MICRO FINANCING AS A TOOL

OF POVERTY ALLEVIATION IN ISLAMIC PERSPECTIVE

Ausaf Ahmad

Presentation at Akbar Peer Bhoy College Of Management

MumbaiAugust 28, 2008

In the name of Allah, The Most beneficent, The Most Merciful.

AN IRONY

• It is estimated that it would require US $21 billions to provide micro finance to world’s poorest 100 million families. Ironically, only if worlds seven richest family got together, they could wipe out global poverty from their combined wealth.

• Alas, the world does not go by Charity alone.

Wealth of an Arab Prince

• A Car Mercedes SL 600 studded with diamonds, worth 4.5 million $

• A ship worth 500 million dollars• A personal Boeing 747• A palace worth 100 million dollars

with 317 rooms and five kitchens. • Four kitchens specializing in Arab,

Lebanese, Continental and Asian cuisine

A world of Contradictions

• Appalling oceans of poverty along with the islands of prosperity.

• Two billion people do not have access to clean and safe drinking water.

• Two billion people do not have access to electricity and drainage facilities.

WHY MICRO FINANCING?

• Financial intermediation between savers and investors.

• Mismatch between the preferences of savers and investors.

• Problems of Moral Hazards• Problems of Adverse Selection• Problems of collateral and enough

return• Solutions: Specialized agencies • Micro Financing

WHAT IS MICRO FINANCING?

• Micro financing is a term used for providing financial services such as micro credit, micro saving and micro insurance to Poor people.

• Credit worthiness, Profitability and Bankable projects? [ Poor people do not have collaterals].

• Poor people could be relied to repay the loans

• Market mechanism could be used productively to improve the economic conditions of the poor.

• Two billion people do not have access to electricity and drainage system

• Two billion people do not have access to clean drinking water

A SHORT HISTORY

• 1864 Wilhelm Raiffeisen’s German Village Experiment, Rural financing.

• 1900 Alphonse Desjardin, Quebec experiment.

• 1963 Mitghamr project• 1970s Grameen Bank, Bangladesh• International Institutions, NGOs,

Multinational Banks.

What is an NGO?

A non governmental organization (NGO) is a legally constituted organization created by private persons or organizations with no participation or representation of any government. In the cases, in which NGOs are funded totally or partially by governments, NGOs maintain their non governmental status so far it excludes government representatives.

http:/Wikipedia.org/wiki/NGO

GRAMEEN BANK

• Owned by the poor borrowers• Esablished in 1976 in Jobra,

Bangladesh• Incorporated in 1983 by Special law• No collateral, No Legal

instruments, Only group or joint Liability.

• Responsibility of repayment with the individual borrower. 97% women borrowers.

GRAMEEN BANK

• 23000 branches, works in 75,000 villages, Total staff over 21,000

• Total loans disbursement TK 310 billion. Repaid TK 277 billion, 33 billion outstanding. Recovery Rate 98.5 per cent.

• 100 percent loans financed from own deposits.

• Group of Five. All are denied credit if one defaults.

GRAMEEN BANK

• Interest Rates:

Fixed for Micro credit programs 11% Income generating loans 20%

Housing loans 8%

Student loans 5%

Struggling Members Zero %Deposit rates 8.5 – 12%

GRAMEEN BANK

• Housing loans, Micro enterprises loans, scholarships, Higher education loans,

• 17 companies in Grameen Network e.g. Grameen Phone, Telecom, communication, Cybernet, Software, IT Park, Information Highways, Udog, Knitwear, Textiles, Shiksha, Bayopar Vikas, Grameen Trust etc.

CRITIQUE OF GRAMEEN MODEL

•Usurious : high interest ratesUsurious : high interest rates•ExploitativeExploitative•Benefits large corporationBenefits large corporation

NEEDS FOR MICRO FINANCE IN INDIA

• With 63000 branches of commercial banks, 14000 branches of regional rural banks and 100,000 branches of cooperative banks, banking is out of reach for millions.

• 75 million household depend on money lenders.

• 90 percent in Rural India have no access to institutional credit.

• Micro credit can change lives.

Limitations Of The Corporate Sector to Provide Islamic

Finance The organized corporate sector REQUIRES:

1. Large Capital2. Large size of Market3. Favorable Political Climate4. Institutional and Legal Framework

Negative Mental block against Islamic banking is a big barrier against it in the Muslim Minority countries.

INTEREST FREE FINANCIAL INSTITUTIONS IN INDIA

• More than 200 institutions, mostly loan societies and investment companies.

• Operating in the unorganized sector• Misnomer to describe them as Islamic Banks• Societies registered under Societies Act. Many

remain unregistered. • Different sources of funds• Lack control and regulation due to absence of

legal framework. • Non Banking Financial Companies and Islamic

Investment Companies.

Interest Free Financial Institution in India

1. Interest Free Credit Associations2. Interest Free Financial Companies3. Investment Funds

Interest Free Credit Associations

• Mostly established in late 70 and 80s. Coincides with employment upsurge in the Gulf

• Concentrated in South India: Karnataka, kerala, AP and Chinnai.

• Motivation: Avoid Riba

• Registration: Charitable Societies or unregistered.

Interest Free Credit Associations II

• Sources of Funds: Different for Charitable Societies, Cooperative Societies,

• Size of Capital involved: Difficult to tell

• Business Practices:

- Deposit taking

- Providing Loans

- Leasing?

SWOT ANALYSIS OF IFCAs

Strength:Grass Root

organizationsMicro Financing

Weakness:Unorganized

SectorLack of

professionalismLack of regulation

(security)Opportunity:

Mobilization of hidden resources

Threat:Disintegration,

competition, liquidation on legal grounds

Islamic Financial Companies

• Al Ameen (Bangalore)

• Al Falah (Delhi)

• Al Mizan (Chinnai)

• Al Najeeb, (Bijnor, U.P.), Muslim Fund

• Al Idafa (Mumbai)

• First three have been closed by the RBI for non compliance

SPIRIT OF COOPERATION

• Democratic Participation

• One person One vote

• Open membership

• Cooperative Education

• Cooperate with other organizations.

REMEDIES

• Require Legal Framework• Professionalism• Transparency• Accountability• Productivity and Efficiency. • Needs to be organized