The Islamic Microfinance Initiatives

around the Globe & Role in Poverty Alleviation

Dr. Haroon ur Rashid Khan

King Abdulaziz University,

Jeddah, Saudi Arabia

&

Sysco Solutions, SAS, France

MICROFINANCE

Microfinance is the process of providing financial services, making small loans to people who would not otherwise

have access to savings or credit facilities.

Small loans for small entrepreneurs

MICROFINANCE IN MUSLIM WORLD

72 % people living in Muslim-majority countries don’t use formal financial services (Honohon 2007).

Even when available, some view them incompatible with Islamic financial principles.

In recent years, some microfinance institutions (MFIs) - low-income Muslim clients …consistent with Islamic principles

Emergence of Islamic microfinance as a new market niche.

ISLAMIC PRINCIPLES

IMF cannot just imitate conventional microfinance programs

In IMF return on capital is allowed, capital participates in the productive process and

exposed to business risk.

Material finality.

Investment activity.

No contractual exploitation.

ISLAMIC FINANCE MARKET

Over 800 Sharia-compliant institutions-75 countries (KPMG ). 292 banks (fully Islamic institutions & those with Islamic

subsidiaries),

115 Islamic investment banks and finance companies, and

118 insurance companies.

Industry’s total assets worth almost US$ 1 trillion (2014).

WHAT IS ISLAMIC MICROFINANCE (IMF) Islamic or ‘Shariah-compliant’, microfinance

provision of financial services for low-income populations

conforming Islamic financing principles.  Islamic finance is simply ethical finance.One of the most important Islamic financing

principles money is not an earning asset in and of itself.

IMF IMF--confluence of two rapidly growing industries

Combine principle of social justice with financial services

Giving millions of Muslims access to finance

Combining Islamic social principle of caring for the less fortunate

Emphasize human development as well as profit maximization

Sensible risk management

Link real economic activity to financing structure.

Islamic microfinance is still in its infancy, business models are just emerging.

IMF INITIATIVES AROUND THE GLOBE

IMF estimated global outreach only 0.5-1% of total outreach.

92% of Sharia-compliant loans are concentrated in East Asia, Pacific and MENA regions.  

82% of IMF in just three countries: Bangladesh, Sudan, and Indonesia

Pakistan recently climbing the ladder with programs like Akhuwat

TYPES AND OUTREACH OF IMF

Cooperative

Village Banks (Syria)

NGOs

Rural bank (Bank Perkreditan Rakyat Syariah or BPRSs-Indonesia)

NBFIs

Commercial Banks

Banks Downscaling and Expanding Product Line Tadhamon Islamic Bank (Yemen)

Noor Islamic Bank (UAE)

Allianz Life (Indonesia)

Islamic Bank Bangladesh Limited (Bangladesh)

OPPORTUNITIES

Conventional MF products --successful in Muslim countries

Yet, not fulfilling the needs of many Muslim clients

Huge potential -Islamic countries, Asia and Africa huge potential – untapped resources

Millions of Muslims required access to finance

Approx. 44% of conventional MF clients worldwide reside in Muslim countries

Islamic principle of brotherhood (Akhuwat)

Scope well beyond the Muslim world

IMF and Poverty Alleviation: Assumptions

•Poverty alleviation is a worthy goal.

•Islamic microfinance can help alleviate poverty.

YOU MAY ASK…

With the Islamic finance industry pushing $1 trillion, why have we not seen larger scale social investment?

Should Islamic finance “innovation” include innovative ways to alleviate poverty?

Because an institution is “Islamic” does this mean it has a particular obligation to invest in economic or

community development?

How does the concept of Islamic microfinance operate to serve the goal of poverty alleviation?

WHY NOW?

With the Islamic finance industry pushing $1 trillion, why have we not seen larger scale social investment?

Islamic Finance industry development and awareness

Microfinance industry development and awareness

Financial crisis

Attention to business ethics

Attention to human capital

Is available in developing world

Needs support from developed economies

Innovation?

Should Islamic finance “innovation” include innovative ways to alleviate poverty?

•Entrepreneurship

•Distribution of wealth

•Social development goals

•Financial structures

•Repayment incentives

•Why not?

Special obligation?

Because an institution is “Islamic” does this mean it has a particular obligation to invest in economic or community development?

•Social and human development goals of IF, but…

•Corporate social responsibility (Friedman)

•Does “Islamic” refer only to financial structures?

•Not everyone agrees

Poverty alleviation?

• How does the concept of Islamic microfinance operate to serve the goal of poverty alleviation?

“I think that there is a common goal in Islam and microfinance which can be summarized in making people self reliant, enterprising and self respecting. A solution to achieve the target of poverty eradication is by practicing microfinance in an Islamic way.” (a common man)

CHALLENGES

Unable to tap fully the market potential

Market research based and proven business models : Build Sustainable Business Models for Performance bench marks (Good

example of Akhuwat)

Product Diversity

Operational efficiency & Risk management (peer pressure rather collateral)

Capacity Building and community education

Funding sources :Leveraging Zakat and Islamic Funds and donations

Regulatory framework to reduce High transaction costs Asymmetric information One suggestion…

WHERE?

Currently most Islamic microfinance is located in the developing world.

We believe that the model should be developed in the developed world.

WHY?Transaction costs are very high; stricter

regulation will discipline the industry to lower transaction costs; these efficiencies can be transferred to the developing world.

Donor fatigue: Funding sources available in the developed world through locals concerned with community and economic development.

Integration and acceptance into Western society

In sum…

“If they take money from charity, they use the money to live. Therefore, they will keep on asking for more charities. When small loans are given to them they try to find ways to generate income out of it to solve the actual root of the problem which is income generation.”

( a common student)

Thanks a lot

AlHuda CIBE FZ LLE - U.A.EP: + 971 56 9286664, + 971 55 938 99 00

AlHuda Center of Islamic Banking & Economics - Pakistan

Ph: (92-42) 35913096 - 98, Fax: (92-42) 35913056Email: info@alhudacibe.com Website:

www.alhudacibe.com