making it a Sustainable Reality

Presenters

• PART I: Rafi-uddin Shikoh

• PART II: Atif R Khan

www.EthicaInstitute.com | www.DinarStandard.com

Agenda

• Presentation: 45 min

• Q&A: 30 min


Section 1: Global Microfinance Context (Part 1)

• Global Microfinance Drivers/ Opportunities

• What is Microfinance?

• Landscape – key players

• Impact & Challenges

Section 2a: Islamic Microfinance

Agenda



• What is Islamic Microfinance?

• Key Islamic Microfinance drivers/ Opportunities

• Landscape – Key players/ geographies

• Impact, Challenges & Opportunity

Section 2b: Islamic Microfinance -- Part 2 to be delivered at the next session

• Islamic Microfinance core models

• Islamic Microfinance structures

Summary

• MICROFINANCE…Banking for the poor

• Big need exists – However poverty alleviation is too big apromise; Industry is growing but showing signs of problems(*primarily excess lending and aggressive collection; akin tosub-prime mortgage lending)


sub-prime mortgage lending)

• However many success stories, best practices developing andgrowing. Problems should be removed.

• Islamic Microfinance in infancy making finance accessible tomany low-income Muslims and with universal potential.

Global Microfinance Drivers1. Addressing “FINANCIAL EXCLUSION” of low-income global population:

Globally 49 percent of adults have deposit accounts in formal financialinstitution*


Source: Financial Access 2010 Report, by CGAP and World Bank

19% of developed world adults do not have bank accounts72% of adults in the developing world do not have accounts

Global Microfinance Drivers1. Addressing “FINANCIAL EXCLUSION” of low-income global population:

Globally 49 percent of adults have deposit accounts in formal financialinstitution*


Source: Financial Access 2010 Report, by CGAP and World Bank

An estimated 72 percent of people living in Muslim-majoritycountries do not use formal financial services

(CGAP Islamic Microfinance Note 2008)

2. Addressing needs of MICRO-ENTERPRISES:Micro-enterprises have historically lacked access to financial productsand services. Microfinance institutions have emerged to serve thesmallest of these enterprises, while banking institutions have typicallyconcentrated on large corporations.

Global Microfinance Drivers


Source: Access Finance, World Bank, JANUARY 2010 | ISSUE No. 30

“Unmet demand for finance is large, but the exactnumber (or even a rough but credible number) has

2. Addressing needs ofMICRO-ENTERPRISES

1. “FINANCIAL EXCLUSION” oflow-income global population

Global Microfinance Drivers


number (or even a rough but credible number) hasbeen hard to pin down, with estimates ranging from

half a billion people to three billion.*”

*Financial Access 2010 Report, by CGAP and World Bank

What is Microfinance?

• Microfinance services lowincome groups (extremepoor, moderately poor-main clients), mostly notserved by commercialbanks.

1. Low-income population

2. Microenterprises


banks.

• Services offered are Creditfacilities, savings account,money transfers,remittances, insurance andeven investment

What is Microfinance?Pioneered the group-basedresponsibility model but othermodels exist*


* Other models: Village model; Coop; Self-help groups (SHGs)

Landscape: Key Players

– MIX Global 100 -- As a group, surveyed institutionsrepresented nearly 85 percent of the known pool ofmicrofinance borrowers, serving 72 million borrowerswith 37 billion USD in loans and holding 22 billion USD indeposits from 67 million microfinance clients. (MIX 2010Report)


Report)

Microfinance Information Exchange, Inc. access tofinancial and social performance information, includingquarterly results, on more than 2,000 MFIs in thedeveloping world covering 92 million borrowers.


Top 100 MicrofinanceInstitutions in the World:MIX 100 that are profitable


MIX 100 that are profitableand top performers in eachof three areas: outreach,efficiency, andtransparency

Impact

• Poverty alleviation: Many studies indicate positiveimpact over the last twenty years, as well as somefindings that suggest limited or negative impact.

• Example:


Since Kiva was founded in 2005:• 680,458 Kiva lenders• $279 million in loans• 98.93% Repayment rate

Work with:• 146 Field Partners• 450 volunteers around the world• 60 different countries

Shortcomings

• Social fallout: Family issues

• High interest rates: “Loan sharks”, 30%, 40% even 60%+ Per year

• Excessive lending/ over indebtedness: Major defaults in India

• Aggressive debt collection: “The past five years have seen theaggressive selling of loans to often illiterate villagers, followed by


aggressive selling of loans to often illiterate villagers, followed byequally aggressive debt collection.” As a result, the past decadewitnessed more than 200,000 farm suicides in India. Reports India’sleading rural journalist, The Hindu’s P. Sainath: “Those who havetaken their lives were deep in debt.”

• Exclusion: Poorest of the poor; Self-exclusion due to prohibition ofinterest for Muslims

Section 1: Global Microfinance Context (Part 1)

• Global Microfinance Drivers/ Opportunities

• What is Microfinance?

• Landscape – key players

• Impact & Challenges


Agenda



• What is Islamic Microfinance?

• Key Islamic Microfinance drivers/ Opportunities

• Landscape – Key players/ geographies

• Impact, Challenges & Opportunity

Section 2b: Islamic Microfinance -- Part 2 to be delivered at the next session

• Islamic Microfinance core models

• Islamic Microfinance structures

Key Islamic Microfinance Drivers• Indonesia, Bangladesh, Pakistan, Nigeria and Egypt - account for over half a billion

(528 million) of the world’s poor with incomes below $2 a day or national povertyline.

• Needs of the poor in Islamic countries are for the most part the same as the poor inother societies …approximately 44 percent of conventional microfinance clientsworldwide reside in Muslim majority countries*.

• Yet an estimated 72 percent of people living in Muslim-majority countries do not


• Yet an estimated 72 percent of people living in Muslim-majority countries do notuse formal financial services (CGAP Report 2008)

• A number of IFC-commissioned and other market studies suggest a strong demandfor Islamic microfinance products: Surveys in Jordan, Algeria, and Syria, for example,revealed that 20–40 percent of respondents cite religious reasons for not accessingconventional microloans. (CGAP Report 2008)

• There is also a category of Muslim clients who use conventional products but preferIslamic ones and tend to switch over once Islamic products become available. (CGAPReport 2008)

Key Islamic Microfinance Drivers

“Islamic microfinance has thepotential to expand access to

finance to unprecedented levels


finance to unprecedented levelsthroughout the Muslim world.”

CGAP Islamic Microfinance: An Emerging Market Niche, Aug 2008

What is Islamic Microfinance?

“Microfinance and Islamic finance have much in common.

Both emphasize the good of society as a whole. Both advocateentrepreneurship and risk sharing and believe that the poor

should take part in such activities. Both focus on developmentaland social goals. Both advocate financial inclusion. Both involve


and social goals. Both advocate financial inclusion. Both involveparticipation by the poor. There are however, some points of

difference between the two.” *

* Intro. to Islamic Microfinance, Mohammed Obaidullah, IIBF

What is Islamic Microfinance?• Islamic Approach to Poverty Alleviation:*

1) Charity (Sadaqa) - Zakat, Sadaqa Jariya or Waqf (endowment/ trust)

2) Economic empowerment.

3) Debt avoidance: Muslims are also warned against the dangers of incurring heavy debt. The ProphetMuhammad (peace be upon him) used to regularly supplicate “Allah, I seek refuge with You fromsin and heavy debt”. When someone remarked, “how often you seek refuge from heavy debt”, hereplied, “when a man gets into debt, he speaks and tells lies, and he makes a promise and breaksit” (Bukhari and Muslim). “The best among you are those who are best in paying off debt”



it” (Bukhari and Muslim). “The best among you are those who are best in paying off debt”(Muslim);

4) Cooperation: A hadith by the Prophet (peace be upon him) reinforces the principle of cooperationand mutual assistance. “Believers are to other believers like parts of a structure that tighten andreinforce each other." (Al-Bukhari and Muslim)

5) Family cohesiveness: “And covet not that whereby Allah has made some of you excel others. Menshall have a share of that which they have earned, and women a share of that which they haveearned. And ask Allah of his bounty. Surely Allah has the perfect knowledge of all things” (4:32)

What is Islamic Microfinance?• Islamic Approach to Poverty Alleviation:*

6) Sharia Compliance of Finance Contracts: All contracts in Shariah must be free from certainforbidden elements. A brief overview of relevant norms is provided below:

• Freedom from Riba: “Allah has permitted trade and forbidden riba.” (2:275) Prohibition ofinterest (riba) is the central tenet of the system. Conventional interest on loans or savings, as afixed return without sharing any risk, is considered unjust. Risk sharing: Because interest isprohibited, suppliers of funds become investors instead of creditors. The provider of financialcapital and the entrepreneur share business risks in return for shares of the profit.



capital and the entrepreneur share business risks in return for shares of the profit.

• Freedom from Gharar: The concept of gharar has been broadly defined by the Islamic scholarsin two ways. First, gharar implies uncertainty. Second, it implies deceit.

• Shariah approved activities: Muslims cannot profit from activities considered immoral. Forexample, investing in businesses dealing with alcohol, gambling, casinos, pornography, orweapons of mass destruction is not allowed.

What is Islamic Microfinance?• Forms of contracts (to be discussed in detail in Part II of presentation)

Micro-credit

MURABAHA(Cost plus profit sale)

Micro-savings

MUDARABA-BASEDaccounts

Micro-transfer Micro-Insurance

TAKAFUL


IJARA(Leasing)

MUDARABA(investment partnership;

trustee profit sharing

MUSHARAKA(JV profit sharing)

QARD HASAN

MURABAHA-BASED termdeposit accounts

Micro-creditMicro-savings

What is Islamic Microfinance?

A FRAMEWORK

Core IslamicFinancing contracts

Poverty AlleviationResponsibility


Micro-savingsMicro-transfer

Micro-insurance Target Audience/Need

Illustration: © 2012 DinarStandard

Islamic Microfinance: Landscape

• Currently Islamic microfinance is concentrated in a few countries, withIndonesia, Bangladesh, Pakistan and Afghanistan ranking in the top.According to the 2008 Consultative Group to Assist the Poor (CGAP)survey, Islamic microfinance accounts for about 0.5 per cent. of globalmicrofinance despite a global Muslim population of about 1.2 billion.

• In a 2007 global survey on Islamic microfinance, CGAP collected


• In a 2007 global survey on Islamic microfinance, CGAP collectedinformation on over 125 institutions and contacted experts from 19Muslim countries. The survey and a synthesis of other available datarevealed that Islamic microfinance has a total estimated global outreachof only 380,000 customers.

• CGAP survey identified that over 70 percent of the products offered areMurabaha. Islamic MFIs generally offer only one or two Sharia-compliantproducts.

• The Consultative Group to Assist the Poor (CGAP), Deutsche Bank, IslamicDevelopment Bank (IDB) and Grameen-Jameel partnered to address newmicrofinance models with Shari’ah compliancy through an IslamicMicrofinance Award.

• 130 banks from 43 countries and Microfinance Institutions (MFIs)submitted their ideas for the award



submitted their ideas for the award

– Winner: Al Amal Microfinance Bank of Yemen (AMB)

– Tameer Micro Finance Bank Ltd (TAMEER) - Pakistan

– Tanzania eco Volunteerism (TeV) - Tanzania

– Bina Insan Sejahtera Mandiri (BISMA) - Indonesia

– Centre for Women Co-operative Development (CWCD) - Pakistan

– Bangladesh Case Study: IBBL (Islami Bank Bangladesh Limited)Introduced own version of microfinance: 'Rural Development Scheme(RDS)' in 1995. Modeled after the Grameen Bank model except thatthe scheme used Islamic modes of investment.

– Effective rate after rebate is 20% per annum, which is a majordifference with typical MFIs. ASA, BRAC, BURO and many other MFIseffectively charge 30% interest per annum.



– IBBL one of the top 10 MFIs offering microfinance; IBBL reached about11,000 villages (about 13% of total Bangladesh villages); andoutstanding investments reached Taka 3752 million (USD 53.6 million).

– Products: saving plans; financing plans; MicroTakaful

– Issue in contract credibility –Bai-muajjal (credit sale) Among alternativemodes, Mudharabah is fraught with practical problems arising out ofreluctance and/or inability among informal livelihood enterprises forproper accounting of results.

– Indonesia Report: Why is Growth of Islamic Microfinance Lower than Conventional?*

– Out of 2200 some rural banks only 92 are Islamic but started in 1990s. Out of 40,000microfinance cooperative, 3000 were Islamic (2003) 54.4% of respondents preferredIslamic MFI rather than conventional MFI (45.6%).

– Most of clients were Muslim and they preferred to choose Islamic MFIs, however inreality they chose MFI based on economic (low interest rates, low collateral and sizeof loan) and non-economic factors (such as quality of services variables easiness,speed, nearness, method and loan officers’ profile).



speed, nearness, method and loan officers’ profile).

– BRI as a government supported entity has the biggest adoption. (conventional) BRI isa biggest five MFIs in the world (Microcredit Year, 2005) in terms of clients and theirloans.

– As the MFIs clients prefer Islamic MFI compared to conventional, the demand forIslamic microfinance can be enhanced if the level of their economic and non-economic factors can be brought to the levels of conventional MFIs.

* Paper presented by Dian Masyita (PhD research scholar in Islamic Finance, Durham University, UK), Habib Ahmed (Professor of Sharjah Chairin Islamic Law and Finance at the Durham University, UK) at 8th International Conference on Islamic Economics and Finance

Islamic Microfinance: Opportunity

• Operational Efficiency/ Risk Management

• Opportunity for integrating Zakah and Awqaf with“for-profit” Shariah-compliant microfinance needs tobe developed


be developed

• Use of Qard hasan

• Introduction of micro-Takaful

• Islamic Microfinance for all globally

Rafi-uddin Shikoh

Business Media Research Advisory


Rafi-uddin ShikohE: [email protected]: advisory.dinarstandard.com

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