REGULATORY AND SUPERVISORY FRAMEWORK
IN ISLAMIC MICROFINANCE
Edited by
Abdelrahman Elzahi
Abdul Ghafar Ismail
Mustafa Najm Albushari
Paper presented at the Roundtable Discussion on
Regulatory and Supervisory Frameworkin Islamic Microfinance,18 -19 March 2014,
Sudan University of Sciences and Technology, Khartoum, Sudan
ISLAMIC RESEARCH AND TRAINING INSTITUTE
ISLAMIC DEVELOPMENT BANK
i
©Islamic Development Bank, 2014King Fahd National Library Cataloging-in-Publication Data
King Fahd National Library Cataloguing-in-Publication DataElzahi, Abdelrahman
Proceedings of the roundtable discussion 2014 on Regulatory and Supervisory Framework in Islamic Microfinance. / Abdelrahaman Elzahi; Abdul Ghafar Ismail;Albushari. – Jeddah, 2014
346 p; …cm
ISBN: 978-9960-32-277-3
1-Microfinance 2- Islamic Development BankI- Abdelrahman Elzahi II- Abdul Ghafar Ismail III- Title
332.1 dc 1435/2195
L.D. no. 1435/2195ISBN: 978-9960-32-277-3
ii
PROCEEDINGS OFTHE ROUNDTABLE DISCUSSION PROGRAMME
REGULATORY AND SUPERVISORY FRAMEWORK IN ISLAMIC MICROFINANCE
Edited by Abdelrahman ElzahiAbdul Ghafar Ismail
Mustafa Najm Albushari
Organized by
Sudan University of Sciences and Technology, Khartoum - Sudanand
Islamic Research and Training Institute (IRTI/ GIDB), Jeddah – Saudi Arabia
In collaboration with
Agricultural Bank of Sudan
Tuesday, March 18th – Wednesday, March 19th , 2014Sudan University of Sciences and Technology
Venue: Khartoum, Sudan
SUDAN UNIVERSITY OF SCIENCES AND TECHNOLOGYISLAMIC RESEARCH AND TRAINING INSTITUTE
2014
iii
iv
PROCEEDINGS OFTHE ROUNDTABLE DISCUSSION PROGRAMME
REGULATORY AND SUPERVISORY FRAMEWORK IN ISLAMIC MICROFINANCE
Edited by Abdelrahman ElzahiAbdul Ghafar Ismail
Mustafa Najm Albushari
Organized by
Sudan University of Sciences and Technology, Khartoum - Sudanand
Islamic Research and Training Institute (IRTI/ GIDB), Jeddah – Saudi Arabia
In collaboration with
Agricultural Bank of Sudan, Khartoum - Sudan
Tuesday, March 18th – Wednesday, March 19th , 2014Sudan University of Sciences and Technology
Venue: Khartoum, Sudan
SUDAN UNIVERSITY OF SCIENCES AND TECHNOLOGYISLAMIC RESEARCH AND TRAINING INSTITUTE
2014
v
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TENTATIVE PROGRAMME
Assoc. Prof. Dr. Abdelrahman Elzahi Saaid AliIslamic Economic Research Division
IRTI/IsDBE-mail: [email protected]
Tel:+966 2 6466330
Prof. Dr. Abdul Ghafar IsmailIslamic Economic Research Division
IRTI/IsDBE-mail: [email protected]
Tel:+966 2 646 6330
Dr. Mustafa Najm AlbushariSudan University of Science and Technology
Khartoum SudanE-mail: [email protected]
Tel: +249916294031
ROUNDTABLE DISCUSSION PROGRAMMERegulatory and Supervisory Framework in Islamic Microfinance
Sudan University of Sciences and Technology Venue: Khartoum, Sudan
Tuesday, March 18th – Wednesday, March 19th , 2014http://www.sustech.edu/
PROGRAMME DAY 1 Tuesday, March 18th 2014 8:00 – 17:308:00 – 8:30Arrival, tea, coffee and registration
OPENING SESSION 8.30 – 9:30Chancellor, Sudan University of Science and TechnologyProf Dr Abdul Ghafar Ismail, Islamic Research and Training InstituteRepresentative, Agricultural Bank of SudanGovernment Official
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SESSION ONEMicrofinance in Sudan
Chaired by Abdelrahman Elzahi Saaid Ali
9:30-10:30-Islamic micro finance in Sudan weaknesses and opportunitiesBakhita Hamdow Gad Elkreem 01-For the development of the microfinance sector (in Arabic)General Federation of Trade Unions of Sudan 02
Break 10:30-10:45
SESSION TWO
Behavioral Economics can inform market regulation Chaired by Qosim al Fakiy ‘aliy Jadullah
10:45-12:30-A Framework for Regulating Islamic Microfinance InstitutionsAbdul Ghafar Ismail 03-Attaining Financial Inclusion through Regulating Islamic MicrofinanceBijay Kumar Swain 04Discussion
12:30-13:30 Buffet Lunch and Solat - Venue
SESSION THREEMicrofinance and Policymakers
Chaired by Mustafa Najm Albushari
13:30-15:00-The Role of State-Created Agencies in Supervising the Islamic Microfinance Institutions to Alleviate Poverty amongst Rural FarmersMuhammad Hakimi Mohd Shafiai and Abidullah 05-Experiences in Regulating and Supervising Islamic Microfinance InstitutionsMuhammad Zubair 06-Legal Framework for Crowdfunding in MicrofinanceDossa Maxime 07Discussion
Break 15:15-15:30
SESSION FOURExperiences in regulating and supervising Islamic Microfinance Institutions
Chaired by Khalid Al-bily
15:30-17:00-Moral and Ethics in Islamic Microfinance and Its Impact on Bangladeshi Rural Poor’s Livelihood: An Empirical Study
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M. Mizanur Rahman 08-Issues in Regulating and Supervising Islamic Micro Finance Institution in Indonesia: Its Policy Direction and Remedies under the New Regime. Akhmad Affandi Mahfudz 09Discussion
18:30 End20h30 Diners for Presenters
PROGRAMME DAY 2 Wednesday, 19th March 2014 8:00 – 17:008:00-8:30 Arrival, Tea, Coffee and registration
SESSION FIVEExperiences in regulating and supervising Islamic Microfinance Institutions
Chaired by Najmadin
8:30-10:30
-An Analysis of Islamic Microfinance InstitutionS (IMFS) In Indonesia: Regulation and Supervision PerspectiveYulizar D. Sanrego, Fikih Apriadi, Miftahussurur, Anita Priantina and Ries Wulandari 10-Regulatory Framework for Member-Owned Islamic Microfinance Institution (MIMI): Focus on Islamic Saving Groups and Cooperatives Sub-Saharan Africa (SSA)Muhammad-Bashir Owolabi Yusuf , Nasim Shah Shirazi and Moha Asri Abdullah 11-The Impact of Regulatory and Supervision framework on Microfinance in KenyaAbd elrahman Elzahi Saaid Ali and Wahida Mohamed Athman Ali 12-The effectiveness of Regulatory and Supervision framework of Microfinance in SudanAbdelrahman Elzahi Saaid Ali 13Discussion
Break 10:30-10:45
SESSION SIXExperiences in regulating and supervising Islamic Microfinance Institutions
Chaired by Mohamad Hammad
10:45-12:30
-Using Subsidy Dependence Index for Regulating and Supervising Microfinance Institutions: A Pakistan’s CaseHina Almas and Muhammad Mubashir Mukhtar 14-The effectiveness of microfinance projects run graduates. (Case study of business incubators at the University of Sudan for Science and Technology from 2010 to 2013) (in Arabic)Kassim al Fakiy ‘aliy Jadullah 15Discussion
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12:30-13:30 Buffet Lunch and Solat - Venue
SESSION SEVENPolicy related to regulation and supervision
Chaired by Abdul Azim?13:30-15:00
-Islamic Microfinance and Sukuk: A Propose Regulatory Framework for Liquidity issue in IndonesiaRaditya Sukmana 16-Capital Requirement and Financing Provision Regulation in Islamic Microfinance Institutions (IMFIs): Single and Double Mandate (s)Suhal Kusairi and Nur Azura Sanusi 1716:30 Discussion
Break 15:00-15:15
15.15 Conclusions – Proposals and recommendations:Abdelrahman Elzahi, Islamic Research and Training InstituteBijay Kumar Swain, National Institute of Rural DevelopmentAgricultural Bank of SudanMicrofinance Unit, Central Bank of Sudan
20h30 Diners for Presenters
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CONTENTS
Tentative Programme...................................................................................................................viiContents..........................................................................................................................................xiList of Contributors ....................................................................................................................xiiiPreface............................................................................................................................................xv
Session One Microfinance in Sudan
Paper 1 Islamic Micro Finance in Sudan Weakness and Opportunities..............................1Bakhita Hamdow Gad Elkreem
Paper 2: For the Development of the Microfinance Sector..................................................3General Federation of Trade Unions of Sudan
Session Two Behavioral Economics can inform market regulation
Paper 3: A Framework for Regulating Islamic Microfinance Institutions..........................12Abdul Ghafar Ismail
Paper 4: Attaining Financial Inclusion through Regulating Islamic Microfinance............29Bijay Kumar Swain
Session Three Microfinance and Policymakers
Paper 5: The Role of State-Created Agencies in Supervising the Islamic Microfinance Institutions to Alleviate Poverty amongst Rural Farmers.....................................38Muhammad Hakimi Mohd Shafiai
Paper 6: Experiences in Regulating and Supervising Islamic Microfinance Institutions............................................................................................................56Muhammad Zubair
Paper 7: How African Diaspora Can Impact The Development Of Islamic Finance..................................................................................................................62Dossa Maxime
Session Four Experiences in regulating and supervising Islamic Microfinance Institutions
Paper 8: Moral and Ethics in Islamic Microfinance and Its Impact on Bangladeshi Rural Poor’s Livelihood: An Empirical Study.....................................................84M. Mizanur Rahman
Paper 9: Issues in Regulating and Supervising Islamic Micro Finance Institution in Indonesia: Its Policy Direction and Remedies under the New Regime..............109Akhmad Affandi Mahfudz
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Session Five Experiences in regulating and supervising Islamic Microfinance Institutions
Paper 10: An Analysis of Islamic Microfinance Institution (IMFs) In Indonesia: Regulation and Supervision Perspective.............................................................120Yulizar D. SanregoFikih ApriadiMiftahussurur Anita Priantina Ries Wulandari
Paper 11: Regulatory Framework for Member-Owned Islamic Microfinance Institution (MIMI): Focus on Islamic Saving Groups and Cooperatives Sub-Saharan Africa (SSA)..................................................................................140Muhammad-Bashir OwolabiYusufNasim Shah ShiraziMoha Asri Abdullah
Paper 12: The Impact of Regulatory and Supervision framework on Microfinance in Kenya ............................................................................................................156Abd elrahman Elzahi Saaid AliWahida Mohamed Athman Ali
Paper 13: The Effectiveness of Regulatory and Supervision Framework of Islamic Microfinance in Sudan.......................................................................178Abd elrahman Elzahi Saaid Ali
Session Six Experiences in regulating and supervising Islamic Microfinance Institutions
Paper 14: Using Subsidy Dependence Index for Regulating and SupervisingMicrofinance Institutions: A Pakistan’s Case..................................184Hina AlmasMuhammad Mubashir Mukhtar
Paper 15: The Effectiveness of Microfinance Projects Run Graduates..............................197Kassim Al Fakiy ‘aliy Jadullah
Session Seven Policy related to regulation and supervision
Paper 16: Islamic Microfinance and Sukuk:A Propose Regulatory Framework for Liquidity Issue in Indonesia..........................................................................214Raditya Sukmana
Paper 17: Capital Requirement and Financing Provision Regulation inIslamic Microfinance Institutions (IMFIs):Single and Double Mandate (s)...................229Suhal KusairiNur Azura Sanusi
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LIST OF CONTRIBUTORS
Abd elrahman Elzahi Saaid Ali, Islamic Research and Training Institute (IRTI/IDB)
Abdul Ghafar Ismail, Head of research division and Professor of Banking and Financial Economics,Islamic Research and Training Institute, Islamic Development Bank, P.O. Box 9201, Jeddah 21413 Kingdom of Saudi Arabia. e-mail:[email protected]
Abidullah, Graduate School of Business, University Kebangsaan Malasyia, 43750 Bangi, Selangor. Email: [email protected]
Akhmad Affandi Mahfudz, Visiting Scholar, Islamic Business School, School of Business Universiti Utara Malaysia. E-mail: [email protected]
Anita Priantina, Institute for Research and Community Empowerment (IRTI), Tazkia University, College of Islamic Economics, Jl. Ir. H. Djuanda, Sentul City, Bogor – Indonesia. E-mail: . www.lppm.tazkia.ac.id
Bakhita Hamdow Gad Elkreem, Assistant Professor, Banking Department, Faculty of Commerce, Kordofan University. Phone No :0122508117. E-mail: [email protected]
Bijay Kumar Swain, Professor & Head Centre for Rural Credit & Development Banking, National Institute of Rural Development, Rajendranagar, Hyderabad - 500 030, INDIA. Cell No. + 09550881770. Office No. 040-24008489. E-mail: [email protected]
Dossa Maxime, E-mail: .
Fikih Apriadi, Institute for Research and Community Empowerment (IRTI), Tazkia University, College of Islamic Economics, Jl. Ir. H. Djuanda, Sentul City, Bogor – Indonesia. E-mail: . www.lppm.tazkia.ac.id
Hina Almas, Research Scholar, MS Economics & Finance, International Institute of Islamic Economics (IIIE), International Islamic University Islamabad (IIUI), Pakistan. E-mail:
Kassim Al Fakiy ‘aliy Jadullah, Lecturer in Economics, Faculty of Business, Sudan University of Sciences and Technology. E-mail:
M. Mizanur Rahman, Director Research, Islamic Bank Training and Research Academy, IBBL, Bangladesh, Presently working on deputation as Head of Training in Jaiz Bank Plc., Abuja, Nigeria. Email: [email protected]
Miftahussurur, Institute for Research and Community Empowerment (IRTI), Tazkia University, College of Islamic Economics, Jl. Ir. H. Djuanda, Sentul City, Bogor – Indonesia. E-mail: . www.lppm.tazkia.ac.id
Moha Asri Abdullah, Professor of Economics, Department of Economics, International Islamic University Malaysia. E-mail:
Muhammad Hakimi Bin Mohd Shafiai, Senior Lecturer, School of Economics, Faculty of Economics & Management, Institut Islam Hadhari, Universiti Kebangsaan Malaysia (UKM), 43600 Bangi, Selangor. E-mail: [email protected]
xiii
Muhammad Mubashir Mukhtar, Research Assistant, Center for Entrepreneurial Development (CED), Institute of Business Administration (IBA), Karachi, Pakistan. Tel: +92-333-3147454; E-mail: [email protected]
Muhammad Zubair, Chief Executive Officer - AlHuda Centre of Islamic Banking and Economics (CIBE). [email protected]
Muhammad-Bashir OwolabiYusuf, Post-Doctoral Researcher, Department of Economics, International Islamic University Malaysia. E-mail:
Nasim Shah Shirazi, Senior Economist, Islamic Research and Training Institute (IRTI), Jeddah, Saudi Arabia. E-mail:
Nur Azura Sanusi, PhD, Associate Professor, School of Social and Economic Development, Universiti Malaysia Terengganu, Tel: +6096684541; Fax: +6096684237. Email: [email protected]
Paper 2 no name, in Arabic and no name, General Federation of Trade Unions of Sudan.
Raditya Sukmana, PhD. Lecturer in Islamic Economic, Faculty of Economics and Business, Universitas Airlangga, Surabaya, Indonesia. E-mail:
Ries Wulandari, Institute for Research and Community Empowerment (IRTI), Tazkia University, College of Islamic Economics, Jl. Ir. H. Djuanda, Sentul City, Bogor – Indonesia. E-mail:. www.lppm.tazkia.ac.id
Suhal Kusairi, Ph.D. Lecturer, School of Social and Economic Development, Universiti Malaysia Terengganu, Tel: +6096684541; Fax: +6096684237. Email: [email protected]
Wahida Mohamed Athman Ali, Maseno University
Yulizar D. Sanrego, Institute for Research and Community Empowerment (IRTI), Tazkia University, College of Islamic Economics, Jl. Ir. H. Djuanda, Sentul City, Bogor – Indonesia. E-mail: . www.lppm.tazkia.ac.id
xiv
PREFACE
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xvi
Paper 1
ISLAMIC MICRO FINANCE IN SUDAN WEAKNESS AND OPPORTUNITIES
Bakhita Hamdow Gad ElkreemAssistant Professor, Banking Department, Faculty of Commerce
Kordofan UniversityPhone No :0122508117
Email : [email protected]
Introduction:
Since the Grameen Bank and its founder Muhammad Yunus won a Nobel Peace Prize in 2006 for
their innovations in poverty alleviation through microfinance, the world has witnessed a virtual
“microfinance revolution.” Microcredit is the most common form of microfinance. Microcredit
provides small (often group-based) loans to those who are impoverished and lack collateral. It has
been credited for alleviating poverty and raising the incomes of millions of people in developing
countries. Beginning with Yunus’s Grameen Bank in Bangladesh, micro financing as both a
development tool and a means for bringing social change has spread to other developing countries and
has been adapted for use in impoverished areas in developed, high-income nations including the
United States.
Microfinance include microcredit with other financial tools such as micro insurance and
micro savings as well as the possibility of combining microfinance with other non-financial aspects
such as healthcare, education, and environmental issues.
In this paper I focus on micro credit in Sudan as one developing country applied micro
finance. so that to discover whether this micro credit led to achievement of micro finance objective or
not .also to investigate whether micro credit in Sudan accommodated to Islamic finance principle.
Moreover to discover any opportunity may improve micro credit to be appropriate tool for alleviation
poverty in Sudan.
The Purpose of paper:
The purpose of this paper is to investigate Islamic micro credit weakness which should be eliminate,
and to discover opportunities for gain in. This paper will begin by describing the historical roots of
microfinance and the basic, economic principles behind this unique form of credit rationing, and
hence overview similarities between micro finance and Islamic finance.
1
Methodology:
This paper follows a descriptive method to get empirical findings from questionnaire .and
argumentative method may be follow to analyze collected data from lenders.
Data Collection:
There are several stages for the data collection as follows.
First: structure interview to the lender institutions consist of some questions about the size
of micro loans as percentage of funds available to credit , and borrowers 'title, so that todistribute
questionnaire to them , also that interview will include questions about micro credit model which is
followed by lenders ,clauses of borrowing ,repayment conditions ,collaterals .also question about
whether gender effects on repayment or not will be included in interview.
Second: Structure questionnaire form consisting of two parts will be constructed to collect the
necessary data. The first part focuses on Demographic information of the respondents which include
gender, income, religious beliefs and practices, age, and occupation. The second parts deals with
respondents beliefs and attitudes toward the Islamic micro finance ,and their point of views about
whether micro finance has affect positively on their Income and living standard, also this part will
include respondents suggestions about improving micro credit to be appropriate tool for alleviation
poverty.
Third: secondary data about GDP will be collected from annul reports which have published
by the central bank of Sudan.
Important of the study:
This study will discuss Islamic microfinance behavior in Sudan, and recommend how can micro credit
accommodated with Islamic finance principle and micro finance objective.
2
Paper 2
For the Development of the Microfinance Sector
المقدمة : أصبح التمويل االص��غر يش��مل قط��اع واس��ع من الخ��دمات ولكن بعض الفئ��ات ال يمنكه��ا الوص��ول لمؤسس��ات التموي��ل الرسمية لذلك يحتاجون الى تشكيل متنوع من االدوات المالية . لذا فأننا نرىان عملية توسيع مفهوم التمويل االصغر والتحدى الحالى الموجود امامنا هو ايجاد طريق��ة كف��ؤه يمكن االعتم��اد عليه��ا لتق��ديم قائم��ة غني��ة من منتج��ات التموي��ل االص��غر . فالتمويل االصغر يلعب دورا هاما فى محاربة الفقر ويمكن ان يك��ون اداة قوي��ة للتمكين ال��ذاتى عن طري��ق تمكين الفق��راء امكاني��ة الحص��ول التموي��ل .فه��و اليس��اعد فق��ط فى نش��اط المش���روع للتوس���ع ولكن يس���اعد فى زي���ادة دخ���ل األس���ر وحص��ولهم على أمن غ��ذائى وتعليم االطف��ال واتاح��ة الف��رص للنس��اء الآلتى ال يعملن على مس��توى الم��دن واالري��اف فق��ط نحتاج الى تطوير اساليب الدراسات اإلقتص��ادية للوص��ول الى
استراتيجيات مالئمة .
:الرؤية بن��اء على الدراس��ة المقدم��ة من مجلس ال��وزراء لتط��وير قط��اع التموي��ل االص��غر ي��رى االتح��اد الع��ام لنقاب��ات عم��ال السودان ضرورة قيام مؤسسة تموي��ل أص��غر تع��نى بالتموي��ل فى شك�����ل مجموع��ات عمالي��ة ) التموي��ل الجم��اعى ( فهى أفضل وسيلة للضمانات الجماعية والبعد عن القرض المباش��ر ق��در المس��تطاع بحيث ته��دف المؤسس��ة لتش��جيع وتط��وير المنتجات الغذائية والزراعية والبئيية التى ي��ذخر به��ا الس��ودان
3
السودان عمال لنقابات العام االتحاداألصغر التمويل قطـــاع لتطوير
لس��د الفج�وة بين الع�رض والطلب وإح��داث ح��راك اقتص�ادى واسع وتطوير البدائل الوطنية التى تمتلك البالد إمكانية إنتاجها
محليا . تتم ترجمة رسالة المؤسس��ة الى األه��داف من خالل تعميم نظم تش��غيلية للتوص��ل الى مجموع��ات العم��ال المس��تهدفين بتعميم وتقديم الخ��دمات وتلبي��ة متطلب��اهم مم��ا ي��ؤدى ب��دوره للتغيير المطلوب . ولبدء المسيرة البد من انتهاج هيكلية تكون افضل وضعا واكثر تركيزا على العمال وذلك من خالل مفاهيم واختصاص��ات جدي��دة ، دراس��ة الس��وق وتط��وير المنتج��ات ودراس��ة متابع��ة تحدي��د االتجاه��ات والمش��روعات ال��تى يتم تسليط الضوء عليها وذلك يتطلب استراتيجية مدروسة وجهود
واعية . س��يقوم االتح��اد الع��ام لنقاب��ات عم��ال الس��ودان برب��ط مؤسس��ة التموي��ل االص��غر ببن��ك العم��ال فى جمي��ع م�ا يختص بإجراءت التمويل ويترك المتابعة للمنظم��ات النقابي��ة ومن ثم توفير مستلزمات ومدخالت االنتاج والتقني��ة الحديث��ة واالرش��اد والتدريب والتأهي��ل لترقي��ة التوعي��ة وكف��اءة االنت��اج واالنتاجي��ة لتمكين��ه من المنافس��ة وذل��ك ع��بر االكاديمي��ة العمالي��ة ك��أكبر وع��اء ت��دريبى للحرك��ة النقابي��ة وتفعي��ل دور النقاب��ات للعم��ل كوسطاء اجتماعيين لتقديم الخدمات غير المالي��ة م��ع مق��دمى
الخدمات المالية مما يعزز آليات التنفيذ لتكون : بنك العمال الوطنى ) تجميع لمحفظة يشارك فيها بن��ك.1
السودان ومؤسساته ( .االكاديمية العمالية. .2شركة باسقات ..3النقابات العامة ..4االتحادات الوالئية ..5
الش��ك ان التح�دى كب��ير فى الوص��ول لتخفي��ف ح��دة الفق��ر والتنمية المجتمعي��ة ورفاهي��ة االس��رة والمس��اهمة فى ال��دخل
القومى و هذه التحديات : 4
تحديات السيولة ..1 تحديات مؤسساتية القدرة التشغيلية للمؤسسة والتدريب.2
.التخطيط للطوارى ء..3ارتفاع التكاليف المالية والتشغلية ..4
ولكن لدى اتحاد نقابات عم��ال الس��ودان معطي��ات مم��يزة وهى القدرة على تكوين قاعدة نفوذ عريضة من ذوى العالق��ة بالمجال ومقدموا الدعم الفنى والخدمات االخرى ذات الص��لة عالوة على االيدى العاملة والخ��برات والمؤسس��ات التمويلي��ة ممثلة فى بن��ك العم��ال الوط��نى وش��ركة باس��قات كم��ا يمكن
توفير بيئة تحتضن اهداف االداء الجماعى . ام��ا وس��ائل التنفي��ذ ف��ذلك يتطلب مجلس ادارة بخ��برات متنوعة تشارك فيه النقابات واالتحادات الوالئي��ة وال��تى تمث��ل الجهة التنسيقية بأن تط��رح ك��ل النقاب��ات العام�ة واالتح��ادات الوالئية مشاريع نموذجية بدراسة جدوى فى شكل مجموع��ات وفردية وفق التخصص�ات المختلف�ة واالمكان�ات المتاح�ة لك�ل والية وعلى يد فرق عمل م��زودة بالمه��ارات المتخصص��ة م��ع تحديد االحتياجات المحلية لكل منطقة واختيار الطريقة االك��ثر مالئمة خاصة مناطق انتاج الصادر من المحصوالت الزراعي��ة . مع التحديد الزمنى لكل مش��روع وفق��ا للخارط��ة االس��تثمارية العامة والمجازة فى الخطة االستراتيجية العامة للدولة .والب��د من البداية بحمالت توعي��ة من خالل التثقي��ف والت��دريب ح��تى نتمكن من احداث التغي��ير للنظ��رة التقليدي��ة للتموي��ل االص��غر مما يس��اعد على تقلي��ل المخ��اطر وض��مان االس��تدامة طويل��ة االج��ل للمش��روعات خدم��ة لمص��لحة الف��رد والجماع��ة على
مستوى قومى . ( والتى قامتBARACيمكننا االستفادة من تجربة بنقالديش )
اللجنة بدراستها وعرضها بتصوير كامل بواس��طة اس��طوانة )CDوهى تتمثل فى قيمة تعميق االنتشار بتملي��ك مش��روعات )
فى ش��كل ح��زم متكامل��ة وتوظي��ف المت��اح لفهم االحتياج��ات5
المعق��دة ألك��ثر الفئ��ات فق��را وعلى م��دار ع��دد من الس��نوات حيث تضم برامج التمويل االصغر برامج تثقيف سكنية وصحية بدءا بالروضة والمدرسة والمراكز الصحية حيث وفر البرن��امج جمي��ع مقوم��ات الحي��اة من الص��حة وال��دخل والتعليم ول��ذلك نجحت فى تط���وير مب����ادرات جدي����دة مص���ممة بحيث تفى باحتياجات هؤالء الفقراء من برامج التموي��ل االص��غر الس��ائدة ممثلة فى شبكة أمان إجتماعى لمساعدة االسر الفق��يرة مم��ا
ينتج عنها تطوير المساهمة فى الدخل القومى . ولتحقيق الوصول السهل للتمويل مع تقديم الجودة النوعية يمكننا توفير مجموع��ة من المص��ادر لجم��ع المعلوم��ات ال��تى نحتاجها والتى تتضمن المعلومات االساسية حول حالة العم��ال والمش��روعات لتك��ون ل��دينا معلوم��ات كافي��ة تتس��م بالكف��اءة
للوفاء بالمتطلبات .
وبذلك يمكننا ان نتوقع . دخل اكثر ثباتا. زيادة االيدى العاملة داخل االسرة .زيادة الشعور باألمان االقتصادى. زيادة دخل االسر
ولتق��وم المش��روعات الص��غيرة ب��دورها المنش��ود فى تحقي��ق التنمي��ة االقتص��ادية واالجتماعي��ة الب��د من الق��اء الض��وء على
بعض المحاور الهامة :
المشروعات : محور إنشاء كيان قومى يختص بتنمية وتطوير االعمال والمنش��أت
الصغيرة يعمل على :
6
توف���ير األط���ر القانوني���ة والتش���ريعية للمش���روعات.1 الص��غيرة ومنح االعف��اءات التش��جيعية من الض��رائب والرسوم المحلية ال��تى تمث��ل زي��ادة تكلف��ة على ه��ذه
المشروعات . تط��وير الهياك��ل والنظم االداري��ة ال��تى تكف��ل الحماي��ة.2
للمشروعات الص��غيرة ومنحه��ا االمتي��ازات االس��ثمارية بتخصيص االراضى والمواقع المناسبة والمالئمة لالنتاج
والتوزيع المباشر لجمهور المستهلكين . التنظيم والتجمي��ع النش��طة التموي��ل االص��غر المتمثل��ة.3
فى وح��دات كب��يرة ذات حجم اقتص��ادى كالتعاوني��ات ومراكز الخدمات المشتركة لالس��تفادة من اقتص��اديات الحجم الكبير وفرص التمويل واستخدام التقنية الحديثة
. تطوير هياكل التمويل المصرفى بالق��در ال��ذى يجعله��ا.4
قادرة على تلبية خدمات االئتمان . تقديم تسهيالت مناسبة لولوج مجال الصادر من االنتاج.5
العمالى ووارد مدخالت االنتاج وآلياته وقطع غيارها . تموي��ل االحتياج��ات التالي��ة بج��انب تموي��ل االص��ول.6
الرأسمالية : أ/ تمويل مصروفات التأسيس .
ب/تمويل رأس المال التشغيلى . تخصيص نسبة كبيرة من التمويل لبنك العمال الوط��نى.7
وذلك لخصوصيته فى التعام��ل م��ع التنظيم��ات النقابي��ةوالقطاع العمالى العريض.
تاس��يس ص��ندوق ض��مان او ص��ندوق كف��االت م��ع.8شركات التأمين بهامش ربح مناسب .
تفعيل دور الضمان الصامت ..9 تعزي��ز دور الض��مانات غ��ير التقليدي��ة فى تنمي��ة قط��اع.10
التمويل االصغر وتوسيع دائرة التغطية واالنتشار خاصة
7
الض�����مانات المجتمعي�����ة وذل�����ك من خالل أى منالضمانات التالية :
أ/ حفز نظم الضمانات المتعاضدة متعددة االطراف . ب/ اعتم��اد اق��رارات وتعه��دات االق��ارب من الدرج��ة االولى
ضمن الضمانات المقبولة للمصارف ج/ اعتم�اد ش�يك العمي��ل من حس��ابه المع�زز بش�يكات س�داد
االقساط كضمان مقبول لدى المصارف. د/ معالج��ة أم��ر تق��ييم اوزان الض��مانات ض��من تق��ييم أص��ول المصارف ألغراض التقويم وذل��ك بإيج��اد مع��ايير بديل��ه لتق��ييم
اوزان الضمانات غير التقليدية ه���/تعزي��ز ف��رص قب��ول ال��راتب والمع��اش الش��هرى كض��مان
لسداد االقساط والتعسر كعنصر أساسى للضمان .التسويق : محور
ان تنتب��ه الدراس��ات المس��تقبلية ح��ول م��يزات المنتج الى استراتيجية الترويج وان تدمج االستراتيجية الترويجية كج��زء ال
يتجزأ من اى دراسة فصياغة العرض تتحكم فى النتائج . القي��ام بأبح��اث تتعل��ق بالس��وق وتأس��يس أنظم��ة للتوزي��ع والمحافظ��ة على إس��تمراريتها والعم��ل على تص��ميم م��واد ترويجية وتق��ديم توص��يات إلس��تراتيجيات االس��تثمار لمج��الس
إدارات مؤسسات التمويل ألصغر العمالية .
التمويل : صيغ محور حف��ز المص��ارف ومؤسس��ات التموي��ل االص��غر للتوس��ع فى
استخدام صيغ التمويل االسالمى المختلفة وذلك من خالل : تحرير هامش االرباح على عملي��ات التموي��ل االص��غر م��ع.1
وج��وب ال��تزام المص��ارف ومؤسس��ات التموي��ل االص��غر8
بحساب االرباح على اساس القسط المتن��اقص فى حال��ةالتمويل بصيغة المرابحة .
تحديد اس��قف ملزم��ة تش��جع )ت��دريجيا( اس��تخدام الص��يغ.2 االسالمية فى عمليات التمويل االص��غر مثال تغي��ير س��قف
% لمؤسسات التموي��ل20% للمصارف 4التمويل بنسبة االصغر من جهة محفظة التمويل .
تمويل مؤسسة التمويل االصغر العمالية بسقف اكبر م��ع.3فترة سماح أطول.
ال��زام المص��ارف ومؤسس��ات التموي��ل االص��غر بتعميم.4 مرش��د فقهى يض��اف لل��دليل االج��رائى لتنفي��ذ الص��يغ االسالمية فى عمليات التموي��ل االص��غر واعتم��اده ض��من
شروط التصديق لممارسة النشاط خاصة صيغ : أ/المضاربة المقيدة .
ب/ االيجاره ) ايجارة المنفعة – االيجارة المتبقية بالتمليك ( .ج/ السلم والسلم الموازى .
د/ رب��ط مؤسس��ات التموي��ل االص��غر ب��إدارة المخ��اطر اس��وةبالمصارف فيما يلى االستعالم االئتمانى .
: التدريب محور االس��تفادة من الف��رص المتاح��ة من بن��ك الس��ودان فى.1
تدريب الكوادر العمالية . اع��داد ب��رامج لرف��ع كف��اءة الق��درات وتعزي��ز المه��ارات.2
لتأهيل المشروعات الصغيرة . تضمين البرامج التدريبي��ة لنم��اذج المش��اريع الناجح��ة فى.3
السودان وعرض مقومات النجاح اعتم��اد م��ادة ثابت��ة فى ب��رامج االكاديمي��ة العمالي��ة لمنهج.4
كفاءة التمويل االصغر.
9
الحرفى : الحر القطاع محور دعم القط��اع الح��ر الح��رفى ب��برامج لتحس��ين المس��توى.1
الثقافى والوعى الفكرى بأهمية الح��رف وتقب��ل المجتم��ع لهذه الح��رف ودعمه��ا ويمكن ان تب��دا بت��دريب الم��دربين للص���ناعات الحرفي���ة لمواكب���ة التط���ورات والتغ���يرات المتس�����ارعة المترتب�����ة على التح�����والت اإلجتماعي�����ة واإلقتصادية لتكون على تواصل مع العلوم والمهارات فى
هذا المجال . المنتجات الحرفية عبارة عن فن واب��داع يه��دف الى منتج.2
يفى بغ���رض معين ل���ذلك الب���د من تط���وير الص���ناعات الحرفية المتخصصة لتحقيق الهدف المرجو منه��ا وتعزي��ز
قدرتها على المنافسة واالستمرارية . يك��ون تط��وير الحرف��يين والمنتج��ات الحرفي��ة من خالل.3
دراس��ة الس��وق واالحتي��اج الفعلى للمنتج��ات الحرفي��ة المختلفة واظهار المنتجات بشكل متطور م��ع المحافظ��ة على أص��التها والتط��وير من حيث االس��تخدام والخام��ات واكساب المنتج الحرفى سمة الج��ودة من حيث النظاف��ة واالتق��ان والس��عى نح��و االب��داع ورف��د الس��وق المحلى
بمنتجات حرفية متطورة ومن ثم المنافسة فى الصادر توظيف خامات البيئة بإقامة مشاريع بعد دراسات لمواقع.4
المواد الخام االولية خاصة الص��ناعات الحرفي��ة المرتبط��ةبالقطاع الزراعى .
تنظيم العالقة بين الحرفيين ومؤسسات التموي��ل االص��غر.5 التى تعنى بشؤونهم عبر الئحة تنظيمية تتضمن التعريفات وان��واع الح��رف وت��راخيص مزاولته��ا واه��دافها ومزاياه��ا
ضمانا لحقوق الحرفى وحماية المنتج وجودته . توسيع قاعدة التعامل بين الحرفيين ومؤسسات التموي��ل.6
االصغر وتحديد الضوابط ) لالفراد والمش��اريع ( وتس��جيل وتب��ويب معلوم��ات الحرف��يين وتوثيقه��ا وتح��ديث قاع��دة
10
البيانات وادراج شريحة الحرف��يين فى الخ��دمات وال��دعمالفنى .
تذليل كاف��ة الص��عوبات ألص��حاب المش��روعات الص��غيرة.7 والمتوسطة من الحرفيين والسعى مع جهات االختص��اص لتخص��يص محالت ل��بيع المنتج��ات الحرفي��ة فى االس��واق
العامة لتشجيع االستثمار فى مجال الصناعات الحرفية .
عامة : توصياتإستهداف السلع االنتاجية لزيادة الدخل القومى . .1 ض��رورة التوس��ع عم��ل التح��ويالت االلكتروني��ة وال��تى من.2
شانها تحقيق االنتشار باالضافة لتقليل تكلفة التمويل . إنشاء فروع متخصصة اضافية للبنوك خاص��ة بن��ك العم��ال.3
الوط��نى م��ع مراع��اة التغطي��ة الجغرافي��ة المتوازن��ة وذل��ك مث��ال لتجرب��ة الف��روع الحرفي��ة المتخصص��ة وال��تى اثبت
نجاحها فى مرحلة من المراحل .تقديم خدمات مصرفية متجولة ..4 التق��ارب والتنس��يق والتكاف��ل االس��تراتيجىبين مؤسس��ات.5
التمويل وقطاع التمويالالصغر . اقامةمنت��ديات فكري��ة لتلقى االفك��ار والمعلوماتالص��حيحة.6
والحقيقيةعن التمويل االصغر . دعوة النقابات العامة واالتحادات الوالئية للقاء ج��امع ح��ول.7
المشروع واالستفادة المتبادلة من االمكانات المتاح��ة ل��دىكل القطاعات لصالح الجماعة .
تكليف االمانات المتخصصة فى النقابات العامة واالتحادات.8 الوالئية لوضع دراسة جدوى نموذجية لكافة االمكانات ال��تى
تتوفر لديهم لتكون نواة لبداية المشروعات . يمكن االس���تفادة من بعض المص���انع المتوقف���ة ودراس���ة.9
إمكاني��ة تش��غيلها ) المملوك��ة للدول��ة او القط��اع الخ��اص (
11
والس���عى المتالكه���ا خدم���ة لمش���اريع التموي���ل االص���غرالعمالية .
إقامة دورات تدريبية لمدربين ضمن برنامج الب��نى التحتي��ة.10لتقديم خدمات التدريب لضباط االئتمان فى كل الواليات .
11. تث��بيت الت��أمين ع��بر اى ش��ركة من ش��ركات الت��أمين مثالشركة شيكان .
يجب ان تعنى مشروعات التموي�ل االص�غر بخ�دمات مالي�ة.12وعينية .
إقامة معرض منتجات للمشروعات الصغيرة ..13 التحف��يز بتق��ديم ج��وائز ومي��داليات للم��يزين من منف��ذى.14
المشروعات الناجحة .)إنشاء وحدة متخصصة لمنتجات ال.15
handmadeللمص���نوعات اليدوي���ة الس���ودانية فى موق���ع) متخصص باالتحاد العام .
والله الموفق
12
Paper 3
A Framework for Regulating Islamic Microfinance Institutions
Abdul Ghafar Ismail1
Islamic Research and Training InstituteIslamic Development Bank
P.O. Box 9201, Jeddah 21413 Kingdom of Saudi Arabiae-mail:[email protected]
AbstractRegulation is crucial for many reasons. More important than that is to produce an effective regulatory framework. In this paper, we will find that the first step in this framework is the philosophical foundation of Islamic microfinance institution’s establishment that is formulated in their operations and incentives. Second, the policy issues related to regulations need to be addressed, among others: Islamic microfinance institution activities and Islamic microfinance institution-philanthropy links; effectiveness and sustainability; shariah based business model; who are the regulators; and ownership. Finally, several guidelines will be introduced to produce environmentally effective regulations, among others aretheguideline on: the shariah advisory council, corporate governance, group lending policy, loan loss financing, minimum capital and micro-takaful scheme.
Keywords: regulation policy, Islamic microfinance institutions, regulatory philosophy, shariah JEL Classification:D03, G21, G23, G28, P40,
1He is head of research division and Professor of Banking and Financial Economics. He is currently on leave from School of Economics, Universiti Kebangsaan Malaysia. He is also principal research fellow, Institut Islam Hadhari, Universiti Kebangsaan Malaysia and AmBank Group Resident Fellow for Perdana Leadership Foundation.
13
1. Introduction
The sources of funds for Islamic microfinance institutions are typically provided by trustee and
depositors and managed by the managers. There are the entrepreneurs who need capital for their
microenterprise activities. The financial authority like central bank or ministry of finance or ministry
of cooperative is responsible for the supervision and regulation of Islamic microfinance institutions.
The philosophy behind the financial authority’s supervision and regulation of Islamic
microfinance institutions has three components. Firstly, the Islamic microfinance institution’s owners
should confine their activities to the management and control of Islamic microfinance institutions; and
Islamic microfinance institution should engage in activities related to shariah principles. They should
not affiliate with entrepreneurs engaged in activities that are not permitted. Secondly, the transactions
between an Islamic microfinance institution and its customers should be subjected to certain limits
and restrictions. Finally, there must be effective and efficient supervision of the financial status and
activities of Islamic microfinance institutions are to ensure their safety and soundness.
Behind this philosophical view, how could Islamic microfinance institutions be regulated?
This paper will first provide an overview of how the financial authority implements each of the
philosophical components. Then, it will be followed by the policy issues related to regulation and
several guidelines will be discussed to produce environmentally effective regulations.
2. Philosophical Foundation of Regulation
In discussing the philosophical foundation of regulation, we will take an approach of regulation where
it will reflect our view on the nature and purpose of Islamic microfinance institutions. We will
consider the theoretical foundations of Islamic microfinance which will be based on the interpretation
of shariah principles that is formulated in their operations and incentives. 2 More importantly than that
is not only that they comply the shariah, but also their roles in providing capital to un-bankable
society. They key is to design regulation so as to allow Islamic microfinance institutions to play their
role in the economy, especially in alleviating poverty. This approach involves a broader understanding
on the philosophical perspectives of regulation.
Epistemological Philosophy
As a branch of philosophy that concerns with the nature and scope of knowledge which is derived
from the belief of oneness of Good (or Al Tawhid) and the Al Tawhid affirms that the obedience to
God and fulfillment of His command are human being’s duty. It also serves the purpose of creating
2 We will refer to Smolo and Ismail (2011). The similar model was also proposed by Maamor et al (2014)
14
human being on earth, i.e., the vicegerent of God on earth.3 In addition, surah Al-Ahzab, God has
invested human being with His trust, a trust which heaven and earth were incapable of carrying and
from which for they shied away with terror.4 Here, the divine trust is the fulfillment of the ethical part
of the divine will, whose very nature requires that it will be realized in freedom, and human being is
the only create capable of doing so. It is this exercise of human freedom regarding obedience to God’s
commandment that makes fulfillment of the command moral.
It shows that al-tawhid tells us that God, being beneficent and purposive, does not create
human being in sport or in vain.5 He has endowed human being with the senses, with reason and
understanding, made them perfect – indeed, breathed into them of His spirit – to the end of preparing
them to perform their great duty. In performing their duty, their ethical striving and action will enter
the realm of space-time. Therefore, the earth (via the economic action) is the object of the human’s
endeavor, and all humankind is to be involved in its and their own nature. In this perspective, how the
economy via the Islamic microfinance institutions be operated? In particular, as mentioned by
Abdullah and Ismail (2014), we want to clarify the essential relation of al-tawhid to the economic
order of Islamic microfinance institutions.
The consensus process or shuratic in making the decision for providing loans to customers
should be reached. The micro entrepreneurs need shari’ah compliant models of microfinance which is
based on al-tawhid perspective. They cannot accept the practice of riba (as a proof in accepting al
tawhid) as normally done by the conventional microfinance institutions.
Islamic microfinance institutions should also maintain to observe the aims (maqasid shari’ah)
of providing the finance to the poor and needy. The Islamic microfinance institutions are not only
providing “money” for them to move up from poverty line but also to “change” their human
characters.
Ethical Philosophy
Ethic (or akhlak) is a branch of philosophy that deals with the human behavior or act in all aspects of
life. Ethic is also a set of Islamic moral values which has been prescribed fundamentally in the Quran
and implemented by Prophet Muhammad (saw) during his life.6 Principally, there are two types of
3 Refer to Al-Baqarah 2:30: And [mention, O Muhammad], when your Lord said to the angels, "Indeed, I will make upon the earth a successive authority." They said, "Will You place upon it one who causes corruption therein and sheds blood, while we declare Your praise and sanctify You?" Allah said, "Indeed, I know that which you do not know."4 Refer to Al-Ahzab 33:72: Indeed, we offered the Trust to the heavens and the earth and the mountains, and they declined to bear it and feared it; but man [undertook to] bear it. Indeed, he was unjust and ignorant.5 Refer to: Al-Qiyaamah75:3 (“Does man think that We will not assemble his bones?”); Al-Mu’minuun 23:115 (“Did ye then think that We had created you in jest, and that ye would not be brought back to Us (for account)?”) and Al-Anbiyaa’ 21:16 (“And We did not create the heaven and earth and that between them in play”).6 The Prophet (saw) said, “(I was sent to complement good morals) [Ahmad, Malik, Bazaar, Haithami and Ibn `Abd Al-Barr authenticated it. From Abu Hurairah]
15
akhlaq, good (or mahmudah)and bad (or mazmumah). Islam emphasizes the important of practicing
good akhlak in all aspect of human life and recognizes it as one of the purpose of sending His
messengers. Muslim is also encouraged to have good akhlak in all aspects which will bring the
business operates ethically.
Classical scholars such as Al-Ghazali in his encyclopedia Iḥya’ ‘Ulum al-Din (Revival of
Islamic Sciences) for instance, dedicated a chapter on the ethics of earning and living (Kitab al-Adab
al-Kasb wa al-Ma‘ash), which precedes the chapter on lawful and unlawful matters (Kitāb al-Ḥalāl wa
al-Ḥaram), indicating the importance of ethical behavior in earning a livelihood. Scrutinizing this
chapter of Iḥya’, al-Ghazzali identifies justice, truthfulness and benevolence as the main ethical values
that must be internalized by parties involved in business transactions. This view, as pointed by Ismail
and Zali (2014) showed general explanation of business ethics and ethics of relation.
Logical Philosophy
The last part is logical philosophy. It tries to investigate human thought and a fundamental to the
thinking straight, accurate and healthy. Learning about the rules of logic is expected to lay the
foundation so that it can make accurate conclusions. Any ethical action must have reasons and be able
to defend our actions if it is called upon to do so (Minja, 2009). In Islam, logic in business activities
can be determined by ijtihad that must obey to the Shariah rules. In the logic behind it, the Muslim
will be classified as a man who disobeys Allah. In this perspective, we can refer to Al-Ghazali’s major
works like (Mizaan al-'Amal (The Criterion or Logic of Action), one of the early works on ethics.7 Al-
Qaraḍāwi (1995) also observes that only in recent years Islamic business has been given due attention
by Muslim scholars and researchers. He describes Islamic business as being Godly, ethical, humane
and balanced, and is of the opinion that it is the responsibility of the state (i.e., financial authority) to
ensure that the theories of Islamic economics are implemented through the legislation of laws to
uphold righteousness and ethics.
The financial authority should promote and maintain Islamic microfinance institutions and
their services for the public and foster higher standards of practices. Hence, traditionally, the financial
authority as a regulator has to keep a close watch on these aspects of the Islamic microfinance
institutions, i.e; safety,stability, structure, public confidence, market discipline and the basis for a
public policy. Think of safety in terms of acting as a custodian for customers and capital funds as
cushion or buffer protection. Stability is protecting the economy from the vibrations of the Islamic
microfinance institution or ensuring a safe and secure Islamic microfinance institution by preventing
financial panic or spillover effects.
7 See Ghazanfar and Islahi (1997) in Islamic Economics Research Series, King Abdulaziz University.
16
The objective of focusing on the Islamic microfinance institution is due to risk, or fear of
collapse of the microfinance system. In contrast, structure focuses on promoting competition and
efficiency and protecting Islamic microfinance institution customers from a monopolistic system of
microfinance institution.
Safety and Stability
The safety objective is to reduce the risk associated with Islamic microfinance institution businesses
(i.e., protecting Islamic microfinance institutions from being exposed to much to external factors and
making them a sustainable institution). Today the safety objective comes under the guise of subsidy
and micro-takaful services. The Islamic microfinance institution stability objective is closely linked
with the goal of poverty alleviation of the economy. The failure to address the outreach and help the
poor and micro-small enterprises dominates regulatory thinking in this area.
The safety and stability objectives build on some fundamental microeconomic and
macroeconomic ideas. One of the tasks of a macroeconomic poverty eradication policy is to reduce
the poverty through providing the capital and employment to the poor and micro-small enterprises.
Capital was perceived as having made the microfinance institution as “the pillars”. However, after
more than three decades of Islamic microfinance institution operations, it seems that customers prefer
to have a long relationship and on a wider scale.
Promoting Competition and Efficiency through Microfinance Institutional Structure
The structure objective is best viewed in terms of the degree of competitiveness and efficiency in the
Islamic microfinance industry. The linkage between structure and competition is provided by the
industrial organization model. This model links structure with conduct and then with performance.
Structure refers to the number of Islamic microfinance institutions in the market (i.e.,
sustainability), conduct refers to the behavior of the Islamic microfinance institutions in the market,
and performance refers to the quantity and quality of products and services (i.e., outreach) by Islamic
microfinance institutions in the market. The conclusion of the model is: the more Islamic
microfinance institutions that exist in the market, the smaller the chances of non-competitive behavior
and the greater the chances that high- quality products and services will be provided to customers.
Hence in the business of providing financing and outreaching customers, a larger number of
customers will mean low level of unemployment.
Public Confidence
17
In addition, to safety and stability as a prerequsite for public confidence. Microfinance institutions
who are managed in Islamic ways could also create public confidence and the shariah compliant
framework is very much needed here. Building confidence at the microeconomic level focuses on
limiting the risk exposure of individual Islamic microfinance institution and at the macroeconomic
level, isolating Islamic microfinance institution failures. The financial authority would try to see that
each Islamic microfinance institution operates in a safe and sound manner. By pursuing the
macroeconomic goal of limited failure prevention, the financial authority expects to maintain public
confidence in the Islamic microfinance system.
Market Discipline
Both, disclosure and market discipline complement formal supervision, and clearly market
participants (i.e., Islamic microfinance institution, customers, non-profit organizations) can play an
important role. In free and open markets, market participants can use their investment and financing
decisions to reward those Islamic microfinance institutions that are performing most effectively. Or
more accurately, reward those Islamic microfinance institutions that their project will be the most
effective performers as going forward.
How market participants make those projections is not always easy to determine. Even in a
system with sophisticated analysis by rating agencies and other market practitioners (for example,
Forbes provide the list of top microfinance institutions) that recognize the inherent strength or
weaknesses of particular microfinance institutions, it seems that the market focuses heavily on short-
term matters-for example, often seemingly unduly penalizing modest shortfalls from quarterly
earnings estimates.
These market reactions can be explained to some extent by the difficulty of projecting the
Islamic microfinance institutions’ performance based on available disclosures. For market discipline
to be a truly effective complement to formal supervision, market participants must be armed with
accurate and timely information, not just about current balance sheet and income statement elements,
but also with information that has a longer-term value such as qualitative and quantitative information
on the Islamic microfinance institutions’ business strategies, risk profiles, and risk appetites.
Basis for Public Policy
It is important for the financial authority to maintain a sound and stable Islamic microfinance
institution. The main objective of a public policy is to establish a relationship that involves three
major groups, i.e., capital providers, operators and customers. The capital providers are the
government, cooperative members, individuals or private and non-governmental organizations
(NGOs). Operators are those who operate businesses such as banks, cooperatives, and individual
18
entrepreneurs. The microfinance customers are the micro-small enterprises (MSEs), low-income
groups and mostly the poor.
The overall effectiveness of a public policy, however, will depend on the extent of its
contribution to: reduce poverty; empower women or other disadvantaged/marginalized population
groups; create employment; help existing businesses to grow or diversify their activities; and to
encourage the development of new businesses. In this case, the financial authority usually employs
two primary methods or instruments; utilization of public funds as sources of funds and providing
capital to targeted groups.
In practice, the operators look at the profitability of their businesses. Normally, to make their
businesses profitable, they will exclude the lower income group and the poor in extending their
microfinance. This is because the revenue received may not be enough to cover the cost of providing
financial services (sustainability). Since operators focus more on the profitability at the expense of the
outreach (social responsibility), capital providers have to think of a way on how to change the
operators’ objective. The capital providers (example, via zakat and waqf) are not only interested in the
profitability of Islamic microfinance institutions, but also must uphold their social responsibility. 8
This responsibility is translated by providing subsidized funds to be channeled to the operators. At
the same time, there are also other operators that operate their businesses unsubsidized. This creates
several Islamic microfinance institutions players in the market. Each of them competes in the market,
and this raises the issues of sustainability, efficiency and competition among players.
3. Policy Issues Related to Regulations
This section will discuss several policy issues related to regulations. These issues cover the
regulations on: Islamic microfinance institution activities and Islamic microfinance institution-
philanthropy links; effectiveness and sustainability; shariah based business model; who are the
regulators; and ownership.
Regulations on Islamic Microfinance institution Activities and Microfinance institution-philanthropy
Links
8 Social responsibility taken by donors in serving micro-credit means donors have to serve this financial service because the needy (low-income group and the poor) have no choice but to get loans from other formal financial institutions. Or else they will go to loan sharks to get loans and will have problems in paying back those loans.
19
Islamic microfinance institutions are synonym with the micro and small enterprise development.
Therefore, micro-enterprise development programs cover financings and/or give classes to poor
people to help them to start or to strengthen their businesses, building self-esteem and self-reliance,
encouraging autonomy and creating community atmosphere. In the last few years, micro-small-
enterprise development has become one of the most diverse and dynamic approaches to poverty
alleviation, with literally hundreds of programs implemented by a wide range of microfinance
institutions across the globe. Within the micro-small-enterprise field, micro-financing is the best
known approach to providing micro-small-enterprise services.
Therefore, the reasons for allowing the degree to which microfinance institutions can only
engage with micro-small enterprises are due to: first, Islamic microfinance institutions work with the
targeted group (example, micro and small enterprises); second, government micro-financing programs
and staff tend to be both paternalistic and distrustful of the targeted group; third, identifying and
reaching the targeted group is extremely time consuming; fourth, government policies (e.g., licensing
requirement) and an unstable economic climate (e.g., high inflation) counter business growth and
saving potential; fifth, the targeted group often reject micro-financing programs because they do not
want to assume the risks involved; and sixth, inflexible micro-financing criteria, such as group
borrowing, initial financing repayments or collateral requirements are beyond the means of the
poorest. Indeed, it is these regulations that help define what observers mean by the term
“microfinance institution”.
Traditionally people with capital invest their money for the purpose of gaining profit.
However, there are people who invest money not to get more money but to get rewards in the life
hereafter. Islam provides several mechanisms for Muslims to get the satisfaction at the same time
investing for the life hereafter. One of the ways is through waqf and sadaqah (or philanthropy). The
concern is how to make it fully utilized and continuously developed. And also the issue is how to
ensure that the trustee will manage the property according to the interests of the original owners who
endow it. This will require good governance and procedures.
Regulation on Effectiveness and Sustainability
The effectiveness of microfinance programs requires considerable attention so that the benefit of the
programs can really be enjoyed by micro-enterprises. So, they can improve their business and enhance
the quality of life. Sustainability of microfinance programs constitutes important component to
support the achievement of micro-enterprise development, since it constitutes long-term process in
which micro-enterprises require long-term access to financial institution. It indicates that the
measurement of effectiveness (to evaluate the benefit of the programs) and the prediction of
sustainability microfinance programs are required in developing micro-enterprises and Islamic
microfinance institutions. The expectation of micro-enterprise development is that micro-enterprises
20
can develop their business and Islamic microfinance institutions as an organizer of microfinance
programs do not suffer losses. Therefore, the benefit of the programs should have been greater than
the cost.
In general, microfinance programs concern about business and job creation, income
generation, and other outcomes. These variables are measurable at the level of the individual, the
business, the community, or the economy. Therefore, the measurement of effectiveness (success) of
microfinance becomes important to examine whether the microfinance programs have attained its
predetermined goals. This activity requires the determination on the method of measurement and the
indicators of effectiveness of microfinance programs.
Furthermore, the indicators of effectiveness are not only tried to connect the microfinance
programs with income and production enhancement, but also the repayment rate and outreach
indicators such as: income of participants; the value and number of financing; saving accounts and the
type of financial services offered; the number of branches; and the annual growth of assets over recent
years. Therefore, the policy should be in place to select the customers to help making better allocation
for sustainability and effectiveness of the financing as they will be a vehicle for economic
development.
The effectiveness of microfinance is also related to the sustainability of the program, because
achieving the success, micro-enterprises need long-term access to financial services. Therefore,
financial sustainability or self-sufficiency is a prerequisite for making micro-financial services
permanent as well as widely available. Sustainability is about creating institutions that can provide a
positive flow of benefit for as long as they are needed. An Islamic microfinance institution can be said
to be self-sustainable if, without the use of subsidies, grant or other concession resources, can
profitably provide finance to micro-enterprises on an acceptable scale. Self-sustainability can be
achieved via financial self-sufficiency and profitability. It reveals that, to continue growth, Islamic
microfinance institutions are required to generate profit, balance the social objectives of reaching low-
income entrepreneurs with generating a return for its investors. It has dual missions that are balancing
a social agenda or social impact with its financial objective.
From the perspective of micro-enterprise development, we can conclude that the effectiveness
of microfinance can be indicated by the success of business, income enhancement, rate of repayment
and the benefit of the program to community, and the sustainability of the financing programs
constituting important component to achieve the goal of programs. Profitability is necessary to
achieve self-sustainability. Therefore, analyzing the ability of Islamic microfinance institutions profit
generation is needed.
To achieve the profitability, financial resources should be allocated efficiently. Efficiency has
important role related to profitability and sustainability. Increasing efficiency enables the Islamic
microfinance institutions generates higher profit and this condition will create two benefits. First, the
profit for savers and investors will increase; therefore, they are still interested in saving and investing
21
their money in Islamic microfinance institutions. Second, the return earning of Islamic microfinance
institutions will increase and can be used to add the capital that enable the Islamic microfinance
institutions to operate in longer time, to reach more micro-enterprises so that eventually the
sustainability can be achieved. Therefore, measuring and improving efficiency become important to
encourage progress of Islamic microfinance institutions to achieve sustainability.
Regulation on Shariah Based Business Model
As part of an effort to help the struggle of the poor people, micro-enterprise development should be
undertaken by giving loans at low charges. Giving loans at high charges causes the wealth of the poor
precisely flows to the rich (capitalist) and it contradicts with the value of justice. The prohibition of
interest (riba) in Islam constitutes the form of way out to avoid injustice.
Socio-economic justice is one of the most important characteristics of an ideal society.
Among the most important teachings of Islam for establishing justice and eliminating exploitation in
business transaction is the prohibition of all sources of unjustified enrichment. According to Chapra
(1985) one of the important sources of unjustified earning is receiving any monetary advantage in a
business transaction without giving a just counter value. Riba represents the prominent source of
unjustified advantage. To achieve the socio-economic justice, Islam offers shariah based business
model via different types of financing such qard, musharakah and mudharabah. Hence, there are
different business models that can be offered for the establishment of Islamic microfinance institution.
Who are the Regulators?
Many regulators encourage private monitoring of Islamic microfinance institutions. For instance,
regulators may require Islamic microfinance institutions to obtain certified audits and/or ratings from
rating agencies. Regulators may also make Islamic microfinance institution directors legally liable if
information is erroneous or misleading. Regulators may also compel Islamic microfinance institutions
to produce accurate, comprehensive and consolidated information on the full range of Islamic
microfinance institution activities and risk-management procedures. Furthermore, a country credibly
imposes a “no deposit insurance” policy to stimulate private monitoring of microfinance institutions.
Some economists have advocated greater reliance on the private sector and expressed
misgivings with official regulation of Islamic microfinance institutions. For instance, the “grabbing-
hand” view of government regulations holds that Islamic microfinance institutions will pressure
politicians who, in turn, can unduly influence regulators. Furthermore, in some countries, regulators
are not well compensated and hence quickly move into Islamic microfinance institution, resulting in a
situation in which regulators may have mixed objectives when it comes to strict adherence to the
rules. Also, since regulators do not have their own wealth invested in Islamic microfinance
22
institutions, they have different incentives from that of private owners or rabbul mal when it comes to
monitoring and disciplining Islamic microfinance institutions. For example, the rabbul mal who act as
capital contributors, via restricted deposits, are in a better position to monitor and discipline Islamic
microfinance institutions
However, questions are raised about placing excessive trust in private-sector monitoring,
especially in a system with poorly-developed capital markets, accounting standards, and legal
systems. A system with a weak institutional environment will benefit more from regulators containing
excessive risk-taking behavior Islamic microfinance institution and thereby instilling more confidence
in customers than would exist with private-sector monitoring. This view argues that, in weak
institutional settings, increased reliance on private monitoring leads to exploitation of small savers
and hence less Islamic microfinance institution development.
Ownership of Islamic Microfinance institutions
Economists hold sharply different views about the impact of government ownership of Islamic
microfinance institutions on financial and economic development. The argument is that government
ownership of Islamic microfinance institutions would facilitate the mobilization of funds and the
allocation of those funds toward strategic projects with long-term benefits on an economy. According
to this view, governments have adequate information and sufficient incentives to ensure socially
desirable investments. Consequently, government ownership of Islamic microfinance institutions
helps economies overcome private capital-market failures, exploit externalities, and invest in strategic
sectors. The government ownership of Islamic microfinance institutions to promote economic and
financial development may be relevant in an underdeveloped financial system.
However, governments do not have sufficient incentives to ensure socially desirable
investments. Government ownership tends to politicize resource allocation, soften budget constraints,
and otherwise hinder economic efficiency. Thus, government ownership of Islamic microfinance
institutions facilitates the financing of politically attractive projects, but not necessarily economically
efficient projects.
4. Regulatory Environments
The policy-related issues mentioned earlier are important for an effective regulatory framework.
Hence, several guidelines shall be introduced to produce environmentally effective regulations,
23
among others theguideline on: the shariah advisory council, corporate governance, group lending
policy, loan loss financing, minimum capital and micro-takaful scheme.
Guideline on Shariah Advisory Council
According to the discussion in section three, Islamic microfinance institutions need to comply the
shariah. Hence, Islamic microfinance institution is required to set up a Shariah Advisory Council
(SAC) to supervise its operations to ensure that those operations comply with the rules of shariah. The
SAC advises the directors about matters pertaining to the operational issues of the Islamic
microfinance institution. The SAC also takes the views of the Shariah Committees of relevant
authorities such as National Shariah Advisory Council on issues relating to the industry.
Guideline on Corporate Governance
The operation of an Islamic microfinance institution embodies a number of features such as equity
participation; and risk and profit-loss sharing arrangements and as trustee. On the one side, an Islamic
microfinance institution is essentially a partner with its trustees, and also a partner with entrepreneurs,
on the other side, when employing trustees' funds in productive direct investment. The trustee also
shares in the profits according to a predetermined ratio, and is rewarded with profit returns for
assuming risks.
These financial arrangements imply quite different stockholder relationships, and by corollary
governance structures, from the conventional model since trustees have a direct financial stake in the
microfinance institution's investment and equity participations and the benefits of investment should
be restricted or unrestricted depending on the types of philanthropy. As discussed above, the Islamic
microfinance institution is subject to an additional layer of governance since the suitability of its
investment and financing must be in strict conformity with Islamic law and the expectations of the
Muslim community. For this purpose, Islamic microfinance institutions should form the Shariah
Advisory Council.
Therefore, the governance structures are quite different because the Islamic microfinance
institution must obey a different set of rules - those of the Holy Qur'an - and meet the expectations of
the Muslim community by providing Islamically-acceptable financing modes. There are two major
differences from the conventional framework. First, and foremost, an Islamic microfinance institution
must serve God. It must develop a distinctive ethics and culture, the main purpose of which is to
create a collective morality and spirituality which, when combined with the production of goods and
services, sustains the growth and advancement of the Islamic way of life.
24
Secondly, Islamic microfinance institutions are formed based on the Islamic legal concepts of
shirkah (partnership) and mudarabah (profit-sharing). An Islamic microfinance institution is
conceived as financial intermediary mobilizing funds from the public on mudarabah and trust basis
and advancing capital to entrepreneurs.
Guideline on Group Lending Policy
The joint-liability lending (also known as group lending policy) practice, see for example Attanasio
et al (2011) has been introduced since the establishment of Grameen bank in the 1970s. The practice
has been widely adopted in microfinance programs in many developing countries as an important tool
to provide credit to the poor. This practice has produced many positive results, likes the expansion of
the number of microfinance institutions and improvement of repayment rates.
This practice also benefits the poor, because most of whom do not have any collateral; it is
very risky to lend them money. This lack of collateral, in addition to a severe lack of financial and
personal information about each potential client, puts an Islamic microfinance institution in the
impossible situation of guessing who is going to pay them back, and who is going to default or run off
with their money.
Group lending, as mentioned in Ismail and Wan Yussof (2014), solves both of these
problems. If one member of the group is unable to pay back their loan, the other members of the
group must pay back that person’s share for them. This provides a form of insurance for the Islamic
microfinance institutions, as they know they will get paid back, even if one person defaults on their
loan or is unable to make a payment. Group lending also addresses an Islamic microfinance
institution’s lack of information by making the members of a community form their own groups.
Since each member of the community has a more in-depth knowledge of who is likely to repay on
time and who is more risky, all of the less risky people will group together leaving all of the risky
people together. This means that the more responsible groups will very rarely have to pay for each
other, whereas the more risky groups will have to pay for someone else more often, thus effectively
creating a higher interest rate for those riskier people. The group-lending model is an ingenious way
of overcoming some of the challenges that lending to the poor entails.
However, it also creates a negative result on the commitment to repayment meetings and can
create social pressure for borrowers. A potential downside to group lending policy is that it often
involves time-consuming weekly repayment meetings and exerts strong social pressure, making it
potentially onerous for borrowers. This is one of the main reasons why Islamic microfinance
institutions started to move from joint to individual lending.
It is also often argued that the high transaction costs faced by Islamic microfinance
institutions in identifying and screening their clients, processing applications and collecting
25
repayments keep prevent Islamic microfinance institution from reaching new clients and expanding
their operations.
Understanding the factors affecting repayment performance, which may vary by (unobserved)
group types, are thus of great policy relevance. In particular, more accurate risk scoring tools can help
to overcome information asymmetries by aiding Islamic microfinance institutions to better classify
their potential clients and understand the factors driving their behavior, further promoting the
development and sustainability of microfinance programs.
Guideline on Loan Loss Financing
Islamic microfinance institutions may self-classify each of their financing assets within one of the five
categories set forth below. In making the decision to classify a financing asset within one of the five
classification categories listed, an Islamic microfinance institution may use its informed judgment but
may be guided by the standards and components set forth below with respect to each category. Self-
classifications of financing assets by Islamic microfinance institution may be subjected to
classification decisions of the regulators. Differences between classification decisions of regulators
with respect to any financing and that of the classifying Islamic microfinance institution may be
subject to negotiation between them but the classification decision of regulators shall be deemed final
for all purposes.
Standard - An asset classified as Standard is paid in a current manner and is supported by
sound net worth and the paying capability of the buyer. The financing was made with sound standards
of credit analysis. Standard assets are sufficiently secured with respect to both the principal amount
and profit, and only a general provision shall be formed for standard assets in the amount of 1%.
Watch-List – An asset classified as Watch List is adequately protected, but is potentially
weak. Such an asset constitutes an unwarranted credit risk, but not to the point of requiring a
classification of Substandard. The credit risk may be minor, and in most instances, Islamic
microfinance institution managements can correct the noted deficiencies with increased attention. Yet
such risk is consideredundue and unwarranted in light of the particular circumstancessurrounding the
asset.
Examples of Watch-List assets are those which may, if not corrected, become weakened by
imprudent financing practices including but not limited to the Islamic microfinance institution
financing officer’s inability to properly supervise them due to lack of expertise; the financing was not
made in compliance with the Islamic microfinance institution’s internal policies; failure to maintain
adequate and enforceable documentation; or poor control over collateral. Watch-List assets require a
minimum financing provision of, say, 1.5%. Under no circumstances should a Watch List category be
utilized as a compromise between the classification categories of Standard and Substandard.
26
Substandard – An asset classified as Substandard is inadequately protected by current sound
net worth and paying capacity of the buyer or by the collateral, if any, supporting it. Such an asset has
at least one well-defined weakness that jeopardizes the full repayment of the financing. It is
characterized by the distinct possibility that the Islamic microfinance institution will sustain some loss
if the deficiencies are not corrected. Assets that are past due 61-90 days for principal or profit
payments must be classified as substandard at a minimum. Substandard assets require a minimum
financing provision of 25%. Examples of substandard assets include the following: (i) primary
sources of repayment are insufficient to service the financing and the Islamic microfinance institution
must look to secondary sources of repayment, including collateral; (ii) the buyer’s current financial
capability or cash flow is not sufficient to meet currently maturing financing; and (iii) the buyer’s
business is significantly undercapitalized.
Doubtful – An asset classified as Doubtful has all the weaknesses inherent in one classified as
Substandard with the added characteristic that these weaknesses make collection or liquidation in full,
on the basis of current circumstances and values, highly questionable and improbable. Although the
possibility of loss is thus extremely high, because of significant pending factors, reasonably specific,
which could be expected to work to the advantage and strengthening of the asset, its classification as
an estimated loss is deferred until its more exact status may be determined. Examples of such pending
factors include but are not limited to mergers, acquisitions, capital restructuring, and the furnishing of
new collateral or realistic refinancing plans. Assets that are past due 91-180 days for principal or
profit payments (or deferred payment amounts) must be classified as doubtful at a minimum.
Doubtful assets require a minimum financing provision of 50%.
Loss -An asset classified as a loss is considered not collectible and of such little value that its
continuance as an asset is not warranted. A loss classification does not mean that the asset has
absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing
off this basically worthless asset even though partial recovery may be affected in the future. An asset
that is past due over 180 days for principal or profit payments must be classified as loss. Loss assets
require a financing provision of 100%.
Guidelines on Minimum Capital
Traditional approaches to Islamic microfinance institutions emphasize the positive features of capital
adequacy requirements. Capital, or net worth, serves as a buffer against losses and failure. When
faced with limited liability, Islamic microfinance institutions owners will avoid higher risk activities
considering the amount of capital at risk relative to assets. With deposit insurance the regulatory
capital requirements play a crucial role in aligning the incentives of Islamic microfinance institutions
owners with fund owners and other financiers. However, disagreement may exist over whether the
imposition of capital requirements actually reduces risk-taking incentives. Moreover, it is difficult - if
27
not impossible - for regulators and supervisors to set capital standards that mimic those that would be
demanded by well-informed, undistorted private-market participants.
For instance, actual capital requirements may increase risk-taking behavior. At the same time,
capital requirement may also induce credit rationing, that produce a negative implications for
economic growth.
Higher capital requirements may induce customers to shift to capital markets and in the
process impair capital allocation, while raising capital requirements can increase the cost of capital.
Thus, these provide conflicting predictions on whether capital requirements curtail or promote Islamic
microfinance institutions performance and stability.
Therefore, at a time when existing regulatory capital requirements are widely viewed as being
arbitrary and inadequate, it seems especially important to examine whether they even matter since
capital adequacy standards might be introduced.
Guidelines on Micro-Takaful
One of the strategies to maintain the sustainability of Islamic microfinance institutions is to create a
guarantee mechanism. It can be done through micro-takaful scheme. It is crucial to arrange micro-
takaful mechanism for Islamic microfinance institutions’ financing operation. The practice of takaful
for Islamic microfinance institutions as implemented by Indonesia Association for BMT (PBMTI)
through Ta’awuni Model can be considered as a good one. The Ta’awuni Model tries to mitigate risk
of financing, by providing guarantee for repayment of financing if the customers fail to do so due to
unexpected incidence prevails.
This guideline may include the coverage against defaults on financing to micro-enterprises.
For example, it can provide the facility such as 3 percent premium for 3-5-year financing and risk
sharing (a guarantee for 75 percent of each financing). Furthermore, by doing this, it will contribute to
a low arrears and default rate for Islamic microfinance institutions.
5. Conclusion
The aim of this paper is to provide a framework for addressing regulatory issues which impact Islamic
microfinance institution operations and institutional development. The first step in regulating Islamic
microfinance institutions is the philosophical foundation of its establishment that the interpretation of
shariah principles that is formulated in their operations and incentives. However, before the
introduction of regulations, several policy issues related to regulations need to be addressed, among
others: Islamic microfinance institution activities and Islamic microfinance institution-philanthropy
links; effectiveness and sustainability; shariah based business model; who are the regulators; and
28
ownership. These policy related issues are important for an effective regulatory framework. Several
guidelines have been introduced to produce environmentally effective regulations, among others
aretheguideline on: the shariah advisory council, corporate governance, group lending policy, loan
loss financing, minimum capital and micro-takaful scheme.
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Paper 4
Attaining Financial Inclusion throughRegulating Islamic Microfinance
Dr.Bijay Kumar SwainProfessor & Head Centre for Rural Credit & Development Banking,
National Institute of Rural Development,Rajendranagar,Hyderabad - 500 030, INDIA
Cell No. + 09550881770Office No. 040-24008489
Introduction
The main aim of this article is to assess the potential for attaining financial inclusion through
regulating Islamic microfinance as an alternative to the conventional microfinance. This paper argues
that Islamic microfinance can play an important role in the eradication of poverty, the socio-economic
development of the poor and small entrepreneurs without charging any interest or riba. In addition, it
generates ethical and moral attributes and creates a new motivation among the micro entrepreneurs.
Its profit and loss sharing feature, which is different to conventional microfinance, allows it to reach
the poorest of the poor; allows equitable distribution of wealth; optimal utilization of resources and
control over inflation and in this way leads to socio-economic justice. Indeed, this article aims to
examine the possibility of narrowing the gaps between haves and have-nots, while bearing in mind the
present financial inclusion policies as the main agenda for developing economies.
Why Islamic Microfinance Over Conventional Finance?
Microfinance has undoubtedly yielded favourable results to a certain extent and microfinance
institutions have grown rapidly to meet the rising demand, but their outreach is still small compared
with the need for such finance. It has been found that even among those who have some access to
basic banking services, there is evidence of significant credit constraints. This problem has been
primarily identified in the Middle East, where Muslims are now showing an inclination to avoid
borrowing from interest based financial institutions. This is because, under Shariah principles, they
are prohibited from being involved in any financial instruments involving interest. A large section of
the Muslim population, therefore, rejects this interest based financing, which in turn leads to
increasing poverty among Muslim populations.
Researchers from the Islamic Development Bank estimated that in the six countries with the
largest Muslim populations like Indonesia, India, Pakistan, Bangladesh, Egypt and Nigeria, the
number of people living on less than $2 per day far exceeds half a billion. Recent studies have also
30
shown that Muslims are excluded from access to banking products and services to a significant extent,
with exclusion rates as high as 80% in India. Finally, for Muslims with access to microloans, the
Consultative Group to Assist the Poor has suggested that up to 40% reject loans on religious grounds.
This means that there is huge potential for interest free microfinance that is yet to be tapped.
Interest free financing is based on profit and loss sharing and is therefore a form of
partnership, where the partners share profits and losses on the basis of their capital share and effort,
but where there is no guaranteed rate of return. It is also consistent with the requirement that Muslims
do not act as nominal creditors in any investment, but are actual partners in the business. It is, in
effect, equity-based financing and does not involve any kind of interest. It may prove to be a
productive approach to the eradication of poverty in the future, but financial services alone cannot be
sufficient to solve the problems of poverty. It is essential, therefore, for microfinance to be
complemented by education in order to enhance economic growth and development.
Islamic finance is growing rapidly, but it has largely failed to engage the Muslim poor, who
comprise almost half of all the Muslims in the world. This issue needs to be addressed and Islamic
microfinance would appear to be a potential solution. The target group for microfinance is not,
however, constituted by the poorest of the poor, who need other interventions such as food aid and
health security, but those poor who live at the border of the so called poverty line; those who could
reasonably attain a decent quality of life and who have entrepreneurial ideas, but lack access to formal
finance. However, microfinance is a very flexible tool that can be adapted to every environment,
based on local needs and the economic and financial situation. Following this logic, microfinance can
also easily be adapted to cultural environments, such as those existing in countries with majority
Muslim populations.
Regulating Islamic Microfinance
The ultimate goal of Islamic finance is the maximization of social benefits as opposed to profit
maximization, through the creation of healthier financial institutions that can provide effective
financial services at a grass roots level, an alternative to the Western system that has created the
current socio–economic crisis. This suggests that Islamic microfinance possesses a tremendous
potential that needs to be recognized efficiently and effectively. In fact, the current, worldwide
economic crisis and the problems that have occurred with conventional microfinance in various
countries like Bangladesh and India compel us to look seriously at alternatives. That alternative may
be interest free financing. Islamic microfinance is a new area of interest within both the Islamic
finance and microfinance fields of study and they appear to share many common characteristics such
as risk sharing, promoting entrepreneurship and striving for economic justice. Interest free financing
is based on profit and loss sharing and is therefore a form of partnership, where the partners share
profits and losses on the basis of their capital share and effort, but where there is no guaranteed rate of
return. It is also consistent with the requirement that Muslims do not act as nominal creditors in any
31
investment, but are actual partners in the business. It is, in effect, equity-based financing and does not
involve any kind of interest. It may prove to be a productive approach to the eradication of poverty in
the future, but financial services alone cannot be sufficient to solve the problems of poverty. It is
essential, therefore, for regulating microfinance to be complemented by effective education in order to
enhance economic growth and development.
In all Muslim countries, Islamic microfinance accounts for a very small portion of the
country’s total microfinance outreach, never exceeding 3% of the outstanding loans. Conventional
microfinance products command in the same countries a market share of around 44%. Of the
conservatively estimated 77 million microcredit clients worldwide, only 380,000 adhere to Islamic
microfinance, 300,000 are reached by 126 institutions operating in 14 countries and 80,000 by a
network of Indonesian cooperatives. Its supply is concentrated within a few players, with Indonesia,
Bangladesh and Afghanistan accounting for 80% of global outreach. In all other countries, Islamic
microfinance is still in its infancy. No scalable institutions are reaching clients on a regional and
national level. The average outreach of the 126 institutions is 2,400 clients, none has more than
50,000 clients and the average Islamic micro loan is similar to a conventional micro loan. Efficiency
lags behind its conventional cousin. A loan-to-deposit ratio of more than 110% indicates the need to
improve the deposit-gathering process. The average operational efficiency ratio at 20% compares with
the more affordable 15% of conventional Asian institutions and shows the need to work on the
average loan size, cost structure and staff productivity. The average portfolio at risk at 30 days of
approximately 9% is well above the 5% as reported by the 1,200 conventional microfinance
institutions surveyed by the Microfinance Information Exchange. This lack of efficiency translates
into an average return on assets at 1.5% below the 2.2% of conventional institutions.
In spite of this low penetration and efficiency, studies suggest that a sizeable pent-up demand
for Shariah-compliant microfinance products does exist. In Jordan, 25% and 32% respectively of
those interviewed by USAID and FINCA cited religious reasons for not seeking conventional loans.
In Algeria, a 2006 study conducted by the Frankfurt School of Finance and Management revealed that
21% of microenterprise owners did not apply for loans, primarily because of religious reasons. In
Yemen, an estimated 40% of the poor demanded Islamic financial services, regardless of price. In
Syria, an International Finance Corporation survey revealed that 43% of respondents considered
religious reasons to be the largest obstacle to obtaining microcredit. In the West Bank and Gaza, more
than 60% of low income respondents to a survey conducted by Planet Finance in 2007 claimed a
preference for Islamic products over conventional products. A 2000 Bank Indonesia report indicated
that 49% of the rural population of East Java considers interest prohibition and would prefer to bank
with Shariah-compliant financial institutions.
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Business Model:
To take advantage of this opportunity, expand access to finance throughout the Muslim world and
ease financial exclusion exacerbated by the abhorrence to interest-based products, Islamic
microfinance needs to develop an original business model based on its authentic principles of equity
financing. Islamic microfinance also needs to adopt a performance-minded culture with a clear
separation between the roles of donors and capital providers and introduce proper risk management
techniques and benchmarking methodologies.
The industry still lacks product diversification to serve the financial needs of the micro
entrepreneur. Access, rather than cost, should be the main focus in designing and implementing an
Islamic microfinance programme. The dentition of microfinance needs to broaden from microcredit to
the provision of a variety of financial services, such as savings, insurance and remittance.
Equity-based products through musharakah are unique to Islamic microfinance and may
account for its superiority over conventional microfinance on the grounds of ethics, efficiency and
resiliency of the cost of capital. But the present Islamic microfinance industry mimics the
conventional version and relies for more than 70% of its products offering on asset financing through
Shariah-compliant debt or murabahah. Although the creation of debt does not require the client to
maintain written records and reduce the opportunity for abuse through inaccurate recordkeeping, the
implementation of murabahah is costly. The checks and balances of adequate documentation showing
ownership and constructive possession are extremely difficult, as microfinance involves the
disbursement of small amounts in large frequencies. The costs associated with purchasing,
maintaining, selling or leasing a commodity are also expensive and are often passed on to clients.
Another problem associated with debt-financing involves the possibility of willful default by
clients, because Islamic modes do not admit the possibility to sanction this behaviour with payments
in excess of the original amount of debt. A growing number of Shariah scholars do not approve of it,
especially in the tawarruq structure, on the basis that it is merely disguised lending, where the
participants have no interest in acquiring the underlying commodities. This particularly applies to
providing microfinance to start-ups and small companies whose businesses do not involve the sale and
purchase of commodities and do not have sufficient surplus funds to be credibly investing in
commodities.
Criticisms:
If, in spite of all these shortcomings, the Islamic micro-finance industry still focuses on debt-
financing, it exposes itself to the criticism that murabahah products are offered with the sole intent of
disguising interest as a cost mark-up or administration fee and that Islamic finance is simply a
rebranding of conventional finance and not truly reflective of Islamic principles. Consequently, low-
income populations, who often rely on financially uneducated local religious leaders to address
questions of religion, will tend to shy away from Islamic microfinancial products. As for musharakah,
33
agency problems with profit-loss-sharing are cited as the key reason behind the preference for debt-
based products. Reporting and transparency requirements surrounding the profit loss-sharing
mechanisms need long-term involvement by microfinance institutions in the form of technical and
business assistance. This in turn raises the cost of implementation and can result, at least at the
beginning, in substantial operating burdens and costs on small enterprises unaccustomed to formal
accounting. The uncertainty about profit is a major drawback of profit-loss-sharing models. To
address these issues, a group financing methodology can be used to fix the principal-agent problem.
Each member monitors other members’ businesses and the profit reporting and profit-sharing
payments are made available to the other group members, the latter may then report them to the
microfinance institution if they systematically understate profit.
Performance Based Culture:
In contrast with its conventional cousin, Islamic micro-finance is permeated by a not-for-profit culture
that relies on donor funds and focuses mainly on social goals. In Asia, non-government organizations
are the dominant players, with 14 institutions reaching 42% of clients and just two commercial banks
reaching 29%. In the Gulf, donor institutions are the key players. The Arab Fund for Economic and
Social Development, a US$2bn fund, includes a microfinance programme. The Arab Gulf Fund for
United Nations Development Organizations supports the establishment of banks for the poor across
several Arab countries, including the Republic of Yemen, Jordan and Lebanon. In Saudi Arabia, the
Abdul Latif Jameel Community Service Programme aims, through an interest-free loans micro retail
strategy, to empower low-income women. Its Bab Rizq Jameel Centre focuses on job creation and
offers interest-free loans to owners of new or existing projects of a service, industrial or production
nature.
Commercial banks are now timidly downscaling and offering Islamic microfinance services.
The Saudi Credit Bank extends interest-free loans for marriage, home repair, vocational pursuits and
other social endeavors, including family loans. The most well-known venture is the Noor Islamic
Bank and Emirates Post Holding Group plan, with aims to establish a company providing an array of
Islamic microfinance products, including microcredit and insurance, to the low income and unbanked
segment of the UAE population.
To expand and be sustainable, the industry should shift from a charity-based donor-dependent
approach to one that reflects the mechanics of the free market. It should emphasize systemic
efficiency and transparency and restrict the use of donor funds to capacity building, the key bottleneck
being the shortage of strong institutions and managers. Donor subsidies should be temporary start-up
supports designed to get an institution to the point where it can tap private funding sources. They
should complement private capital, not compete with it.
Capacity building is needed at all levels to realize the full potential of Islamic microfinance.
At the macro level, the Islamic Development Bank and Islamic financial standard setters, should
34
consider developing global financial reporting standards adapted to microfinance to build the
infrastructure for transparency in the global Islamic microfinance sector. This infrastructure would
entail comprehensive disclosure guidelines on Islamic microfinance accounting principles, pricing
methodologies, financial audits and, eventually, rating services.
At the micro and institutional levels, international donor agencies can play a major role by
helping existing institutions reach scale, and funding pilot projects testing various business models.
More effort should be made to train Islamic microfinance institutions managers and staff through, for
example, the development of operational tools and manuals for use in Indonesia. Governments should
set a supporting policy environment and legal and regulatory framework to enable financial services.
As for private funding, this should finance Islamic microfinance initially as an alternative business
model in which participants might like to engage, and subsequently as an alternative asset class in
which participants might like to invest.
Sources of Funds:
But where does one find the necessary funds? The UN Capital Development Fund estimates that there
is potential for seven million borrowers and 19 million savers. It appears that the availability of micro
savings products may be more important than microfinancing. The lack of fund mobilization and high
administrative cost means that most Islamic microfinance institutions are not economically viable and
their growth and sustainability largely depend on the availability of external funds and efficiency of
operations. External funds are needed, particularly during the initial stages of operation, members’
savings are small but as savings of beneficiaries accumulate and get recycled, the dependence on
external funds should reduce.
Risk Management Techniques:
This for-profit approach should help to address the issues related to the implementation of
musharakah and enable the industry to provide affordable financial services in a cost-effective manner
with the introduction of risk management techniques. As the conventional microfinance industry has
developed a set of good practices to manage credit risk and boasts an excellent portfolio quality,
Islamic microfinance should take peer pressure and strict discipline into account for collection in
accordance with principles embedded in Islam. For example, pressure from the religious community
and appeals to a sense of religious duty should complement reliance on peer pressure. A number of
ready instruments in Shariah are available to address the extra-financial issues.
One example is the kafalah, where the group members are guarantors for repayment.
Members in the group can agree to help each other in case any are unable to pay the installment. One
way to do this is to provide qard-hasan or interest-free loans to the person facing problems in paying
the installments. The Islamic social development programme builds the social capital, such as a
feeling of brotherhood and comradeship and obligation to repay debt, which helps the regular
35
repayment of installments. This approach will foster the establishment of benchmarks with Islamic
microfinance institutions, producing accurate and comparable reporting on financial performance, for
example, loan repayment and cost recovery, as well as social performance, such as number and
poverty level of clients being served.
Reporting not only helps stakeholders’ judge costs and benefits but also improves
performance. Islamic microfinance can pay for itself, and must do so if it is to reach large numbers of
people. Unless microfinance institutions are not economically viable and their growth and
sustainability largely depend on the availability of external funds and efficiency of operations,
external funds are needed, particularly during the initial stages of operation. Members’ savings are
small but as savings of beneficiaries accumulate and get recycled, the dependence on external funds
should reduce. The Islamic social development programme builds the social capital, such as a feeling
of brotherhood and comradeship and obligation to repay debt, which helps the regular repayment of
installments.
Future Potential:
The emergence of microfinance, conventional and Islamic alike, is a testimony to the fact that all is
not well with our world. There are a number of known and unknown lacunas with prevailing systems
of commercial banking, financing and resource allocation. Among the known lacunas, there are
problems of adverse selection and moral hazards like interest rates. As for conventional microfinance,
it is already structurally aligned to applying Islamic equity financing structures. Microfinance
programmes are based on group sharing of risk and personal guarantee, while maintenance of trust
and honesty is tied to the availability of future funds. This should allow for the inclusion of a
musharakah-based model or at least a model of collective guarantee.
Microfinance institutions looking to implement Islamic finance in their programmes can
develop mudarabah-based programmes. Microfinance institutions can find Islamic finance a natural
fit in their programmes, both debt and equity-based. Interest rates, high or low, are rejected by
Muslims as tantamount to riba, something that is prohibited in no uncertain terms by Shariah. Islamic
microfinance has the potential to respond not only to unmet demand but also to combine the Islamic
social principle of caring for the less fortunate with microfinance’s power to provide financial access
to the poor.
Microfinance and Islamic finance have much in common. Both emphasize the good of society
as a whole. Both advocate entrepreneurship and risk sharing and believe that the poor should take part
in such activities. Both focus on developmental and social goals and advocate financial inclusion and
both involve participation by the poor. Unlocking this potential could be the key to providing
financial access to millions of poor Muslims who currently reject microfinance products that do not
comply with Islamic law. It has been estimated that it would require only US$21bn to provide
microfinance facilities to the world’s poorest 100 million families.
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Benefits of Islamic Microfinance:
There are undoubtedly lessons to be learned from the experiences with microfinance in many
developing countries which may hasten the development of an interest free Islamic microfinance
system. In addition Islamic microfinance could be beneficial in other ways better recovery rates and
increased organizational and borrower sustainability, as well as more effectively meeting
microfinance’s core objective of poverty alleviation, increased production and job creation.
Simultaneously, Islamic microfinance can also offer an alternative paradigm for millions of poor
people who are currently not served by conventional microfinance.
It has been suggested that Islamic microfinance could be a critical enabler of wealth creation
and its equitable distribution, but the challenge of poverty alleviation through microfinance needs to
be achieved through a comprehensive approach to the issue. Innovations in Islamic microfinance must
be set within a background that includes financial instruments yielding stable income flows, cover or
security to deal with penalties on payment defaults and formulae for pricing Islamic financial
products. Innovations should be firmly based in the application of a new product or a technology to
specific market opportunities, for example, lifestyle or explicit socio-economic problems. Combining
the Islamic social principle of caring for the less fortunate with microfinance’s power to provide
financial access for the poor has the potential to reach out to millions more people, many of whom
have now started to prefer Islamic products over conventional ones. It also demands the development
of financial reporting standards to build the infrastructure for transparency in the global Islamic
microfinance sector.
Concluding Remarks:
It is time for the industry to adopt innovative and sound practices and prove that the model works
quite efficiently; that micro entrepreneurs with an appropriate business idea can be helped and thence
find a way out of poverty. In this way Islamic microfinance can be a fruitful initiative towards
microenterprise development and prove to be a positive accelerator of economic growth. Islamic
microfinance is, however, a new concept, still in its infancy and demands further introspection
through market research to identify market segments and to enable products to be customized
appropriately. It also demands the development of training courses so that micro entrepreneurs are
well equipped to take advantage of the opportunities they are being offered. Simultaneously, effective
regulation of Islamic Microfinance from the beginning will lead to the successful growth and
development of the sector benefitting the genuine borrowers who can change their standard of living
for ever.
37
References:
Farhat Abbas Shah – ‘Revitalizing the World Economy through Islamic Micro Finance’, Published by
the Farz Foundation, 2012
Brugnoni, A. – ‘Islamic Microfinance Models Needs Changing’, Published by Consultative Group to
Assist the Poor, 2011.
Shebrawy, A. – ‘Innovation in Micro entrepreneurship and Islamic Microfinance’, Published by
Islamic Economy & Finance Pedia, 2011.
Alasrag, H. – ‘Global Financial Crisis and Islamic Finance’, Published by Munich Personal Archive,
2010.
Khnifer, M & Baig, A. – ‘Design, Implementation and Risk Aspects of Islamic Financial Products
and Services’, Published by Reading University, 2010.
Ahmed, M, Masood, T. – ‘Problems and Prospects of Islamic Banking’, Published by Aligarh Muslim
University, 2010.
Ashraf, M. – ‘The Effectiveness of Microcredit Programme and Prospects of Islamic Microfinance
Institutes’, Islamic Bank Training and Research Academy, 2010.
Karim, N and Tarazi, - ‘Islamic Microfinance: An Emerging Market Niche’, Published by
Consultative Group to Assist the Poor, 2008.
Khan, A. – ‘Islamic Microfinance Theory, Policy and Practice’, Published by Islamic Relief
Worldwide, 2008.
Obaidullah, M – ‘Introduction to Islamic Microfinance’, Published by The Islamic Business and
Finance Network, 2008.
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Paper 5
The Role of State-Created Agencies in Supervising the Islamic Microfinance Institutions to Alleviate Poverty amongst Rural Farmers
Muhammad Hakimi Bin Mohd ShafiaiSenior Lecturer
School of Economics, Faculty of Economics & Management &Institut Islam Hadhari
Universiti Kebangsaan Malaysia (UKM)43600 Bangi, Selangor
e-mail: [email protected]
AbidullahGraduate School of Business
University Kebangsaan Malasyia43750 Bangi, Selangor.
Email: [email protected]
AbstractRural poverty is considered as a major challenge for the today’s economies. The people of rural areas have less access to education and health facility and hence linked with agriculture for earning their livelihood. Due inconsistent availability of the land from the landlord and less experience in input utilization, the farmers are left with small portion of earnings that are less than average. Hence, Islamic Microfinance Institutions (IMFIs) with the frequent supervision and assistance can play an important role in alleviating poverty amongst the rural farmers. The IMFIs with the introduction of Islamic sharecropping based on al-muzāraʻa and al-musāqāt contracts can help the farmers to earn the average incomes that they would need to have. In this paper through qualitative means we have investigated the role of agriculture department and IMFIs in poverty alleviation. Secondly, we have tried to develop an Islamic sharecropping contract the would address the issues sorted out by previous scholars. In the end we have developed a mechanism by which IMFIs can help in poverty alleviation amongst rural farmers with the application of sharecropping and with the assistance of agriculture department created by the Government.
Keywords: Poverty, Sharecropping, Al-muzāraʻa and al-musāqāt, Islamic Sharecropping, Islamic Microfinance Institutes, Department of Agriculture
39
1. Introduction:
The earnings of the people in developing countries are mostly linked with agriculture. These people
mostly reside in rural areas with less education and health facilities. It has been observed that the
poverty ratio is also higher in the rural areas with about 80% of the poor are living there and about
70% of the workforce depends their livelihood on the income from agriculture, fisheries, forestry and
livestock sectors. The agriculture intensification is on top as the governments are putting more focus
on it nowadays. But efficient output cannot be seen in most of the areas because of the fact that
farmers fails in applying appropriate farming system which led to erosion of soil and depletion of soil
fertility and ultimately results in less output (Polman, 2002).
In such case the role of government become vital to provide solution to the agriculture related
problems. Hence most of the governments have established a separate department that deals with the
issues regarding agriculture. The responsibilities that agriculture departments hold are mostly related
to policy development and implementation. The policies are regarding enabling agriculture industry to
adapt its self to compete in a fast-changing international and economic environment, assisting to
improve market access and market performance for agriculture sector, helping the industry in
adopting new technology and practices and also assisting the primary producers to develop marketing
and business skills to be financially self-reliant. But performing such kind of activities are quite
challenging for the agriculture department to perform efficiently.
Hence, the role of Islamic microfinance institutions (IMFIs) becomes vital in such kind of
situation. The mutual cooperation of both Agriculture Department and IMFI would help the farmers in
financing for performing the agriculture activities as well as the proper guidance and supervision from
the agriculture department.
Islamic microfinance institutions with the introduction of ‘Islamic sharecropping’ contract
can help the farmers to raise their living standards. Sharecropping is an agriculture contract according
to which the farmer and the landlord works in partnership to produce an adequate amount of output
and then share the output with pre specified ratio.
In this paper we have discussed about the sharecropping and the issues exist in it. We have
tried to provide the solution to those issues with the help Islamic sharecropping. Secondly we have
identified the role of government departments in economy and specifically the role of agriculture
department in poverty alleviation. Thirdly, we discussed about the Islamic Microfinance Institutions
and their role in agriculture sector in order to alleviate poverty amongst the rural farmers. In the end,
we came up with a workable mechanism that how IMFIs and Department of agriculture would help
the farmer to get sufficient earnings from the agriculture activities.
40
In order to come up with the workable mechanism we have used qualitative research
technique. Hence the research is based on the theory that is sorted out via secondary data collection
methods. We have mostly focused on journal articles, books, proceedings and article on websites.
2. Theories of State Created Agencies and Islamic Microfinance Institutes in Agriculture
Development & Poverty Alleviation:
2.1 Sharecropping:
Usually, in agriculture farming, three types of contracts are used such as rental based, wage based and
sharecropping. Sharecropping is widely used contract in agriculture in most of the poor countries
(Eswaran & Kotwal, 1985). Rental based contract which is known as Ijarah, is a contract in which the
tenant rents the land from the landlord for cropping. In wage-based contract the tenant is hired by the
landlord and is being paid on daily or weekly basis. While, in sharecropping contract the tenant and
landlord work on the land in partnership and then divide the output on pre-specified ratio. It is
believed this contract was developed in order to discriminate the tenant. This contract has received
severe criticism from the famous authors such as Adam Smith and Alfred Marshall. According to
Alfred Marshall (1920), sharecropping is an inefficient contract because tenant is paid in a percentage
rather than all, of their entire marginal product of the labor which will reduce their work effort. Hence
the contract was declared as inefficient contract. But this theory is contradicted by Cheung and his
follower. He further explained that the degree of risk aversion between landlord and tenant varies
hence it can make possible for them the advantage of risk sharing to offset the transaction cost
element. Garrett and Zhenhui (2003), found sharecropping as more efficient contract as compare to
other tenure systems in postbellum south. The question arise that why sharecropping contract still
exists while fix rent contract is considered as superior. According to Stiglitz (1974), sharecropping
may not be productively efficient (the effective land and labour ratio may vary on different plots) but
we can’t apply this inefficiency on the system as a whole. He further argued that sharecropping
system is adopted because of it risk sharing feature because in case of rental system worker or tenant
is forced to bear all the risks whereas the wage system push landlord to bear all the risks. Eswaran and
Kotwal (1985), mentioned that sharecropping is a partnership contract in which both landlord and
tenant provides some un-marketed factors in which they have expertise. For example, landlord may be
expert in managing the resources whereas the tenant can have expertise in supervising the labour.
Canjels and Volz (2001) argued that when the tenant’s efforts and skills are unobservable then the
monopolist landowner will offer sharecropping contract to the tenant.
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2.1.1 Issues in Supervision:
Supervision of the tenant is a main factor in sharecropping as it is the way to keep an eye on tenant to
produce the output in efficient way. The issue of supervision has been discussed by many economists
and they have provided their alternatives for supervision. It is considered as one of the vital factor to
be mentioned in the contract that whether the landlord can efficiently monitor the tenant (Steinmetz,
2004). According to Braverman and Stiglitz (1986), monitoring the level of tenant’s inputs cannot be
perfectly monitored but it is known that increase in efforts can increase the landlord profit. Hence, if
the inputs are complementary to the tenant’s effort then increase in the level of inputs (e.g. fertilizers)
by the landlord will decrease the cost share of the tenant.
The empirical evidence to this issue is provided by Jacoby and Mansuri (2008) by conducting
study in the rural areas of Pakistan. According to them, if the tenant is unsupervised, it will result in
low productivity and vice versa. But this supervision becomes costly for landlord (hiring people to
supervise tenant). Hence, this type of sharing contract depends on the cost of supervision. It is sure
that monitoring directly affects the choice of inputs used by the tenant. If tenant is not supervised
properly, he may use low quality of seeds or fertilizers. To overcome such issue, the landlord should
only be concerned with the output rather than tenant’s efforts. In this way the tenant will be induced to
work hard and honestly to produce optimal output (Prescott, 2005). But in such case, if the tenant only
focused on the optimal level of output then it can raise the issue of land fertility. According to Dubois
(2001), soil quality is an important factor in selecting the tenancy agreement because choice of crops
and level of production can affect the land fertility. Bhandari (2007) mentioned that the intensity of
monitoring the tenant depends on the social distance (the landlord and tenant are closer to each other),
if the social distance between the landlord and tenant is less, then the supervision costs will be low as
less effort will be needed to supervise the tenant’s actions.
2.2.2 Input and Output Sharing
Normally in sharecropping the output is shared with the ratio of 50:50 ignoring the capabilities of
tenant that has been provided as input for production (Bell and Zusman, 1979). According to them,
the tenant use hired labour for harvesting operations. Hence the cost of this operation falls on the
tenant. Moreover, acquiring labour for work are from different areas, hence contacting and acquiring
them incurs some transaction cost that are also passed to the tenant by the landlord. Also, some other
input factors such as choice of crops, timeliness of operation and good husbandry skills are also
needed to be considered. The tenant also needs to have bullocks, the cost of which is also bear by him.
Hence, the theory of 50:50 sharing is invalid in such case. The tenant should be compensated for his
efforts that he put for the production of specific crops. Roumasset (1995) classified the inputs that
each party provides. According to him, the landlord carries out land and asset management as well as
decision regarding production, where the tenant is mostly concerned with controlling the labour and to
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make routine production decisions in sharecropped land. The landowner manage his assets (e.g. land,
fertilizers, anti-pesticides etc) since he want to benefit from any increase in the productivity.
The efforts that tenant and landlord put in the form of different skill in quest of better output cannot be
measured; hence the cost of such inputs cannot be calculated. As Roumasset mentioned that the inputs
provided by landlord are in the shape of asset management and decision regarding production whereas
the tenant’s inputs are supervising the labour. It is better to offset such efforts with each other. The
inputs costs that are measureable such as fertilizers, bullocks or tractors and anti-pesticides etc. should
only be considered.
2.2 ‘Islamic Sharecropping’ Contract in Islamic Jurisprudence:
In Islamic Jurisprudence there are some contracts that are related with the concept of sharecropping,
namely al-muzāraʻa and al-musāqāt. Although, a lot of arguments have been seen on its validity from
different scholars but the later scholars do approved its validity based on their arguments. Basically
these are the contracts between the landlord and the tenants according to which the output from the
land will be shared between the landlord and the tenant based on the managerial skills provided by the
tenant and the land and seeds provided by the landlord.
There is no proof in the Quran which the primary source of law for all the Muslims. Neither
any proof can be found in the Sunnah, the secondary source of law, has given a clear idea about
whether or not sharecropping is permissible for the Muslims. There is only one Hadith on which the
al-muzāraʻa and al-musāqāt are based. According to that Hadith, the Prophet Muhammad S.A.W.
said to the Jews on the day of conquest of Khaybar that “I keep you on the land on which the God has
kept you, on the condition that the fruit will be equally shared between you and us”. To deal with the
problems regarding al-muzāraʻa and al-musāqāt, the jurists put some conditions and restriction to
make the contract valid (Muslim 2000: no. 3939).
The theory of al-muzāraʻa has prompted more criticism amongst the legal school as compare
to al-musāqāt. Al-muzāraʻa (derived from the word zar’ which means sowing or cultivation though
not necessarily with grain) is a sharecropping contract between two parties i.e. the landowner and the
tenant whereby the landowner provide the land and the tenant or farmer cultivates the land against the
specified ratio of the output share (Donaldson, 2000).
Imam Abu Hanifah acknowledged the contract of al-ijara but invalidate the contract of al-
muzāraʻa and al-musāqāt. According to him, the land cannot be the basis of the entitlement of the
profit and it is not liable for loss too, whereas partnership is founded on the notion of profit and loss
sharing. Imam Mālik and Imam Shāfiʻī validate the contract of al-musāqāt while they rejected the al-
muzāraʻa contract. According to their argument this contract involves uncertainty regarding the sale
of commodity at yet unknown future values (Imam Malik).
A major element of gharar (uncertainty) can be found in al-muzāraʻa contract because such
contracts is frequently regarded as ijārah contract and ultimately the contract of al-muzāraʻa contract
43
will be consider as either fāsid (defective) or bātil (invalid) due to the strict interpretation of the rules
for ijārah contract. According to ijārah contract, the date of payment cannot be specified since the
time and date of the harvest cannot be exactly known. Secondly, the exact value of the rent cannot be
determined as the output (harvested crop) is not available at the time of contract is made (Donaldson,
2000).
Imam Abu Yusuf and Muhammad al-Shaybani were the followers of Imam Abu Ḥanīfa. But
their views regarding al-muzāraʻa and al-musāqāt were opposed to Imam Abu Ḥanīfa. Based on their
view, these contracts are considered to be the partnership between property and work, which is
permissible under analogy of Mudarabah. According to them, the seed contiributed by the landowner
can be considered as capital whereas the land is to be considered as real estate because of which the
profit will be generated with the help of labour input (Nyazee, 2002). The view of these two has been
accepted by the later Hanafite jurists and declared al-muzāraʻa as a valid contract.
The contract of al-muzāraʻa and al-musāqāt are validated by the scholars as a legal contract
of financing operations. The input sharing in al-muzāraʻa can be in many forms such as the land and
other physical factors of production will be provided by one party whereas, the labour will be
provided by the other party. Alternatively, the land will be provided by one party while the other
factors of production and labour will be provided by the second party. According to the third
alternative for input sharing the land is provided by one party whereas the other factors may be
provided by all the other parties in the contract (Kāsānī, 1968).
For al-musāqāt all the forms that have been applied for the al-muzāraʻa contract will apply
for this contract as well. The farmer is obliged to provide the labour whereas the landlord is
responsible for providing a full access to the trees or orchards.
The primary responsibilities such as sowing, cultivating falls upon the tenant while the other
works such as harvesting and transportation is a joint liability of both the parties. In case, if the land
does not produce the output, then neither party is entitled for the profits. The landlord cannot claim
the rent and the labour is not entitled for the wages for his work (Aziz & Jamali, 2008).
Furthermore, the responsibility of farmer regarding the crops is like a trustee, he is not responsible for
the damage or loss to the crops except in case of excessive authority provided to farmer, default or
violation of al-muzāraʻa contract conditions (Hakimi, 2011).
On the other hand, in case of al-musāqāt, full authority should be given to the farmer
regarding all major decisions about maintenance, watering and protection of the trees etc. whereas, the
landlord has the authority to force the farmer to perform in case he is delaying or avoiding to work
(Kāsānī, 1968).
It is an obvious condition for al-muzāraʻa that the output should be share in percentage e.g.
one third, one fourth of the output etc. None of the party can be paid with the money instead of output
share, otherwise the contract will be considered as void (Aziz & Jamali, 2008). The same ruling goes
for al-musāqā.
44
2.3 The role of Government Agencies in Economic Development:
The role of government agencies has been realized after the World War II when almost all the
countries were destroyed and there was a need of rebuilding process. In such a situation the
government ordered to form agencies that should cooperate in the rebuilding process. Hence the
economic development was carried out by different government owned agencies and they played a
significant role in the development process. The economic development can be viewed as a growth
process that needs the systematic reallocation of factors of productions from low-productivity,
traditional technology, decreasing returns to a high-productivity, modern, increasing returns, mostly
industrial sector (Adelman, 1999).
In the capitalist economy, the role of government is to provide the public goods that are
required by the society, issuance of currency, levy taxes, money borrowing & investments, and
maintaining economic order and stability & growth (Gorman, 2003). The agencies that are involved in
public goods are mostly zakat and waqf organizations, police departments etc. The government tends
to maintain the economic growth in the country. Disorder in the economy prevail unrest and chaos
with in the economy. For example when the unemployment ratio is increased, the government
savings tend to decrease leading the investment to decrease which can put a significant effect on the
economic growth. Unemployment gives rise to poverty, and hence the government channel funds in
order to alleviate poverty.
Nowadays, the state economic development organizations or agencies are the backbone of the
government. The economic development cannot be achieved without the existence of such agencies.
The government is the main fund provider to such agencies. The major responsibilities of such
agencies are taxing, setting unemployment insurance, reducing poverty ratio, funding major
infrastructures, and transportation projects. Such state owned agencies also involved in technology
development, education, workforce development and enhancement as well as special funding for
business development etc. (Mountford, 2009).
2.3.1 Rural Poverty and Food Insecurity:
The day by day increase in the rural poverty amongst the developing countries is the major concern
for the governments. Developing countries within Asia-Pacific region represent more than half of the
world population today. Government policies towards poverty alleviation in the populated countries
like china and smaller countries like Thailand, worked successfully. But still majority of the poor do
exists in this region with in average wage of just a dollar per day (Polman, 2002). In the Asia-Pacific
region, about 80% of the poor and hungry lives in rural area and about 70% among them are linked
with agriculture, fisheries, fisheries, forestry and livestock sectors (Wan & Sebastian, 2011).
45
The World Bank’s report1 revealed that Rural East-Asia has improved its technological and
economic transformation which lead to the improvement in the food security and reduced the poverty
by raising the income in rural areas. But despite of such efforts the most unemployed people reside in
rural areas. The people in such areas are linked with agriculture and fishery and due to increase in the
population the unemployment rate is escalating. According to the report, the most poor people lives in
South Asia. About 500 million people are still in the state of deprivation, lack of sufficient access to
nutrition, health etc. Poverty in South Asia mostly lies in rural areas. The reason for poverty and
insecurity that are mentioned by the farmers include crop failures, natural disasters, domestic
violence, market fluctuations and non-accessibility to the market.
Hence the role of government in poverty alleviation in such regions is an important factor that
should be considered. As most of the people in such areas are linked with agricultural farming, hence,
the govt. owned agriculture departments should play an important role in providing solution for
improvement as well to provide support to the farmers in rural areas.
2.3.2 The Role of Agriculture Department in Agriculture Development and Poverty
Alleviation:
The responsibilities that agriculture departments hold are mostly related to policy development and
implementation. The policies are regarding enabling agriculture industry to adapt its self to compete
in a fast-changing international and economic environment, assisting to improve market access and
market performance for agriculture sector, helping the industry in adopting new technology and
practices and also assisting the primary producers to develop marketing and business skills to be
financially self-reliant. But performing such kind of activities are quite challenging for the agriculture
department to perform efficiently. In such situation, the collaboration of this government organization
with the NGOs is provided as solution as it will help in reducing the burden of agriculture department
and assists in rural development (Enyioko, 2012).
Although democratization has helped in the smooth operations of NGOs in different parts of
the world but the fact cannot be neglected that NGOs have faced harassment from democratic
government rather than autocratic regimes. Such situation has led the morale of the NGOs down in
order negotiate with the governments. Secondly, the resentment regarding the operations of NGOs
from the political parties has worsened the situation even more (Bebbington & Farrington, 1993). In
most of the Asian countries where the operation of foreign organizations face more resistance from
the people and political parties would lead the NGOs to shut down the operations.
Hence the role of Islamic Microfinance Institutions (IMFI) becomes vital in such kind of
situation. The mutual cooperation of both Agriculture Department and IMFI would help the farmers in
borrowing the loans for performing activities as well as the proper guidance and supervision from the
agriculture department. As till now, the role of IMFIs is neither criticized by the political parties nor
1 Agriculture for Development, 2008, accessed from: http://go.worldbank.org/H999NAVXG0
46
by the people, hence it could be a good opportunity for the Government to cooperate with IMFIs to
alleviate poverty and improve agricultural production.
2.4 Islam Microfinance Institutions and its Comparison with Conventional Counterparts:
Although the aim of both the Islamic and conventional microfinance institution looks the same i.e.
helping the poor via financing but in practice the Islamic MFIs are different than conventional
counterparts because of the interest factor that is not allowed in Islam. Hence, it is not allowed for
IMFIs to deal in interest based transactions. The source of funds for both the Institutions remains the
same but the factor of interest is not acceptable for Islamic MFIs hence these Institutions get financing
from non-interested based parties.
Items Conventional MFI Islamic MFI
Liabilities(Source of Fund)
External Funds, Saving ofClient
External Funds, Saving ofClients, Islamic CharitableSources(zakat, waqf)
Asset(Mode of Financing)
Interest-Based Islamic Financial Instrument
Financing the Poorest Poorest are left out Poorest can be included byintegrating with microfinance
Funds Transfer Cash Given Goods Transferred
Deduction at Inception ofContract
Part of the Funds Deducted asInception
No deduction at inception
Target Group Women Family
Objective of Targeting Women Empowerment of Women Ease of Availability
Liability of the Loan(Which given to Women)
Recipient Recipient and Spouse
Work Incentive of Employees Monetary Monetary and Religious
Dealing with Default Group/Center pressure andthreat
Guarantee, and Islamic Ethic
Social Development Program S e c u l a r ( n o n I s l a m i c)behavioral, ethical, and socialdevelopment
Religious (includes behavior,ethics and social)
Table 1: Differences between Conventional and Islamic Microfinance Source: (Rahman, 2007)
The other thing that is included in Islamic MFI is zakat and waqf. This can increase the
participation of poor in Islamic MFIs According to Rehman (2007), Islamic MFIs should exploit more
sources of fund that are not interest-based in order to get pool of funds. It has been also mentioned
that conventional MFIs provide financing via loan whereas in Islamic MFIs good are transferred and
the loan is in the shape of Qardul Hassan in which no interest is charged on the loan. The objective of
47
Islamic MFIs is not to only focus on women but also focus on other poor who are in need of financial
assistance. Hence the aim of the Islamic MFIs is not to only gain monetary benefits but also to follow
the Islamic ethics as opposed to the conventional counterpart which only focus on monetary benefits.
2.5 Monitoring in IMFIs:
Micro financing is the provision of funds to the poor and low income households without access to
the formal financial institutions (Conroy, 2003). Microfinance is described as “Banking for the Poor”
as the main target segment for such financial services is poor people. Loan is provided to the poor
without any strict conditions to start their business or an economic activity that can generate profit for
him and he repays the loan to the microfinance institution in installments. However Hulme (2003)
argued that microfinance is not a cure for poverty but it is a mean to alleviate poverty via broad range
of micro financial support that would support the poor in the effort to improve their living standards.
The purpose of both conventional and Islamic Micro financing is the same but the difference lies in
the prohibition of riba that is observed in IMFIs. The conventional microfinance institutes start
collecting the loans as the loans are sanctioned and disbursed. The repayments also include a portion
of interest that is charged by the Microfinance Institute (MFI). But for IMFI, as riba is illegal or
haram hence they use financing instruments that are allowed by the Shariah. The financing
instruments that can be used by the microfinance institutes include Mudarabah, Musharaka,
Murabahah, Ijarah, Tawaruq and Qard Hassan (Wilson, 2007).
2.5.1 Modes of Financing
There are several Islamic contracts through which Islamic microfinance institutes can provide
financing to the poor. Although some of the contracts are not preferred by the Islamic banks due to
existence of high risk of default, hence the mostly preferred Murabahah contract because in such
contract the loss will be borne by the borrower rather than capital provider. But such banks least
prefer the partnership contracts such as Mudarabah and Musharaka because of the risk of loss to be
borne by the bank (Rahman, 2007). Anyhow, IMFIs can use the given below financing contracts by
developing risk mitigation techniques.
2.5.1.1 Musharaka:
Musharaka contract can be used by IMFIs where it will enter in a partnership with the entrepreneur or
borrower. The profit and loss will be shared by both the parties on the pre-agreed ratio. According to
Akhtar (1997), a specific percentage of profit should be granted to the client as management fee and
after that the profit derived from the project should be distributed between both the parties as well as
the loss should also be borne by both the parties according to their share of investment. Rahan,
(2007), mentioned that the most suitable technique of Musharaka for IMFIs could be the concept of
Musharaka Mutanaqisah. According to this concept, the share of the IMFI would diminish with the
48
gradual installments paid by the borrower. When all the installments are paid by the borrower, the
ownership would be transferred to the borrower.
2.5.1.2 Mudarabah:
IMFIs can also use Mudarabah as a mode of financing. The IMFI would play the role of rab ul maal
(capital provider), whereas the borrower would be mudarib (entrepreneur). In such case the profit
would be divided by both the parties on pre-specified ratio whereas the loss would only be borne by
the capital provider. As the loss is only borne by the capital provider, it may create the probability of
capital erosion. Secondly, the IMFI is exposed to potential credit risk as it cannot ask for collateral in
Mudarabah contract.
2.5.1.3 Murabahah:
This sort of contract is more suitable for buying business equipment. In such contract, the
microfinance institute would buy an asset for the client, and then add the profit on the asset and sell it
to the client on installment basis. Dhumale and Sapcanin (1999), conducted a study on the feasibility
of Islamic Microfinance, they evaluated qardul hassan, Mudarabah and Murabahah as potentially
suitable instruments for financing. They come up with conclusion that Murabahah is the best
financing tool for IMFIs as less monitoring is involved in such contract.
2.5.1.4 Ijarah:
Under such contract the IMFI handover the asset to the lessee on the rental basis. The lessor i.e. IMFI
takes the responsibility of monitoring the use of an asset while discharge its responsibility for
maintenance and repair. Ijarah Muntahia Bitamleek, the elaborated concept of Ijarah can be used by
the lessor according to which the asset would be handover to the lessee after the complete payments
of the installments. The asset may be handover as a gift, pre-determined price at the time of agreement
or through gradual transfer of ownership.
In this contract the IMFI can be exposed to the settlement risk when the lessee is unable to
pay the rentals and when it fall due. In such scenario, the IMFI can request urboun from the lessee as
the advance payment of the lease rental. The lessor can claim the rental asset back if the lessee
defaults on the rental payments (Iqabl & Mirakhor, 1987).
2.5.1.4 Qardul Hassan:
Some borrower needs money instead of an asset. In such case, Qardul Hassan contract would be
suitable. According to this contract the loan is provided to the borrower who wants to start up a small
business. The IMFI can only charge service fee while the loan can be settled in installments on an
agreed period. But in this case the IMFI is exposed to credit risk as the borrower may default on the
49
loan. Hence the IMFI needs a proper risk mitigation technique to cope with such kind of risk
(Rahman, 2007).
2.5.2 Monitoring the Borrower
The main challenge arises when the loan is disbursed. There is need of proper monitoring from the
MFI to overlook the activities of the borrower that may lead to the default. The monitoring is essential
element for MFIs in order to increase the repayments frequencies and increase profits and
sustainability to the Institute. There are certain issues due to which the monitoring becomes necessary.
2.5.2.1Information Asymmetry:
Mostly these MFIs operate in least developed countries, hence the information regarding the people
and the area is vague. In order to dig out such kind of information, the MFIs incurs expenses that may
be too costly. Although, collateral or security can be a safeguard against such problem but due to the
nature of the borrower it is very difficult to attain the assets to be pledged (Godquin, 2004).
2.5.2.2Avoiding Adverse Selection:
Adverse selection arises when a borrower is chosen with undesirable characteristics. The information
regarding borrower is difficult to obtain hence this information asymmetry give rise to adverse
selection. There are borrowers with high risk profiles and those with inability to take benefit of the
credit. Hence the role of monitoring becomes necessary in such case (Rehman, 2010).
2.5.2.3Avoiding Moral Hazard:
Moral hazard relates to the unexpected act or behavior from the agent or borrower. This term can
mostly be seen in principle-agent theory. In Microfinance, moral hazard is of severe importance
because in case if borrower acts in an unexpected manner e.g. the borrower use the fund immorally
and used less efforts to generate profits, would lead to loss for MFIs as well the abandonment of the
contract (Rehman, 2010).
To overcome such issues and reduce the pressure of monitoring on MFIs, a concept of group
lending was introduced by Dr. Muhammad Yunus, the founder of Grameen Bank, Bangladesh.
According to him, credit is the fundamental right of every human. The banks provided the loans to the
poor where 95% of the borrowers were women. To overcome the issue of moral hazard and adverse
selection, the bank introduced a concept according to which a group of certain borrowers have to
apply for loan rather than an individual. A single borrower out of the group would get the loan, upon
successful payment of the first installment; the others in the group would get the loan. Hence it would
create a monitoring cycle within the group as each member has to keep a check on the others because
default of one member would lead to termination of contract with all the members (Chowdhury,
2005).
50
As in Shariah, it would be unethical if the other members are held liable for the losses
incurred by one of the member of the group. In such case, shariah principles should be developed that
should be compliant with group lending. But due to the non-availability of such principles, in Islamic
Microfinance the loan is provided to individual via three modes. One alternative is continuous
repayment according to which the initial small amount is provided to the borrower if he succeed to
pay back then a slightly higher amount of loan is sanctioned and so on. Another for is installment
based which means that full loan amount is sanctioned at the start and then it is recollected via
installments. Third form loan is provided in small installments that should be paid back i.e. return in
full at a certain period of time (Rehman, 2010). But due to provision of loan to individuals, the
monetary costs of IMFIs would be high because the IMFI has to monitor the individual in order to
avoid moral hazard and adverse selection and create sustainability in loan payment. But the IMFIs are
more preferred as compare to MFIs because of prohibition of riba element.
3. Findings and discussion:
3.1 Resolving the Issues under ‘Islamic Sharecropping’ Contract:
From the literature, it has been observed that although a lot of criticism has been seen on the
sharecropping and al-muzāraʻa contracts but the later researchers and the Islamic jurists have
approved the contract of al-muzāraʻa as well as the contract of sharecropping has been approved by
Cheung (1969) and the followers. But the issue of monitoring and input and output sharing has not
been answered satisfactorily. In this section, we will try to resolve these issues based on the previous
literature of al-muzāraʻa and sharecropping that has already been discussed in this paper. If the given
below suggestions are put into the al-muzāraʻa contract then we can get a modified and more
comprehensive form of the Islamic sharecropping contract.
3.1.1 Monitoring and Supervision:
In the literature of sharecropping it has been discussed that the farmer or tenant activities cannot be
monitored perfectly and supervising the tenant will cost the landlord extensively. But according to our
opinion, this issue can be resolved if the landlord convey to the farmer that he is only concerned with
the adequate output that should be produce and in the urge of attaining this objective the fertility of
the land should not be damaged extensively. This will save the cost of supervision for the landlord
and it will also reduce the change of work avoidance and using of low quality of seeds by the tenant to
the great extent. On the other hand each party should know their managerial responsibilities i.e.
monitoring activities involved in the sharecropping. Hence the monitoring of primary activities that
has already been acknowledged by Aziz & Ismail (2008) includes the sowing and cultivation etc. will
fall upon the tenant whereas the monitoring of secondary activities such as harvesting and
transportation will be the joint responsibility of both the parties. It should also be known to the
51
landlord that the role of tenant is like a trustee; hence he is not responsible for any damage caused to
the crops except in case of the negligence form the tenant side. Regarding the power of landlord, it
should be acknowledged that he has the authority to force the farmer in case he is delaying or
avoiding doing certain works that has already been mentioned in the contract.
3.1.2 Input and Output Sharing:
For the Islamic sharecropping contract to be valid, it is necessary that the output should be shared on
the basis of percentage. It has been argued that the work effort and the skill of farmer that he holds are
not compensated at the time of output sharing. On the other hand it is also acknowledge that the
managerial capabilities of landlord are also avoided at the time of output sharing. As these skills are
the intangible and their value cannot be calculated, hence it is better to offset the skill of each party
with the other. Hence at the time of output sharing only the tangible inputs should be considered. For
example if the seeds and technology is provided by the landlord and the labour is provided by tenant,
then the output should be shared on the basis of these inputs e.g. the more inputs provided by a party
can hold a higher share of output.
3.2 The role of ‘Department of Agriculture’ and ‘IMFIs’ in Poverty Alleviation amongst
Rural Farmers via Sharecropping Contract:
As mentioned earlier that the sources of fund for IMFI could be government, external funds such as
NGOs etc., savings of the clients and charity organizations such as waqf and zakat. Hence in our
model as shown in Figure 1, the source of land for IMFIs would be waqf, where the waqf organization
would hold the land from public and family waqf. The capital would be used from government funds,
external funds and savings of the client. This would be enough for the IMFI to act as a landlord in the
sharecropping contract. So, for the sharecropping contract, the landlord and the farmer should enter
into the sharecropping contract where the decisions regarding supervision, input and output sharing
are made. Once the contract is settled, then the input would be provided for the sharecropping project
based on the terms of the contract. Mostly, each party would provide specific inputs. As it is discussed
earlier that the cost of supervision can be decreased if the landlord convey his intentions to the farmer
that he is only concern with the adequate output with less damage to the soil fertility. In such case, the
cost of supervision would decrease and less effort would be required to monitor the farmer. On the
other hand, the farmer would also supervise his labour for the sake of producing efficient level of
output with less damage to land fertility. Hence, the supervision would become the joint responsibility
of both the parties. On the other hand, in the process of sharecropping (from the initiation of the
contract till the output is shared), the department of agriculture would play the role of supervisor and
consultant. It would help the farmer in contract formulation, providing assistance in input selection
and techniques to get maximum outputs, as well as training for the farmers. On the other hand it
would also help the IMFI in certain ways, such as contract formulation, selection of the right inputs,
52
providing with the pricing policies etc. The issue that is raised by Rahman (2007), that this contract
would put IMFI or Islamic banks on risk because of less or no experience in the farming sector, can
be overcome by the introduction of department of agriculture in the model.
Figure 1: The model regarding the role of ‘Department of Agriculture’ and ‘IMFIs’ in
Poverty Alleviation amongst Rural Farmers via sharecropping contract
53
WAQF (Source of Land)
External Funds, Govt. Funds Saving of Clients(Captial Providers)
ISLAMIC MICRO FINANCE INSTITUTE
Sharecropping ContractSupervision DecisionInput-sharing DecisionsOutput-sharing Decisions
FARMER OR TENANT
Sharecropping Project
Output sharing
supe
rvis
ion
supe
rvis
ion
The DOA General legislation Land Tenure Infrastructure Public utilities Pricing Policies Field Selection Technical Input Contract Formulas Contract Formats
The DOA
Project Components Crop schedules Pricing policies Contract formulas Contract formats Farmer selection Field selection Technical inputs Farmer advances Farmer training Farmer forums
3. Conclusion:
Poverty has been mostly observed in rural areas because the people in such areas don’t have access to
quality education and health facilities. The people in these areas earn their livelihood from the
agriculture activities. But due non availability of the land and less awareness about the technical
know-how regarding production of efficient output these farmers earn below than average. The
government owned agriculture department plays an important role in such case. It can provide
assistance to the farmer in using the inputs appropriately and maintaining the soil fertility. However it
is a difficult task for the agriculture department to provide financing facility to the farmers due less
resource availability with the department.
Islamic Microfinance Institution with the help of Islamic Sharecropping contract can provide
a better solution to the problems of rural farmers. We have tried to provide a better solution to the
issue of conventional sharecropping by developing an Islamic sharecropping contract.
To play the role of landlord, IMFI must hold the land. This land can be provided by the waqf
organizations. The capital would be taken from the investment parties such as government, and
client’s savings for input sharing and supervision etc. By doing so, IMFI can enter in the contract of
Islamic sharecropping with the farmer. On the other hand the role of agriculture department would be
as supervisor and advisor, and would provide suggestions regarding the inputs application,
supervision and contract formulation etc.
In short, the IMFIs and agriculture department mutually can play and important role in
poverty alleviation amongst the rural farmers. The courage and good intentions of both the parties in
working together would be an important factor in providing a relief to the rural farmers in the shape of
good earnings. The IMFIs need to develop models for sharecropping and also to develop risk
mitigation tools that can help in from the potential risks that can arise from the contract.
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al-Muzāraʻa & al-Musāqāt. Kyoto Bulletin of Islamic Area Studies, 4(1), 190-209.
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contentId=446
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Press.
Polman, W. (2002). Role of government institutions for promotion of agricultural and rural
development in Asia and the Pacific Region-Dimensions & Issues. Food and Agricultural
Organization UN.
55
Rahman, A. R. (2007). Islamic Microfinance: A Missing Component in Islamic Banking. Kyoto
Bulletin of Islamic Area Studies, 1(2), 38-53.
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Lap Lambert Publishing.
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Paper 6
Experiences in Regulating and Supervising Islamic Microfinance Institutions
Muhammad ZubairChief Executive Officer - AlHuda Centre of Islamic Banking and Economics (CIBE)
Abstract
Islamic Microfinance is a sub-set of the Islamic Economic & Financial System. The demand for Shari’ah complaint financial products and services is increasing with the progress of the Islamic finance industry. It is widely accepted that microfinance is the most effective tool for the alleviation of poverty and to uplift the living standards of the poor through generating real economic activities in society. However, market studies have shown that the conventional micro financial system could not serve this purpose as expected due to some deficiencies in the system. Therefore, there is an immediate need to develop substitute financial products for microfinance institutions. During the latest research on the microfinance sector, it was determined that the Islamic financial system provides the best solutions for Poverty alleviation and Social sustainability. This is due to the fact that it is not only providing an opportunity to utilize a sustainable system, but also offers a good rate of return with better and ideal performance in comparison to the conventional microfinance system.A number of institutions have been established as focal points on major issues in Islamic finance including the Accounting & Auditing Organization for Islamic Financial Institutions (AAOIFI), the International Islamic Rating Agency (IIRA), the Islamic Financial Services Board (IFSB), and the Liquidity Management Centre (LMC). Sudan, Indonesia, and Bangladesh are unlocking their potential for Islamic finance in their respective regions. Although Islamic banking regime is broad and encompassing, Islamic microfinance is in its nascent stages and still needs more attention in the realm of regulations for prudent practices and possible services to the deserving segment of community in a transparent way. As per industry preferences, conventional microfinance has the full attention of a microfinance regulatory regime, but Islamic microfinance has some challenges in acceptability, practices, and adaptability by conventional microfinance institutions. Lack of donors’ interest and absence of Shari’ah compliant sources of Funds, unavailability of Quality HR, and lack of a uniform regulatory/ legal framework for Islamic Microfinance institutions are the major challenges faced by Islamic Microfinance Institutions today.
State Bank of Pakistan presented a case study and issued certain guidelines for the Islamic microfinance business in Pakistan to be done by full-fledge IMFBs. This included instructions for conducting Islamic microfinance by full-fledged Islamic banks, Islamic microfinance by conventional banks, and Islamic microfinance services by conventional microfinance banks with the required formalities to prudently offer Islamic microfinance.
Keywords: Islamic Microfinance, Islamic Micro Finance Regulatory, Islamic Microfinance Models
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1. INTRODUCTION
Islam is not only a religion, but a complete code of life. Islam is a practical religion to be
implemented in our daily life since it covers all aspects of human life. As such, when implemented
honestly and correctly, Islam provides solutions to all problems that are faced by humanity. One of
the most widespread and dangerous problems faced by humanity is that of poverty, hunger, and
starvation. Millions of human beings on this planet are living under severe poverty and very brutal
conditions.
The issue of poverty has been the focus of the international community for quite some time.
Everybody is talking about poverty reduction and different measures are being suggested for this
purpose. Different instruments are being tried with different levels of success, however, the situation
has not improved to such a level where it can be claimed that this anti- poverty drive has paid its
dividends. It is widely accepted that microfinance is the most effective tool for alleviation of poverty
and uplifting the living standards of the poor through real economic activities in society. As per
market research, the conventional micro financial system could not serve this purpose as was expected
due to a few deficiencies in the system. So, there is an immediate need to develop substitute financial
products for microfinance institutions.
Islam always encourages asset- based financing. We have seen the recent international
financial crises and learned a lesson that financing without asset backing is always risky. Although
Islamic Microfinance is a system and not a Religion, it can be utilized & practiced by both Muslim
and Non-Muslim Communities for Poverty Alleviation, Social & Economic Development. Islamic
Microfinance is very much compatible with the all the models, which are being utilized in
conventional microfinance like the Grameen Model, Village Bank Model, Credit Union Model,
Cooperative Model, and Self-Help Group etc.
Interest is forbidden in all the divine religions, but Islam has a strict verdict on it. Therefore,
Muslims hesitate to utilize the conventional financial system and remain excluded from financial
access. Approximately 44% of conventional microfinance clients worldwide reside in Muslim
countries and almost one-half of the 56 IDB member countries in Asia and Africa are classed as
United Nations Least Developed Countries (LDCs), so there is an immediate need to focus Islamic
Microfinance institutions and regulation as well as in Muslim Majority countries for financial
inclusion. Right now, there are more than 250 Islamic Microfinance Institutions working globally in
32 countries. Islamic Microfinance has a proven track record, which deals with long lasting &
ultimate solutions for Sustainability, which can be strengthened further with strong regulatory
foundations.
Islamic finance is the broader term and it encompasses the diversified approaches such as
Islamic banking, Islamic Microfinance, Sukuk (Islamic Funds), and Takaful. Islamic financial
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institutions are guided by AAOIFI, IFSB and somehow by LMC and IIRA to improve the efficiency
in services around the globe although these said working bodies may be helpful for prudence in the
overall performance of Islamic microfinance institutions.
As per the latest research on the conventional and Shari’ah compliant Microfinance sector, it
is evaluated that the Islamic financial system provides the best solutions for Poverty alleviation and
Social sustainability. It is not only providing opportunity to utilize a sustainable system, but also
offers a good rate of return with ideal and better performance than he conventional microfinance
system. Islamic Microfinance is a sub-set of the Islamic Economic & Financial System. The Islamic
microfinance needs more attention in regulatory grounds for strong branches and proper
implementations.
“Islamic microfinance basically refers to a system of localized finance arrangements set up as
an alternative source of funds for small, low-income Islamic clients. Typically, users of Islamic
microfinance have little or no collateral, as they do not possess significant assets, and would therefore
be excluded from other forms of financing, including Islamic bank financing. Thus, Islamic
microfinance provides a means of accessing funds for those who are unlikely to qualify for other
forms of finance, yet are still seeking full compliance with Islamic law and the Islamic way of life.”
1.1 Sources of Islamic Microfinance
Islamic Microfinance products are basically derived from the four main sources of Fiqah. The first
source is Quran-e-Pak, which is the Holy Book of Muslims. It is the constitution of the Muslims from
which they derive the teachings to organize both of their religious and everyday affairs. Many Islamic
Microfinance products like Ijarah, Bai etc. have been derived from Quran-e-Pak. The Second source
of Islamic Microfinance is Sunnah, the sayings and practices of the Holy Prophet Hazrat Muhammad
(SAWW). Many Islamic Microfinance Products such as Mudarabah, Istisna, Wakalah, etc. have been
derived from Sunnah. The third source of Islamic microfinance is Ijma’a which is the consensus
among Jurists. Some Microfinance Products derived from Ijma’a like late payments and the charity
mechanism etc. are being utilized in the Islamic Microfinance Sector. The last source is Ijtihad &
Qiyas (Analogy). Ijtihad refers to making a decision in Shari’ah by personal effort, independent from
any school of jurisprudence as opposed to taklid, copying or obeying without question whereas Qiyas
is the process of deductive analogy in which the teachings of the Hadiths are compared and contrasted
with those of the Qur’an, in order to apply a known injunction to a new circumstance and create a new
injunction. Takaful or Micro Takaful is an example of Ijtihad.
1.2 Islamic Microfinance Products Mechanism
Islamic Microfinance products can be segregated into four categories: the partnership Mode, Trade
based Mode, Rental based mode and other Models like, Qard-e-Hasan, Waqf & Zakah, and Islamic
Cooperatives etc. In partnership Mode, MFIs & their clients enter into a Partnership agreement for a
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business venture on profit and Loss sharing mechanism. We have two Products in Partnership based
mode, Musharakah & Mudarabah. In Trade based Mode, MFIs & their Clients enter into trading
agreements. The products of Trade based Modes are Murabaha, Musawamah, Salam and Istisna.
There are two products in Rental based mechanism; Ijarah (a Shari’ah Compliant mode of leasing)
and Diminishing Musharakah. Qard e hasana is an Islamic financing, a loan, which under Islamic law
is always free of profit. Zakah is one of the five Pillars of Islam which is the giving of a fixed portion
of one's wealth to charity, generally to the poor and needy.
1.3 Basic Principle of Shari’ah Based Microfinance
Shari’ah based Micro financing is based upon several principles like the Prohibition of Interest and
Gharar (Speculative Behavior), Asset Based Financing, Risk Sharing, Sanctity of contracts, and
financing in Halal/ Shari’ah Complaint activities.
Prohibition of interest is an important principle of Islamic Microfinance. Interest is forbidden
in all the divine religions but Islam has a strict verdict on it. Therefore, Muslims hesitate to utilize the
Conventional financial system and remain excluded from financial access. Islam also prohibits
speculative behaviours (Gharar) because in Islamic finance, any transaction entered into should be
free from excessive uncertainty and speculation.
Care for the poor and poverty alleviation are religious obligations in Islam. In Islam, Zakah,
Sadqa (Donation), Tabbrumm, Fitrana, Usher etc. are dedicated for financial well being of Poor
people. Islam always encourages asset based financing. We have seen the recent international
financial crisis and learned a lesson that financing without the backing of assets is always risky. One
of the fundamental principles of Islamic Microfinance is Risk Sharing. Risk is shared in order to
compensate the loss occurred. Islamic Microfinance emphasizes the sanctity of Contracts. Micro
Takaful is a Shari’ah Compliant System of Risk Mitigation.
2. ISLAMIC MICROFINANCE WORLDWIDE
Islamic Microfinance is an emerging Market worldwide. Approximately 44% of conventional
microfinance clients worldwide reside in Muslim countries. Research shows that almost one-half of
the 56 IDB member countries in Asia and Africa are classed as United Nations Least Developed
Countries (LDCs). Islamic Asset-based Financing can prevent diversion of funds for consumption.
For Muslim majority countries, a great need for Islamic Microfinance exists as a large target segment
is averse to the interest based microfinance products. Islamic Microfinance has a proven track record
and its deals with long lasting & Complete solutions for Sustainability.
When we look for need assessment of Islamic Microfinance in Central Asia, the Caucasus and
South Asia, we see a great demand. The total Population of South Asia, Central Asia, West Africa,
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and the MENA Region & Caucasus are 2.4 Billion and out of them 1.12 Billion are Muslims, which
are 47.3%. This shows a big Demand of Islamic Microfinance Products for Financial Inclusion
because Muslims are reluctant to move towards the Interest based MF System. IMF is beneficial for
Muslims as well as for Non-Muslims. According to the World Bank, South Asia is home to half of the
world's poor, where the Muslim population is 33.2% of the total population, which shows the
immediate need of Islamic Microfinance there and shows a great potential and demand for Islamic
Microfinance in these regions.
There are about 250 Islamic Microfinance Institutions, which are working globally in 32
countries. There are 14 Islamic Microfinance Institutions in Pakistan whereas Yemen Sudan,
Bangladesh, Afghanistan, UK, and Malaysia have 11, 13, 9, 9, 5 and 11 Islamic Microfinance
Institutions respectively. This shows that Islamic Microfinance Institutions exist worldwide not only
in Muslim Countries, but also in Non-Muslim Countries.
Table 1 shows the names of the countries along with the institutions providing Islamic Microfinance.
Countries Islamic Microfinance Institutions
Indonesia BPRS, Islamic Financial Cooperatives referred as Bait ul Maal Wat Tamwil (BMT)
Bangladesh Islamic Bank Bangladesh, Social and Investment Bank Alfalah and Rescue
Afghanistan FINCA (Qard Hasan), WOCCU, Ariana Financial Services , IFIC, etc.
Pakistan Akhuwat , Farz Foundation, ASASAH, Muslim Aid, Islamic Relief, CWCD, ,HHRD , NRSP, NRDP, Naymet etc.
Malaysia Amina Iftikhar, Tabung Haji etc
India AICMEU, BASIX, Sahulat, Bait-un-Nasr , Al-Khair Co-operative, Marwar Shari’ah Credit
Azerbaijan Bait –un Nasr
Egypt Mit Ghamar Project
Syria Sanadiq project Jabal al Hoss
Lebanon Mu’assat Bayat Al-Mal
Yemen Hodeidah Microfinance Program, Al-Amal Microfinance Bank
South Africa Awqaf South Africa
U.K Faith Matters, Islamic Relief, Muslim Aid, HSBC Amanah
Jordan Jordan Islamic Bank
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Fig. 2 shows the demand of Islamic Microfinance in Central Asia, South Asia, Caucasus, West Africa
and MENA Region. [2]
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Fig. 1: A glimpse of Demand for Islamic Microfinance Worldwide
2.1 Challenges faced by Islamic Microfinance
Islamic Microfinance Institutions are facing some challenges, which need to be addressed. The
biggest challenge, which is now faced by the Islamic Microfinance Industry is the lack of Donors’
interest and non-availability of Shari’ah Compliant Sources of Funds, which is also a hurdle in the
way to scale it up. A Strong regulatory regime is the missing component in the Islamic microfinance
industry around the globe and IMF is being regulated, in reality as a component of conventional
microfinance, but the fact is opposite to it and Islamic microfinance institutions have their own norms
and practice. Therefore, there is a need to develop a uniform regulatory and legal framework for
Islamic Microfinance Institutions. Due to limited Islamic microfinance institutions, this sector is also
facing the shortage of quality HR. There is a big need to develop Shari’ah expertise towards the
growth of Islamic Microfinance. If we see the product mix of the Islamic Microfinance industry, it is
seen that Murabaha is covering almost 80% of the Microfinance Industry so there is an immediate
need of research on other Islamic Microfinance Products for product diversification. In short,
standardization of Islamic Microfinance Products is very much needed.
2.2 Opportunities for Islamic Microfinance
Many opportunities exist for the Islamic Microfinance sector. The International Islamic Microfinance
Network (IMFN) was established in 2009 by Islamic Microfinance institutions to strengthen and
support the Islamic Microfinance Institutions. It is an effective platform for coordination and harmony
among Islamic Microfinance Institutions. One should try to expand the market of Islamic
Microfinance where conventional Microfinance Institutions face limitations especially in Muslim
Majority Countries. AlHuda Centre of Islamic Banking and Economics, Pakistan has established a
Centre of Excellence in Islamic Microfinance (CEIMF) for advisory, trainings, and capacity building
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for Microfinance Institutions and to address the needs of the Islamic Microfinance industry. It
provides complete solutions in the field of Islamic Microfinance.
A perfectly sustainable system with the goal of poverty alleviation is needed to expand
Islamic Microfinance. Islamic Banking and Finance is emerging in South Asia and the MENA region,
which will strengthen the Islamic Microfinance effectively.
2.3 Islamic Microfinance Regulation
Islamic microfinance regulation has been the forefront of policy discussions among donors, investors,
and practitioners since the development of Islamic microfinance as an effective tool of poverty
alleviation. Islamic microfinance regulation is decisively needed to address the Shari’ah compliant
microfinance industry. Giving due consideration to the prevailing phenomenon in the microfinance
industry, it is concluded that somehow Islamic Microfinance is matched with conventional
microfinance in regulatory aspects but, in reality, most importantly there should be a separate Islamic
microfinance regulatory skeleton being followed by the policy makers and Islamic finance experts.
Apparently AAOIFI and IFSB, at their best, are filling the gaps in Islamic finance assistance
with a deep focus on the Shari’ah compliance of the microfinance industry through standardization for
Islamic finance industry around the globe, but Islamic microfinance is deprived of proper
consideration and structuring in its many potential areas in the world such as MENA Regions, Asia,
and Central Asia. Currently, there is no identical existence of regulations in the Islamic microfinance
industry working for it to provide rationale and Shari’ah compliant grounds.
Islamic microfinance should be kept separate in terms of regulatory ground as it has its own
Shari’ah requirements to target a selective segment of society to bring them into the financial
inclusion though diversified products. BMT (Baitul Mal Tamveel) initiatives taken by Indonesia
further strengthen the concept of Shari’ah compliant microfinance.
Although we did not see a handsome Islamic Microfinance Regulatory regime, we can take
some guidelines from the work, which has been done in Sudan, Indonesia & Pakistan. As Islamic
Banking and Finance is growing globally, it would be a supplementary to promote Islamic
Microfinance in all aspects including regulation & supervision alongside and complimentary to the
Islamic banking and finance industry.
3. ISLAMIC MICROFINANCE REGULATORIES GUIDELINES
With reference to the time to time research studies of CGAP and the situation a decade ago, most
policy makers, donors, and private investors involved in microfinance now appreciate that poor and
low-income people, like the rest of us, need a variety of basic financial services, not just credit. The
ability of the market to respond to this demand depends not only on providers developing sustainable,
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low-cost ways to provide such services, but also on having an enabling policy and regulatory
environment. Appropriate regulation and supervision of financial service providers is therefore
critically important in bringing to the poor and low-income people the financial services that they
need.
As per the guidelines of CGAP for financial inclusion of the poor in the Islamic microfinance
industry, different key approaches have been the need of time as explained further.
There is the need of increased attention to financial services beyond microcredit and reliance
only on the microcredit element, which may not generate the desired results. New financial services
providers should be encouraged with a compatible delivery mechanism. A Regulatory regime
evolution at a rapid pace will definitely satisfy the need of Islamic microfinance institutions.
Encouragement of public and private investors in the financial sector is mandatory in order to meet
the financing requirements of Islamic microfinance institutions. Most countries practicing Islamic
microfinance and potential target markets of Islamic microfinance should be connected with the new
comers of Islamic microfinance not only for financial inclusion, but also for regulatory aspects to
develop the most compatible environment and transparency with prudent norms and practices in the
Shari’ah compliant microfinance industry.
Transformation of microfinance institutions from non profit to for-profit shall ensure their
self- sufficiency, sustainability, and donors’ satisfaction with the long run position of microfinance
institutions. Microfinance integration of main players in the financial sector will cause the more
mature Shari’ah compliant microfinance industry. Yet international standard setting bodies are not
excluded from such job as they must contribute through proper supervision and appropriate guidance
with Shari’ah connection.
There are several factors, which should be considered while doing Islamic Microfinance.
There is a misconception that Islamic Microfinance is only for Muslims, but basically Islamic
Microfinance is a system not a Religion so it can be utilized & operated by both Muslim and Non-
Muslim Communities for Poverty Alleviation, Social & Economic Development.
As discussed earlier, Islamic Microfinance is Shari’ah compliant microfinance, which is free
from Riba and Gharar. It takes into consideration Shari’ah compliant funding as it is necessary for
Islamic Microfinance Institutions to have Shari’ah complaint funds in the Asset side & liability side.
Islamic Microfinance deals in Shari’ah vetted Products according to AAOIFI standards. There should
be trainings and Quality HR in this field and it is a very important element for Islamic Microfinance
Institutions. There should be qualified Shari’ah Advisors and Shari’ah Review etc. in MFIs. One of
the examples of Islamic Microfinance Products is Micro takaful, which is the mechanism of Shari’ah
compliant insurance.
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3. 1 Establishing and Modelling the Islamic Microfinance
Islamic microfinance can be promoted by assisting Islamic commercial banks to establish units,
branches, or counters with Islamic microfinance products and by reassessing the challenges and
opportunities of Islamic rural banks and cooperatives through the following steps:
Commercial banks should learn about setting up branch networks of Islamic MFIs from the
experience of successful microfinance strategies and their successful experiences in consumer finance
services.
Islamic rural banks should be revamped in overcoming their deficiencies in overall operations
as they are the appropriate channel to be used for microfinance in financially deprived and excluded
areas, particularly in the regions having agriculture potential.
Islamic cooperatives and microfinance institutions need a system of prudential regulation,
mandatory auditing, and effective supervision by an appropriate financial authority to attain the trust
of investors and fund providers with the operational transparency and prudence in Shari'ah compliant
microfinance operations.
4. PAKISTAN’S ISLAMIC MICROFINANCE INDUSTRY
Pakistan is considered to be a leader of the Islamic Microfinance Industry. Islamic Microfinance
Institutions operating in Pakistan are Akhuwat, Centre for Women Co-operative Development
(CWCD), Narowal Rural Support Program (NRSP) – KPK, Farz Foundation, Islamic Relief, KKCB,
Helping Hand for Relief and Development, Muslim Aid, Deep Foundation, NGO World, Al-Noor
Foundation etc. Table 2 shows the product wise detail of Islamic Microfinance Institutions operating
in Pakistan.
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Table 2: Microfinance Institutions operating in Pakistan
Institution Mode of Finance
Akhuwat Qaraz-e-Hasna, MicroTakaful, Grants
CWCD Murabaha, Ijarah, Salam & Istisna MicroTakaful
NRSP – KPK Murabaha, Mudarabah with BOK for funding Source
Farz Foundation Murabaha, Musharakah, Livestock
IslamicRelief Murabaha and Qarz-e-Hassan
KKCB Murabaha and MicroTakaful
HelpingHandfor RD Murabaha, Mudarabah
MuslimAid Murabaha
NRDP, Deep Foundation, NGO world, Al Noor Foundation
5 MicroTakaful Co, 5 Full fledge Islamic Banks, 13 SAIBB
4.1 Experience in Regulation and Supervision - SBP’s guidelines for Islamic Microfinance
business – A Case Study
Since the development of Islamic microfinance as an effective tool for poverty alleviation, State Bank
of Pakistan has contributed greatly for the industry as it has published some guidelines for Islamic
microfinance business in Pakistan by financial institutions, which are presented here as a case study
covering all the material aspects related to Islamic microfinance practitioners. The purpose to publish
this document was to provide assistance in Shari’ah compliance for microfinance business and these
guidelines are in addition to the willing financial institutions for Islamic microfinance services rather
than replacing any already issued guidelines or directives. Islamic microfinance services and products
can be offered by various types of financial institutions, in different forms. Each type of financial
institution has been separately discussed under the following headings in these guidelines:
Full-fledge Islamic Microfinance Banks (IMFBs)
Islamic Microfinance Services by Full-fledge Islamic Banks
Islamic Microfinance Services by Conventional Banks
Islamic Microfinance Services by Conventional Microfinance Banks (MFBs)
Full-fledged Islamic Microfinance Banks, initially, are mandatory to be licensed by SBP
under Microfinance Institution Ordinance, 2001 for microfinance services on the national, provincial,
regional, and district level. Each full-fledged Islamic microfinance bank shall be mandatory to have
been appointed with a Shari’ah advisor after qualifying with the fit and proper criteria for the said job
67
and responsibility prescribed by SBP. As per the guidelines, all the asset and liability side products
are required to be vetted and properly modelled/sutured prior to launch in the supervision and
guidance of an independent Shari’ah advisor.
While Islamic microfinance can be offered by full-fledged Islamic banks, SBP requires that
the bank be licensed prior to launch. In a nutshell, SBP gave an opportunity to the financial sector to
perform in and for the microfinance industry in a Shari’ah compliant mode under actually supervised,
safe, and regulated environment, which builds donors’ and investors’ confidence.
Full-fledged Islamic banks can also offer Islamic microfinance for financial inclusion and
microfinance services, but the prerequisites, as stated earlier; to initiate Islamic microfinance shall
prevail. Islamic banks can offer Islamic microfinance products through four different ways prescribed
by SBP as:
Through established counters of Islamic microfinance at existing branches
Standalone Islamic microfinance branches and mobile banking
Establishing independent and subsidiary Islamic microfinance banks
Networking and developed linkages with existing IMFBs and MFIs
Islamic Microfinance services by conventional banks can be provided through different
institutional level models such as:
Islamic Microfinance counters at existing branches
Islamic Microfinance Standalone branches and mobile banking
Establishing independent Islamic microfinance banks as subsidiary of conventional banks
Networking and developed linkages with existing IMFBs and MFIs
Islamic Microfinance services by conventional microfinance banks, after getting license,
can offer Islamic microfinance products under the regulatory supervision of SBP in Pakistan. The
conventional microfinance bank is licensed for microfinance operations on financial strength, Net
capital (capital free from actual and potential losses), and adequacy of the capital, asset and liability
base with respective products, which are critically examined. The appointment of an independent
Shari’ah advisor after qualifying fit and proper criteria is the significant element, which is mandatory.
Further SBP has specific guidelines for internal control, audit, accounting, book keeping, minimum
capital requirement, and the establishment of an Islamic microfinance division. Most importantly, the
HR was also given due consideration regarding capacity, educational level, experience, and standing
of executives in the respective field.
In Pakistan, the Islamic microfinance regime is strong and strict in Shari’ah compliance,
which could have not been possible without the independent regulatory body of Islamic finance,
especially Islamic microfinance in Pakistan.
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5. REFERENCES
Central Asia. (2010). Retrieved January 2013, from Wikipedia:
http://en.wikipedia.org/wiki/Central_Asia
QFINANCE. (S.F.). Islamic Microfinance. Retrieved January 2013, from Q-Finance-The Ultimate
Financial Resource: http://www.qfinance.com/financing-checklists/islamic microfinance
South Asia. (2010). Retrieved January 2013, from The World Bank Group:
http://www.data.worldbank.org/region/SAS
South Asia. (2010). Retrieved January 2013, from Wikipedia:http://en.wikipedia.org/wiki/South_asia
State Bank of Pakistan guidelines for Islamic Microfinance Business (2013), website:
http://www.sbp.org.pk/ibd/2007/Annex-c5.pdf
CGAP – A guide to regulate and supervise Microfinance (2014), official
website:http://www.cgap.org/publications/guide-regulation-and-supervision-microfinance
MFTRANPARENCY, “Regulation in Microfinance” (Azish Filabi), Pub. September 4, 2013,
http://www.mftransparency.org/regulation-in-microfinance/
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Paper 7
HOW AFRICAN DIASPORA CAN IMPACT
THE DEVELOPMENT OF ISLAMIC FINANCE
Dossa Maxime
INTRODUCTION
Africa has recently witnessed considerable developments that have allowed Islamic finance to expand
in many parts of the continent. In fact, several African countries have proposed new legislative
initiatives and amended regulatory and legislative regimes in order to accommodate Islamic banking,
and to a lesser extent to attract Gulf funds into their own markets. Countries like Nigeria, Kenya,
South Africa, Morocco and Senegal really stand out from the other African countries and have
expressed much interest in Islamic finance and are acting to establish themselves as the African hub
for this industry.
Therefore, Islamic investors keep an eye on Africa because the continent features a great
potential and strong demand for Islamic financial services and products in the field of and
microfinance.However, there is still a long way to go and numerous challenges have to be
overcome.Among them, I think that an important component of resources known as Africa diaspora
and crowdfunding are not explored yet in order to ensure a great growth of the Islamic Microfinance
sector in Africa. This is the purpose of the current paper.In the following pages, I will stress on West
Africa Economic and Monetary Union
( WAEMU)
I. Crowdfunding: Alternative way to fund Islamic micro finance in Africa
Let’s focus on one of the region in Africa where some rules and legislation on micro finance already
exist. But the legislation have to change in order to incorporate Islamic micro finance and
crowdfunding principles.
A. State of the art
1. West African Economic and Monetary Union market
West African Economict and Monetary Union (WAEMU) are Eight French speaking countries:
Benin, Burkina Faso, Ivory Cost, Guinea-Bisau, Mali, Niger, Senegal and Togo.These countries are
working together so that to build a regional integration in economics and currency.The population in
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this area is mainly muslims with 60% muslims on an average and more than 90 % in some of the
countries…
Figure 1: Map of WAEMU countries
2. Legal framework of micro finance
a) The general concept of micro finance
Micro finance refers to financial services and products granted to people excluded from the financial
system due to the lack of guaranties they provide and little amounts of money concerned such as
micro credit, micro insurance, micro savings, money transfer, etc.
Microcredit is a very small loan, granted almost without guarantee to people excluded from
banking system and willing to develop a small activity allowing them to generate an income.
The loans are granted either to a group of persons or small businesses.
Sometimes it may be granted to an individual but with the solidarity of other members.
b) Micro finance definition in WAEMU
The legal framework of micro finance provision in WAEMU (West African Economic and Monetary
Union) is valid for the 8 countries: Benin, Burkina Faso, Ivory Coast, Guinea-Bissau, Senegal, Niger,
Togo and Mali.
All of them are French-speaking countries and share the same currency called FCFA. They
form a custom and currency union together.
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In this economical region, micro finance sector is regulated by a law called “Système
Financier Decentralisé” (Decentralised Financial System) which allow the following activities
- Deposit collection
Are considered as deposits, funds, other than participations and compulsory contributions collected by
the decentralized financial system from its members or clients with the right to use it with the
obligation to give back the money when needed by the clients in regard of the contract.
- Loans operations
A loan operation is any action undertaken by which a decentralized financial system gives funds for
value to a member or a client with obligation for him to pay the money back at maturity.
- Guarantees
This refers to any legal act by which a decentralized financial system takes some guarantees on behalf
of a member or a client.
3. Some characteristics of current microfinance sector
- Deficit of intervention of banks to fund small businesses
- The lack of collateral from the borrowers or micro entrepreneurs
- The majority of the population lives in rural region where there are less infrastructures, banks
and services
- The repayment rate are higher than in the banking sectors
- It contributes really to empower the women and rural population impact on the local region
The non-bankables could mostly not fit a sufficient credit scoring by banks because they have no
regular income or no good track record (bad credit history or no credit history, etc.)
4. Islamic finance in the WAEMU
a) The concept and Activities
This concerns all the financial system including banking activities and services, Takaful insurance,
fund management, financial services, micro finance based on Islamic rules and principles. These
principles are derived from the ethical values as described by Coran and Sunna among which the ban
of interest, forbidden activities, - profit and loss sharing, asset backing principle, solidarity, etc.
We can distinguish 2 types of contracts generally used in Islamic finance:
- Profit and loss sharing contracts commonly used which are Musharaka, Mudaraba
- Contract based on trade finance -buy and sell activities- commonly known as Murabaha,
Ijara, etc.
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In certain cases, the parties involved in these types of contracts may sign agency contracts.
As additional and alternative source of funding, Islamic finance could insure the effectiveness of
financial intermediation for economic activities. Its ethical principles have demonstrated robustness
and social responsibility throughout the recent financial crisis.
b) The lack of an effective Islamic microfinance framework in WAEMU
Article 56 of the Banking Law in WAEMU
“Central bank can decide particular rules in favor of companies with special status, namely companies
which don’t use interest rate and apply the principle of sharing of profits and losses.”1
This is the only one reference on non-conventional activities based on interest.
In consideration on this article of the financial system law, Islamic banking or financial activities are
possible in WAEMU area but needs to be strenghten.
B. Suggestions of micro finance contracts to develop in WAEMU area
We can notice that the law on Decentralised System in WAEMU does not consider the aspect of
Islamic finance namely the ban of interest by avoiding money to money operation.The loan operation
described as funds to be granted involve money to be given on conventional way of interest.
In Islamic finance, there are some alternatives of avoiding money to be given to the client.
The system has performed some product like Commodity Based Murabaha (CBM) by which the
financier sell goods to the client who has to sell it to a broker and get the equivalent money.
Even if the practice is criticized, it avoids the financier to give money directly to his client.
The margin or the commission is justified by the fact that the financier sells a good to his client.
Selling goods is a commercial activity and is allowed in Islamic finance.
“ God allows commercial activities but forbid interest ”, etc.
The law has to integrate the aspect that MFI can offer alternatives products apart from savings, loan,
and guarantees.The following contracts can be integrated in the microfinance law in WAEMU
1. Murabaha contract
2. Ijara contract
3. Salam contract
4. Musharaka contract
5. Micro insurance
1 Source:Portion of Article 56 of the Banking Law in WAEMU
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C. Justification for an alternative source of funding micro finance institutions
1. Finding additional / alternative source of funding
- There is a lack of funds and demand is going higher and higher in WAEMU the MFI are fund
by: 75% financing by banks and only 25% from specialized funds and international
organizations2.
The CGAP Cross-Border Funding Survey, 2010 shows that the loan granted by MFI comes mainly
from deposits of their clients.
But these deposits are very low and limited. So MFI have to face banks high credit rates.
Figure 2: Source of funding
Even in big economies, the smallest firms have difficulties in obtaining financing.
There is always a gap between the demand (entrepreneur) side and the supply side (financial
institutions) and this fact create difficulties especially to small enterprises and more for micro
entrepreneurs.
- The local banks are reluctant to develop micro finance activities
- The cost of fund is low by using IT processes
- According to Babyloan, crowdfunding platforms represent in 2012 only 0.15% of the overall
micro credit which is worldwide standing at USD 65 billions. But as a new market, the
platforms increase this niche market which by 400% in 2012.
2www.babyloan.fr
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- The development of new technology for communication and services create new
opportunities for micro finance sectors.
The whole public is going to become a major player in financing micro projects by using the
crowdfunding mechanism in the word in general and particularly for developing countries projects.
One of the main target group to focus on as lender is the diaspora of the countries who
participate in the development of their country.
2. The cost of current funding
A report issued by CGAP 2009 Overview of Microfinance-Related Legal and Policy Reform in Sub-
Saharan Africa 2009 demonstrated that banking funding represents the majority of MFI source of
funding and this is expensive.
Figure 3: Institutional lenders of micro finance institutions in Africa
LENDERS PER REGION ( In USD Millions )
Private
Funds
Financial institutions
Public lenders
Source: Mix Database on financing structure, 2008
In 1997, the unusual rate of loan has been fixed by the banking and financial regulator in WAEMU at
18% and 27% respectively for banks and MFI.
The interest rate applied by MFI varies in accordance of many factors: the amount of the loan, the
geographic area, the MFI policy, the type of target, etc.
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Table 1: Cost of funding per type of lender
Type of lender Ass Central East South WestPublic lenders 8% 3% 9% 8% 5%Financial institutions 9% 7% 8% 13% 10%Funds 10% 8% 10% 11% 10%Private 3% 4% 3% 1% 5%Mixte 8% 5% 8% 9% 9%
Source: Mix Data base on financing structure, 2008
By using crowdfunding principles on Islamic way, the ethical principle meets a low cost of
funding to contribute to reduce poverty.
D. Recommandations of legal framework on crowdfunding
1. Definition and concepts
According to specialists, one of the key points in succeeding in micro finance strategy is the funding
mechanism of the lenders.
Crowdfunding provides a convenient access to a wide range of donators and investors.
Crowdfunding is a new concept of funding economical activities and businesses using internet
technology.
Some policymakers may be reluctant beause of the weekness of infrastructure and bad quality
of internet but, Africa has shown that it’s the continent where the internet, mobiles, mobiles banking
are booming.
The concept is improving and the legal approach also.According to the activity run by
crowdfunding operators, it may be considered as providing
Micro investment services
Providing micro financial titles
Banking operations
Payments services
Each of these activities is have to take account the legal framework in the countries.
But, the perspective of developing the tool for the enhancement of crowdfunding, the following
aspects should be considered for WAEMU or for Africa in general.
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2. Main factors to include in the regulatory perspective
Nowadays, there is no particular and specific regulation for crowdfunding operators in most of the
Africa countries.
To avoid that crowdfunding platform operators be considered as banks, a specific framework have to
be developed because these types of operators face particulars reality in there operations and risks
management.
It should forbid any entity running such activities without agreement from the local regulator. We
may distinguish 3 types of Islamic crowdfunding platforms for funding mico finance activities
Those collecting Zakat
This will be gift granted for a micro project selected by the donor in the platform
Those collecting Quard Hassan
This will be reserved for investors who want to support a project without any need of return in
the project
Those facilitating loss and profit sharing : Mudharaba, Musharaka..
These types of investors are risk takers.
The legal framework has to take account the protection and security of the investors and consider also
that some or most of the investors and donators and country diaspora members can grant a huge
amount of money.
The crowdfunding operators should not be considered as banks, or investment companies
because most of time they just create link between donors: investors and financial operators.
The minimum capital requirement to operators
A maximum amount of investment or donation per person
A maximum amount leveraged by the platform
The size of projects funded and the mechanism of funding are different from banking and
related sectors.
A specific status has to be developed for crowdfunding activities.
The status has to allow them to collect money, keep and transfer funds for the purpose and
financing participative projects.
A limitation of financing amount has to be defined for such activities per each person
They should not use the money for their one activity by any means.
They should act as an intermediary in financing small size activities.
They should provide some minimum report and statistics to the financial authority
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Some of the banking and financial prudential rules have to frame the activity (money
laundering, protection of investors, etc.)
As it’s done for micro finance sector, the corresponding legal framework on crowdfunding operators
have to consider some financial requirement in term of equity, limit in the amount collected by
project, by month, by year, per investor, door…so that banking and other financial services be
protected.
3. The main questions to ask while deciding to participate as investor in a
crowdfunding platform:
- The experience of the platform in financing micro credit ( how long it takes, which amount)
- The regulatory framework under which the platform is operating ( authorization, gift, loan, equity…)
- Analyzing the whole costs of funding even, cost of services provided, money transfer costs, foreign
exchange costs …
-What are the additional costs of monitoring from the platform requirements?
- How the platform keeps their lender loyal?
- Do the platform respect the law against money laundering and terrorist financing ( on of the
principle of Islamic finance- transparency and ban of forbidden activities…)?
In regards of the fundamental principles of Islamic finance, micro finance institutions have to:
- Develop transparency
- Enhance the portfolio quality
- Improve financial sustainability of their operations …
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II. Implementation of Crowfunding platform in Islamic finance way
A. Presentation of the model
Figure 4: Crowfunding platform in Islamic finance way
Contractual relationship
Monetary flow
B. Explanation of the model
The projects are published in the platform after selection by the IMFI
The platform operator deploys the community management strategies to attract investors but also
contact it’s basis potential investors so that they can invest in the project.
For marketing reasons, the projects have to stay on line for a limited period of time during which
potential investors can grant funding.
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PLATEFORME
IMFI
RECIPIENTS
Moudaraba 1
Representation infrastructure Disposal of fund fees
Wakala 2
Moudaraba 2
X% M = N
Y% N = P
POTENTIAL INVESTORRepresentation
and infrastructures fees
Wakala 1
After this limited period, if the project doesn’t reach the funding objectives it has to be removed
because it means a lack of interest from investors.
1. Differents types of contrats to be used
a) Wakala contract: The platforms way of earning money
According to AAOIFI, “Wakala is a mandate given by a person to another for all of activities needing
mandate….”
The approval, the subject and two parties are the elements of a Wakala.
Regarding the paid Wakala, the compensation has to be defined as a fixed amount for a package of
services provided or as a percentage of a certain amount.
Between the investor and the platform
Here, the investor commit the platform to represent him in all his operational actions with the IMFI
and the recipient.
The platform operator provides IT infrastructure to the investors.
For this services provided, the investor grant a% of the loan to the platform operator.
Between the platform and the IMFI
The platform provides it infrastructure to the IMFI so that they publish their clients micro projects.
The platform represents the IMFI in the transactions with the investors
The platform operator transfers money to the IMFI
For all these services provided, the IMFI pays some fees to the platform operator.
b) Mudharaba contracts
The money provider Rab Al Mal commit a Mudarib who is the entrepreneur to manage the business
Between the Investor and the IMFI
The investor commits IMFI to grant money to a selective project in accordance of some specific
criteria to be agreed together.
The selected criteria will lead to a selection of projects that can provide a profit of M
The IMFI will be committed to pay back Y% of N to the investor.
We can imagine that when the total budget of a specific project is not reached, a suggestion is maid
with the funder so that his money be affected to a similar project.
This rule will be specified in the contract.
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Between the IMFI and the Recipients
The recipient is committed by the IMFI to run the project in accordance to a binding specifications
and to make a profit for amount of M.
X % of M comes to the IMFI as his profit share : Mudharaba fee1 = N
When the financing target – money collection- is not reached, either the money is returned back to
the investor minus the Wakala fees or with the support of the IMFI it may be directed to another
project.
Possibility to offer profit and loss sharing contracts (compliant to Islamic law) to recipients.
The principle of profit and lost sharing
In order to make the loan Sharia compliant and back the compensation attractive to investors/ money
providers who are sensitive to Islamic ethics, the main objective is to suggest a non guaranteed
compensation, that will be based on the outcome of the IMFI recipients activities.
We will therefore target the money providers not as philanthropists but as investors in need of
Returns.
- If M is the profit earned by the recipient,
- The target rate of the income paid on the investment will be X% = N
- N is the profit to be shared by the IMFI and the investor
- Y% = P is the sharing part of that profit for the investor and the balance belongs to the IMFI (
1-Y%)x N
The state of the needs to develop such a model
The infrastructure : crowdfunding platform such as de www.babyloan.org
Potential investors data base
Strong marketing strategy with communication (community management, advertising …)
Wide partners network ( in marketing, IMFI, associations, institutional partners, states, local
councils…)
Trainings on Islamic micro finance and crowdfunding
Some Challenges to Overcome
- Regulation update in term of crowdfunding
- Regulation aspect of the model
- The sharing of profits and losses
- Supervisions, monitoring, reporting to manage with IMFI
- Legal structuring cost including Sharia Board cost ( in case of Mousharaka, they could be
additional cost)
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- Governance issue, transparency in under developed countries
- Basic training to recipients
III. How African migrants in Western countries can boost the environment of Islamic
microfinance
We can target 2 types of investors
A. The African Diaspora of the WAEMU, working in Western countries ( Europe, USA…)
According to Africa Union definition, african diaspora are considered as the sixth region of Africa.
For this category of potential investors, there is a need to participate to the development of their
countries.
According to Word Bank report « Migration and Remittances Facebook 2011 » money sent
by migrants in developing countries is estimated to USD
325 billion, including USD 56,9 billion sent in Africa and Middle East.
A recent study published by the Central Bank of West African States in WAEMU area show
that the Africans migrants of WAEMU remittances have been multiplied by 4 from 2000 to 2011.
The report also concludes that the remittances are higher than Development Aid.
This means that the Diasporas can contribute to the development of their countries if they are
more framed and some activities are organized to better master these crucial resources.
Figure 5: Remittances received in WAEMU countries
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The study reveals that almost 54.6% of the money sent by the migrants are used for
consumption goods and only 5.5% goes to investment.
One of the objectives of our suggestion is to redirect this source of funding in productive
investment.
B. Investors without any link with the project or the region
As a part of African Diaspora, some investors without any link with a country are just focused on the
type of the project and the ethical aspect of Islamic finance.
They are Muslims and non-Muslims who can be sensitive of the projects and contracts suggested by
the model.
A market study has to be realized and community management principles can lead to identify
this segment of investors.
A success of crowdfunding comes when the investors have a kind of emotional link with the
recipient.
With marketing, this link can be created between the recipients and those of investors who are
sensitive to the local development, to the ethical approach, to Muslim communities, to cities inter
cooperation…
Most of the African diaspora are involved in migrants associations, have social development
link with their resident countries and locals councils.
In France for example, the government grant fund to these migrants associations so that they
impact their countries.
This example can be generalized to attract other funds in reach muslims countries for the
development of Islamic micro fiancé in Africa.
IV. The Precious support of the IDB
As it is said in the web site of IDB:
“The purpose of the Bank is to foster the economic development and social progress of member
countries and Muslim communities individually as well as jointly in accordance with the principles of
Sharia”
IDB as one of its objective is to promote the Islamic finance activities overall the world, it’s technical
and financial assistance is needed in this field of micro finance.
.
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In conclusion, I’m convinced that the development of Islamic microfinance could help a lot of African
countries to strengthen their economic situation and thus reduce poverty.
The articles 4,6 and 60 in the law called Decentralized Financial Systèm have to be reviewed
so that to allow some alternative products and services to be provided by Decentralized Financial
systems (micro finance institutions).
Therefore, an appropriate regulatory framework is to be suggested to take in consideration
new approaches such as crowdfunding so that the industry catch additional money and reduce the cost
of funding.
An other potential player in this industry is african diasporas who have financial power to
participate in funding Islamic micro projects.
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Paper 8
Moral and Ethics in Islamic Microfinance and Its Impact on Bangladeshi Rural Poor’s Livelihood: An Empirical Study
M. Mizanur RahmanDirector Research, Islamic Bank Training and Research Academy, IBBL, Bangladesh, Curently working on deputation as Head of Training in Jaiz Bank Plc., Abuja, Nigeria.
Email: [email protected]
1. Introduction
The charismatic words of Muhammad Yunus, pioneer of the Grameen is “that we can create a
poverty-free world, if we want to…in that kind of world, [the] only place you can see poverty is in the
museum.”
The Grameen Bank, founded in 1983, offered poor communities an alternative to the rich
moneylenders and traders that charged usurious interest rates. By achieving 98% repayment rates
from the very poor in Bangladesh Yunus showed the world that the poor are “bankable” and set a
trend in the international development community.
Based on his assumption the term microfinance is developed which refers to the provision of
financial services, most commonly microcredit, to poor individuals around the world with the primary
goal of poverty alleviation. The microcredit movement operates under the presumption that the poor
lack access to formal financial services and the current alternatives are loan sharks that charge
usurious rates. Two potential strategies by which MFIs alleviate poverty are financial inclusion and
the development of income-generating activities. The former strategy emphasizes the benefit to poor
people of having an alternative to the abusive moneylenders that charge exorbitant interest rates. The
latter strategy emphasizes generation of additional sources of income that permit individuals to
permanently escape the trap of poverty.
The Grameen Bank’s success in Bangladesh became the face of microfinance, and the Bank
served as a role model to other MFIs. Microcredit is now a well-established poverty alleviating
programme which is being implemented in many parts of the world to address different development
activities. This is especially so in Bangladesh the birthplace of the well-known initiative by Nobel
laureate Professor Rahman. Besides providing credit facilities, all such institutions also provide
training for skill development and self-employment of the poor.
But, unfortunately, all these institutions provide interest based credits and the rate of interest
is often exorbitantly high to commensurate with the risk in micro-finance lending. The interest rates
for institutional sources vary from 15-20%, while those for the non-institutional sources range from
33 to 120 per cent (Mahmood, 2006). Sometimes the interest rates of non-institutional sources may
even be 120-140%. Mahmood also mentioned that the poor do not have any surplus production hence
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accumulation of capital is very difficult and sometimes impossible for them. On the contrary, owing
to the absence of access to productive assets, lack of skills, low-level literacy, malnutrition and
absence of an organization of their own, the rural poor fall into the poverty trap (Jaim, 1986). Besides,
these microcredit institutions do not care about the ethical development of the rural poor to change
their behaviour consistent with a disciplined approach to economic activity. Business behaviour and
ethics are interrelated since the disciplined approach needed for good economic management is also
seen as founded in ethically consistent behaviour.
Considering the above mentioned factors, Islami Bank Bangladesh Limited (IBBL) launched the
Islamic microfinance program in the name of Rural Development Scheme (RDS) in 1995. This
scheme is completely interest free and the main objective of this scheme is to alleviate rural poverty
by providing Sariah based small capital micro investment finance to the agricultural and rural sector
for generating employment and raising income of the rural poor. The scheme also provides welfare,
moral and ethical services to the rural people of the country. Presently, the scheme is operating in
more than 13,000 villages in 60 districts. Some 0.67 million group members of around 22,206 centres
of the country covering 94% are females. As on 31st December 2012 the total ddisbursement is USD
618 million and the recovery rate is 99.58%
In the year 2007, a study was conducted to assess the impact of said microfinance scheme in and
found positive impact on income and livelihood of the rural poor’s of Bangladesh (Rahman, 2008,
2009). Based on that study findings some of the activities was revised and the scheme was further
expanded to the new areas. A further study was conducted to assess the impact on rural poor’s
livelihood especially the ethical and moral development of microfinance clients, which is one of the
major objectives of the scheme, and its impact on clients’ livelihood. It may be mentioned here that
although there are thousands of conventional microcredit programs are functioning in Bangladesh
with a view to alleviating poverty but the rural poor are still in the vicious circle of poverty and they
have little hope of getting out of poverty in the near future. Besides, none of them care about ethical
and moral development of the clients but IBBL micro-finance is giving especial emphasis to changing
behaviour, which aspect is its distinctive difference. Therefore, this study has especially assessed the
moral and ethical changes of the clients and its impact of on their income and livelihood.
2. Literature Review of Micro-finance Impact Studies
In Bangladesh, Islamic and conventional microfinance has a positive impact on rural poverty-as
shown by empirical studies which concluded that households’ income, wheat and cattle productivity,
and levels of expenditure and labour have all increased due to microloans programs, especially in
rural areas. The study concluded that the various loans program alone were not enough to alleviate
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poverty, unless they were in an environment with material and social capital sufficient to achieve the
goals of said programs (Rahman, 2005).
A 2007 survey by CGAP on Islamic microfinance revealed that total global coverage is only
an estimated 380,000 customers, which is half of one per cent of total microfinance coverage.
Furthermore, over 80 per cent of this small amount of borrowers is concentrated in Indonesia,
Bangladesh and Afghanistan. Although Muslim majority countries encompass approximately 44 per
cent of total conventional microfinance clients worldwide, the growth of Islamic microfinance has
been incredibly slow. In Bangladesh the largest MFI that provides Islamic products has a reach of
only 100,000 compared to the 22 million active borrowers reached by the MFIs Grameen Bank,
BRAC and ASA.
PKSF (2005) studied the impact of micro-credit on the members of partner organizations of
PKSF and found that absolute poverty was reduced by 9% during 1991 to 2000; moderate poverty
declined by 5% during 2000 to 2004. Chowdhury and Bhuiya (2004) examined the impact of credit
programme on the Bangladeshi borrowers under the BRAC projects and found positive impacts on
human well-being, survival rate and schooling of children. Amin, Rai and Ropa (2003) conducted a
study on the microcredit clients of Grameen Bank, BRAC and ASA. They observed that the micro-
credit programme was more successful to reach the poor, but less successful to reach the vulnerable
poor. Zaman (2001) assessed the impact of microcredit on poverty alleviation and women
empowerment. He found positive impact on income, decision making ability and in reducing gender
disparity.
Bangladesh Institute of Development Studies (BIDS) conducted impact study on the
microcredit borrowers under the partner organizations of PKSF. This study showed positive impact on
the income of microcredit participants in comparison to non-program participants (BIDS, 2001).
Khandker (2000) assessed the impact of microcredit on saving and found that microcredit increased
voluntary saving, which was more pronounced in the cases of women than men.
However, all of these studies simply assessed the impact of interest based microcredit
programmes which are interest based and which did not consider Sariah (Islamic rules and
regulations) related lending in investment. Islamizing the idea of conventional microcredit program
Islamic microfinance programs are functioning in different countries of the world. In the following
sub-section this study also reviewed the impact of some of the mentionable Islamic microfinance
programs functioning across the country.
Islamic Microfinance Overview
Islamic microfinance attempts to provide observant, poor Muslims with access to financial capital
through the use of tools from both microfinance and Islamic finance. The development of Islamic
microfinance has faced many obstacles and remains in its early stages; as a result, millions of poor
Muslims remain excluded from the financial sector.
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A review of recent studied on the impact of Microfinance on poverty shows that most
researchers agree that Islamic microfinance is highly effective in poverty alleviation. Most studies
contented that microfinance is an adequate instrument for preventing the spread of poverty at low
costs. This applies to countries of different development level like Turkey, India, Bangladesh and
Ethiopia and others. Microfinance provides the poor with self-employment opportunities and enables
them to overcome the obstacle of not owning any material assets that can be converted to banking
collaterals. Empirical studies present statistical evidence proving that these loans have led to an
increase in productivity in a number of countries and augmented the poor’s ability to achieve gains,
providing them with health care. These loans also had a great impact on the poor’s economic
independence. (Fadlallah, 2012)
In Pakistan, 86.8 per cent of surveyed people said that microloans were quite useful in
achieving prosperity and increasing the purchasing power of beneficiaries. A study in Islamic
microfinance in the Middle-east and North Africa found that this type of finance was the most able to
achieve social and economic development goals. In the Arab world, there are some successful
experiences such as: Jabal Al-Hoss Funds Project in Syria, Al-Hasida Project in Yemen, and Al-Qard
Al-Hassan Association in Lebanon. (Fadlallah, 2012)
The Iranian experience is considered pioneer in the field of Islamic Micro-finance that is
devoted to fund basic needs. Iran has nearly 3000 Qard Hasan funds in the urban and rural areas.
Islamic microloans are also popular in non-Islamic countries.
The lack of availability in Islamic microfinance products coincides with passionate demand
by individuals in Muslim majority countries. A 2006 study in Algeria revealed that 20.7 per cent of
microenterprise owners do not apply for loans primarily for religious reasons.27 Furthermore, a 2007
study shows that 60 per cent of low-income survey respondents in Palestine prefer Sharia-compliant
loans and products to conventional ones, and over half of these respondents claim they would even
pay a higher price for such products.28 The strong demand for Islamic microfinance products remains
unmet despite a vibrant conventional microfinance industry in those areas. The lack of growth of
Islamic MFIs, despite the strong demand reported, could be the result of an over-exaggerated demand
or a lack of supply, as discussed below.
Anecdotal evidence suggests that individuals may claim a preference for Sariah-compliant
loans when surveyed in an attempt to appear more pious. Alternatively, potential borrowers may have
a true desire to only use Sharia loans, but practical limitations, such as higher rates, may inhibit them
from selecting Islamic loans.
Notwithstanding likely exaggeration, however, the surveys referenced above indicate
potential for growth in the Islamic microfinance industry.
Another explanation for the slow growth is that Islamic microfinance is used as a general term, and
there is a lack of distinction between its financial products. Currently 70 per cent of Islamic
microfinance loans, an overwhelming majority, are Murabaha based.
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A study on Islamic microfinance in the Middle-east and North Africa found that this type of
finance was the most able to achieve social and economic development goals.
The Iranian experience is considered pioneer in the field of Islamic MF that is devoted to fund basic
needs. Iran has nearly 3000 Qard Hasan funds in the urban and rural areas.
Rahman (2008, 2009) conducted an empirical study on impact on Islamic microfinance and
found it had a positive impact on rural poverty alleviation especially on households’ income, crop
productivity, and level of expenditure and labour have all increased due to microloans programs,
especially rural areas. The study concluded that microfinance along cannot alleviate poverty, unless
they were government effort to develop infrastructure development and Zakat and Awqaf for touching
ultra-poor.
Literature review shows that the conventional microcredit does not care about ethics and
morality rather cares about poverty alleviation. While, Islamic microfinance care about ethical and
moral development of the clients but none of them assessed the ethical development of neither the
clients nor even its impact on poverty alleviation. Previous studies on the impact assessment of
microcredit programmes in Bangladesh have also been narrow in their focus. Therefore, unlike other
microcredit programmes, the main objective of this study was to examine the linkage between clients
moral and ethical behavioural changes as well as their income and demographic and investment
factors, using modern econometric techniques.
Another point is that the size of the rural households in Bangladesh is generally large and they
have a low level of literacy. Rural development is hampered due to lack of credits, lack of training,
weak infrastructure and poor transport systems. The weak resource base coupled with a faster growing
population is aggravating the poverty level of the country. This study will also determine if the above
factors which are most relevant in explaining poverty alleviation will have important implications for
refining micro-finance policy.
3. Theoretical Concept about the Role of Morality and Ethics in Islam
The term Islam is commonly defined as the full submission to God; therefore all actions can be
considered religious practices such that morality plays a central role in all actions of a Muslim,
including economic decisions. Perspectives on Morality and Human Well-Being by Syed Naqvi lists
five elements of Islam’s ethical system that he argues are universally believed by Muslims and
significantly influence their economic behaviour: (i) Islam is a complete way of life; (ii) Allah is
omnipresent; (iii) Allah owns all wealth; (iv) Individuals must be committed; and (v) the poor have a
right to the wealth of the rich.
With the support of the Qur’an and Hadith, these five principles are explained below.
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a. Islam is a complete way of life
The full submission to God required of all Muslims encompasses every component of an individual’s
life. Islam sets rules and expectations for a wide range of activities to guide this full submission.
Almost every action can be an act of worship if it carries the appropriate intention. The following
verse from the Qur’an demonstrates the holistic definition that is given to “righteousness”:
It is not righteousness that ye turn your faces Towards east or West; but it is righteousness to
believe in God and the Last Day, and the Angels, and the Book, and the Messengers; to spend of your
substance, out of love for Him, for your kin, for orphans, for the needy, for the wayfarer, for those
who ask, and for the ransom of slaves; to be steadfast in prayer, and practice regular charity; to fulfil
the contracts which ye have made; and to be firm and patient, in pain (or suffering) and adversity, and
throughout all periods of panic. Such are the people of truth, the God-fearing. [2:177]
The reference to turning to the East or West is for the physical act of prayer. This verse
reminds Muslims that worshipping God is not limited to religious activity in the narrow sense. There
is no “checklist” of actions that would ensure admittance to heaven for Muslims. God is believed to
be the most just of judges, and also the most merciful.
Muslims strive for a “righteous” character that demonstrates itself in all aspects of life.
b. Allah is omnipresent
Muslims believe that God knows every action, and every intention behind that action. The concept of
taqwa commonly translates to God-consciousness and involves the remembrance of God’s
overarching presence in the universe. The following two verses illustrate the omnipresence of God in
each individual’s life.
It was We Who created man, and We know what dark suggestions his soul makes to him: for
We are nearer to him than (his) jugular vein. [50:16]
He it is Who created the heavens and the earth in Six Days, and is moreover firmly
established on the Throne (of Authority). He knows what enters within the earth and what comes forth
out of it, what comes down from heaven and what mounts up to it. And He is with you whosesoever
ye may be. And Allah sees well all that ye do. [57:4]
The active presence of God in all aspects of a Muslim’s life has a clear effect on his/her
individual behaviours, both in public and in private, serving as an additional source of due diligence
in financial contracts.
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c. Allah owns all wealth
Man is an agent of God’s wealth during his time in this life; ultimately all wealth belongs to God, and
wealth serves as a test of character. It is clear in many verses that God is the creator of the universe
and all things will return to Him. The following verse directly poses the questions to Muslims:
And what causes have ye why ye should not spend in the cause of Allah? - For to Allah belongs the
heritage of the heavens and the earth. [57:10]
“The cause of Allah” is a common phrase in the Qur’an, and one interpretation of it is caring
for the poor in society. In the following phrase, it is commanded that a Muslim care for her/her
relatives (kindred), the needy, and travellers:
And render to the kindred their due rights, as (also) to those in want, and to the wayfarer: But
squander not (your wealth) in the manner of a spendthrift. Verily spendthrifts are brothers of the Evil
Ones; and the Evil One is to his Lord (himself) ungrateful. [17:26-27]
This verse also emphasizes the importance of not spending money wastefully. At the same
time, Islam strongly condemns the hoarding of wealth. This careful balance of saving and spending is
an important concept for any successful economic system. The verse below illustrates the serious
tones in which God condemns hoarding and announces a grave punishment for doing so.
And let not those who covetously withhold of the gifts which Allah Hath given them of His
Grace, think that it is good for them: Nay, it will be the worse for them: soon shall the things which
they covetously withheld be tied to their necks Like a twisted collar, on the Day of Judgment. To
Allah belongs the heritage of the heavens and the earth; and Allah is well-acquainted with all that ye
do. [3:180]
Wealth is considered the means to an end in Islam. Islam emphasizes the spending of wealth
in moderation, and the fact that all wealth belongs to God means that such wealth should be spent in
His cause.
d. Individuals must be committed
Islam rejects the concept of pure self-interest, and strongly promotes a commitment to the welfare of
others. An individual carries great responsibility for his/her community. While Islam does recognize
the inherent self-interest of man, it expects Muslims to overcome this and care for their community.
Islam places the responsibility of the community upon its very members. If an individual in a
community goes hungry, the blame is placed upon the community, and it is not the job of the
community to judge the worthiness of a poor person’s need. The Qur’an states that such actions will
directly affect an individual’s prosperity on the Day of Judgment, linking the giving of charity to
one’s own self-interest. The verse below promises a return for wealth given in the cause of God:
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Whatever of good ye give benefits your own souls, and ye shall only do so seeking the “Face”
of Allah. Whatever good ye give, shall be rendered back to you, and ye shall not Be dealt with
unjustly. [2:272].
Islam recognizes self-interest of all men. However, rather than selfishly loving worldly
possessions, Muslims should be willing to sacrifice things they love most for the hereafter. Through a
detachment from worldly possessions, an individual can truly share the things he/she loves most with
the community. The following verse illustrates the fact that Muslims are expected to give from that
which they love most:
By no means shall ye attain righteousness unless ye give (freely) of that which ye love; and whatever
ye give, of a truth Allah knoweth it well. [3:92]
The commitment to the well-being of society must play a central role in the life of a Muslim,
and this commitment requires that Muslims give freely and are detached from the material
possessions of this life.
e. The poor have a right to the wealth of the rich
The paying of zakat, or alms, is one of the five pillars of Islam, and continuously referenced in the
Qur’an and Hadith. Charity is not a gift, but instead a right of the poor:
And in their wealth and possessions (was remembered) the right of the (needy,) him who
asked, and him who (for some reason) was prevented (from asking). [51:19]
In this verse, the Qur’an references both the needy that ask, and the needy that do not ask.
Helping the latter group requires that Muslims play a proactive role in the aid of others. These five
moral principles operate in tandem to shape the economic life of Muslims and encourage the
advancement of a just economic system. The acceptance of these moral ethics is expected to advance
a Muslim society’s economic system. Today, no society unanimously embraces these principles;
however, that does not restrict an individual from pursuing them. Doing so does not require the
unanimous cooperation of an entire society, and the principles can be successfully implemented at the
individual or grassroots level. Muslims commonly believe that the economic ills in their society are a
result of the failure to embrace these principles. The five principles presented above describe the
moral responsibility of Muslims in a general framework, and the following section discusses other
concepts relevant to economics.
f. The Work of Ethics in Islam
“It is work that Islam sanctifies; making work the primary ground of possession and profit; and it does
not permit wealth to grow through idleness, nor will it allow wealth to beget wealth. Only effort can
beget wealth, otherwise wealth is unlawful.”
—Syed Qutb
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Both the Qur’an and the Hadith extol the work of an honest businessman. A society can be
neither productive nor successful if its citizens are idle. Islam thus promotes a strong work ethic
among its believers. Individuals are permitted to profit from their work, as long as the profits are
extracted in a just, transparent and honest manner. The Hadith below extols the role of an honest
businessman, raising him to the level of the most esteemed individuals in Islam:
A producer or a businessman whose behaviour complies with Islamic rules is said to be like
the prophets, martyrs, and the truthful friends of Allah (swt). He is ranked with the prophets because
he, like the prophets, follows the path of justice; like martyrs because they both fight with heavy odds
in the path of honesty and virtue; and like the truthful because both are steadfast in their resolves.
Islam forbids dishonest dealings in business. Profits are permitted, and work is strongly encouraged
when done in a lawful and honest manner. There are expectations for people when engaging in
commercial transactions and the Qur’an warns against any unjust behaviour in trade:
Give full measure when ye measure, and weigh with a balance that is straight: that is the most
fitting and the most advantageous in the final determination. [17:35]
Individuals are expected to deal justly in all matters, especially regarding trade. God’s omnipresence
serves as a constant reminder for Muslims to deal honestly in their trade.
g. Ethical finance underpinned in the monotheistic scriptures
Christianity:Being in debt is equivalent to servitude because of the immense burden to
repay. Hence, “The rich rule over the poor and the borrower is slave of the lender” (Proverbs
22:7).
Judaism: "The first question an individual is asked in the afterlife at the final judgment is:
“Did you conduct your business affairs honestly?” (Babylonian Talmud, Shabbos 31a).
h. Economic Concepts in Islam
Ibn al-Qayyim emphasizes the role of economic activity and its need to fulfil man’s needs and
requirements. He writes:
When it is preordained that grains will be obtained only after performing a certain chain of
activities, it means that the produce cannot be obtained without the sowing of the seeds and the
cultivation of the land. Likewise, quenching the thirst or satisfying the appetite depends on drinking
water or taking food. Neither of these objectives can be achieved without the specific action it
demands. The same is true of all affairs in this life and affairs pertaining to the life hereafter.
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4. Methodology and Data
A. Conceptual Framework
The microfinance has been recognized as a powerful and an effective tool for combating poverty, the
poor access to credit has been rapidly expanding over the past few decades in the area of hopeless and
helpless hunger society over the world (Bhuiyan, Siwar, Islam, and Rashid, 2012; Mirghani et al.,
2011).
An early study of Grameen Bank noted its support for the poor, to alleviate poverty especially
women, through empowerment and income generation and empowerment in social indicator
microfinance has been recognized as a powerful and effective tool for combating poverty, the poor
access to cred it has been rapidly expanding over the past few decades in the area of hopeless and
helpless hunger society over the world (Basher, 2010; Mohammad Hossain, 1988a; Kabir Hassan and
Tufte, 2001; Morduch, 1999; Schreiner, 1999).
In this study, it was observed that the beneficiaries are mainly rural poor having very limited
access to education and institutional credit and they also have low command over productive
resources Due to their inability to meet the collateral requirement, the rural poor cannot start up
productive activities even though they may have the adequate skills for pursuing income-generating
activities.
Because of their low level of income, they cannot even fulfil their consumption needs
properly and ultimately they have to lead a lower quality of life. In such circumstances, microcredit
programme may support the poor in reducing their poverty by creating both direct and indirect
benefits.
Under microcredit programmes, borrowers can take investment without providing collateral
from the microcredit providers. The amount of investment they receive from the providers increases
their financial ability to invest more into income generating activities. Microcredit programmes also
provides opportunity to generate employment for the poor in the locality.
By participating in income generating activities under microcredit, rural poor may have more
earnings from activities that directly add to their income. This increased income would ultimately
increase their purchasing ability. More purchasing ability would enable them to spend more on food,
thus, leading them to higher quality of living. The conceptual framework of microcredit in alleviating
poverty is shown in Figure 1.
Besides income, there are other factors which are related to well-being of the borrowers. It is
imperative to enhance human capital as it is deeply related to the well-being of the borrowers.
Therefore, the programme provides training and non-formal education to the borrowers, hoping that
training and education will enhance their level of skills in performing income-generating activities.
Therefore, borrowers’ age, education and experiences need to be considered carefully in choosing
participants because decision-making ability may largely be influenced by such factors. Factors like
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household’s asset will increase the ability of the borrowers to invest in income generating activities.
Household asset also helps in increasing income earnings for them. In addition, it is difficult for the
poor households to hire labour for operating income generating activities.
Thus, they largely depend on family labour for pursuing income-generating activities. Due to
the microcredit programme, they have the opportunity to utilize their manpower for productive
purposes. Inadequacy of rural infrastructure is one of the major obstacles for development of
Bangladesh. Rural poor have very limited access to infrastructural facility and this hampers their
economic activities. Initiative to establish rural infrastructures (such as rural markets, roads etc.)
under the microcredit programme may help them to accelerate their economic activity. Access to
infrastructure facility and its proper utilisation will increase the ability of rural poor in pursuing their
income generating activities (IGAs). Training and non-formal education of borrowers can enhance
their level of skills in performing income generating activities. Therefore, the RDS programme also
provides training and non-formal education to the clients.
Ethics and moral development is an important factor for developing human capital which is
deeply related to the well-being of the clients. As RDS investment is collateral free, therefore, clients
with good ethics and moral behaviour as determined by the field officer would indirectly act as
collateral to get their investment back and also to invest the borrowed money to the proper income
generating activities.
Bangladesh is the one of the most growing up developing countries as well as most density of
population in terms of the number of the population living and land area in the world (Bhuiyan, Siwar,
and Talib, 2012). Last three decades the Bangladesh economy could not able to achieve a rapid
macro-economic development and strong track record of tackling poverty due to Natural disasters as
like as floods, cyclone, river bank erosion and as well as the political unrest and misused or unused of
national resources the economic development of Bangladesh is not most remarkable but impressive
(Bhuiyan, Siwar, Islam, et al., 2012; Bhuiyan, Siwar, Ismail, and Talib, 2011a; Bhuiyan, Siwar,
andTalib, 2012).
In the above circumstances the microcredit came with the revolutionary approach by providing
the poor accessibility for the credit to increase their total family through different approaches of
Income Generating Activities (IGAs) and thus, sufficient income provides a hope to the poor to
ensure livelihood development by improving good health, access of children's education, achieved
skill, acquiring assets, take part social activities. After those achievements they acknowledge
themselves as important parts of family members that means other family members honour about their
opinion at the time of decision making. Furthermore, at the end above successive factors microcredit
borrowers able to ensure the opportunity of sustainable livelihood if all other livelihood assets remain
constant.
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B. Model Specification
Literature shows that different techniques such as Descriptive Analysis, Ordinary Least Square
(OLS), Weighted Least Square (WLS), Linear Programming (LP), and Simultaneous Equation
Systems (SES) had been used by researchers in order to estimate the effect of microcredit on the
various outcomes such as income, consumption and saving etc. Khandker (2000) estimated a
conditional demand equation to assess the effect of microcredit on the economic outcomes, such as
saving. The researcher used OLS estimation technique, using log in both sides, for this study which is
as follows:
Y=a0+❑i∑j=1
n
X ij+ Iij+❑ij
Where,I = amount of credit taken by the borrower,Y = household income,Xij = a vector of exogenous characteristics (such as age or education of household head)α, and unknown parameters, and❑ij error component in the equation.In this study, Ordinary Least Square (OLS) regression was used to assess the effect of microcredit on the dependent
C. Households Income Model
Y=a0+∑i=1
n
❑i X i+ I+µi
n = 1,……., 5
where,Y = amount change2 of annual income of the household,I = amount of investment taken by the borrowers in 2006,X1 = total land size,X2 = age of the borrowers dummy (above 40 years of age is 1 and 0 otherwise),X3 = education dummy (up to 5 years of schooling is 1 and 0 otherwise),X4 = number of family members engaged in income generating activities,X5 = ethics and moral of the clients,❑i and are the coefficients of the variables to be estimated, andα constant for the equation and µ error term for the equation.
D. Estimation of Well-being Based on the Clients’ Opinion
The Logit model was applied to find out the probability level that the clients would be well-off due to
the influence of particular explanatory variable. In the Logit model, dependent variable “clients’ well-
being” had two categories such as “borrowers were well-off” under the programme coded as one and
otherwise coded as zero.
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Researchers who had used the logit model to assess the effect of microcredit programmes on
loan utilization, awareness towards living-standard, and women empowerment had found positive
effects of microcredit (Begum, 1998; and Zaman, 2001). Different studies used different dichotomous
dependent variables in the logit model for example; Begum (1998) used awareness of the borrowers;
Zaman (2001) used women’s empowerment. In this study, the researcher used "borrowers’ well-
being" as the dependent variable which was divided into two categories: (i) borrowers were well-off,
and (ii) borrowers were not well-off.
ln [ P i
1−Pi ]=❑0+❑1 EDU+❑2 FMIG+❑3 DOM +❑4 SFE+❑5 EHC+❑6 EAMC+µ
where,Pi = probability that borrowers were well-off,1- Pi = probability that borrowers were not well-off,EDU = education dummy for the clients (up to 5 years of schooling is 1, 0 otherwise),FMIG= no of family members involved in income generating activities,DOM = duration of membership (Years),SFE = share of food expenditure to the total expenditure (%),EHC = expenditure on health care (taka),EAMC= ethics and moral4 of the clients. and❑0 = constant, ❑i = coefficient to be estimated and µ= error term.
E. Estimation of Ethical and Moral Change Based on the Clients’ Opinion
The Logit model was selected in this study to find out the probability level that the clients could be
better off due to the influence of particular explanatory variable. In the logit model, the dependent
variable (clients’ ethical and moral development) had two categories such as clients being “ethically
and morally become well-off” under the programme coded as one and otherwise coded as zero.
Specifically model can be written as:
ln [ P i
1−Pi ]=α0+❑1 EDU+❑2 AGE+❑3 DOM+µ
where,
Pi = probability that borrowers were well-off,1- Pi = probability that borrowers were not well-off,EDU = education dummy for the clients (up to 5 years of schooling is 1, 0 otherwise),DOM = duration of membership (Years),AGE= age of the borrowers dummy (above 40 years of age is 1 and 0 otherwise). and
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❑0 = constant, ❑i = coefficient to be estimated and µ= error term.
F. Estimation of Ethics and Moral of the Clients
Opinions were sought from the clients about their awareness and practice of 10 different religious
activities. Table 1 shows the different religious activities of the clients. A four-point Likert scale was
used to evaluate the borrowers, moral and ethical development i.e. each statement had four options,
which were regular, very often, very rare and not at all.
The points were summed up from each 10 statements and the total score obtained by each
borrower were divided by the highest score of seventy- five in order to create an index of acceptability
towards effectiveness of the microcredit programme. The borrowers who received scores less than
70% per cent were coded as zero otherwise coded as one. Borrowers performance was considered
satisfactory when they scored 70% or above. Therefore, in this study, borrowers’ moral and ethics
was evaluated based on the score of 70% or above. Mahmud (1999) created an acceptability index
towards effectiveness of ADIP programme and the borrower who received scores 70% or above was
coded as one to indicate that they were well-off under the ADIP’s microcredit programme, otherwise
coded as zero. Begum (1998) created an awareness index and the borrowers who received a score
50% was coded as one in order to indicate that awareness level increased toward their living-standard
otherwise coded as zero.
Logit model was chosen in this study to find out the probability level that the borrowers
would be morally and ethically well off due to the influence of particular explanatory variable. In the
logit model, dependent variable ‘clients moral and ethical development’ had two categories such as
‘clients morally and ethically well-off’ coded as one and otherwise coded as zero.
Table 1: Religious Activities Perform by the ClientsStatements Regular Very often Very rare Not at allScore (no.) 10 (0) 6 (4) 4 (6) 0 (10)Saying prayer 57 23 29 26Know how to recite Holy Quran 113 - - 32Reciting Holly Quran 31 47 39 28Fasting 109 21 17 08Inviting towards Islamic activities 48 29 37 31Involvement with dowry 11 - - 134Maintain Parda 57 33 30 25Involve with interest 31 23 19 72Misunderstanding with husband 21 19 07 98Involvement with social activities 03 49 51 42Note: Figures in the parentheses are the score for dowry, interest and misunderstanding with husband
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G. Justification of Retaining Variables in the StudyThe factors which are responsible for the impact of microcredit on the rural poor have been reviewed.
Girish and Mehta (2003) and Asanoy (2004) observed that age of the family head and family size
were an important factor for economic decision such as production and consumption. Latif (2002)
also observed that family size had influence on consumption and calorie intake of rural Bangladeshi
households. Shrestha and Shivakoti (2003) mentioned that family labour was one of the important
human capitals. Therefore, rural farmers are largely depended on their family labour for pursuing
economic activities. Khandker (2000) reported that microcredit programmes had increased
production, consumption, and employment opportunity and reduced informal borrowing among the
borrowers and it had also increased the ability of the poor borrowers to save regularly for building
financial and physical capital. Asanoy (2004) indicated that educated borrowers had higher level of
knowledge and skills as compared to less educated borrowers in case of performing their economic
activities.
Latif (2002) observed that the establishment of rural infrastructure had reduced production
cost, transportation cost and it had created easy access to markets for inputs and outputs. Shrestha and
Shivakoti (2003) mentioned that physical infrastructure facilities helped in distributing inputs and
output, adding value and enhancing production.
It is hypothesized that all of these variables would influence households’ livelihood,
therefore, age, education, family size, financial capital, savings and asset base has been considered in
this study as important factors of livelihood.
H. Sources of dataThe primary data were directly collected from the field in Early 2013, through interviewing 150
clients from some selected areas, namely Amin Bazar, Savar and Manikgonj. The impact of
investment on ethics and moral of the microfinance (RDS) clients were our major interest therefore
assessment was made comparing clients’ present position (31 December 2012) with their base
information (at the time of becoming member).
The study areas were purposively selected based on the convenience of researcher’s data
collection. From the clients lists of the study areas a second list was prepared from all three areas
consisting the clients having minimum membership. It was because it was assumed that without
having minimum five years involvement with microfinance activities impact assessment would not be
feasible. From the said lists 150 clients (50 from each area) were randomly selected.
The data were collected from the clients using a set of semi-structured pre-tested questionnaire
prepared for the purpose. A total of 3 enumerators (one for branch), have collected the data under the
supervision of the researcher. The data were coded and entered into the SPSS (Statistical Package for
Social Scientist).
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I. Analytical Frame Work
The major concern of this study was to assess the impact of Microfinance investment client. So,
comparison was made between the status at present (up to December 2012) and at joining (joining
time of the individual clients) on a cross sectional basis. In total 150 clients were interviewed. Five of
them were incomplete and hence were dropped from the analysis. The rest of the sample (145) were
analysed and the conventional tabular method was used in describing and comparing the performance
of the Microfinance clients. The responses were expressed in terms of percentage/frequencies.
Besides, in order to meet up the objectives the collected data were analysed economically, statistically
and econometrically.
4. Results and Discussion
The study was intended to explore the true picture of ethical and moral development of the clients’
livelihood and its impact on poverty alleviation through micro-investment of the Islamic Microfinance
Scheme of IBBL. The results are presented below:
A. Impact of Microfinance on Clients Religious Activities
In addition to the poverty alleviation the micro-investment program has taken initiative to increase the
clients’ awareness on religious activities. Therefore, in this study attempt was made to assess the
influence of microfinance on clients’ awareness on religious activities. Table 2 shows that a
significant number of clients (33%) have started praying after joining RDS programme. About 57
percentage clients have learned reciting Holly Quran after joining the Microfinance program. Besides,
a significant number of clients have started practicing some other religious activities like, reciting
Holly Quran, inviting others to follow Islamic activities and avoid taking interest.
Table 2: Microfinance Clients Religious ActivitiesIndicators At present At Joining Change Status
Frequency Frequency Frequency PercentageRegular prayer 57 38 19 33.34Know how to recite Holy Quran 113 49 64 56.64Reciting Holly Quran 31 19 12 38.71Fasting 109 56 53 48.62Inviting towards Islamic activities 48 29 19 39.58Involvement with dowry 11 11 0 0Maintain Parda 57 31 26 45.61Not Involve with interest 31 71 -40 -129.03Misunderstanding with husband 21 43 -22 -104.76Involvement with social activities 03 0 2 66.66
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B. Changes in Family Income
Effort was taken under this micro-investment programme to increase clients’ family income by
investing their borrowed money to different income generating activities. Table 3 shows that on
average clients’ income have increased by more than 32% from joining in the microfinance program
to until 2012. The highest income change (US$108/year) was observed for small business which was
followed by income from crops (US$82 /year). The service sector income has also significantly
increased but highest change was observed for small business which implied that clients preferred
investing money into the business sector.
Table 3: Income Generation of the Households by SourcesSource of Income Household income
(US$/year)Change of income Level of
significancePresent Joining US$ Per cent t-value Sig.
Off FarmSmall Business 496 388 108 27.83 4.150 0.000Labour Selling 212 182 30 16.48 3.210 0.003Service Income 228 153 75 49.02 6.502 0.000On FarmCrops 231 149 82 55.03 4.890 0.000Fruits 22 18 4 22.22 2.501 0.021Vegetables 47 39 8 20.51 2.242 0.012Livestock 51 42 9 21.42 20291 0.022Poultry 23 18 5 27.78 2.284 0.019Fish 31 23 8 34.78 3.571 0.004Others 210 145 65 44.83 5.432 0.000Total 1551 1157 394 31.99
C. Results of Ordinary Least Square (OLS) Estimation of the Model
One of the prime objectives of the study was to assess the factors influencing households’ income,
expenditures, well-being and ethical and morals of the clients. The Ordinary Least Square (OLS)
technique was used to estimate the model for assuming the effect of different factors of the model. If
the regression equation estimation of similar functions involves more variables, the model would have
suffered from low degrees of freedom and multicollinearity problems resulting in inefficient
estimates. Therefore, multicollinearity was tested and the outcome of some independent variables not
being significant could be the effect of multicollinearity. The regression model was re-estimated;
dropping some variables whose level of significance was very low. The results were significantly
improved and hence have been interpreted.
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D. OLS Results for the Household Income Model
It was expected that the amount of investment taken by the borrowers would increase their household
income. Therefore, this study examined the influence of micro-investment on the households’ income.
However, household income does not depend on only one factor like amount of investment. It also
depends on the other socioeconomic factors. That is why, variables like borrower’s age, borrower’s
educational background, involvement of family members in farming, total land size of the households,
distance to branch from the borrowers’ place and ethics and moral of the clients were considered as
independent variables.
Table 4 shows the results of OLS for the households’ income. As can be seen from the
statistics, the sign of all the variables are plausible but only four of them namely, borrowers’ age,
amount of investment taken by the borrowers, number of family members involved in earning and
clients’ ethics and morals had positive and significant influence on the household income. The value
of R-square was 0.612. It indicates that about 61% of the total variation of the dependent variable was
explained by the independent variables.
It was found that the amount of investment taken by the borrowers had a positive and
significant influence on the household income. This collateral free investment-money had increased
their opportunity to start up income generating activities. It had also increased their ability to invest
more on the existing economic activities resulting in more earnings from their investment. All these
reasons had assisted them in increasing their household income. Household income would increase by
1.01 point because of receiving additional one unit of investment by the borrower from the micro-
investment providers.
The study showed that the borrowers’ age variable was positively and significantly related
with household income. As age increases, borrowers acquire more experiences which would
ultimately assist them to increase their household income level. Many researchers used age as
independent variable in their regression analysis in order to assess its influence on borrowers saving,
agricultural production, household income and consumption (Khandker, 2000; Amin et al., 2003) and
found significant influence.
This study shows that the number of earning family members’ had positive and significant
influence on their households’ income. This result implied that higher the number of earning family
members, the higher the family income.
This expected result is also supported by Mahmood (2006). Education did not show any significant
influence on household income as there was small variation of education among the clients. Result
showed that more than 90% of the borrowers had schooling of less than five years. However, the
variable had a positive sign. This indicates that education might influence their income level but it
required more time and more educational facilities for the borrowers to realize the effect of education
on income.
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Finally, the ethics and morality variables, which were the main objective of the study, had
significantly positive contribution on household income. This result is not unlikely as it is assumed
that the clients who are bearing good moral and ethical characters are honest and sincere enough, so
they did not divert their borrowed money to any unproductive sector. Besides, they are sincere enough
in their activities and hence may have generated more income.
Table 4: OLS Results of Household Income ModelVariables Coefficient t-value Sig.Constant 3.189 23.314 0.000**Log of Investment taken in 2012 1.010 2.402 0.020**Log of total land size 0.121 0.518 0.693Log Number of earning family members 1.210 2.110 0.028**Borrower’s age dummy (above 40 years 0.322 2.726 0.019**Education dummy (up to 5 years schooling is 1 and 0 otherwise)
0.220 0.7183 0.470
Ethics and Moral (Dummy) 0.090 2.847 0.045*R-squared: 0.612Note: **Significant at 1% level, and *Significant at 5% level.
E. Results of the Logit Model for Clients’ Well Being
The Logit model was selected in this study to find out the probability level that the clients would be
well-off due to the influence of particular explanatory variable.
In the Logit model, dependent variable “clients’ well-being” had two categories such as
“borrowers were well-off” under the program coded as one otherwise coded as zero. The rural poor
had to lead a low quality of life. It is expected that the microfinance programme would bring a
positive change in the overall living-standard of the borrowers by improving their economic activities.
Therefore, an attempt was made to investigate the influence of socioeconomic variables on the
dependent variable "borrowers’ welfare". Based on the borrowers’ perceptions, the dependent variable
was coded as one if the borrowers had answered well-off under the micro-investment programme,
otherwise, it was coded as zero. The logit model was used in order to find out the probability level
that the borrowers would be well-off due to the influence of a particular independent variable.
Table 5 shows that the duration of microfinance clients membership, number of income
generating family members, share of food expenditure to total expenditure, households health
expenditure and clients ethics and morals had positive and significant contribution on clients well-
being.
Table 5 shows that the Wald statistic for the variable "expenditure on health" was 3.13 and it
was positively and significantly related to the dependent variable. This indicates that more
expenditure on health care would increase the likelihood for the borrowers to be well-off.
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Due to the low level of purchasing ability, borrowers had to maintain a low level of
expenditure indicating a lower quality of living. They had to struggle even to meet their expenditure
on food items. The microfinance programme takes the effort to increase borrowers’ ability to spend
more on food items for better living. Table 5 shows that wald statistic for the independent variable
"share of food expenditure to the total expenditure" was 4.946, and it was found significantly and
positively related with the dependent variable.
It may be mentioned here that ethics and moral had significantly positive contribution on
clients’ well-being. This result is not was likely as the clients bearing good moral and ethical
characters are honest enough so they did not divert their borrowed money to any unproductive sectors.
Besides, they are sincere enough to their activities hence were better-off.
Table 5: Logit Model Results of Clients Well-beingVariable (B) Standard
errorWalld Statistics
Sig. Odd ratioEXP (B)
Constant -0.756 0.723 1.432 0.251 0.343Duration of membership 0.242 0.071 14.44 0.000** 0.713Education dummy (up to 5 yrs of 0.020 0.251 0.211 0.986 0.987Income generating family members 0.211 0.067 13.59 0.00** 0.787Age of the clients dummy (up to 40yrs of age is 1 and 0 otherwise)
-0.070 0.656 0.012 0.906 0.931
Share of food expenditure to thetotal expenditure (%)
0.011 0.008 4.946 0.018 1.021
Health expenditure (taka) 0.018 0.021 3.131 0.051* 0.810Ethics and morals 0.154 0.213 3.416 0.050* 0.816Cox and Snell R square: 0.198-2log likelihood: 667.280Overall accuracy: 82.8Note: **Significant at 1% level and *significant at 5% level.
F. Results of the Logit Model for Assessing Clients Ethics and Moral
It is expected that Micro-finance program would bring a positive change in the ethical and moral
development of the clients. Therefore, an attempt was made to investigate the influence of
socioeconomic variables on the dependent variable "moral and ethical development".
Based on the borrowers’ perceptions, the dependent variable coded as one if the borrowers
were morally and ethically well-off under the micro-investment program and otherwise it was coded
as zero. The logit model was used in order to find out the probability level that the borrowers would
be morally and ethically well-off due to the influence of a particular independent variable.
Table 6 shows that the educational level, age and membership duration had positive and
significant contribution on clients’ ethics and moral development. This result implies that elderly and
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educated clients who have several years’ involvement with this microfinance programme have
ethically and morally been more developed than the young and illiterate new clients.
Table 6: Logit Models Results of Clients Ethics and MoralVariable (B) Standard
errorWalld Statistics
Sig. Odd ratioEXP (B)
Constant 1.21 0.451 6.110 0.014** 3.008Education dummy (up to 5 yrs of schooling is 1 and 0 otherwise
0.672 0.161 13.016 0.000** 0.511
Age of the clients dummy (up to 40yrs of age is 1 and 0 otherwise)
1.411 0.316 14.126 0.000** 0.243
Membership Duration (years) 0.112 0.032 11.021 0.003** 1.118Cox and Snell R square: 0.198-2log likelihood: 667.280Overall accuracy: 82.8
G. Clients’ Opinion towards Micro-investment Programmes
Clients’ opinion about the benefit of micro-investment programmes on their skill, social and
economic condition was assessed.
The clients opined that that micro-investment programme had brought positive changes in
their skill and socioeconomic status. It had also brought positive changes in self-confidence
development, economic solvency, communication skill, and knowledge on business and religion
practices are mentionable.
H. Major Problems and Suggestions Stated by the Clients
Like other credit programs, Islamic micro investment clients also face problems participating in the
microfinance program. Their problems are diverse in nature and vary depending on time, space,
socioeconomic aspects, and nature of the program. Success of the programs largely depends on
identifying and solving the problems on time. Therefore, in order to improve the operations of the
program, it is important to identify clearly the borrowers’ problems.
Islamic microfinance still has very small markets and still suffers sometimes from a decline in
demand, as Islamic financial products are still less flexible than the usury-based, than conventional
counterparts.
In most of the microfinance programs across the world use mostly Bai modes. This limited
approach to Islamic microfinance inhibits the industry’s ability to leverage Islam’s emphasis on
economic justice and discover innovative means that can achieve poverty alleviation. Paradoxically,
however, the prohibition of interest in Islam provides the microfinance industry with an opportunity
to experiment with the financial product offered to the poor to better meet the industry’s goal of
poverty alleviation, mainly through a new emphasis on profit-generating activities. Profit-loss sharing
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contracts provide an alternative to conventional microfinance and a more acceptable financial product
for conservative Muslims.
Assessing the social and development performance of Islamic microfinance is not possible
before the sector of Islamic microfinance reaches the maturity phase that it has not attained yet.
The positive relation between Islamic microfinance and poverty alleviation is often limited to the
benefiting categories and households without having considerable impact on the economy as a whole,
for the size of this finance has not exceeded 0.04 per cent of the total credits granted to the private
sector in the Arab countries in 2011, knowing that this percentage goes up to 0-05 per cent if the
balance of conventional microfinance is added.
Table 7 shows that majority (93.55%) of the borrowers had problems with investment size.
They mentioned that the amount of investment they had received from the micro-investment providers
was inadequate for them to pursue their income generating activities (IGAs) smoothly.
Lack of training facilities to upgrade their skills and technical and Islamic knowledge is also an
important problem mentioned by 82% clients. About 87% respondents mentioned that a delay in
receiving investment is also a problem which was followed by very short gestation period for
repaying investment.
Some respondents (91%) mentioned that sometimes they needed to start repaying their
borrowed money even before investing the money. Some clients (33.65 %) had to produce false
voucher which is a clear violation of Sariah.
Although small percentages of clients (30 %) mentioned that having no Islamic school under
this scheme, which can teach Islamic knowledge to their children, is a problem but to the researchers
it is a major issue. Because, in most of the study village, there is school operates by the conventional
micro-credit institution like, BRAC, where some of the educations contradict with the Islamic ethics.
This issue needs to be considered as it can cause severe ideological problem in the long run.
Lack of proper sanitation facilities, poor infrastructure, and power shortage absence of rural market is
also problem mentioned by the clients, which researchers also observed.
The most important issue, from the researcher’s point of view, is that this microfinance does
not touch ultra-poor. Rather it deals with the clients having certain level assets. Therefore, to alleviate
the poverty of ultra-poor an integrated approach, including zakat, awqaf and Government initiative
can truly alleviate the poverty of Bangladeshi rural poor.
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Table 7: Major Problems Clients’ Face in the Study AreasProblems Per centAmount of investment is very small 93.55Do not have any training programme 82.50Investment getting period is very long 87.29Gestation period for repaying investment is too short 91.50Insufficient time for meeting 49.55There is no place for organizing meeting 57.85Need to produce fake buying and selling voucher 29.52No Islamic school for their children 29.58Woman has no control on their borrowed money 19.55
5. Conclusion
Microcredit is now a well-established poverty alleviating programme which is being implemented
across the world. But, the conventional micro-credit institutions working in Bangladesh and some
other countries of the world provide interest based credit which is straightway a violation of Shariah.
These institutions also do not care about the ethical aspects of the rural poor, although it is obligatory,
not only in business sector but also in all aspects of life. Business and ethics should be interrelated.
However, the Islamic micro-investment programme, which objectives is to uplift the overall
socioeconomic plight of the rural poor, which, in this case, cares about developing ethics and morals
development of the clients as it can play a crucial role in alleviating poverty.
This assessment highlighted the achievement of ethics and morals of the clients and its
contribution on poor people’s livelihood and summary of the study findings along with the some
major policy implications are presented below:
Although, level of participation in religious activities by the clients has greatly been improved
after joining Islamic Micro-finance programme, there is still room to improve these activities,
especially knowledge about interest, its consequence, and how to get rid of it. Therefore, a
weekly meeting or frequent lectures may be organized regarding these issues, which can
assist building clients’ ethics and morality.
Results showed that most of the clients utilized their borrowed money but the reality is that
not all clients invested their borrowed money to income generating activities. Instead, some of
them utilised their investment in house repairing, children’s marriage ceremony and furniture
purchase etc. Therefore, proper monitoring and supervision should be done to develop their
morals and ethics so that they use their money in income generating activities.
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It was observed that some field supervisors do not properly practice the Murabaha mode;
which is a clear violation of Shariah so, necessary measures have to be taken to develop their
moral and ethics so that they do not violate Shariah.
Musharaka mode of investment may be practised with some selective good clients, even if in
some cases this mode does not bring any profit for the scheme so that the clients and person
concerned would find the difference between conventional (interest based) and Islamic
microfinance. Incorporating this mode along-with of Murabaha mode may reduce Shariah
violation. Besides, this Musharaka mode will make clients’ clearly understand the difference
between conventional and Islamic Microfinance.
Besides, some of the benevolent mechanism can also be practiced here which can bring
welfare for the clients, although Qard is practiced to provide sanitation and pure drinking
water to the clients but the areas and amount can be widen. In addition, to touch the ultra-poor
an integrated approach including zakat and awqaf is needed to alleviate ultra-poor.
Government efforts to develop infrastructure, supplying electricity can also contribute
alleviating ultra-poor’s’ poverty.
Poor borrowers are not aware of the modern technology. They depend much on the traditional
method of farming resulting in low production, which is a severe issue in the study areas.
Therefore, provision should be made to provide demand-led and effective training on
different aspects of on-farm and off-farm activities, credit management, environmental
pollution, nutrition, health care and ethical development.
It was observed that field supervisors are not well trained up and hence they found it difficult
to motivate the rural people toward Islamic Microfinance activities. Frequent training should
therefore, be organised for improving the field supervisors’ knowledge, skill, moral and
ethical values.
The number of microfinance clients is sharply increasing over the time, although the average
rate of dropout is also alarming. The reason for dropout is not yet known therefore, proper
selection of clients is very important and monitoring should be increased to reduce the rate of
dropout.
References
Amin S., Rai A.S. and Ropa G. (2003) Does microcredit reach the poor and vulnerable? Evidence from Northern Bangladesh. Journal of Development Economics, 70, 59-82.
Asanoy, A. (2004). Effects of agricultural credit and microfinance on expenditure patterns in Yemen (Unpublished doctoral dissertation). University Putra Malaysia, Selangor, Malaysia.
Bangladesh Institute of Development Studies (BIDS). (2001, October). Final Report on BIDS Study on PKSF’s Monitoring and Evaluation System (MES), Dhaka.
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Begum, R.A. (1998). A comparative study on the status of awareness and potential of credit receiver and credit non-receiver rural women in selected areas of Dinazpur district of Bangladesh (Unpublished master’ thesis). Agricultural University, Mymensingh, Bangladesh.
Bhuiyan, A. B., Chamhuri, S, Abdul, G. I., and Basri, T. (2011), “Islamic Microcredit is the Way of Alternative Approach for Eradicating Poverty in Bangladesh: A Review of Islami Bank Microcredit Scheme,” Australian Journal of Basic and Applied Sciences vol. 5, no 5: 221–230.
Bhuiyan, A. B., Abdul, G. I., and Mamunur, R. (2011). “Islamic microcredit in Bangladesh: performance analysis of rural development scheme (RDS) of Islami Bank Bangladesh Limited (1996–2009),” The Global Journal of Finance and Economics vol. 8, no. 1: 1–21.
Chowdhury, A. M. R., and Bhuiya, A. (2004). The wider impacts of BRAC poverty alleviation programme in Bangladesh. Journal of International Development 16(3), 369-386.
Girish, M., and Mehta, P. (2003). Crop diversification: An empirical analysis on Kangra farms of Himachal Pradesh, India. Asia-Paci c Journal of Rural Development, 13 (2).
Latif, M.A. (2002). Income, consumption and poverty impact of infrastructure development. The Quarterly Journal of the Bangladesh Institute of Development Studies, 28 (3), 1-36.
Mahmood, T. (2006). Effectiveness of microcredit for poverty alleviation under agricultural intensi cation projects in Bangladesh. (Unpublished doctoral dissertation). School of Graduate Studies, University Putra Malaysia, Malaysia.
Mahmud, K. T. (1999). Impact of credit on income and employment of women members of Savar Thana under world vision project (Unpulished master’s thesis). Bangabandhu Sheikh Mujibur Rahman Agricultural University, Gazipur, Bangladesh.
Mirghani, M., M. Mohammed, A.B. Bhuiyan and C. Siwar, (2011). Islamic microcredit and poverty alleviation in the Muslim World: Prospects and challenges. Australian Journal of Basic and Applied Sciences, 5(9): 620-626.
PKSF (2005). Follow up monitoring and evaluation system (MES). HB Consultant Limited.Rahman, M. Mizanur (2010). “Islamic Micro-finance Programme and its Impact on Rural Poverty
Alleviation,” International Journal of Banking and Finance vol. 7, no. 1: 119–138.Rahman, M. Mizanur., M. Jafrullah, and Anm Tawhidul Islam (2008). “Rural Development Scheme
of Islami Bank Bangladesh Limited (IBBL): Assessment and Challenges,” IIUM Journal of Economic and Management vol. 16, no. 2: 139–163.
Rahman, M., (2005). Microcredit in Poverty Eradication Achievement of MDGs”: Bangladesh Experience.
Shrestha, S. G. and Shivakoti, G. P. (2003). Prominent livelihood asset Pentagon within the analytical framework of irrigation system performance assessment. Asia-Pacific Journal of Rural Development, 13(1), 60-88.
Zaman, H. (2001). Assessing the poverty and vulnerability impact of micro-credit in Bangladesh: A case study of BRAC. (World Bank Policy Research Working Paper No-2445). Washington D.C.: World Bank.
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Paper 9
Issues in Regulating and Supervising Islamic Micro Finance Institution in Indonesia: Its Policy Direction and Remedies under the New Regime
Dr. Akhmad Affandi MahfudzVisiting Scholar
Islamic Business SchoolSchool of Business
Universiti Utara [email protected]
Abstract
Amid remarkable growth of Islamic micro finance industry (IMFI) in Indonesia, the vast compendium on regulation and supervision remain unresolved issues although their operation to be transferred to new government body, i.e., financial services authority (FSA) in 2015. This paper aims to unveil those issues whilst exploring some essential notes on better policy direction and remedies on existing problems since the operation of all Islamic financial institutions now under the auspices and responsibility of FSA. This paper found that in terms of regulation, IMFI has no specific and strong legal entities in its operation while government policy treated IMFI as the same with that of other financial institutions in deposit protection and capital adequacy. This paper also produced some essential notes on idiosyncratic strategies to wreak remarkable growth of IMFI in Indonesia whilst deliberately explores its policy direction.
1. Introduction
The emergence of Islamic micro finance in Indonesia is considered as an infant industry whilst its
existence undeniable to be considerable focus of interest for many Indonesians today since it is an
integral part of financial industry that can boost national economy particularly the economy of poor
and the poorest. The main function of this institution is to empower the life of destitute while
upgrading the economic wellbeing of low income families. The history of Islamic micro finance can
be traced through discovering the history of establishing Bank Rakyat Indonesia (BRI) who
proclaimed to be the largest bank of small and micro financing in the country. BRI is the first bank
operating in Indonesia and in fact the pioneer of Islamic micro finance and cooperative in the country.
BRI initially was established through a mosque-based association, which function was to manage and
disburse trusted fund to community of that mosque in a very simple scheme (Affandi, 2011).
It is no doubt that financial institutions are needed to support capitalization of the real sector
where IMFIs are involved. This function has long been experienced by Indonesia through the concept
of banking, either in the form of conventional (by capitalist and socialist) or the Islamic principle
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(Sunyikno, 2008). However, banks are technically found not connected its intermediary function to
the small micro businesses (SMEs) particularly among street traders1 who are in traditional markets
due to the limited types of businesses and assets owned by these traders. In fact, it is undeniable that
they are contributing much larger percentage of businesses in Indonesia and only IMFI can bridge
financial need of low income enterprises, i.e., street traders. Hence, if that capital not fulfilling the
demand of street traders to enhance their business capacity would result simultaneous loss and market
imbalances in the economy that will surely create a new havoc that can wreak unemployment in
Indonesia.
On the other hand, in the microfinance sector, there are actually individual activities of people
who have noticed it that they are providing the necessary capital for SMEs. These individuals are
often known in the public as loan sharks. It is no doubt that micro financial institution plays
significant role whilst boosting real sector as strong foundation that is proven to be resistant from
uncertain financial atmosphere. Indonesia with more than 220 million populations where majority of
them relying their survival on the micro small and medium enterprises recently encountering the
problem of capital injection from financial institutions. In addition, small and medium enterprises
(SME) sector played significant role in boosting Indonesian economy. According to the Bureau of
National Statistic, the number of SME in 2010 approaching 99,99% out of total 49.845 enterprises in
Indonesia where 97,3% of workforce absorbed by this sector. It is predicted that there will be swelling
number of SMEs in the years to come as the impact of global financial crisis in the early 2008 that
brought corporate sector in a declining scale (Asrin, 2008). Unfortunately, this magnitude potential
has not been captured a serious attention from financial institutions, banking and non-banking,
particularly in the field of capital. It is proved that the rapid growth of banking industry in Indonesia
hitherto not able to create strong banking industry after the financial crisis.2
On the other side,no government agency that is strong enough to take on broader policy scope
and focused for the benefit of the development of IMFI. State Ministry and department office possess
different capacity in their operation to produce law. That is why, the operation of IMFI undertaking
the regulation of cooperatives considered as an emergency action to be amended. This issue is in line
with the principle of Islamic jurisprudence “mâ lâ yudraku kulluh lâ yutraku kulluh”which means
anything that could not be fully obtained, not to be abandoned altogether.
Prior to the establishment of Financial Authority Services, over two decades of IMFI
operating in Indonesia, the regulation has been progressing quite fast and responsive. At the start of
recognition of Islamic banks operating in Law No. 10 of 1998 on banking, Bank Indonesia and then
being allowed to conduct monetary policy based on the Sharia Law No. 23 of 1999 concerning Bank
Indonesia until approved and the enactment of Law No. 21 of 2008 concerning Islamic Bank by
1 Street traders known in Indonesia as “Pedagang Kaki Lima (PKL)”, the traders who sell merchandise along the roads2 Financial crisis that occurred in 1997 whilst adopting dual monetary system
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Parliament. All the legal foundation also supported by a number of Bank Indonesia regulations related
to operations of Islamic banks such as Bank Indonesia Regulation (PBI) and Bank Indonesia Circular
Letter. All legal basis and regulations that have been issued by the government, Bank Indonesia, and
the House have supported the development of Islamic banks.
Indonesia's Islamic financial system was implemented in the early 1990s that started from
Islamic banking institutions and then followed by insurance, capital markets, pawn shops, and Islamic
finance. The Government supports the desire of Muslims to implement Islamic financial system by
making laws and implement policies related to Islamic financial institutions. However, such support
had not been optimum so that it needs to be improved, especially in terms of drafting legislation for
each type of Islamic financial services in accordance with Sharia and policies that wreak to growth
and development of Islamic financial services in Indonesia.
Meanwhile, the new regime of Islamic financial services started by establishing Financial
Services Authority (FSA), the Indonesian government agency that regulates and supervises the
financial services sector. With the Law No. 21 Year 2011 on the Financial Services Authority (FSA),
the regulatory and supervisory functions of all activities in the financial services sector is under the
authority of the Financial Services Authority where the main function of FSA is to promote and
organize a system of regulations and supervisions that is integrated into the overall activities in the
financial services sector. Effective as of 31 December 2013, the agreement has been made between
Bank Indonesia and the Financial Service Authority, where the duties on banking regulation and
supervision are to be transferred from Bank Indonesia to FSA.
Since the regulation and supervision of IMFI under FSA will commence in 2015, some
unresolved issues which are promptly to be considered by all parties particularly government
agencies. The attention of this matter must be preceded by political will of the government and
cooperation of all related parties since majority of Indonesian population are involved in micro
finance institution whilst relying their financial need on this institution to empower their economic
well-being.
This paper therefore attempts to unveil all issues related to IMFIs pertaining to its regulation,
supervision, policies and wreak an idiosyncratic strategies and remedies especially under new regime
of financial services authority that hitherto remain unresolved.
2. The Establishment of Financial Services Authority: New Regime of Regulation and
Supervision for IMFI
Reflecting on the experience of the financial crisis that occurred in 1997, the global financial crisis of
2008, and the Euro zone crisis that struck in 2010, the financial industry is predicted to experience a
very bad condition. Fiscal policy and monetary policies are needed to save the economy. Most
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probably this would threaten the financial crisis in Indonesia. At the end of 2011, as efforts to reform
the financial sector, the government and the House of Representatives agreed to set up the Financial
Services Authority.
Then, on 22 November 2012, Law No. 21 of the Financial Services Authority inaugurated.
This so-called independent institutions have been functioning from December 31, 2012 and which
replaces the functions, duties and powers of regulation that has been conducted by the Ministry of
Finance through the Capital Market Supervisory Agency and Financial Institution. On 31 December
2013, the turn of the functions, duties and powers of regulation and banking supervision by Bank
Indonesia also has been transferred to the Financial Services Authority (Badroen, 2005). Financial
Services Authority incorporated in the Financial Sector Stability Coordination Forum (FSSCF)
together with the Ministry of Finance, the central bank and the Deposit Insurance Agency. FSSCF a
coordination protocol to maintain the stability of the financial system. FSSCF also has the authority to
make policies for the prevention or handling a crisis,”
FSA is an agency authority formed from the integration of two large institutions, namely the
Directorate of Banking Regulatory and Supervision of Bank Indonesia and Capital Market
Supervisory Agency and Financial Institution, Ministry of Finance. In addition to the constraints of
time lags, the effectiveness of institutions, and the scope of the work area, the FSA facing problems in
achieving optimum integration model for the role and interests of each tend to be different, ie,
between the prudential principles of banking and financial institutions as well as the openness of the
capital market.
Pertaining to IMFI under this new regime, IMFI do not yet have the level of self-regulation
legislation. Sudarsono (2007) states that the absence of independent law makes clear the agency
position is not so exposed to other problems that inhibit the growth of IMFI. The existence of FSA
laws can provide a legal loophole to give birth insistence of FSA regulation of Islamic finance
services to strengthen the presence and operation of the IMFI. Some essential notes on the FSA act
that require attention, especially related to the existence and sustainability of IMFI in Indonesia,
among others: (a) the financial services supervision function will switch from Ministry of
Cooperatives, Ministry of Finance and Bank Indonesia to Financial Services Authority, (b) Function
including licensing of establishment , and business activities of all Islamic financial institutions
including Islamic micro finance industry, and (c) investigation function of financial institution.
3. Issues in Regulatory Aspect of Islamic Micro Finance
In line with the growth of Islamic banks in Indonesia, followed by the development of other Islamic
financial institutions, Program linkage between Islamic banks and IMFI (IMFI) is among the policies
implemented by Bank Indonesia. These conditions provide a favorable situation for the growth of
IMFIs which are mostly operate under the cooperative legal entity.
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In terms of specific regulations for IMFI, it is the urgent need for the presence of legal and regulatory
framework that supports the growth and development of IMFI as an institution that focus on specific
access for the small micro-business practitioners. Furthermore, the existing law not sufficient to
undertake further practice of IMFI in years to come particularly to convert IMFI into credible
institutions like other financial institution such as a bank. In line with these phenomenon, there are a
few reasons that promptly to explain the weakness of the regulatory aspects in the development IMFI
in Indonesia, namely;
3.1. The Legal Framework of IMFI
Concerning the legal status, the main foundation for operation of IMFI is Islamic Cooperative
Financial Services based on regulation of Ministry of Cooperative 20043 on Islamic financial services
cooperatives possess legal status even though under new Decree but it is equal to the legal status of
cooperatives subject to the law No. 25 Year 1992 on Cooperatives. However, this legal status is not
sufficient and strong when compared to Law No. 10 Year 2004 on the Establishment of legislation,
the Decree of Ministry of Cooperative is no longer exists due to the change in the Constitution of
1945.
Meanwhile, the Law no. 25 of 1992 on Cooperatives is no longer relevant to anchor the law
since it does not accommodate the need of change in development of law. The existing Cooperative
Act does not incorporate the aspects of "shari'a" in its operation, accounting standard, performance
indicators and even fail to accommodate the development of regional autonomy. The regional
autonomy has broad authority for local governments to undertake such policy for the sake of local
development, particularly to foster efforts to boost local government revenue (Djumiarti, 2005).
The absence of legal protection in the form of an Act to specifically regulating microfinance
institutions both conventional and Islamic institutions has led to get less full attention from the
government. In practice, there is difference in operation for both cooperatives and IMFI. IMFI
regarded as a financial institution that collect funds from the public and distribute it to the people who
have a small business micro. Legal entities of cooperatives Islamic financial services is only used for
the legality alone but in substance majority of them do not practice as cooperative.
The function of IMFI has the same sharia principle with that of Islamic banks that correspond
to the regulation of Islamic Bank in Law No. 21 out of 2008. However, to some extent, IMFI differs
with that of cooperatives. Therefore, the regulation for both could not be treated the same. According
to PINBUK (Center for Incubating Small Business), in 2006 there are more than 3000 units and 1302
units of IMFI according to Ministry of Cooperatives that has been operating for a long time but have
not been accommodated in the existing regulation. Ministerial Decree on Islamic cooperative financial
service is not strong enough to acknowledge the position of IMFI.
3Kepmenegkop 91/Kep/M.KUKM/IX/2004
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The absence of law makes other aspects related to the development IMFI not been prepared
because it is not a priority. Cooperative legislation and related Ministerial Decision seem merely to
bind IMFI since it has been incorporated cooperative law, while many IMFI that have not been
incorporated or in the form of micro finance institutions such as the District Credit Institutions and
Development Financing Institutions Micro, Small and Medium Enterprises which is a microfinance
institution as developed by the banking system following the rural areas that extend credit to people
without collateral is not enclosed by this rule. In future there will be emerging microfinance
institutions in various forms. Framework of regional autonomy gives ample scope to support the
emergence of the microfinance institutions.
3.2. Government Policy
The absence of a government policy lead the institutions to have a duty to regulate IMFI in various
aspects just like Bank Indonesia in supervising and regulating the operations of commercial banks and
rural banks in Indonesia. The existence of IMFI is essential in order to provide rules for the operation
of technical standards of IMFI, its restructuring, risk management, rating agencies, IMFI financial
performance and of course IMFI sustainability. Today most of the roles performed by the Ministry of
Cooperatives and SMEs who have the technical functions for setting this field but still much more that
has not been done. Currently, Standard Operating Procedures, Standard Operations Management and
Standardization Agreement have been prepared. In addition, implementation of regulation and
supervision have not been consistently implemented as Bank Indonesia supervise Islamic Bank
including Islamic rural banks (Irawan, 2007).
3.3. Regulation Related to Customer’s Deposit
The lack of protection of deposits for customers in the form of deposit insurance agency for MFIs
need to be regulated. Cooperative Law No. 25 of 1992 on Cooperatives a Legal Entity, State Minister
of Cooperatives and SMEs No. 91/Kep/M.KUKM/IX/2004 on Implementation Guidelines
Cooperative Operations of Islamic Financial Services, and the Regulation of the Minister
Cooperatives and SMEs No. 10/Per/M.KUKM/VI/2006 on Technical Guidelines Program Financing
Productive Cooperatives and Micro Enterprises have set up several issues related to customer
protection from possible abuse by managers of IMFI. However, these provisions are still far from
enough when many customers are still reluctant to keep their funds in these micro institutions for fear
of risk liquidity. Not to mention that in practice it does not work effectively due to the Ministry of
Cooperatives not actively supervising and monitoring the activities of IMFI. As a result, the operation
of IMFI do not comply with cooperative principles and even utilize it as a protection of illegal
operation. There are even some cases regarding the lack of sanctions but did not get anything. IMFI
incorporated cooperative is supposed to obey the basic principles and provisions of the cooperative
operations and must also comply with sharia. IMFI as non-bank financial institutions still required to
115
maintain the principle of prudence in running operations but the existing system is not strong enough
to maintain this principle.
3.4. Capital Adequacy
Pertaining to the lack of access to capital Insurance Agency. Financing for MFIs , among others have
been regulated in the government regulation no 44 of 1997 concerning the Partnership, Cooperative
and SME PERMENEG No. 10/Per/M.KUKM/VI/2006 on Technical Guidelines Program Financing
Productive Cooperatives and Micro (P3KUM), SOE PERMENEG PER/MBU/2007 about Partnership
Program State Owned Enterprises with Small and Community Development Program. People
Business Credit (PBC) is a financing facility that can be accessed by SMEs and cooperatives
especially those who have a viable business (feasible) but not bankable. This business usually has
good business prospects but does not have adequate collateral.
The existence of Islamic micro finance institutions as a provider of funds for capital facilities
for SMEs is clearly undeniable. The absence of law constitutes the agency position not so exposed to
other problems that inhibit the growth of these institutions function for financing Small Micro
Business. The existence of this law should not be intended to strictly limit the operation but
implemented within the framework of legal safeguards for the existence of institutions and the
protection of those who use the services of the IMFI.
4. Policy Direction and Remedies under the New Regime
4.1. Policy Direction
Based on the various problems encountered by the IMFI, it can be formulated some policy direction
as follow:
a. Definition of independent legal entities for IMFI. This calls to increase public confidence in
investing money in IMFI because the guaranty is legally clear.
b. Establishment of IMFI as the main IMFI of all IMFI in Indonesia where the elements of
regulation should be inherent. In other words, there must be specific legislation for IMFI. The
main IMFI should be regarded as reference and the laws are decentralized through IMFI
center of each region, while the parent national IMFI serves as a general policy determination.
Thus will facilitate in setting policy and determining the potential for the development and
expansion of IMFI network throughout Indonesia.
c. Supervision of the IMFI conducted by an independent monitoring agency. The supervisory
board has the primary duty under the supervision of IMFI primarily related to the Islamic
system. The cornerstone of this work is based on a fatwa council of the National Sharia
Board. The main functions of the council include: as advisors and providers of advice or
116
fatwa to administrators and managers on matters related to the establishment of sharia as a
product, as a mediator between the IMFI and National Sharia Council, representing the
members of the Shariah supervision.
4.2. Strategies and Remedies towards Existing Problems
Taking into account the direction of policy development IMFI and problems facing by IMFI and in
order to achieve the desired strategies and remedies on the existing problem, this paper has produced
several notes as follow:
a. The need for a clear long term strategy for the development of both IMFI institutional
blueprint or architecture as a strategy that has been applied in the banking industry.
b. The law on Microfinance Institutions should be structured as an umbrella both for business
practitioners and providers of funds.
c. The government should have a database of Microfinance Institutions in Indonesia
d. Integration of social approach to business development and finance with charity
organizations for productive financing and risk management
e. Systematic mentoring through collaboration with various stakeholders such as universities to
conduct technical assistance, business assistance, marketing strategy, financial management
and spiritual enhancement for SMEs.
f. Improving the quality of human resources through appropriate education and training.
g. The existence of strategic knowledge in business. It is necessary to improve IMFI
professionalism in service.
h. Paradigmatic aspects of development, the necessary knowledge about aspects of Islamic
business
i. Expanding the network of cooperation among IMFI, Islamic rural banks and Islamic banks.
Horizontal network is a network among IMFI and vertical networks is between IMFI with
another larger institution. Networking is important because it allows IMFI obtain the
information needed, access to funds, as well as the transfer of knowledge and technology.
j. Intensive supervision, as this is very important as a means of control in the operational
implementation of IMFI. Intensive supervision is important to ensure that there are no
irregularities in the operation of IMFI.
k. Increase the number of IMFI to set it up in every village. This is because today, IMFI in
Indonesia are generally located in sub rural areas, such as districts and sub-districts.
l. The needs to be a joint evaluation in order to provide opportunities for IMFI to be
competitive. This evaluation can be done by establishing evaluation agencies IMFI or
certified institutions IMFI. It aims specifically to provide a report quarterly or annual
performance rating IMFI in Indonesia
117
5. Conclusion
There are many IMFI in Indonesia who encounters critical condition. It is due to various problem in
operation. Theoretically, IMFI existence is needed by the community, but in terms of its application is
deemed not able to function optimally. Human resources is largely owned by IMFI in Indonesia but
still low . This greatly affects the operations and competitiveness IMFI with other agencies working in
the same field. The lack of public confidence in the IMFI because the agency does not yet have a clear
legal basis. Besides, the doubts of the people to the products offered, as it is considered not in
accordance with Islamic principles. IMFI has been not able to address the real economic problems
facing society today.
The need for sharia-compliant product innovation offered to the public. Innovative product
development can be done through replication products that have proven successful. Orientation of
marketing strategies resulted in flaws IMFI efforts to promote products IMFI. In order to develop
IMFI, efforts to improve marketing techniques needs to be done, to introduce IMFI existence in the
midst of society. IMFI also need to grab the support from community and religious leaders in
disseminating the potential and the existence IMFI as financial institutions.
Islamic micro finance institution under the new regime characterized by some challenges,
problems and prospects. The most critical notes on regulation of IMFI that has no specific law
pertaining to the operation of IMFI. This lead to ambiguity of government and practitioners to expand
financial intermediaries to empower the economic well being of the poor. Although the operation of
IMFI will be under the auspices and responsibility of Financial Services Authority, the treatment of
IMFI should apply the same as other financial institution in all matters.
In terms of policy direction, this paper concludes that the establishment of main IMFI in
Indonesia is essential and urgent to oversee and monitor the performance of each IMFI just like the
bank. Supervision of the IMFI conducted by an independent monitoring agency and Fatwa. The
strategies adopted in order to reach policy direction whilst producing remedies towards existing
problem facing by IMFI has come up with an essential notes to be undertaken by related parties.
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120
Paper 10
AN ANALYSIS OF ISLAMIC MICROFINANCE INSTITUTION (IMFS) IN INDONESIA: REGULATION AND SUPERVISION PERSPECTIVE0
Yulizar D. SanregoFikih ApriadiMiftahussurur
Anita PriantinaRies Wulandari
Institute for Research and Community Empowerment (IRTI)Tazkia University, College of Islamic Economics
Jl. Ir. H. Djuanda, Sentul CityBogor – Indonesia
www.lppm.tazkia.ac.id
AbstractObjective - The purpose of this study is to obtain ideas about the concept of regulation and supervision for Islamic Microfinance (IMFS) industry.Design/Methodology - The method used is the analytic network process (ANP). This method begins with the problem decomposition through the study of literature and in-depth interview to IMFS practitioners and experts, followed by filling the questionnaire. The data will than running by Super Decision software resulting priorities with a particular rater agreement. The results are then analyzed and described which will be taken into consideration in formulating policy.Result – The overall results showed that the solution to IMFS regulation and its supervision model are ranging from the most important issue; the establishment of operation standards, the establishment of competition restriction regulation and the establishment of supporting regulation.
Keywords: Islamic Microfinance Institution (IMFS), Analytic Networking Process (ANP)
0 This research is sponsored by Division of Non-Bank Financial Industry (IKNB) – Financial Services Authority (FSA), Republic of Indonesia.
121
I. Background
Non-Bank Financial Industry (IKNB) began to be demanded bythe public for investment
purposes. The evident could be seen from its high growth within the last decade. Based on Financial
Services Authority (FSA) data, during the first semester of 2013 Sharia Non-Bank Financial Industry
in the aggregate showed a positive development (FSA, 2013). Total assets Sharia IKNB increased
from Rp35, 8 trillion in the second half of 2012 to Rp42, 61 trillion in the first half of 2013.0
However, the market share of sharia is still far less than the total assets of IKNB Rp1.233, 63 trillion
that is 3.3%. It shows the market share of sharia IKNB still far less than the potential market that
could be working on. However, when it is compared with other countries in Asia, IKNB penetration
in Indonesia is still lagging behind the economic growth (FSA Consumer Education, 2013).
One of the IKNB sectors that showed a significant growth is Islamic Microfinance Institutions
(IMFS). The important role of IMFS is also prominent in the several views in some forums. LKMS
requested more act as intermediaries between banks and the public, for example Islamic Cooperative
Financial Services and BMT (Nugroho, 2012). In the D-8 Islamic Microfinance Workshop, in 2011,
assessed the role LKMS also still experiencing problems because of the concept and practice of
Islamic microfinance is still searching for the ideal shape to find the optimum result for the sake of
poverty alleviation and economic development (Alamsyah, H, 2011).
Given the strategic role of IMFS in the lack of its support situation, the study aims to identify
challenges in the development of IMFS in Indonesia. The development approach of IMFS can use
both demand and supply side. The challenge faced by regulators or the government as the parties who
have authority and power to formulate laws or regulations is a problem on the supply side. While the
challenges faced by the industry as the party requiring IMFS laws or regulations related to a problem
from the demand side.
In-depth study of the issues on the both two sides can then be used to formulate an appropriate
regulation and supervision model. The results of the study will be used as a reference in the
formulation of IMFS regulations and supervision development in 2014.
II. Methodology
In order to support the results of the study can be justified scientifically; all the activities of
this research will be undertaken within the framework of Analytic Network Process (ANP)
methodology. ANP is a new qualitative method approach, which is non-parametric and non-
Bayesian, to a decision-making process that provides a general framework in treating decisions
without making assumptions about the independence of the elements at a higher level than the
elements on the lower level and on the independence of the elements in a level (Ascarya, 2005).
0 Quarterly Report II 2013, www.ojk.go.id
122
This method begins with the problem decomposition through literature study and in-depth
interview to some IMFS practitioners and experts by filling the questionnaire. The data will then be
running using Super Decision software in order to have priority scale with a particular rater
agreement. The results are then analyzed accordingly as a consideration for policy formulation.
Respondents were selected from IMFS experts and practitioners in Indonesia, which consist of 5
experts and 5 practitioners. ANP does not require the number of respondents. The most emphasized is
that the respondent must master in the field being studied.
123
DEVELOPMENT POLICY OF IMFS
Solution
Establishment of Competition Restriction Regulation
Establishment of Supporting Regulation
Establishment of Operation Standard
Operation Assistance
Financing Analisys and Risk Management Risk
Customer Companion and Capacity Building
Sharia Compliance Standard
Problem
Regulation of Competition Restriction
Supporting Regulation
Operation Standar Operation Assistance
Deposit Guarantee
Credit Guarantee
IMFS Healthy
Financing Ceiling
Customers’ Turnover
Service Coverage
Financial Assistance
IT Development Assistance
Management Capacity Building & HR Development
Figure 3.1. Conceptual Framework
124
III. The Result of Problem Decomposition
From literature study and some of the views that have been collected from practitioners and
academics through in-depth interviewsat the beginning of the study (preliminiery research), there are
some IMFS problems development of the regulations and institutions that can be seen in the above
conceptual framework (Figure 3.1).
The Result of Priority Scale and Rater Agreement
In the subsequent discussion will be presented some priority graphs and figures. There are
two scales that will be used, there are priority scale and deal scale. Priority scale is a scale that shows
how important an issue compared to other issues. The higher the priority number, the higher important
problem needs to be solved. In general, there is no specific standard numbers to see a significant
problem or not. However, particular issue could be considered important that needs to be resolved if
this particular issue gets the highest number compared to the other priority issues. The agreement
scale among rater agreement which symbolized by the letter W (W value) is the level of agreement
value among respondents in assessing the problem. For the criteria level of agreement value is as in
the following table.
Table 3.1 Rater Agreement Criteria
No W Value Rater Agreement1 0,063 Very Low2 0,118 Low3 0,235 Medium4 0,578 High5 1,000 Very High
Develop from Saaty, 2006
For more details, the following describes how the views of each party as well as its
comparison, both the views of experts and practitioners on the subject of the development of Islamic
microfinance institutions.
125
Figure 4.1. The Regulation of Competition Restriction
p1 p2 p3 p4 p5 a1 a2 a3 a4 a50
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
omsetplafonS-coveage
The priority values from practitioners’ side indicate that regulatory restrictions on competition
in the form of financing ceiling become the first priority with the priority value of 0.38 followed by s-
coverage with 0:34 and turn over of 0.28. This is because the regulation of competition is very
important so that the bank should not have to provide financing ceiling up to two million dollars
below. The government must have long term vision; build a strong economic foundation and support
IMFS which is owned by its own citizen. This mind set should be clearly understood. Foreign
microfinance institutions only pursue their own targets, bad credit, and guarantees execution resulting
in death of SMEs.0
While different views addressed by academicians. They declared that it is the turn over that
should be take priority into account in the regulation restriction of competition with the priority value
of 0.47, followed by ceiling finance of 0.39 and the last s-coverage with 0.24. Rater agreement value
among academicians is as high as 0.73. This indicates that there is an agreement of the scholars
regarding the determination of the priorities that have been mentioned above.
The overall calculation/result between practitioners and academicians indicate that the
restriction competition through the ceiling of funding is a top priority with its priority value of 0.39,
followed by restriction of competition through turnover with 0.37 and the last restriction of
competition is through the S-coverage 0.24. While the overall rater agreement of respondents both
academicians and practitioners is very low at 0.053. This number indicates the diversity views of the
respondents.
Regulatory on competition restrictions in the form of ceiling financing means that there
should be clear limits on competition between financial institutions to finance their potential
customers. Each type of the existing financial institutions must have clear boundaries that limit how
much should be given to each customer. If there is no clear limit on the ceiling financing of all
0 In line with what has been opined by Abdullah Yazid inindepth interview on Wednesday, 06 November 2013 at 12.15-13.15pm.
126
financial institutions (either in the form of bank, rural bank, cooperative, microfinance institution,
etc), they will go into all level of people and compete in an uncontrolled manner. This situation would
be very detrimental to relatively small financial institutions such as IMFS.0These findings are in line
with what has been produced by Jansson et . al (2004 ) in his research that shows that there are four
types of financial institutions that compete in the microfinance market ; 1 ) commercial banks and
non-bank financial institutions that provide microfinance services; 2 ) commercial banks and non-
bank financial institutions that specialized only provide microfinance services ; 3 ) cooperatives , and
4 ) BMT .
Similar results are also shown in the research of Masyita and Ahmed (2011) which states that
BMT (IMFS) faced unbalanced level of competition, whereby each of the institutions, especially
commercial banks, have much larger business scale so that their cost of funds arevery small. One of
the main obstacles faced by the managers in developing BMT is a matter of competition (Sakti, 2013).
BMT-performance among banking business competition is one of the factors that influence the
professionalism of BMT practitioners (Karsidi et al, 2011). It means that in general could be seen that
there has been unfairness competition within the IMFS operational so far. Therefore it’s urged to have
a strict regulations that govern the competition among the existing financial institutions.
Figure 4.2. Supporting Regulation
p1 p2 p3 p4 p5 a1 a2 a3 a4 a50
0.1
0.2
0.3
0.4
0.5
0.6
0.7
regulasi kesehatanregulasi penjamin kreditregulasi penjamin simpanan
The most important aspect that needs attention is the problem aspect with lack of regulation
regarding IMFS health assessment. Both views of experts/academicians and practitioners give the
highest priority to this problem.
The average priority value of practitioners indicates that support regulation in the form of
health assessment become the top priority with its priority value of 0.39. The second priority within
0In line with what has been opined by Aslihan (secretary general of PINBUK) in indepth-interview on Monday 3 November 2013 at 13.15 – 16.20pm.
127
support regulation is deposit guarantee with its priority value 0.32. The final priority is credit
guarantee with 0.29. With this close priority value, it is indicates that the three priorities within the
cluster of support regulation is not much different or relatively the same. However, rater agreement of
practitioners is high at 0.25. This value indicates that there exist agreements among the practitioners
about the issues that have been mentioned. In fact the health assessment for IMFS under cooperative
is already there, but the implementation remains constraint. The constraint is actually health in Islamic
perspective which is not well accommodated.0
The academician average priority value is slightly different with practitioners, where support
regulation in the form of health assessments primarily to be a top priority with its value of 0.5. The
second priority is deposit guarantee regulations with its priority value of 0.27 and finally credit
guarantee regulation priority value of 0.23. However, rater agreement among academicians is high at
0.31. This indicates that there exist an agreement among academicianss on issues that have been
mentioned.
The overall results show not much different between the sides of views. Support regulation in
the form of health assessment is at the top priority with priority value of 0.45. The second level of
priority is deposit guarantee regulations with its priority value of 0.29 and last but not least is credit
gguarantee regulation with priority value of 0.26. Total rater agreement is at the medium level with
0.12. This shows the diversity views of the respondents.
Health regulation in the context of developing IMFS is the existence legislation that mandated
the establishment of a special agency or entity that independently and continuously assessing and
overseeing the health of IMFS across Indonesia. This regulation must exist and be implemented
immediately to ensure IMFS able to walk with an adequate level of security. The health of IMFS
could become be the key that will make society more confident when interacting with IMFS. IMFS
health regulations will also be able to ensure or at least minimize business risk. Third party funds are
also becoming safer since IMFS considered as a healthy body with minimum standard that has been
standardized by the regulator.0
Meanwhile with regard to the supervision issue in order to ensure the healthy of IMFS and its
competitives in the future, it is best to be submitted to an independent and professional body which
can be established either by Ministry of Cooperative or Financial Services Authority (FSA).0 Similar
views were also expressed by other practitioners that in order to create professional IMFS and not
detrimental to the public, IMFS health supervision problem should be left entirely to the authorities so
0 In line with what has been opined by Abdullah Yazid inindepth interview on Wednesday 06 November 2013 at 12.15-13.15pm.
0In line with what has been opined byAsadullah and Mulyadih (Chairman and Deputy Chairman of Peramu Foundation that specifically work on incubation and development of BMT) in indepth-interview on friday 08 November 2013 at 13.00 – 16.15pm.
0In line with what has been opined by Saat Suharto in indepth-interview (Chairman of BMT Association) on Wednesday 5 November 2013 at 09.00am – 14.12pm.
128
as to create a fair and good climate of competition. With one roof supervision, it will create a healthy
and strong IMFS.0
Further supporting regulation is related to deposit guarantee and financing in IMFS. For these
particular purposes, there should be a formulation of fixed rule regarding the establishment of deposit
guarantee agency that ensures all customer deposits at IMFS and also ensure the financing which
channeled by IMFS to the public.
The emergence of new rules and regulations will support the development of IMFS in the
future; the new regulations that particularly related to how IMFS will guarantee the provision of
customers as what has been implemented in insurance as well as banking industry. Thus with
comprehensive instrument support, IMFS will participate and contribute Indonesia economic
development in the future. These results reinforce what is inferred by Soetrisno (2005) that the
existence of institutional guarantee that guarantee IMFS credit or financing is badly needed to
increase the range of IMFS services extensively. Kusmuljono (2009) also suggested to have Bank
Apex as a patron of the entire microfinance institutions.
In fact there is an optimism, particularly from the practitioners, that if the IMFS supporting
institutions/instruments are existed and well implemented as what has been experienced by banking
industry, it is no longer for IMFS to require regulation that subject to competition restriction with
other financial institutions. The reason is that, if there is no problem in security deposit and its
financing, IMFS has another advantage compared to banks. IMFS have better human resources that
very much understand conditions and character of the micro community spread over the territory of
Indonesia.0
However, the real practices show that the expected supporting institutions/instruments by
IMFS industries and managers are lack behind. According to practitioners, this condition is caused by
miss management and the ego of each department within the ministry level who feel more entitled to
take care of IMFS. Other practitioners further explained that the problem is more acute sincethe
financial roadmap and who will be responsible is not clear. The current situation is a logical
consequence of those obscurity.0
Referring to the above discussion, it can be concluded also that IMFS practitioners/experts
expect the regulations/legislationsthat govern specifically IMFS in order to support its future
development. These findings correspond to what has been observed previously by Seibel and Agung
(2008) which revealed that IMFS requires effective regulation and supervision. To avoid a loss to the
community as customers, there should only healthy IMFS and properly supervised that are allowed to
0Sesuai dengan hasil indepth-interview dengan Iwan Setiwan (Ketua Microfin BMT) yang dilakukan pada hari Ahad tanggal 10 November 2013 pada pukul 10.46 – 12.15 di Bogor.
0In line with what has been opined byAsadullah and Mulyadih (Chairman and Deputy Chairman of Peramu Foundation that specifically work on incubation and development of BMT) in indepth-interview on friday 08 November 2013 at 13.00 – 16.15pm.
0In line with what has been opined by Saat Suharto (ketua Perhimpunan BMT) in indepth-interview on Wednesday 05 November 2013 at 09.00am – 14.12pm.
129
raise funds from non-members. Similar results were presented by Hascaryani et al., (2011) that the
absence of a funds guarantee system has been an obstacle for BMT to optimize fund raising.
Figure 4.3. Operation Standard
p1 p2 p3 p4 p5 a1 a2 a3 a4 a50
0.1
0.2
0.3
0.4
0.5
0.6
0.7
standar analisa pembiayaan dan manajemen risikostandar kepatuhan syaiahstandar pembinaan dan pendampingan
The graphic above denotes that there exist similarity priority value between practitioners and
academicians in which the absence of standards sharia compliance issues becomes the most priority
among others. The second priority of the issues is lack of standard financial analysis and risk
management and final priority is the absence of mentoring and coaching standard.
The average priority value of practitioners indicate that the absence of sharia compliance is
the top priority with its priority value 0.41 . The second priority of the issues is lack of standard
financial analysis and risk management with its priority value 0.33. The last priority is no standard
mentoring and coaching with its priority value 0.26. However, rater agreement of practitioners is at a
low level with 0.09. This number indicates various views among practitioners about the issues that
have been mentioned . Sharia deviations in Islamic financial institutions including MFIS have been
quite remarkable. Sharia is only used as a “mask" to exploit customers by using jargon that is not
relevant such as "going in heaven should not be paid by cheap price" or " for the sake of Islam we
should be willing to pay in whatever price". It is a mere camouflage to cover the capitalist motives
under the guise of sharia.0 In this case there should be a sharia compliance standards, with gradually
0 In line with what has been opined byDian Masyita in in-depth interview on Monday, 11 November 2013 at 14.00 – 15.05pm.
130
implemented since most IMFS not have a deep understanding of sharia nature and its practices in
microfinance institutions.0
Compare to practitioners, the average priority value of academicians is slightly different,
where the absence of sharia compliance is the top priority with its priority value 0.37. The second
priority with slightly different is a problem that there are no financial analysis and risk management
standard with its priority value 0.36 and the last is the lack of mentoring and coaching standards with
its priority value 0.27. Those priority values with a small different indicates that the priority level of
the three operational standards are not much different or relatively the same. However, rater
agreement among academicians is high at 0.60. This figure indicates that there exist a consensus
among academicians on this particular issue.
The overall results show not much different. The absence of sharia compliance standards
becomes top priority with its priority value of 0.39. The second priority with slightly different is a
problem that there are no financial analysis and risk management standard with its priority value 0.35
and the final priority is credit guarantee regulation with its priority value 0.26. However, the total rater
agreement is at very low level with 0.12. This value shows the diversity of the views of the
respondents.
The problem of IMFS operational standardization is a classic problem due to the related
parties feels not responsible to provide such standards that actually mandatory. It is a sour fruit from
the obscurity of IMFS regulators as an organizers and due to mis-management so far.0
In terms of IMFS operational standardization, the first rule that should become the next
priority for Regulator is sharia compliance standards. Furthermore, the constraint violations of sharia
rules that has been happening in the real practices is because of lack knowledge and understanding of
IMFS managers. Though Shariah compliance is something that is absolute and can not be negotiable
in running IMFS.0
The above discussion is consistent with the research done by Kholim (2004) which revealed
the one that hamper the operations of IMFS is lacking understand of Islamic economic and concepts
and Islamic finance. Karsidi et al (2011) also found that there are practitioners who have not mastered
the concept of the Islamic finance well. Even Masyita (2013) claimed that on behalfof sharia, many
Islamic financial institutions including IMFS “exploitate”their clients.
Reinforcing the importance of this sharia compliance standards from the above discussion,
can be concluded that adherence to sharia is the IMFS existence spirit in Indonesia. Thus, the
0 In line with what has been opined byAbdullah yazid in in-depth interview on Wednesday, 06 November 2013 at 12.15-13.15pm.
0 In line with what has been opined by Iwan Setiawan in indepth-interview (Head of Microfin BMT) on Sunday, 10 November 2013 at 10.46am – 12.15pm. The opinion also in line with what has been addressed by Saat Suharto in indepth-interview (Head of BMT Association) on Wednesday, 5 November 2013 at 09.00am – 14.12pm.
0In line with what has been opined by Aslihan (Head of PINBUK)in in-depth interview on Monday, 3 November 2013 at 13.15pm – 16.20pm.
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regulation of sharia compliance standards should be devised and defined by the FSA together with the
National Sharia Board (DSN). This element is a special feature for MFI.0 In fact the lack of sharia
compliance standard rules agreed by LKMS is clear evidence of bias and lack of concern for the
government. It was started with the vagueness of financial institutions road map in Indonesia.0
On the other hand some have concluded that non-sharia compliance of IMFS is issues at the
regulator policy level, while the fact that a more prominent issue in the field is operation problems not
sharia compliance. This may be due to the lack of knowledge of the public or customers themselves to
the implementation of sharia concepts in finance even though sharia is the main reason of customers
to come and to have financial services from IMFS.0
Figure. 4.4. Operation Assistance
p1 p2 p3 p4 p5 a1 a2 a3 a4 a50
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
ITpermodalanSdm
From the data presented in the graph above, it can be said that the most important aspect that
needs attention is the lack of support to enhance and to empower the capacity of human
resources.Both view either experts and practitioners give the highest priority to the problems of lack
of human resources assistance empowerment.
The average priority value of practitioners indicates the problem the lack of support to
enhance and to empower the capacity of human resources is in the top priority with its priority value
0.46. The second priority is the lack of assistance in Information Technology (IT) with its priority
0In line with what has been opined by Iwan Setiawan in indepth-interview (Head of Microfin BMT) on Sunday, 10 November 2013 at 10.46am – 12.15pm.
0in line with what has been addressed by Saat Suharto in indepth-interview (Head of BMT Association) on Wednesday, 5 November 2013 at 09.00am – 14.12pm
0In line with what has been opined byAsadullah and Mulyadih (Chairman and Deputy Chairman of Peramu Foundation that specifically work on incubation and development of BMT) in indepth-interview on friday 08 November 2013 at 13.00 – 16.15pm.
132
value 0.32. While the last priority in the issue of operation assistance is limited funding assistance
with its priority value 0.22.
However, practitioners’ rater agreement is at the high level with 0.25. This number indicates
various views among practitioners about the issues that have been mentioned. The most important
operation assistance is setting up IMFS human resources. Human resources development and training
should become program and subsidized by the government. In order to run smoothly this development
and training program should be monitored closely since there were many cases in this particular
program does not run properly.0
The average priority value of academicians is slightly different with practitioners, where the
lack of support to empower human resources is in the top priority with it priority value 0.46. The
second priority with considerable difference is the problem of limited capital fund assistance with
0.32, while the last priority is the lack support of Information Technology (IT) with its priority value
0.22. The slightly difference in the priority values indicates that the priority level of the third
operation standards are not much different or relatively the same. Hence, rater agreement among
academicians is relatively high at 0.60. This indicates that there exist the consensus among
academicians on the issues that have been mentioned.
However, the overall showed slightly different results. The lack of support to empower
human resources is as the top priority with 0.39. The second and the third priority ranking with a very
thin margin is the lack of Information Technology (IT) support with 0.27 and limited funding
assistance with its priority value of 0.27. The total rater agreement is at very low level with 0.043.
This shows the diversity of the views of the respondents.
Another assistance that is badly needed by IMFS is capital. In order to operate properly, it is
necessary for IMFS to have sufficient capital to cover all operation expenses or even to make profit.
In this capital aspect, IMFS need of capital or bailout funds that could be used to resolve the liquidity
problem. This assistance is very important since there are still many IMFS that have not been able to
predict their liquidity needs properly and optimally.
Minimum level of IMFS human resource competence becomes a major issue in the future
development of IMFS particularly in the era of financial inclusion. In fact, this human resource
problem that has been causing a lot of IMFS failures LKMS; ranging from the inability in mapping
the risk, lack of financing analysis, inability to use technology effectively, and low level of
understanding on sharia aspect.0The similar view is also delivered by other practitioners that the real
problem of human resource is becoming the central issue to develop Indonesia IMFS in the future.
0In line with what has been opined byAbdullah yazid in in-depth interview on Wednesday, 06 November 2013 at 12.15-13.15pm.
0In line with what has been opined by Aslihan (Head of PINBUK)in in-depth interview on Monday, 3 November 2013 at 13.15pm – 16.20pm.
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Current IMFS limitations could be solved properly by having better competence of their human
resources/managers.0
There is even a belief that if IMFS human resources/managers are good people and
professional, IMFS will be able to compete with other financial institutions regardless limited
infrastructure and minimum regulations facing by IMFS.Therefore, IMFS manager certification
program should be immediately required by the regulator though the early stages should be facilitated
accordingly.0 The results of this study in accordance with the results of previous studies conducted by
Soetrisno (2005), Sakti (2013) and Hamzah (2013) which revealed that the most prominent problem
faced by BMT managers is the issue of human resources competency.
The Solution to Develop IMFS
From the data presented before, it is revealed that the most important solutions that need
critical attention are the establishment of operation standards. Both views either from the experts and
practitioners side give the highest priority to the establishment of operation standards as the solution
to develop IMFS in the future.
The slightly difference in prioritiy value ofthe four problem solutions as mentioned above
illustrates that these particular solutionsare havingrelatively the similar level of priority. In other
words, the establishment supporting regulation, operation standards, operation assistance, and
competition regulation are the similar important solutions that need to be resolved immediately.
The sequence of priority values between practitioners and academicians are different mainly
in the second, third and fourth. The average priority value of the practitioner for the second solution is
the establishment of supporting regulation with priority value of 0.27, followed by the third solution
that is the establishment of the operation standards with its priority value 0.23 and the final solution is
providing operation assistance with 0, 22. While academicians put the establishment of supporting
regulation in the second place with its priority value 0.24, followed by the provision of operation
assistancewith 0.21 and finallythe establishment of competition regulation with its priority value 0.20.
The overall results show that the average different of priority values is relatively small. It
indicates that all the mentioned solutions have almost the same priority value to be executed
immediately.
0In line with what has been opined by Iwan Setiawan in indepth-interview (Head of Microfin BMT) on Sunday, 10 November 2013 at 10.46am – 12.15pm.
0 In line with what has been opined byAsadullah and Mulyadih (Chairman and Deputy Chairman of Peramu Foundation that specifically work on incubation and development of BMT) in indepth-interview on friday 08 November 2013 at 13.00 – 16.15pm.
134
p1 p2 p3 p4 p5 a1 a2 a3 a4 a50
0.1
0.2
0.3
0.4
0.5
0.6
pembentukan regulasi penunjangpembentukan regulasi pembatasan persainganpembentukan standar operasionalpemberian bantuan operasional
Regulation Solution Related to Competition Restriction
The solutions that can be offered related to the above matter is to arrange and to issue the
regulations that govern and manage the distribution of market share among IMF (particularly IMFS)
with commercial bank that has microfinance services. This is similar to what has been expressed by
Sakti (2013) that ensuring financial services of BMT (IMFS) to reach the BMT is also important,
given the main common factor that support the development of BMT is its financial services which
affordable for the community (members). However, cooperative institution must sit down with the
ministry of cooperatives and the Financial Services Authority (FSA), determines what will be the
coverage between these two authority. Government must have long term vision to build the economic
foundation that really strong. IMFS which is owned by the citizen should be supported. This
philosophy should be clearly understood.0
The Solution for Supporting Regulation
One effort that can be done to handle the problem of capital is doing linkage with Islamic
banks. However, the current practice of such linkage program still facing a limitation. One of the
limitations is the unavailability of relevant information related to the soundness/healthy of BMT
(Sakti, 2013). Actually, the supervision on this issue is still lack behind. In some surveys revealed that
most respondents from BMT managers/officials stated that there exist regular
monitoring/supervision.0 However, it was found that this supervision has not been running regularly
and uniformly in all IMFS (BMT). Hence, when the supervision is undertaken, any indicators or
0 In line with what has been opined byAbdullah yazid in in-depth interview on Wednesday, 06 November 2013 at 12.15-13.15pm.
0 For example by Seibel and Agung (2008) and Sakti (2013)
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financial ratios used as benchmarks for the soundness health levels are still not uniform.0 Supervision
for example run conditionally upon the necessary information about the condition of the BMT in the
context of capital assistance programs, either from the government0 or from the private sector (Sakti,
2013).
Among the institutions that have been undertaken the supervision and health assessment role
are cooperative agency (Ministry of Cooperative), BMT associations such as Puskopsyah, BMT
builder institutions (such PINBUK, BMT Center and Inkopsyah). However, there is no one particular
institution that has formal supervisory functions. In order to achieve better industrial development of
IMFS, the governance improvements in this industry at the macro level is badly needed. In addition, it
is expected to have micro-guarantee institution or similar with micro-insurance institutions that can
manage risk mitigation for both BMT depositors and BMT themselves (Sakti, 2013).0 So far, some
efforts have been made to address this issue. It was agreed the cooperation between Sharia Indonesian
Credit Association (Askrindo)0 and Indonesian Association of Islamic Baitulmaal wat Tamwil
(Absindo).0
The Solution of Operation Standardization
In general, BMT regulation, reporting, and supervision are not effectively applied (Seibel &
Court, 2008). This is due to the absence of basic standard. The reports provided are not in the same
form, especially because there are no sanctions in this particular matter. In the worst case, there exist
BMT which doesn’t come up with their financial report. Thus, there are no standard procedures for
cooperative that decided not to continue their business (Seibel and Agung, 2008). Several BMT
studies provide recommendations for BMT to sit for the training; not only on BMT operatio, but also
in the form of mentoring and coaching clients including the concept of the Islamic finance (Kholim,
2004 and Karsidi, 2011).
The Solution for Operation Assistance
With a variety of limitations, there have been performed various training related to the
capabilities of BMT operation. Unfortunately, the training is not done effectively.Human resource
training of BMT was still concentrating on basic training (Sakti, 2011).0 Given the limited availability
0 Usually the minimum measurement being used is Non-Performing Financing (NPF), Return on Asset ( ROA)and Return on Equity(ROE)
0For example in 1998, government through certain departments create development program of microfinance institution in order to anticipate the declined of economic performance and the increase of unemployment rate due to crisis.
0See also Soetrisno, 2005.0 Askrindo is State-owned Enterprises (BUMN) which established 1971. It has holding company
Askrindo syariah which operated since Februari 2013.0 This particular cooperation agreement has been done 20 May 2013.0 In the survey conducted by Sakti (2013) it has been known that type of training mostly provided BMT
are related to BMT operation, accountant training, and BMT Marketing training.
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of funds, the assistance from the government is badly needed in order for BMT/IMFS toperform
training programs to enhance their human resource capacity particularly in term of BMT operation
and technology information.The completion of services problems that have not been computerized is
expected to improve the competitiveness of BMT (Karsidi, 2011).
If it is further explored, crucial functions in the Islamic microfinance industry especially that
carried out by BMT/IMFS are already exist; such as the functions of regulation and supervision,
advocacy and liquidity provider both for liquidity management as well as for a lender of last resort.
Regulation and licensing functions are performed by Ministry of Cooperatives and SMEs. However,
the execution its supervision functions is performed by Cooperative Agency Office under the
coordination of Local Government (Pemda), both at the provincial and district or municipality level.
The separation of the two entities that agencies have the authority function is a challenge, especially
in terms of synchronization policies and effective implementation of policies.
Figure4.5. The Relationship Inter-Institutions in IMFSSource: Sakti, 2013
Some of other BMT builder that serves as a companion and consultants who provide services
for capacity building, IT development and fund disbursement from donor agencies, among them are
Small Business Incubation Center (PINBUK), Induk of Islamic Cooperative (Inkopsyah), MicroFin
Indonesia, BMT CENTER , Indonesia Association of BMT (Absindo), and Center of Islamic
Cooperative (Puskopsyah). In addition, there is also the APEX institutions that provide liquidity
facilities for BMT, such as PT. Permodalan Nasional Madani (PNM) Limited and Permodalan BMT
Ventura (Sakti, 2013). The relationship among these institutions is as in the above figure.
Based on a survey conducted by Sakti (2013), BMT is expecting government to take the role
as lender of last resort for BMT liquidity needs. Another source fund that is expected by BMT is
linkage program that might be take place with Islamic banks.One of the solution that can be offered to
address the problem of capital and human resource development and IT is the linkage program with
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Islamic banking. There are three linkage scheme commonly used by Islamic banks, the patronage
BMT, local government, or other financial institutions; namely channeling scheme, executing or joint
financing. It should be made clear and practical policies in order to optimize it.
IV. Conclusion and Recommendation
Conclusion
Based on discussion and analysis of IMFS development issues from regulatory and institutional side,
the following are some conclusions:
1. In the cluster whereby regulatory restrictions is absence, restriction competition in the form
offinancing ceiling is at the top priority with its priority value 0.39, followed by restriction
competition in the form ofIMFS’ turnover with 0.37 and the last restriction competition is in
the form ofservice coverage with 0.24.
2. In the cluster whereby supporting regulation is absence, Supporting regulation in the form of
health assessments become the top priority with its priority value 0.45. The second one in this
cluster with considerable difference is deposit guarantee regulations with 0.29 and finally is
credit guarantee regulation with its priority value 0.26.
3. In the cluster whereby operation standard is absence, masalah tidak adanya standar kepatuhan
syariah menjadi prioritas utama denan nilai prioritas 0,39. Di peringkat prioritas kedua
dengan selisih yang tidak jauh yaitu masalah tidak adanya standar analisis pembiayaan dan
manajemen risiko dengan nilai prioritas 0,35 dan terakhir yaitu regulasi penjamin kredit
dengan nilai prioritas 0,26. the absence of sharia compliance standard issue is at the top
priority with its priority value of 0.39. The second priority with slightly difference is the
absence of financial analysis and risk management with 0.35 and finally is credit guarantee
regulation with 0.26.
4. In the cluster whereby operation assistance is minimum, minimum assistance for human resources empowerment is at the top priority with its priority value 0.39. In the second and third priority level with a slightly different, that is sequence minimum assistance of IT with its priority value 0.27 and limited funding assistance with 0.27.
5. The research results in this cluster suggests that the formation of operation standards become
the first priority with its priority value 0.31, followed by the establishment of competition
regulation with 0.24, supporting regulation with 0.23 and finally providing operation
assistance. In general, it can be seen that the average priority values are slightly different
which indicates that the all mentioned solutions have relatively the similar priority value to be
further executed.
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Recommendation
Based on the results of the discussion, there are some suggestions that can be recommended, among
others:
The government should immediately establish operation standards since it is urgent to be
implemented as a reference for IMFS. Both respondent practitioners and academicians are
agreed that the establishment of operation standards is the first priority followed by other
solutions that have been mentioned above.
REFERENCES
Hamzah, et al. 2013. Analysis Problem of Baitul Maal Wat Tamwil (BMT) Operation in Pekanbaru Indonesia Using Analytical Network Process (ANP) Approach. International Journal of Academic Research in Business and Social Sciences, Vol. 3, No. 8.
Hascaryani, Tyas D et al. 2011. Metafora Risk and Return sebagai Dasar Pengembangan Baitul Maal wa Tamwil (BMT) yang Mandiri. Journal of Indonesian Applied Economics, Vol. 5 No. 1 Mei 2011, hal. 93-109.
Jansson, T., et al. 2004. Principles and Pratices for Regulating and Supervising Microfinance. Washington: Inter-American Development Bank.
Karsidi et al., 2011. Strategi Peningkatan Profesionalisme Praktisi BAITUL MAAL WAT TAMWIL (BMT) di Kabupaten Banyumas. Performance, Vol. 14 No.2 September 2011, hal.13-34.
Kholim, Muhammad. 2004. Eksistensi Baitul Maal Wat Tamwildan Permasalahan dalam Operasionalisasinya: Studi di Provinsi Jawa Tengah. Tesis di Universitas Diponegoro. Tidak diterbitkan.
Kusmuljono, Bangun Sarwito. 2009. Menciptakan Kesempatan Rakyat Berusaha: Sebuah Konsep Baru tentang Hybrid Microfinancing. Bogor: IPB Press.
Masyita, Dian dan Ahmed, Habib. 2011. Why is Growth of Islamic Microfinance Lower than Conventional? A Comparative Study of the Preferences and Perceptions of the Clients of Islamic and Conventional Microfinance Institutions’ in Indonesia. Paper presented in 8th
International Conference on Islamic Economics and Finance, 19-21 December 2011, Qatar.
Nugroho, M.R. dan W. Untoro. 2012. Prosiding Forum Riset Ekonomi dan Keuangan Syariah Ke-1. BI dan DPP IAIE. UIN Suska, Riau.
Sakti, Ali. 2013. Pemetaan Kondisi dan Potensi BMT: Kemitraan dalam rangka Memperluas Pasar dan Jangkauan Pelayanan Bank Syariah kepada Usaha Mikro. Jurnal Al Muzara’ah, Vol.1 no.1 2013 hal.1-17.
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Seibel, Hans Dieter., Agung, Wahyu Dwi. 2008. Islamic Microfinance in Indonesia: The Challenge of Institutional Diversity, Regulation, and Supervision. Sojourn: Journal of Social Issues in Southeast Asia Vol. 23, No. 1, hal. 86-103.
Soetrisno, Noer. 2005. Ekonomi Rakyat Usaha Mikro dan UKM dalam Perekonomian Indonesia. Jakarta: STEKPI.
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Paper 11
REGULATORY FRAMEWORK FOR MEMBER-OWNED ISLAMIC MICROFINANCE INSTITUTION (MIMI): FOCUS ON ISLAMIC SAVING GROUPS AND COOPERATIVES
SUB-SAHARAN AFRICA (SSA)
Muhammad-Bashir OwolabiYusufPost-Doctoral Researcher,
Department of Economics, International Islamic University Malaysia.
Nasim Shah ShiraziSenior Economist
Islamic Research and Training Institute (IRTI), Jeddah, Saudi Arabia.
MohaAsri AbdullahProfessor of Economics
Department of Economics, International Islamic University Malaysia
AbstractMember-owned Islamic microfinance institutions have been toast to be the alternative means of financial inclusion among the Muslims who are voluntarily excluded from participating in the traditional member-owned microfinance institutions because of the interestthey charge. This novel idea is still new and few are known about its operations and regulations guiding its operations. This paper surveys the practices of the common member owned Islamic microfinance in Sub-Saharan Africa with a view of recommending regulatory framework for its operations based on these practices. This paper thus proposes a number of regulations for the operation of both Islamic Saving Groups and Financial Cooperative. It is hoped that these proposed regulations will assist the operators, policy makers and donor agencies to chat a way of improving the financial inclusiveness of the poor who are excluded from benefiting from the available member-owned microfinance institutions with a view to lift them out of poverty.
Keywords: Member-Owned Islamic Microfinance, Regulatory Framework, Financial Inclusiveness, Saving Group, Financial Cooperative.
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1. Introduction
The newness of member-owned Islamic microfinance institution, its peculiarity and the environment
in which it operates need some regulations to forestall spectacular bankruptcy in the nascent Islamic
financial institution. This is because when it performs badly, the investment of the poor members are
at risk. Experience from the conventional member-owned microfinance institutions have shown that a
saving-led institution does not guarantee the quality of loan and its repayment.
The importance of member-owned microfinance in Sub-Saharan Africa cannot be over
emphasised. More than 85 percent of people in this region are un-bankable with majority living in
rural areas where there are no financial services, be it formal or informal 0. Member-owned
microfinance is as major instrument to reach out to these people in order to facilitate financial
inclusion of all rural of the population. Saving group and financial cooperatives are two saving-led
and member-owned microfinance institutions common in this region of the world with over 27
million members. Saving group refers to an informal, self-selected group of between 10 and 30
individuals that own and manages it. It is widely distributed in both rural and urban area and thrives
well in the areas that lack the presence of microfinance institutions with women being the majority of
the members. Financial cooperatives are member owned microfinance institutions that is open to
people as long as they satisfied the laid down criteria. Member-owned Islamic microfinance
institution refers to either Saving Group or Financial Cooperatives that has resolved to use Islamic
principle in its operations. This institution operates similar to the conventional member-owned
microfinance institutions with additional shariah restrictions.
While member-owned microfinance institutions have a long history in Sub-Saharan Africa,
the operation of the Islamic member-owned microfinance institutions is still less than a decade in the
region where it is still struggling to have a firm grip. If this institution is expected to fill the gap of
financial exclusion of the poor Muslims who are voluntarily excluded from enjoying the financial
benefits of the conventional microfinance institutions, because of their beliefs, there is the need for a
sound regulatory framework to guide its operations in order to protect members meager saving,
facilitate government appropriate supervision and encourage donor assistance, especially those that
are interested in assisting the non-interest based member-owned microfinance institutions. This paper,
therefore, proposes a set of rules and regulations for member-owned Islamic to guide its operations to
safeguard its members and facilitates both government and donors involvements.
The rest of the paper is organized as follows. Section two presents the literature review, section
three is on the regulations proposed and section four concludes the work.
0FinScope Africa Brief, November 2007. MIX and CGAP analysis trends, February 2012. ‘2011 Sub-Saharan Regional Snapshot’.
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2. Literature Review
Microfinance Institutions
Microfinance refers to the provision of a wide range of financial services like, deposits, loans,
payment services, money transfers and insurance, to poor and low-income households and their
microenterprises. This is borne out of the concept that poor individuals have the abilities to lifting
themselves out of poverty if they have access to financial services0.A microfinance institution offers
financial services to the low income, poor and marginalised individual that would not be accepted
normally by traditional banks, and provides transaction services for amounts that may be smaller than
the average service fees charged by the traditional mainstream financial institutions 0. Poor people
encounter problems which impede their ability to move out of poverty. These problems include
inadequate funds which results from insufficient infrastructural and institutional provision (Alam,
2003). Coleman (2006) identifies perceived high risk and high cost of transaction related to the loans
and saving deposit as the reasons why the commercial banks could not provide the credit needs of the
poor. This is because commercial banks require security for their loan which the poor do not have; the
process of loan is complex and they prefer giving out big loans which is far more than what the poor
entrepreneurs need (Gofran, 1996).
This is where Microfinance institutions come in. They offer poor financial services that meet
their needs. These services include loans, savings, remittance, insurance and venture capital at their
level to overcome their financial shortages. This helps the poor micro enterprises to boost their
income and guarantee their economic wellbeing; create assets and reduce susceptibility; increase their
demands of other goods and services and promote local economies (Juwainiet al. 2010). Microfinance
is also a very flexible tool that can be adapted in every environment, based on the local needs and
economic and financial situation (Fouzia, 2012). Traditionally, three types of microfinance
institutions are in operation. These are: formal institutions - i.e. rural banks and cooperatives,
semiformal institutions - i.e. nongovernment organizations and informal sources - i.e. money lenders
and shopkeepers.
However, the facilities of the traditional micro financial services fall short of the needs of the
majority of Muslim population. This is because the conventional microfinance institutions operate on
riba which they charge on the loan they extend to the people. This is against the Islamic tenets, and as
such a large number of Muslim entrepreneurs abstain from benefitting from the traditional
microfinance services to do away with interest which is against the Sharī’ah (Obaidullah, 2008).
Islamic Micro Finance (IMF) was developed to fill this lacuna. Its goal is to extend shariah compliant
loans to the poor entrepreneurs that have been excluded from the capital provided by the banking
0http://www.adb.org/sectors/finance/microfinance0http://www.investorwords.com/17362/microfinance_institution.html
143
sector, which target only the bigger players in the economy. Meanwhile, microfinance is not for the
poorest of the poor who are subjects of financial intervention, rather the fringe poor with
entrepreneurial ideas who could reach more easily a decent quality of life but lack access to formal
finance. In this circumstance, Islamic micro finance has a big role to play in Muslim countries as
alternative to conventional microfinance as a tool of enterprise creation and expansion that develop
human capital base to meet the financial requirement of Muslim community thereby play a great role
in their economic growth.
Islamic Microfinance
The Islamic financial system broadly denotes financial activities that comply with the teachings of the
Shari‘ah (Islamic law). The principle and laws of Islam demand some types of activities, risks or
rewards to either be forbidden or encouraged. Many Shari‘ah laws, rules and interpretations take into
account the subject of social justice, equity and fairness, as well as the implementation of commercial
transactions. Islamic microfinance fits into the asset-based economic paradigm and equity objective of
Islamic moral economy as well as fulfilling other social expectations. Thus it provides wide range of
financial resources such as small loans, insurance, and saving to low-income families in order to help
them build businesses and increase their income.
The conventional microfinance services exclude the majority of Muslim population. This is
because, though they have access, they refuse to utilize the conventional microfinance institutions as
they operate on Interest. Paying or charging interest is forbidden in Islam. Thus, a large number of
Muslim entrepreneurs abstain from benefitting from the traditional microfinance services to do away
with interest which is against the Sharī’ah (Obaidullah, 2008).
The success stories of Islamic microfinance in Muslim countries are still few. This is because
these institutions have not been fully incorporated in countries’ formal financial systems. With the
exception of few countries, Islamic microfinance in Muslim countries has been experimental projects
operated by foreign donor agencies, religious or political groups. The case becomes worse when we
consider the number of Islamic banks practicing microfinance. The first Islamic microfinance
initiative after the fall of Islamic caliphate was by MitGhamr in Egypt in 1950s. However, the
experiment was aborted shortly. This notwithstanding, the recent years have witnessed a few
successful experiment of Islamic microfinance throughout the world (Obaidullah, 2008).
Islamic microfinance begins in Malaysia in the early part of second half of the 20 th century
with the introduction of the Tabung Haji. This was borne out of the intention to finance the hajj cost
of poor Malaysian farmers. Started as a saving and investment institution, Tabung Haji has now
become a big specialized financial house, financing various projects within and outside Malaysia.
This good initiative has been followed by some other South East Asian countries (Obaidullah, 2008).
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Islamic Microfinance and Poverty Alleviation
A number of authors have discussed the role of Islamic micro finance as a means of poverty
reduction. According to Rahul and Sapcanin, the risk sharing component of Islamic microfinance is
compatible to the needs of the poor who have no collateral to obtain loans from the conventional
banks. This they said will make it possible for poor entrepreneurs to finance viable projects that have
been turned down by conventional institutions for lack of collateral to be financed by Islamic
microfinance through its risk sharing products. In his own submission on the role of Islamic finance in
poverty reduction, Chaudhri (quoting Mirakhor) described Islamic finance as a double prong approach
to poverty alleviation. This is because it empowers the poor by utilizing the idle capital which would
have been charged negative interest (Zakat) for lying fallow for a year round (Chaudhri, 2006). Thus
Islamic microfinance will provide fund for enterprising poor and generate additional income for the
owner of the fund.
Islamic microfinance has also been described as a safe haven for investors against credit
crisis. Frasca (2008) while looking at the competitiveness of Islamic microfinance, noted its ability to
protect the investors from the excessive speculator of the conventional thus protect them from
unwarranted financial crisis.
Characteristics of Member-Owned Microfinance Institutions in SSA
The importance of member-owned microfinance is obvious anywhere in the world and SSA is not an
exception. This is because saving led organization has more members compared to credit-led
providers. The two common saving-led organizations that are focus of this study are saving-group and
financial cooperatives. In SSA, membership of financial cooperatives is more than 20 million while
that of saving group is over 7 million. The characteristics of these two saving-led organizations are
summarized in the table 1 below.
Table 1:The key Characteristics of Saving-Led Organization
Subject Saving Groups (SG) Financial Cooperatives (FC)LEGAL SITUATION SGs are informal groups and
inmost countries do not need any registration or license.
SGs are time-bound and operate in cycles of approximately one year. At the end of the cycle, themembers receive their savings plus earnings and start the following cycle.
FCs are legal institutions that need to obtain legal recognition.They aim at sustainability.License requirements aredependent on the legislation and regulations for FCs and cooperatives in general, very different from one country to the next.FCs are usually under a kind of supervisory framework.
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MEMBER-OWNEDAND
MEMBER-MANAGED
SGs are member-owned and managed by its members. Group members are self-selected.
Management Committeeis elected from among themembers.
FCs are member-owned.Oversight and control are through representative bodies,membership of which is elected according to the ‘one member one vote’-principle. No externalparties can be appointed to positions in the regular organs/ committees.
Sometimes FCs are also –partly member-managed. In thatcase elected members perform-certain- operational tasks of aFC. This is usually the case for small or starting FCs.
There are also many FCs inwhich elected members are notat all engaged in operational daily tasks.
MEMBERSHIP Typically between 10 and 25 self-selected members. Tokeep the group manageableand ensure transparency oftransactions by witnessing, memorization and simple record keeping, the total number of members should be limited.
Membership is open to anyonethat meets certain criteria.These criteria vary per FC:• in the case of ‘employment-based’FC; people with the sameprofession/ employer;• In the case of ‘community-based’FCs: limited to a certain geographical area.
PROFILE OF MEMBERS
SG mostly promoted amongthe rural, remote and/or poor population, but also in urban environment, like city slums. Some promoters explicitly target women.
Membership profile of FCs is very diverse; rural and urban, poor and non-poor. Amongcooperative members, thereis often a difference in profile between savers and borrowers; borrowers are usually the better-off or salaried members.
SECURITY OF SAVINGS
Cash and records are kept in a box with multiple locks. Cash boxes rarely get lost. Sometimes groups open bank accounts.
Good governance, professionalmanagement, effective internalcontrol, external audit, and legislation and supervision have to ensure security of savings.
When these requirements arenot fulfilled there are higherrisks of fraud, abuse anddefault, with subsequent risks for depositors.
SOURCE OF LOAN SGs provide loans based on FCs are traditionally and legallyalso
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FUND theirsavings, sometimes linked for refinancing to MFI’s (mature groups).
saving-led (often 2x or 3x size of loan).
However a source of loan fundof the FC can also be contracted through external loan.
PRODUCTS Flexibility of savings products vary according to savings group methodology.Savings is the most preferred product.
Average loan size usually small.Both consumptive and productive loan uses.
Return on savings because ofinterest (or service fee) chargedon loans. Net earnings aredivided proportionally to savingsamong members at the share-outat the end of each cycle.
Social fund caters to emergencies.
Loan size is dependent onliquidity, loan policy, regulationand what products are developed. Individual loans can vary between 200 to 10.000 euro. If the FC has introducedsolidarity lending, the loan amounts are lower.
Consumption loans and lendingto salaried people may be favoured in view of less risks and operational costs.
Interest on loans is usually lower than in commercial banks or MFIs.
Interest given on savings is also usually quite low, and current savings accounts often dominate.
Depending on how much profitis made, dividend is distributed to members, based on their shares.
INTEGRATION IN WIDERSYSTEM
SGs operate independentlyafter an initial training andsupervision investment of 9to 12 months. Survival rate ofgroups is high; dropout rate of members is low.
FCs can be stand-alonecooperatives, not associatedor integrated into a wider cooperative system.
They can also be part of a(three- or two-tier) –nation orregion-wide-, integratedFC network, with degrees of autonomy for the primary society. Some FC networks have their own banks, full-fledged parts of the financial sector.
Source: Athmer and Bosch (2013)
Key Characteristics of Member-Owned Islamic Microfinance Institutions in SSA
Member-owned Islamic microfinance is relatively new and few in SSA. This section enumerates a
number of characteristic observed among the two types of member owned Islamic microfinance in
this region0. These characteristics are discussed separately for Islamic saving group and financial
cooperatives.
0This section draws heavily from the experience of member-owned Islamic microfinance organizations in operation in Nigeria.
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Islamic Saving Group (ISG)
There are different types of saving groups methodologies in operation, most especially when they
draw heavily from the experiences of the well-established conventional saving groups. However, the
following characteristics seem to cut across them:
i) Membership: Like its conventional counterparts, Islamic saving groups are typically self-
selected group between 10 to 30 members, single sex or mixed group within the same
locality. At times they are guaranteed by members of already existed saving group in that
locality that has already have the required number of members. This is to make sure that
members are not only known within the locality, there are actually others who could stand
for them. Members are expected to be active in attending meetings, paying their
contributions and returning the loan as at when due. Any member found wanting of their
responsibilities may be replaced after recovering their outstanding, through paying up or
the use of guarantor contributions to cover the shortfalls.
ii) Ownership and Management: It is normally owned and managed by members.
Management committee is chosen among the members to take charge. However, the
decision is taken jointly at the meeting which normally comes up once every month. All
the request of loan or issues that arise is tabled at the meeting and decisions taken
together. The committee members mostly comprise of chairperson, secretary and
treasurer. While the chairperson chairs the meeting, the secretary takes the minute and the
treasurer keeps the record of accounts. To ensure transparency, another members are also
encourage to take note of the group’s account and all the decision must be taken at the
monthly meeting where every member is in attendance and all the request must pass
through this process even if it is from the management committee.
iii) Profile of the member: Members are mostly Muslims who have come together to form
Islamic saving group in order to avoid interest pay and charged by the traditional saving
groups. They are common in the urban area or its suburb, mostly as self-help
organization. Members are not necessarily poor.
iv) Sources of loan fund and administration of the group: Members contribution forms the
bases of loan provided to the members. The affair of ISG is normally run by the
membership fees paid by members for joining the group. There is no other ways by which
ISG makes save through these two sources since they don’t charge interest and they do
not involve in other money making activities. Each member normal pledge certain
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amount of money as month contribution. This varies from member to member and group
to group based on the capability of the members.
v) Products: The main product of ISG is saving which serves as the main source of fund for
the other product which is loan. The average loan is usually small, for both consumptive
and productive. There is always an initial period of contributions before a member can be
entitled to loan (usually six months). The initial loan extend to the member is always
equal to initial contribution on the probation period which is guaranteed by other
members and payable over the period of between 3 to 10 months. Subsequent loan may
be up to maximum of 3 times the individual’s contribution. Member requests are tabled at
the meeting and request entertained based on the availability of fund, the needs of those
who applied and their performance on previous loan. Some amount is also reserved to
cater for emergency among the members
vi) Legal status: Islamic saving group, like other saving group in SSA are mostly informal
organizations that do not need registration or license. In some countries where they need
some form of registration under the local authorities, the inability of the group to satisfy
the registration requirement in terms of fees and documents often prevent them from
registering because they do not have the money and documents to meet this requirement.
However, in difference to other cooperatives, ISGs are not normally time bound, though
member can opt out anytime if they feel they could not meet the obligation of been an
ISG member.
vii) Security of Loan: Members contribution is kept in ISG bank account at the
community/microfinance bank. Members, who can do so, are encouraged to pay their
monthly contributions into the group account directly and provide their evidence of
payment to the treasurer for account reconciliation. The monthly contributions by
members are kept in the group account at the bank and record kept with the treasurer.
Where there is no presence of banks within the vicinity, cash contributions and record are
kept in a well secure box.
viii) Shariah components of ISG: The main shariah component of ISG is absence of interest in
their transactions. Because their main product is extension of loan, most of the well-
known shariah compliant products are not in demand by ISG.
ix) Integration in wider system: ISG operates independently though there may be informal
relationship with parent ISG (inform of guaranteeing members of new ISG). There is no
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initial training like the other SG. There is also no external support, either from the
government or donor agencies. ISG also lack access to continuous training and shariah
input at minimum level.
Islamic Financial Cooperatives (IFC)
The Islamic financial cooperatives in SSA, like its conventional counterparts, are of two types:
employment financial cooperatives and community cooperatives. An employment cooperative is a
workplace based financial cooperatives that provide services that share the same workplace,
employment or profession. These individuals are formally employed and on salary, either from
government or private organizations. These types of financial cooperatives are mostly common in the
urban areas where there is opportunity for white collar jobs. A community based cooperative on the
other hand is a financial cooperative whose membership is opened to every member of a particular
community or geographical location, no matter what is their economic activities. This type of
financial cooperative is found in both rural and urban centres (Athmer and Bosch, 2013). Employment
based Islamic financial cooperatives were the first set of IFC in SSA. These were formed by Muslim
professionals in their various places of work to promote members’ consumptions. Being professional
organizations, members usually have high education and ability to understand the fundamentals of
financial cooperative and even well versed in shariah principle or well placed to be able to obtain
shariah information about Islamic transaction from the experts. Another advantage enjoy by
employment based financial cooperatives is the guarantee provided by the employer to retain loan
repayment by gradual deduction from the salary of the borrower.
The case of community based cooperative is a bit different from what is obtainable in
employment based cooperative. The first difference is that members are mostly self-employed, with
jobs, reflecting the economics activities present in that particular location. The members are of
different education level, ranging from no formal education to post primary level. The loan obtained
could be for consumption, enterprise creation and/or expansion. The loan extend to members requires
collateral in form of solidarity lending which replaces physical guarantee. However, this is not
without its own cost as solidarity lending requires nearness and regular visits of highly trained and
supervised loan officers that constantly monitors the lender before and after obtaining the loan. This
makes the management of loan to be more demanding. Nonetheless, this type of cooperatives
organization provides financial access to women in developing nations because they are more active
in micro, small and medium enterprises in the informal sector0.
Key Characteristics of Islamic Financial Cooperatives in SSA0ibid
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i) Membership: Membership of cooperative is open to people that meets the criteria set by
the IFC. In the case of employment based IFC, membership is open to people having the
same profession or belonging to the same employer, mostly Muslims, because IFC always
have a religious undertone, though that is not an express condition. In case of the
community based IFC, members come from different profession or self-employed
individuals with different enterprises. Like the traditional FC, IFC is mostly limited to
people of a particular geographic location, but there are some IFC that have members
beyond a certain geographical location, even across different continent. This is possible as
some of the IFC operates online membership and have members from different
geographical location.
ii) Ownership and Management: Islamic Financial cooperatives in SSA are member owned.
The cooperative is run by executive committee that are elected by voting or selected
through the shura committee. This is a tenured position, with stipulated number of years,
ranging from one to three and is renewable only once. In most cases, the elected
members perform operational task of IFC. This is because most of the IFC are still not yet
in the position to employ people to perform the operational task of the cooperative. These
operational tasks include record keeping, evaluating and monitoring members.
iii) Profile of the Members: The members of employment cooperative are somewhat similar
as it is normally made up of people with similar profession or under the same employer.
However, community based cooperatives have diverse membership with different
employment portfolio and coming from the same or different geographical location as
long as they can meet the membership requirement. There is no limit to the membership
of the cooperative.
iv) Sources of Loan Fund and Administration of the Group: The loans giving to members
come from the saving by the members. The money use for running of the cooperative
affairs comes from membership charges and profit makes by the cooperatives in the
businesses it involves in. IFC also makes money from partnering members in their
business and setting up of cooperative owned businesses.
3. Regulatory Framework for Member-Owned Islamic Microfinance Sub-Saharan Africa
A regulatory framework refers to the law, regulations, guidelines, rules and code of conducts which
entities being regulated are expected to comply with, together with institutions or structure in place to
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enforce it. Regulation of financial institutions is as a result of need for the system to boost funds
mobilization and intermediation to promote efficiency in the distribution of capital and guarantee
correct risk management, and depositors’ protection. With reference to Member-owned Islamic
microfinance, it refers to set of laws, regulations, guidelines, rules and code of ethics that it must
comply with to safeguard the money of the members and comply with Islamic standards.
Reasons for Regulating Member-Owned Islamic microfinance institutions in SSA
There are a various reasons why member-owned Islamic microfinance institutions in SSA need sound
regulations, some of which are listed below:
i) For it to reach a large number of Muslims and others who are financially excluded
because of non-availability/lack of coverage of non-interest taking microfinance banks
and the charge of interest by traditional member-owned microfinance institution to be
able to attract government and/or donor support to boost private capital it has attracted
from member savings.
ii) To give room for properly and orderly development of the nascent institution.
iii) Most MIMI begin as self-help organizations to assist members and have to seek
alternative strategies to survival such as assessing donor fund.
iv) To be able to move from credit organization to more commercially oriented entities-
regulations lays the foundation for such transformation.
v) Ensure financial sector stability- though players in MIMI, like other microfinance sector
have little systemic impact, failure can have negative impact on the credibility of the
financial sector
vi) To render legitimacy and confidence to the sector in order to attract long-term funding to
the sector
vii) Investors and donors need to have confidence in the systems in which the recipient of the
funds operates in.
viii) Regulation sets minimum acceptable standards and gives confidence in MIMIs as a safe
destination of donor or investor funds
Proposed Regulatory Frameworks for Member-Owned Islamic Microfinance Institutions in
SSA.
Given that MIMI have evolved as self-help initiatives by members to ensure their financial
inclusiveness, there exists various regulatory structures that can be used to regulate it. These
regulatory structures may be one or combination of any/or all of the following depending on what is
obtainable in a particular country:
Primary Registrars
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Microfinance institutions are registered legal entities under different pieces of legislation in many
countries in SSA. These legislations include “The Money Lenders and Rates Interest Act”, “Banking
Act”, “Cooperative Society Act” and “Private Voluntary Act”. MIMI can come under any of these
legislations depending on which country and what is obtainable. However, most of these need special
provision to be able to cater for the non-interest component of MIMI as most of them are formulated
based on interest bearing activities.
Network of MIMIs
There exist different national and international networks that give support to MFIs. These networks
compose of both formal and MFIs. These networks serve a regulatory role as they develop
performance standard for best practices that member organization are persuaded to meet. Inability to
obey these laid down network norms by members mostly result in loss of benefits provided by the
network for its members. These benefits include capacity building opportunities, inform of training
and system implementations, and financial services such as grants and guarantees. MIMI can also
form local, national and international networks among similar organizations, both formal and
informal, and play a regulatory role by developing sets of performance standards and best practices
that member organizations should be encouraged to struggle to achieve. There should also be
incentives attached to these norms, failure to follow which should also attract loss of benefits, such as
training and systems implementation especially those relate to Shariah which MIMI are noted for, and
financial services like grant and guarantees as in the case of traditional MFIs.
Self-Regulatory Body
This refers to a body that is founded, owned and controlled by MIMI members to be supervised. This
can be an umbrella association of MIMIs in any of the countries. The duty of these self-regulatory
bodies will be to regulate the market conduct through the formulation of codes of conduct as well as
other norms for member organizations. The primary responsibility of the self-regulatory body will be
to monitor and enforce the agreed norms. However, experiences from MFIs show that this regulatory
structure is not suitable for prudential supervision as most of member institutions normally lack the
power to adequately sanction erring members.
Apex Institution
This is another body that can be used to regulate MIMIs. This involves having an apex institution or
national fund that will be giving wholesale lending to the local MIMIs. Because of its role as an
investor in MIMIs, that apex institution can naturally be used as a form of regulatory structure. This
institution will assess and monitor the soundness of the MIMIs it extends loan to. Any MIMIs that do
not meet the laid down standard can be sanction by denying it loans. This will make MIMIs to
struggle to conform to the terms and conditions of the loan. These conditions may include: Financial
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soundness (adequate capital); achieving and maintaining acceptable profitability (if need be); ability
to meet obligations as they fall due (liquidity); having a competent Board of Directors; having annual
audited financial statements, and conforming to appropriate Shariah standard.
Delegated Supervision
This is an arrangement whereby financial supervisory agency of the government delegates its role as
the direct supervisor of financial institution to an external body while it monitors and controls the
body. This role can be given to an apex regulatory structure, umbrella association of MIMIs religious
council (or Shariah board) or audit firms. However, there are some issues that need to be clarified for
proper implementation of delegated supervision. These, among others, include: who bear the cost of
the delegation; in case of the need to withdraw authority from the delegated supervisor, what will be a
realistic fallback option; and which authority will take charge to sanitize the system in case the
delegated authority fails. These are important issues that must be settled before engaging delegated
authority to supervise the activities of MIMI.
Financial Supervisory Agency
The central bank is the financial supervisory agency in most of the countries in SSA that is
responsible for supervising bank and other financial institutions including MFIs. However, the focus
of the central banks is more on deposit-taking MFIs and applies non-prudential supervision on credit
MFIs alone. Unfortunately, most of MIMIs only deal with members saving and do not take deposit
from the general populace. Some central banks are also using minimum start-up capital for MFIs as a
way of rationing prudential supervision. Sadly too, MIMIs do not meet this minimum start-up capital
for it to fall under the MFIs that will come under the supervision of the central bank. The result of
these is therefore the lack of financial and human resources to supervise MIMIs effectively. The
central banks could make special provision for this faith based financial institutions and other MFIs
that are not deposit-taking or meet the minimum start-up capital to be able to monitor their financial
activities.
ShariahAdisory Board
Shariah advisory board is a body that regulates the shariah activities of financial institutions. Where it
operates, it either comes under the central bank or operates as an independent body. This body advises
the central bank on the shariah issues regarding to Islamic financial activities. They look at the shariah
compliance of any financial products/activities under Islamic financial institutions and advice
appropriately. This body or similar one may be used to regulate the activities of MIMIs, especially in
the area that has to do with shariah compliance.
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4. Conclusion
Member-owned Islamic microfinance is a new self-help group by Muslims in SSA to ensure financial
inclusion of the members. The importance of this initiative is underscored by the fact that more than
85 percent of the people in this region are un-bankable, out of which a reasonable number are
Muslims who will not deal in interest. As laudable as the idea may look, leaving it unregulated may
be a time-bomb for the poor members, who put in their meager resources to assist themselves, if it
fails. This calls for a sound regulatory framework that will not only protect poor fund, but will also
ensure the continuity of the good idea.
This study has looked at the operations of the two commonly used member-owned
microfinance organizations by Muslims- saving groups and financial cooperatives, with a view to
understand their mode of operations. It has also discussed various regulatory frameworks that are
available to regulate this nascent financial institution. It is hope that this study will gear up the
stakeholder to do what is necessary and call the attention of researcher to research more in this area.
References
Alam M. N. (2003) ‘Institutionalization and Development of Saving Habits through Bai-Muajjal
Mode of Islamic Banking Finance (A unique means of mobilizing rural savings towards
productive sources).’, Managerial Finance, Selected Financial Institutional Structures and
Policy Perspective, Volume 29, Number 2/3, Barmarick Publications, England, January,
2003. pp. 3-22.
Coleman, B.E. (2006). Microfinance in Northeast Thailand: Who benefits and how much? World
Development, 34(9), 1612-1638.
Fouzia, J. (2012). Financing Microenterprises: Creating a Potential Value-Based Hybrid Model for
Islamic Microfinance, Proceedings of International Conference on Excellence in Business,
Sharjah, United Arab Emirate, May, 09-10.
Gofran, M. (1996). Loan Utilization and Repayment Behaviour of Women Members inBasanGazipur
Branch of Grameen Bank, MS Thesis, Institute of Post-graduate Studies in Agriculture,
Gazipur, Bangladesh.
Juwaini, A. Rambe, M. Mintarti, N. and Febrianto, R. (2010). BMT (BaitulwaTamwil) Islamic Micro
Financial Services for the Poor, ISO/COPOLCO WORKSHOP, Bali, Indonesia, May 26,
2010.
Obaidullah, M. (2008).Islamic Finance for Micro and Medium Enterprises (ed), IRTI, IDB.
Athmer, G. & Bosch, E. (2013).Policy Guidelines for Donor Support to Member-owned Financial
Institutions in RuralSub-SaharanAfrica.Access on 10/12/2014 from
http://www.microfinancegateway.org/p/site/m/template.rc/1.9.63399/.
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Paper 12
The Impact of Regulatory and Supervision framework on Microfinance in Kenya
Abd elrahman Elzahi Saaid ALI, (PhD.)Islamic Research and Training Institute (IRTI/IDB)
Wahida Mohamed Athman ALI (MA )Maseno University
AbstractMicrofinance, through formal and informal means and institutions, is one of the very essential branches of lending that is used to mitigate the negative impact of high poverty and unemployment among the youth, mariginalised groups and the needy in Kenya.Therefore, in order for these services to be delivered to the targeted beneficaries effectively, a strong regulatory and supervisory system is rather essential. This research seeks to investigate and test the Kenyan microfinance regulatory system and pinpoint its positive and negative impacts on institutions and the targeted beneficiaries located in different parts of Kenya. This study is expected to give strong policy implications for both government and the public.
Key Words: Microfinance Institutions (MFIs), Development Financial Institutions(DFIs), Savings and Credit Cooperative Societies (SACCOS), Rotating Savings and Credit Societies(ROSCAS) ,Accumulating Savings and Credit Associations (ASCAS), Association of Microfinance Institutions –Kenya (AMFI-Kenya), DTMs-Deposit Taking Microfinance
Introduction:
The Central Bank of Kenya (CBK) defines a microfinance institution (MFI) as an institution that
offers financial services such as credit, savings, insurance, money transfer services to the poor, low
income households and Small and Micro Enterprises (SMEs) who do not qualify for, and therefore
lack access to, traditional formal financial institutions. CBK broadly categorises MFIs into credit non-
deposit taking (credit-only) and deposit-taking microfinance(DTM) institutions. The distinction
between the two is that DTMs are licensed and regulated by the Central Bank of Kenya and are
permitted to mobilize and intermediate (or lend) deposits from the general public. However unlike
commercial banks DTMs can only engage in a limited range of products. They are not allowed to
invest in enterprise capital; undertake wholesale or retail trade; underwrite or place of securities; and
purchase or otherwise acquire land except for expansion of deposit-taking business
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Non-deposit taking microfinance institutions, on the other hand are regulated by the Ministy
of Finance, and are not allowed to mobilize public funds and can only lend their own funds or
borrowed funds.
Both categories of MFIs support the economic activities of the youth, the marginalized, the
needy and SMEs contributing immensely towards poverty alleviation. Therefore the sound
development of a conducive regulatory and supervisory environment that takes into account the
different categories of MFIs and facilitates their rapid growth is vitally important.
Background
The potential of using institutional credit and other financial services for poverty alleviation in Kenya
is quite significant. About 22 million people, or 50% of the population, are poor and mostly out of the
scope of formal banking services. Yet, according to the Financial Sector Deepening Trust (FSD)
website, Kenyan banks serve no more than 4 million people leaving the rest of the economically
active population to depend on expensive informal and semi-formal sources of finance not subject to
the prudential regulations that apply to banks and other formal-sector institutions. This is because the
ability of most of these ‘less regulated’ microfinance institutions (MFIs) to leverage capital and
mobilize external resources is limited to borrowing expensively from formal financial institutions or
large institutional and individual investors, or the government or accepting limited and forced deposits
from the public.
Kenya’s MFI landscape
Figure 1: Kenya’s financial access strand
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Figure 2: Kenya’s Financial Sector Landscape
MFI business in Kenya is carried out by different institutions with varied institutional forms.
There are companies (including commercial banks), Co-operative Societies, Trusts, Non
Governmental Organisations (NGOs),State Corporations(Such as the Uwezo Fund and Women’s
Enterprise Fund) and Informal institutions such as ROSCAs, ASCAs & Moneylenders.The ROSCAs,
ASCAs and money lenders are user-owned and managed and offer products tailored to the needs of
their different communities.
According to AMFI Kenya’s 2012 annual report on MFI sector in kenya the total assets for
the sector report a steady growth averaging 30.4% and are worth over KES 220bn (USD 2.59bn) as of
Dec 2011, up from KES 129bn (USD 1.71bn) as of Dec 2009. However, Equity Bank alone accounts
for 80.4% of the sector’s total assets. In fact, the sector’s asset growth, excluding commercial banks,
is less strong, and relatively stagnant. In 2011, DTMs recording a negative growth despite the fact
that there was an increase in the number of granted DTM licenses.
Overall,the sector reaches out to nearly 1.5 million borrowers with the value of the
outstanding loan book standing at KES 138.4bn as of Dec 2011 (USD 1.6 bn), which shows positive
growth trends. Total liabilities amount to KES 178.4bn (USD 2.2bn) as of December 2011 and show
steady growth trends of 40% and 27.6% in 2010 and 2011 respectively .The sector largely funds itself
with deposits collected from the public, which account for 58.9% of total assets, while total equity
accounts for 18.2% of total assets, followed by borrowings accounting for 16.6%. compulsory savings
account for only 4.16% of the funding structure.
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Figure 3 Liabilities and Equities of Kenyan MFIs
Problem Statement
Despite, the ‘slow’ paced growth, Kenyan MFIs continue to evolve rapidly by creating new ways to
service the increasing demand for their services. This innovation and rapid development of many
localized efforts to provide financial services to the population outside of formal channels seems to
have generally overtaken taken policy formulation by the Kenyan government. The reaction to this,
by some quarters in government and multilateral agencies is to favor comprehensive regulation
through mandated standards of performance and risk-ratios based on the untested hypothesis that the
institutional and market impact of moving from an less regulated environment to one that is blanket
and as tightly regulated as the one for formal banks will have the same positive impact.But is this the
best available option?
With this in mind it is important to note that the MFI sectorin Kenya is quite unlike the formal
banking sector. MFIs face a number of constraints that need to be addressed to enable them to
improve outreach and sustainability. In Kenya, like in many other countries, approaches to the
regulation of MFIs are complicated because many institutions involved in providing microfinance
services exist under different legal structures. MFIs in Kenya can be registered under eight different
Acts of Parliament namely: The Non Governmental Organizations (NGO) Co-ordination Act, The
Building Societies Act, The Trustee Act, The Societies Act, The Co-operative Societies Act, The
Companies Act, The Banking Act and The Kenya Post Office Savings Bank (KPOSB) Act. Some of
these forms or registrations do not address issues regarding ownership, governance and management
capacities, unhealthy competition, access to funds and accountability simply because they lack the
appropriate regulatory oversight machinery that can enforce compliance to set performance standards.
This presents a challenge when it comes to identifying the appropriate overarching regulatory
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approach that is conducive to the development of the sector while providing adequate flexibility to
microfinance activities.
Many may also argue that the ‘reduced’ oversight mode has enabled the MFIs to innovate and
develop different techniques of providing micro finance services. Bearing in mind the risks involved
and the impact on the well being of the youth, marginalized groups and the needy when a majority of
the MFIs that serve them operate in an environment that doesn’t have the appropriate oversight and
set performance standards the debate then moves from whether or not to have regulation but to how
much regulation and what kind of regulatory framework is necessary.
Objectives
This general objective of this study is to examine how Kenya’s regulatory and supervisory framework
impacts on the clients, operations and institutional development of microfinance institutions (MFIs).
Specifically the study will
1. Examine the performance of the microfinance sector since the implementation of the
Microfinance regulatory and supervisory framework of 1996 to date;
2. Critically review, identify and analyze the basic regulatory and supervisory weaknesses,
constraints and challenges that are obstacles to the efficient performance of the microfinance
sector.
3. Suggest a course of action to enhance the regulatory and supervisory framework of MFIs in
Kenya.
Research Questions
1. What is the impact of the regulatory and supervisory framework on the performance of
Kenya’s microfinance sector since 1996?
2. What are the basic regulatory and supervisory weaknesses, constraints and challenges that are
obstacles to the efficient performance of Kenya’s microfinance sector?
3. What is the best course of action for enhancing the regulatory and supervisoryFramework for
MFIs in Kenya?
Methodology
The study will basically use secondary information and a questionnaire survey which will be
distributed through AMFI to MFIs and commercial banks.
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Scope
This study will seek to examine the impact of Kenya’s existing regulatory and supervisory framework
on MFIs. It will define its weakness, constraints and challenges and then suggest the best course of
action that can be taken to enhance the framework. This paper will only deal with external supervision
of MFIs that is usually performed by central bank or specialized supervisory agencies.
Justification for the study
This study is expected to contribute to the efforts of strengthening Kenya’s regulatory and
supervisory framework of microfinance institutions by pinpointing the weakness, constraints and
challenges as well as make suggestions for improvement.
This study seeks to use the Kenyan context to improve the understanding of the host of
challenges being proliferated by the regulatory and supervisory framework on MFIs existing outside
the formal regulatory framework.This will be of significant use to governments, funders,
implementers and practitioners who are seeking to develop a financial inclusion strategy that
leverages on these kinds of MFIs.
MFI service providers are continuously discovering innovative usages that their users are
inventing. They are seeing what works and what does not. Such lessons learned need to be
incorporated in regulatory and supervisory frameworks and shared widely and quickly. The
Innovators themselves cannot do this as fast as they should, as they already have enough to do in
terms of improving their services and fine-tuning their business model. This is why studies such as
this one need to be conducted in order to incorporate and disseminate lessons learnt quickly and
effectively. This paper is useful therefore in the development of up to date guidelines and strong
policy that lead towards the establishment of a regulatory environment that permits all MFIs to
progressively evolve into institutions capable of wider outreach and achieving critical mass in
operations.
Finally, it is envisioned that this study will add to the existing literature, provoke interest in
areas for further research in regulatory systems as well as be a valuable tool for students,
academicians, institutions, corporate managers and individuals.
Organization of the paper
This paper will start by discussing the need to regulate and supervise microfinance institutions. It will
then identify various principles, approaches and instruments of regulating and supervising MFIs from
various literatures, books and theoretical papers. The next section will assess Kenya’s financial
system, the historical development of microfinance and provide a review of the regulatory and
supervisory framework focusing on major weaknesses and challenges. The final section will
summarize the findings, present a conclusion and set out recommendations for a course of action
leading to the enhancement of Kenya’s regulatory system.
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Literature Review
Introduction
The current literature and actual practice tell us that the government and donor funds can supply only
a tiny fraction of global microfinance demand and hence financial intermediation by self sufficient
institutions is the only way that financial services can be supplied to lower-income people worldwide
(Marguerite S.Robinson , 2001). Only an MFI that is able to cover its costs can be able to continue its
operations in a sustainable way and generate benefits to its clients (H.Schmidt and Zeitinger, 2003).
This paper is based on the belief that the microfinance sector can reach its full potential in a regulated
environment. It must be able to enter the arena of licensed, prudentially supervised financial
intermediation. At the same time regulations must be crafted that allow effective and efficient
development of the MFIs (Peck Cristen and et.al, 2003).This section discusses the basic issues in
regulation and supervision of microfinance institutions. Effort is also made to present and learn from
Uganda and Tanzania’s experience.
Definitions
According to Peck Christen, R. Lyman and Rosenberg (2003) regulation refers to a set of enforceable
binding rules that govern the conduct of legal entities or individuals, whether they are adopted by a
legislative body (laws) or an executive body (regulations). PrudentialRegulation on the other hand
refers to the set of general principles or legal rules that aim to contribute to the stable and efficient
performance of financial institutions and markets (Chaves and Gonzalez_Vega, 1994). Therefore, the
purpose of prudential regulation is to ensure the financial soundness of financial intermediaries such
as MFIs and try to prevent financial system instability and loss of depositors’ money. Prudential
supervision refers to external oversight of the financial intermediaries though examination and
monitoring mechanisms to verify compliance with regulation.
Rationale of Regulation and Supervision of MFIs
The need and rationale for regulation of economic activities is often justified as a policy instrument to
minimize the effects of market failure, protect public deposits and small depositors, ensure integrity
and financial stability, promote efficient performance of the institutions has gained substantial
attention by governments of different countries recently, particularly in the course of reform measures
in developing countries (Armstrong and et.al cited in Thankom Arun, 2004). The regulatory
framework of any country should therefore have a clear rationale and objectives for regulating the
financial sector, otherwise it leads to wastage of scarce supervisory resources, unnecessary
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compliance burdens of licensed institutions and development of the financial sector will be
constrained.
Principles of Regulation of Financial Intermediaries
The current debate in relation to regulation and supervision of financial intermediaries is not about
whether there should be regulation or not but how much regulation and what kind of regulatory
framework to introduce for microfinance institutions. In order to appropriately design a regulatory
framework of the optimal type it should be very specific in terms of time, location, and institutional
structure of the organization to be regulated (Chaves and Gonzalez-Vega, 1994).
This paper presents the appropriate principles of regulation as:-
Regulation should accord competitive neutrality or fair competition among the MFIs;
Regulation should enhance efficiency (Chaves and Gonzalez-Vega, 1994). But it is important
to note here that measures such as high equity requirements to safeguard the soundness of
financial systems always affects competition and tend to impact efficiency.
All regulatory guidelines and supervisory methods should be subject to a cost-benefit analysis
because overregulation can hamper innovation. For example, while the number of MFIs in
Kenya is high, the cost of supervision tends to be high especially when compared to the actual
risk these MFIs impose on the financial system. This is one of the major challenges for
Kenya’s regulators and supervisors.
The regulatory framework should be dynamic and not static. It should be flexible enough to
fit into the environment in which the intermediaries operate, the market niches they serve, and
their institutional design. According to Chaves and Gonzalez-Vega, the idea is to allow for
diversity of organizations compatible with the diverse needs of the market, but at the same
time to assign the regulatory burden with maximum efficiency.
Prudential Regulation
Different countries apply different instruments of prudential regulation. Therefore, there is a variation
on type and scope of government regulation of depository financial intermediaries. The two
frequently adopted instruments of regulation are preventive and protective regulation.
Preventive Regulation
Preventive regulation is a pre-crisis measure that is taken by external supervisors in order to reduce
the probability of failure of depository financial institutions. Preventive regulation tries to control the
risk exposure of the system. External supervisors use entry and ongoing requirements as instruments
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of preventive regulation. Entry requirements ensure that only financially healthy institutions join the
market place. Generally these are institutions that do not have flawed governance and organizational
structures, have quality staff and portfolios. Otherwise they will negatively affect the financial system
and hence the economy as a whole (Michael Fiebig, 2001). Entry requirements are usually based on
minimum capital requirements, ownership criteria, feasibility studies and other ongoing requirements
such as capital to asset ratio. This is one of the most powerful actions that can be laid down by
external regulators and one of the most difficult for Kenyan MFIs from the less regulated sector to
overcome.
In terms of ownership, according to A. Chaves and Gonzalez-Vega (1994), since the MFIs in
the less regulated sector do not have owners in the traditional sense, this may suggest the need for a
different type of regulation for the microfinance institutions. In terms of capital adequacy, Michael
Fiebig (2001) proposes the idea that for developing countries a higher capital adequacy rate than 8%
to cushion the specific risks of narrow and volatile financial systems and for microfinance providers
in particular to buffer the danger of rapidly deteriorating short term credit portfolios. Stefan Staschen
(2003) recommends stricter capital adequacy requirements for MFIs than commercial banks.
Protective regulation
Protective regulation is a post crisis measure taken by external regulators so that to avoid run on
deposit by assuring the depositors that they will be the first to withdraw the funds from the financial
intermediary. Protective regulatory instruments include government as a lender of last resort, deposit
insurance and the formalized process of financial intermediaries restructuring and reform.
Prudential supervision
According to Chaves and Gonzalez vega (1994), prudential supervision refers to the process of
enforcing the regulatory framework. The financial intermediaries are monitored and directed to ensure
that they comply with the regulatory requirements so as not threaten the financial system. Efficient
regulatory policies are useless if they are not backed by enforcement mechanisms of efficient
supervision (Christen and Rosenberg, 2000).
The challenge here therefore is for a supervisory authority to design indicators for measuring
risks, monitoring and analyzing the impact external events that might have an impact on the
performance of the financial intermediaries. The prudential supervisory system must work as an early
warning system.
Offsite and On-site supervision
An adequate mechanism of the supervision of financial intermediaries has two components. These are
offsite and on-site supervision. The off-site component is the early warning system and is based on
the analysis of the data reported to the supervisory authority. The on-site component involves actual
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visits to the financial intermediaries to verify thatthe data fed to the off-site system are accurate. The
most commonly applied tools for on-site supervision include CAMEL and PEARLS however recent
development indicate that central banks are moving towards introducing risk based supervision
approach.
External and Internal audit for Supervision
It is a fact that the external auditors and internal audit departments of MFIs can besource of
information for supervisory work but the reliability of the information provided by them is determined
by the quality of the external and internal audit practice. The quality of audit negatively affects the
quality of data provided to regulators and hence impacts on the quality of off-site analysis which then
leads to the demand for increased need of on-site examination and hence higher cost of supervision.
East African experiences in regulating and supervising MFIs:
Tanzania case study
The microfinance sector in Tanzania is highly segmented and exists in the form of banks,
financial institutions, community banks, saving and credit societies and NGOs. There are three
commercial banks (National Microfinance Bank, CRDB Bank and Akiba Commercial Bank) that
provide microfinance services. The post bank also provides a variety of saving deposit services.
Saving and Credit Cooperatives (SACCOS) and foreign donor assisted NGOs are also providers of
microfinance services. The primary and legal functions of the microfinance companies in Tanzania
include accepting savings deposits, and fixed (time) deposits from the public, making microfinance
loans making remittances and domestic payment orders and transfers. There is no restriction on the
lending methodology to be used by MFIs. The microfinance institutions are allowed to provide loans
to individuals, groups, micro and small enterprises
The regulatory framework of Tanzania’s MFIs stipulates requirements for licensing such as
adequacy of capital, verification of ownership and manpower competency. Under this regulatory
framework branch opening is also subject to review process. The microfinance companies (MFC) and
microfinance activities law of 2004 also stipulates that the board of directors appoints the internal
auditor who then becomes accountable for them. A specialized directorate at the Bank of Tanzania
(BOT) regulates and supervises the MFIs.
The main regulatory requirements in Tanzania are summarized below:
Minimum Capital Required to establish MFC with nationwide branches TSHS 800,000,000
equivalent to (US$ 587,000)
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Minimum Capital Required to establish unit MFC Tshs 200,000,000 equivalent to (US$
147000)
Maximum Lending Limit .3% of core capital if granted against collateral and 1% of core
capital if secured by other than registered collateral
Capital Adequacy Ratio: Core capital of 10% of RWA or total capital of 15% RWA
No. of Days Past Due Classification ;0 days (Current) 2%,up to 15 days (Specially
mentioned) 25%, 16 – 30 days (substandard) 50%, 31 – 45 days (Doubtful)75% ,More than
45 days (Loss) 100%.
The more notable characteristics of Tanzania’s microfinance industry are (a) the existence ofthe
specialized directorate for microfinance at the country’s central bank, (b) the regulatory framework
for microfinance (which should inform the activities of the specialized directorate and govern the
operations of microfinance intermediaries), which still needs to be drafted by outside consultants,
and(c) a very thin and fragmented microfinance sector whose main players – the SACCOs and NGOs
(at least until NMB and the commercial banks with microfinance programs are able to reach critical
mass in their microfinance operations) – might not even fall within the ambit of the regulatory
authority, even though the BAFIA 1991 gives the Bank of Tanzania the discretion to subject SACCOs
to the same regulations as those [licensed deposit-taking] institutions of similar size and offering
similar activities in order to ensure a level playing field.
Challenges faced and lessons learned from Tanzania
The National Microfinance Policy is a clearly-articulated document, but it is not sufficient to
guide semi-formal and unregulated providers of microfinance services in assessing which institutional
transformation processes need to be considered until the appropriate microfinance regulatory
framework is put in place and becomes operational.
The gap between requirements for and the supply of manpower with financial skills for
banking and microfinance operations is becoming increasingly more apparent as a major constraint to
development of sustainable microfinance. Thus, capacity constraints are a major issue, not only for
providers of banking and microfinance services, but for the regulatory agencies (BOT and the
Cooperatives regulator) as well. A related obstacle arises from Tanzania’s labor laws, which make it
virtually impossible to terminate the employment status of an employee even for just cause such as
fraud.
While the relevant banking and financial laws and regulations clearly permit the
establishment of licensed specialized regional and community banks oriented to rural and micro
finance, there have only been three such institutions established. The reasons and factors underlying
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this need to be identified and better understood by policy makers, stakeholders and practitioners, to
make appropriate adjustments in the regulatory framework.
There is need for a clearly defined strategy on how to integrate SACCOs and NGOs into the
emerging microfinance regulatory framework, and what policy environment, resource and capacity
requirements will be required not only by the institutions but also by the regulatory bodies.
While not specific to the rural and micro finance sector only, the practical application of
accounting methods and standards appear to lag significantly behind the needs of a dynamic and
modern financial sector. Similarly, the tax regime’s treatment of loan loss provisions has an adverse
impact on the application of sound banking practice and compliance with prudential standards.
Two other areas that require attention and appropriate policy action because of their impact
on the growth of micro and small enterprises and of institutional providers of microfinance services
are
o The reporting requirements (and associated time and resource costs) for legalentities and
o The impact of the structure for business and local taxes and impositions thatmake the cost
of transactions much higher or impede the application of and compliance withprudential
banking standards.
Uganda case study
The formal financial institutions in Uganda are composed of Central Bank, commercial banks,
credit institutions and MDI (Microfinance Deposit taking Institution) (David D Kalyango, 2005).
Many other institutions like NGOs, SACCOs and unregistered microfinance institutions also provide
microfinance service. The regulatory and Supervisory framework in Uganda is based on tiered
approach. According to David D Kalyango (2005) the tired approach reflects microfinance as a line of
business and it is conducive to the development of a sound microfinance sector and it does not
constrain the microfinance activities in the country.
The tired approach identifies four categories of MFIs which are regulated using different
approaches that are compatible to their nature. They are allowed to graduate from the first tier to the
next when they meet the requirements of that tier.
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Table 1: The Tiered Regulatory Framework of Uganda
Criteria Level Deposit Taking
Initial capital required
Regulated and supervised by
Tier 1 - Banks which are licensed under the provision of Act 2004 by whichmicrofinance is considered as a new financial product in their lending portfolio.
Yes US$ 2 M Bank of Uganda
Tier 2 - Credit institutions are licensed under provision of the Financial Institutionsact 2004
Yes (but notallowed totake demanddeposits)
US$ 500,000 Bank of Uganda
Tier 3 - Microfinance Deposit taking Institutions (MDIs), which are regulatedunder microfinance deposit taking institutions Act. 2003
Yes US$ 250,000 Bank of Uganda
Tier 4 - Non deposit taking institutions or credit only institutions
No NA Under discussion withMinistry of Finance andumbrella body
Source: Adapted from: How to regulate and supervise microfinance (Kampala, 2000) and Kalyango (2004).
The Micro Finance Deposit - Taking Institutions regulation of 2004 dictates conditions for suitability
of shareholders, liquidity, capital adequacy and provisioning requirements to be complied with by
MFIs. While Uganda’s MDIs Act of 2003 covers issues such as procedures to be followed during
liquidation, management takeover ,receivership, deposit protection mechanisms, application of Credit
Information Bureau, and duties/responsibilities of external auditors.
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Table 2: Prudential Norms set for Uganda Deposit Taking Microfinance Institutions
No Item Requirement Frequency of reporting
1 Liquidity 15% of total deposits Weekly
2 Capital Adequacy Core capital not less than 15% of risk weighted assets.Total capital not less than 20%RWA
Monthly
3 ProvisioningSubstandard (Un paid for 30-60 days)Doubtful (un paid for 60-90 days)Loss (un paid for > 90 days)
25% of outstanding balance
50% of outstanding balance100% of outstanding balance
Monthly
Source: Extracted from Uganda's Micro Finance Deposit Taking Institutions Regulation Issued in 2004
Challenges and lessons learned from Uganda
On the practitioners’ side, smaller MFIs are advocating for a far smaller capital amount (USh 20m
[US$15,000]) compared to the Bank of Uganda(BOU) suggested requirelimit of (USh 700m [US$
388,000]). However, all parties agree in principal that the capital requirements for MFIs needed to be
smaller than those for the formal financial institutions even though it was evident that the bigger
MFIs, especially internationally based MFIs, did not have a problem with the USh 700m requirement.
The promulgation of the MDI Act 2003 has however set the minimum capital requirement at USh.
500m (US$ 250,000).
The key MFIs in Uganda are donor funded, which raises the issue of ownership. The key
question was how donor-funded institutions would become deposit-taking financial institutions and
what would be the appropriate ownership structure?
There is also the fear that BOU had limited experience with MFIs, which would results in
MFIs being subjected to the same rigorous regulations as those applicable to banks. However, through
consultations it has been able to successfully develop specially tailored regulations.
The original thinking at the BOU was that any form of deposit/savings, whether voluntary or
involuntary, had to be regulated and supervised by the Central Bank. To the practitioners, such
measures were too restrictive. They strongly believe that this would stifle innovation especially for
those MFIs that were not intending to mobilize voluntary deposits due to their own lack of capacity.
The practitioners urged that the future of unregulated MFIs was in allowing them to accept forced
savings as a form of collateral. Because, most microfinance loans are character-based and an
important way of securing their portfolios from default is to encourage forced savings from clients.
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Besides, such savings help the MFIs to develop a credit history of the clients. In a bid to promote the
industry and through the consultative process, it was agreed that forced savings would not trigger
licensing requirements as long as they were not intermediated.
The overview of Financial System and Development of Microfinance Sector in Kenya.
The earliest cases of micro-finance and microcredit development were church-based lending programs
that arose in the 1980s. Most were confined to specific church parishes that started with local
financing for members before they developed into institutions that could cover a wider number of
people in rural and suburban areas of Kenya. While these church-based lending programs served the
primary function of providing the credit to the members of their congregations, they were often very
small and operations limited to specific geographic locations hence with limited reach and financial
resources. However, they still served the function of providing limited credit facilities for their
members for use in specific purposes.
However in many cases, these organizations were overwhelmed by the demand for credit by
their membership. From the beginning, nongovernmental organizations (NGOs) began to fill this gap
by extending the credit services more widely. Due to this, in the 1990s, the NGOs developed
functioning systems to facilitate the administration of the credit delivery. The programs were funded
and were not necessarily considered as outright business ventures in spite of the success that most of
the schemes achieved. As the successes of the microcredit institutions grew, they received
considerable funding and began to turn into full commercial entities. This development was also aided
by the increased competence in administration, credit assessment and the organization of individuals
into groups to facilitate the collective guarantee of loans by individual members. As the micro-finance
industry in Kenya grew, the institutions assumed various formal structures and were registered under
different statutes.
Towards the end of the 1990s, many micro-finance institutions moved away from serving
closed groups and into more formalized institutions. This institutionalizationnecessarily required that
the micro-finance and micro-credit institutions also move away from subsidized institutions into more
commercial entities. Evidence of the growth and increasingly significant role played by the micro-
credit and micro-finance institutions is seen in the development of the K-Rep Bank. The K-Rep bank
is the first of the micro-finance institutions in Kenya to develop into a full commercial banking
enterprise. In order to formally conduct its business as banking institution, the K-Rep Bank in Kenya
is registered under the Banking Act (Cap 488).
The Kenyan banking sector has experienced a continued growth trajectory. It is developing
and deepening faster than the overall economy. It grew by 9% in 2010 and 7.8% in 2011, while the
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economy grew by 5.8% and 4.4% in 2010 and 2011 respectively. This development within the
financial sector is strongly guided by the medium-term objectives of the financial sector reform and
development strategy embedded in the economic development blueprint, ‘Vision 2030’, which covers
the period 2008-2030. The 2030 vision for financial services is to create a vibrant and competitive
financial sector that will create jobs and promote a high level of savings to finance Kenya’s overall
financial needs. It provides for the introduction of both legal and institutional reforms in the sector
that will enhance transparency in all transactions, build trust and make enforcement of justice more
efficient.
Some of the specific developments include continued expansion of the sector through
branches and other places of business across Kenya as well as the larger East African region; growth
of the deposit-taking microfinance sub-sector; increased permeation of mobile financial services, with
more financial service providers entering into partnership with mobile service providers to provide
financial services through mobile phone platforms; and greater usage of the agency banking model,
which was rolled out in May 2010, to allow commercial banks to engage third parties to offer
specified banking services on their behalf.
Kenya’s Regulatory architecture
The Microfinance Act 2006
The microfinance industry in Kenya is primarily governed by the Microfinance Act 2006 (Chapter 19,
Laws of Kenya) (the “Microfinance Act 2006”), and by the Central Bank of Kenya Act (Chapter 491,
Laws of Kenya) (the “CBK Act”). The main objective of the Microfinance Act is to provide the legal,
regulatory and supervisory framework for the DTMs. The Act categorises the Deposit Takings MFIs
as nationwide MFIs (operating countrywide) with a minimum core capital of KES 60M (USD
860,000) and Community MFIs (operating within a specific administrative region) whose minimum
core capital is KES 20M (USD 300,000). The Act makes provisions for MFI licensing issuance,
revocation and restriction, provides for MFI entry into regulated status, defines the minimum core
capital requirements and prohibited activities, provides limits for loans or credit facilities, defines
ownership and management structure, provides for supervision by CBK and stipulates the terms for
periodic reporting to the CBK.
The Microfinance (Amendment) Bill 2013 increased the range of financial services that the
DTMs can offer. It is now possible to differentiate regulated MFIs from other un-regulated lenders
because they are required by law to incorporate the term DTM into their names. Thereby enhancing
market confidence in Kenya’s MFI Sector. Section 14 of the Microfinance Bill was amended to
ensure that now the DTMs can issue third party cheques, operate current accounts and can perform
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foreign trade operations .It is argued that the transformation of DTMs into microfinance banks will
help in reducing their reliance on loans from local and international banks for lending.
The Deposit Taking Microfinance (DTM) Bill
The Deposit Taking Micro Finance Bill inter alia, specifies three different tiers of micro finance
institutions and who should regulate and supervise them:
First tier — Formally Constituted Deposit-taking MFIs: MFIs intending to take deposits from
members of the public regulated and supervised by CBK via the Deposit Taking Micro Finance Bill.
The Bill empowers the CBK to license, regulate and supervise formally constituted micro finance
institutions intending to take deposits from members of the public. Specific performance parameters
and appropriate guidelines will be developed to facilitate supervision of this group of MFIs. This
group of MFIs are members of the
Deposit Protection Fund Board (a deposit insurance scheme) that protects depositors’ deposit up to
KES. 100,000.
Second tier — Formally Constituted Credit-Only MFIs that do not take deposits from the
public but can accept cash collateral tied to loan contracts are regulated and supervised by the
envisaged Micro Finance Unit in the Ministry of Finance through regulations issued by the Minister
for Finance.
Third tier — Informally Constituted MFIs like ROSCAs, club pools, and financial services
associations (FSAs) are not be supervised by an external agency of the Government. Donors,
commercial banks, and government agencies from which they obtain funds or that support them are
obligated to carry out due diligence and make informed decisions about them.
Financial Institutions Department and Rural Finance Department
In the year 2000, CBK set up a microfinance division in the Bank Supervision Department (now
Financial Institutions Department) to participate in the drafting of the Microfinance Bill and to
develop prudential guidelines/regulations to be used once the Bill was in place. In 2004, the Central
Bank established a Rural Finance Department to address various policy issues concerning rural
finance, including microfinance. This department, in liaison with the Financial Institutions
Department is involved in developing capacity to regulate and supervise those microfinance
institutions that will be licensed under the DTM Bill.
Microfinance Units
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A Fully-fledged microfinance unit is envisaged at the Ministry of Finance (the Treasury) to formulate
policies and procedures to address the challenges facing microfinance institutions not supervised by
CBK, especially those in the rural areas, and to build a database to facilitate better regulation and
monitoring of their operations.
The Association of MFIs in Kenya
The Association of Microfinance Institutions (AMFI) is a member-based institution, registered in
1999 under the Societies Act by the leading MFIs in Kenya, with the aim to build the capacity of the
Kenyan microfinance industry. The main reasons for its establishment were the felt need for MFIs to
have a common voice; to lobby government for favorable policies; to share information and
experiences and to link up and network with both local and international actors.
AMFI currently has 59 member institutions serving more than 6,500,000 poor and middle
class families with financial services throughout the country. Membership ranges from banks such as
K-Rep and Equity to Deposit Taking Microfinance such as Faulu Kenya and KWFT smaller and rural
MFIs such as KADET and Aga Khan Foundation micro credit program as well as micro-insurance
providers such as Chartis and CIC insurance, wholesalers such as the government backed Women
Enterprise Fund, SACCOS such as Unaitas and development partners such as Swiss contact.
AMFI is governed by a General Assembly and is led by a Board of Directors who
experienced practitioners are running some of the leading microfinance Institutions in Kenya. AMFIs
mandate is to enhance collective action by MFIs and other stakeholders for a conducive policy and
regulatory environment for microfinance in Kenya;to strengthen the capacity of MFIs in delivering
appropriate and sustainable microfinance services to low income people, through organization and
coordination of workshops and training sessions and effective systems for information collection,
analysis and dissemination ;to develop and operationalize a Performance Monitoring System for MFIs
that will set standards and increase professionalism in the industry and to enhance collaboration,
linkages and partnerships between AMFI, its members and other development actors and
stakeholders, both locally and internationally.
Financial Reporting Centre
The Financial Reporting Centre (the “Centre”); established under the Proceeds of Crime and Anti-
Money Laundering Act, 2009 (the “AML Act”) became fully operational in 2012. The centre’s
principal role is to assist in the identification of the proceeds of crime and the combating of money
laundering. All banks, financial institutions, non-bank financial institutions, mortgage finance
companies and forex bureaux are obliged to monitor and report suspected money-laundering activities
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to the Centre, verify customer identity including that of existing customers, establish and maintain
customer records, and establish and maintain internal reporting procedures. With regard to cash
transactions, the reporting threshold for reporting institutions is set at US$10,000 or its equivalent in
any other currency, irrespective of whether or not such transactions are suspicious. This means that a
reporting institution would have to report to the Centre any cash transaction whose value is or exceeds
US$10,000 or its equivalent in any other currency. Banks and financial institutions have complained
that this is a relatively low threshold, and results in numerous transactions having to be reported.
The Prudential Guidelines
Prudential guidelines deal with a wide range of issues including licensing requirements, corporate
governance, board composition, remuneration of directors, capital adequacy requirements, liquidity
management, stress testing, foreign exchange exposure limits, prohibited business, anti-money
laundering, consumer protection, enforcement of banking laws and regulations, agent banking, and
representative offices.
The reason behind these new Prudential Guidelines is best summarized by reference to the
circular issued by the CBK which states that: “Pursuant to its mandate of fostering the liquidity,
solvency and proper functioning of a stable market-based financial system, the Central Bank of Kenya
has conducted a comprehensive review of the Prudential Guidelines and Risk Management Guidelines
currently in use. The review has been necessitated by developments in the national, regional and
global arenas and the need to proactively strengthen the regulatory framework for banks and other
institutions licensed pursuant to the Banking Act.”
Retail Transfers Regulation
As part of Kenya’s recent move to bring in adequate measures for consumer protection and to prevent
money laundering, the CBK has published the draft Retail Transfers Regulation, 2013 (the
“Regulation”) for provision and regulation of electronic retail transfers and e-money. Stakeholders
have been invited to review and comment on this draft Regulation before it is brought into force. The
Regulation will apply to all retail transfers utilizing an electronic payment method, and to all payment
service providers that are not licensed as banks or financial institutions. Such payment service
providers will be required to apply to CBK for authorization and, at the time of authorization, will be
required to hold a core capital of not less than KES 10m (approximately US$119,000). If the
Regulation is brought into force, service providers would need to report any suspicious transactions
which indicate possible money-laundering or terrorism financing to the Financial Reporting Centre.
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Islamic banking
There are currently two fully-fledged Shariah-compliant banks and a few conventional banks that
have an Islamic Banking arm but there are no fully fledged shariah compliant MFI in Kenya. A few
donor funded Islamic microcredit projects exist; none of which are regulated by CBK or are members
of AMFI. The challenge for offering Islamic financing has been the lack of a proper legal framework,
which prevents financial institutions from providing certain products. In addition, there is ambiguity
in respect of the tax treatment of Shariah-compliant financial instruments.
Recent regulatory themes and key regulatory developments that may impact MFI operations
A credit information-sharing mechanism was launched in July 2010 continues to be used by both
commercial banks and individuals. Through this mechanism, the CBK has ensured that banks have
strengthened credit appraisal standards by their incorporating credit reference reports in the credit risk
appraisal. However regulation has not yet been amended to allow MFIs to incorporate this process
into their credit appraisal system.
The Kenya Deposit Insurance Act, 2012 (the “KDI Act”), which has been assented to but is
yet to commence, provides for the establishment of an autonomous body called the Kenya Deposit
Insurance Corporation which will replace the current Deposit Protection Fund Board, a department of
the CBK. The KDI Act provides for the setting up of a deposit insurance system, and the receivership
and liquidation of deposit-taking institutions.
There is increased interest in Islamic MFI and non-deposit-taking microfinance business in
Kenya; areas not covered by specific legislation as yet.
Suggestions for further research
Further research needs to be done to determine the actual minimum capital requirements for every tier
of the regulatory and supervisory framework for MFIs.
It is also important to research into the exact number, size and suite of products offered by
MFIs in the less regulated sector so that it is then possible to design an appropriate regulatory and
supervisory framework.
Many MFI are moving towards the use of mobile phones for various transactions yet there is
no regulation in place to supervise these popular and globally acclaimed services. Urgent studies into
this arena are therefore very much required.
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Finally research into the definition of a proper legal framework and policies for Islamic finance needs
to be conducted if the Kenya expects to achieve significant growth in this sector.
Conclusion:
Most of the literature in the area of regulating and supervision MFIs confirms that themicrofinance
sector has to be regulated in order to have massive and sustainable delivery offinancial services to the
lower income section of the population. Therefore, the issue ofPrudential regulation and supervision
of MFIs is key to its success yet it is also a complex matter because it keeps evolving.
One of the objectives of this paper is to provide an appropriate model for tackling the
challenges and constraints of Kenya’s current regulatory and supervisory framework. In this regard
the paper will provide suggestions for a regulatory framework that will facilitate the transition of
MFIs from lower tier to the upper tier without creating problems of regulatory arbitrage. This will
involve the determining the impact of linking capital adequacy requirement not only to total capital as
well as the core capital of the MFI; the availing of special treatment by the regulators to Commercial
Banks, international MFIs and NGOs that have an interest in owning equity in MFIs; the review of
loan classification provisioning percentages; an improvement into the off-site reporting system.
References:
Albino Dak Othow, Micro-finance Unit, Bank of Southern Sudan, Microfinance n Sudan, Regulatory framework and Vision
Anne Pouchous The Regulation and Supervision of Microfinance: The International Institute for Sustainable Development September 2012
Bikki Randhawa, Joselito Gallardo, Microfinance Regulation in Tanzania: Implications for Development and Performance of the Industry Africa Region Working Paper Series No. 51 June 2003
Cassian J. Nyanjwa, Central Bank Of Kenya, The Status Of The Microfinance Industry In KenyaPresentation At The 5th Afraca Microfinance Forum 2nd - 4th July 2008 Cotonou, Benin
Chaves R. and C. Gonzalez-Vega, "Principles of Regulation and Prudential Supervision and Their Relevance for Microenterprise Finance Organizations 1994
David Kalyango, Bank Of Uganda, Uganda’s Experience With The Regulatory And Supervisory Framework For Microfinance Institutions, May 2005
177
David. L. Kalyango, Uganda’s Experience with Tiered Banking RegulationGeorge Omino, Central Bank Of Kenya, March 2005 Regulation And SupervisionOf Microfinance Institutions In Kenya
Hennie van Greuning Joselito Gallardo Bikki Randhawa A Framework for Regulating Microfinance Institutions, Financial Sector Development Department, The World Bank, December 1998
Marguerite S Robinson, The Microfinance revolution: Sustainable Finance for the poor, 2001 ISBN-10: 0821345249 | ISBN-13: 978-0821345245
Michael Fiebig, Prudential Regulation and Supervision for Agricultural Finance, Food and Agriculture Organization of the United Nations, 2001
Reinhard H. Schmidt and J.D von Pischke, Networks of Micro and Small enterprise banks:a contribution to financial sector development, Frankfurt and Washington issn 1434-3401
Robert Peck Christen, Timothy R. Lyman, Richard Rosenberg Microfinance Consensus Guidelines © 2003 by CGAP/The World Bank GroupJune 2003
Robert Peck Christen, Richard RosenbergThe Rush to Regulate: Legal Frameworks for Microfinance, Consultative group to assist the poorest (CGAP), 2000
Sonal Sejpal & Mona Doshi, Anjarwalla & Khanna, Banking Regulation: Kenya, Global Legal insights, 1st Edition
Stefan Staschen, Regulatory Requirements for Microfinance, A Comparison of Legal Frameworks in 11 Countries Worldwide Deutsche Gesellschaft fürTechnische Zusammenarbeit (GTZ) GmbH,2003
Special Issue, Kenya Gazette Supplement No. 169 (Acts No. 41) Acts, 2013 Nairobi, 2nd December, 2013 The Microfinance (Amendment) Act, 2013 page 1101
T G Arun, JD Turner, Corporate governance of banks in developing economies: concepts and issues 2004
Yigrem Kassa, National Bank Of Ethiopia, Regulation & Supervision Of Microfinance Business In Ethiopia: Achievements, Challenges & Prospects, presentation at the International Conference On Microfinance Regulation, March 15-17, 2010, Bangladesh, Dhaka
Websites
www.vision2030.go.ke
www.amfikenya.com
www.centralbank.go.ke
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Paper 13
The Effectiveness of Regulatory and Supervision Framework of Islamic Microfinance in Sudan
Abd elrahman Elzahi Saaid Ali, (PhD.)Islamic Research and Training Institute (IRTI/IDB)
AbstractIslamic microfinance is one of the essential unconventional branch of lending that uses by Islamic finacial institutions to mitigate the negative impact of the extreme poverty. Since finacing micro-borrowers and extremely poor projects are highly risk, the need for efficient and effective regulatory and supervision of microfinance frame work is very important. This research investigated Sudnese Islamic microfiance regulatory and supervisory framewark. The results of this research gives stromg policy implications for both government of Sudan to carry on some improvement in their experience of supervsion and the users of Islamic microfiance in and ouside for further improve thier dealing with Islamic microfinance institutions.
Key Words: Islamic microfinance, regulatory of Islamic microfinance
Introduction:
Recently Sudanese economic has weakened. The country economic growth was totally depending on
exporting crude oil since the beginning of this century particularly after 1999. The country used to
depend on mainly on agricultures and livestock before the oil. The game is over. Sudan loosed 75% of
its oil revenue due to the secession of the South in 2010. In addition to that the internal and regional
conflicts, heightened political tensions, are continuing to effect the economic growth which eventually
leads to the high unemployment and disadvantages among most of the citizens.
Sudan dominated the political instability from the independence in 1956. Since then the
country exposure to three military cops. All the civil governments that attempt to rule the used to be
the largest country in Africa were overthrown in an overnight by the military even before
implementing their agendas. Other factor contributed to the unemployment and poverty is longest
civil wars and the internal conflicts across the regions.
Civil wars had great imact on the economic growth and creates econoimical and political
disorder. Sudan has the longest civil wars in the continent between the North and the South since
1955 until 2005. In addition to the ongoing internal conflects between the North and Western Sudan
since 2003 fueling on the previous valnerable areas due to the huge immigrations of people
particulary from rural inhabitants. More people leaved thier farms and lost thier livestock to live as
refugees around the urban cities.
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The Sudan has a histrory of high inflations and strcutre economic disorder particularly during
the 1980th and the 1990th. The country also among the poor and low income and highly indebted
countries. Sudan economics growth was started to improve shortly after had started exporting the
crude oil in 1999. Unfortunately the economic prosperity was not complete due to the secession of the
south that lead to the lost of three quarter of the oil revenue.
The slowing economic growth following the secession of the south, the continuing US
economics sanction and boarders conflicts have exaggerated the high existing unemployment for the
country of more than 40 million population majority are Muslims. Moreover, the country faces the
challenges of economic diversification. Sudan is only Arab country that has most fertilize land and
huge livestock resources, faces high unemployment and more disadvantages people most of the in the
rural areas. Hence, the outgoing factors and other such as that related to the unrelevent jobs education
and skills mismatch training might lead to unfavorable economic conditions that caused the current
high unemployment and extreme poverty across the country.
Sudan government who aware of the dilemma has taken immediate policy priorities including
micro-financing business model as is an initiative to assist in restoring the confidence and create more
jobs for its people particularly among the youth, the graduates and skillful categories.
The country has complete transform the all the conomics into Islamic system since more than
twenty years. Being the majority are Muslims and more than 25 Islamic banks in addition to others
non- banks Islamic financinf providers, the country has become a suitable host for Islamic
microfiance. Islamic microfinance is one of the essential unconventional branches of lending that use
by Islamic financial institutions to mitigate the negative impact of the extreme poverty and
unemployment among the people in Muslim countries and Muslims minorties in non-Muslims
countries. Sudan is the pioneer country that adopts Islamic mirofinance among other Muslims
countires.
Islamic Microfinance in Sudan: Opportunities and Challenges:
Opportunities:
The Government of Sudan aware of the challenges of the chronic poverty that dominated the country
even before the National Revolution Salvation in 1989. Since then the government has attempted
many initiatives to reduce the bearding from the shoulders of the poor particularly in the rural areas.
The current Sudanese government supported the Islamic finance in general and Islamic microfinance
in particular from its inceptions.
Islamic financial infrastructure has witnessed tremendous growth and improvement since
1989. The government transformed the available dual economic system into Islamic financial system.
This initiative has improved Islamic financial infrastructures and made enabling environment for
Islamic microfinance and its supportive intuitions such as Waqf and Zakah to play their vital roles in
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helping the poor in Sudan. Due to that Islamic banks have increased from about four banks before the
Islamization of the economic to more than 28 commerical Islamic banks and financial institutions by
the end of the twenty century. In addition to the Islamic commercial banks, there are also at least more
than three specialized banks working effectively with its branches scatored all over the country.
Recently the country also witness the entrasnce of some foreign banks has joined the banking
operation particularly from Emirates. The new copital injected from the foreign banks, improve
banking technology in Sudan, enhence skills that might lead the good banking servies, improving
banking outreach and might help in getting better financial inclusion.
Moreover, for a better broading the economic and providing sustianable source of financiaing
for the Sudanese exportors, the Central Bank of Sudan and the Ministry of Finance and National
Economy were jointly established a National Agency for Insurance and Finance of Exports. The goal
of this agency is to provide and expands the financing the resources of for Sudanese exporters.
Hence, the establishment of National Agency shows an additional evidence for Sudanese government
in supporting financial infrastructure in general and the micro producers in particular.
Zakah collections and Waqf system was revived to play their designed role effectively as are
needed by the Maqasid Al-shari’ah. Zakah is very important tools for poverty alleviation. It is the
right of the poor on the wealth of the rich people. Islamic microfinance can better use Zakah fund to
provide the basic needs for the extremely poor. This will pave for better utilization of the
microfinance fund. Moreover, Zakah help in reducing the unemployment by recruiting considerable
number of people and helping them to have small projects specially the women. The strategic of the
Sudan government was also to revive the Waqf and to encourage all types of Sadaqah including Al-
Gardul Al-Hassan. Waqf either land or cash can play essential role to support microfinance and help
in uplifting the extremely poor in the community. Having reviving Waqf, Zakah and Sadaqah,
Sudanese government went further step to establish effective Islamic microfinance model that might
help in alleviating the poverty in the country.
Other very essential opportunities for Islamic microfinance in Sudan is that the availability of
the sound Islamic Micro-Finance infrastructure. The Islamic financial infrastructure in Sudan
represents an enabling environment for Islamic microfinance that created good opportunity for it to
grow and prosper. The establishment of the Islamic financial institutions followed adaptation of the
Shariah law all over the country in September 1984. The all ready existing Shariah law help the
central banks of Sudan to adopt regulations and supervisions guide lines to be extracted from Islamic
jurisdictions more easily compared to other country in the region. In addition to that the availability of
the natural resources such as agriculture land and livestock in the areas of disadvantages people in
Sudan has created another opportunity. Agricultures represent more than 36% from the national
income of Sudan. Most of the disadvantages people in Sudan are traditional farmers and livestock
producers. Hence the involvement of the Sudanese Islamic and Islamic microfinance intuitions along
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with the local and international ONGs under the guidance the supervision of the Sudanese Central
Banks provides effective services to reduce costs and expand outreach.
Despite of the favorable Islamic financial system development in Sudan, Islamic
microfinance is not risk-free. There are more challenges facing Islamic Microfinance particularly in
the very fragile areas such as western and eastern Sudan. Sudan is very big country in Africa with
more disadvantages people outside the main town. Similar to Sub-Sahara and other IDB member
countries, Islamic microfinance faces the challenges of poor quality basic infrastructures. Previous
studies showed that the quality and the development of the basic utilities such as energy, water,
transportations (land and marine), warehouses, rural infrastructure, and low cost technologies are very
essential for the Islamic micro finance . The weakness on basic infrastructure represents big challenge
which hinders Islamic microfinance institutions and their ONGs alliances to reach the poor in the very
remote areas. Moreover, putting in mind the nature of Islamic finance such as Al-salam and Istisna’a
in to consideration, the availability of warehouses and cheap in-land transportation are even more
essential.
Challenges:
Despite of the financial support of the Islamic development banks, UN, and Sudan governments,
accessing Shari’ah Compliant Sources of Funds is one of the most formidable challenges facing
Sudanese Islamic microfinance in the Sudan. Given the high rate of the poverty and the recent
separation of the rich South part of Sudan, Sudanese economic has encountered sever instability. This
is in addition to the high demand for Shari’ah fund due to the uprising civil wars that lead to more
disadvantages on the countryside areas. Hence the limited donors fund, inability of the government to
provide sustainable micro-financing support for the poor and the microfinance institutions, lead to the
severe shortage of Shari’ah Compliant Sources of Funds.
The nature of Sudanese Islamic microfinance model is involving more payers, need to co-
ordinate between them-selves. All these parties are supporting the development of Islamic
microfinance in the country. They are either providing the microfinance services directly to the
beneficiaries such as Islamic banks and non-banks microfinance institutions or supporting and
managing the Islamic microfinance system such as the Central Banks of Sudan and the Ministry of
Economic and Finance, Zakah and Waqf institutions in Sudan, internal and external donors and the
leaders of the Sudanese community in the disadvantages areas. Hence the absence of coordination
between micro-finance providers in term of data, information and exposure best practices, experiences
and other parties might represent one of the more challenges facing the successful of Islamic
microfinance in Sudan. Therefore, there is an argent need for establishing effective and electronic
networking among these contributors to Islamic microfinance in Sudan, particularly between banks
and non-banks sector, Ministries of Economic and Finance, the Central Bank of Sudan and the
donors.
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Microfinance outreach to the extremely poor people is one of the main goals of the
microfinance providers. Sudan is an extended country with wide and undeveloped country side areas
in which rural and farmers are reside. Considering the nature of Islamic financing that based on profit
sharing and Salam mode of finance, the poor communication, and the weakness of the Sudanese basic
infrastructures are represent one of the most challenges hindering Islamic microfinance services
deliverance to the disadvantages areas.
Another big challenges facing Islamic microfinance is the high tax. Sudan like any other less
development country depends on tax revenue in many aspects. There are more than 20 types of tax on
the income or the agricultures products. None the less more than authorities taxing the same product
particular when moving it from one area to another are for the recommended market. Human
development is one of the essential priorities for the successful of microfinance. To provide effective
and successful microfinance to poor the Islamic finance providers much give much attention to the
capacity building need of the beneficiaries. Most of the disadvantages people in Sudan they are lack
of expertise in many areas related to their microfinance project such as identifying the opportunities,
feasibility studies, cost evaluations and marketing their output to end users. Hence building capacity
apart of the other might represent one of the challenges need to solve for the successful of the Islamic
microfinance model.
Regulatory and Supervision Framework of Islamic Microfinance in Sudan:
The previous section shows that the Sudanese government exerted more efforts to build reseanable
Islamic financial infrastures through complete Islamization of the economic. This intiatve has created
reasonabling enabling environment for encubating Islamic microfinace. the government was aware of
the regulatory and supervision challenges that might face the implementation of Islamic microfinace.
hence, the Central Banks of Sudan was empowered to play the role of the regulatory and supervision
for the microfiance in addition to the orginal madated job.
Since the interest rate was completely abolished from the Sudanese financial systems, the
previous role of the Central Bank of Sudan on regulation, control, supervision, promotion and
development of the banking business and enhancement has modified or changed into Shari’ah based
tools. Based on the additional empowering to regulated Islamic microfinance, the CBOS role has
become not only limited to the designing of the monetary policies, and prudential regulation and
supervision and promoting the economic growth through these policies, but also encouraged to play
vital role in developing a comprehensive financial system that include Islamic microfinance business
model.
To expand the base of the banking services, prepare policies, control and supervision and
regulations for the development of inclusive financial system that cater for micro-finance producer,
the Banking Supervision Department of the CBOS together with a Sudanese consultancy firm, were a
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pointed to lead the team. in additional to that the Banking Supervision Department has a pointed to
prepare policies and regulation for licensing Islamic micro-finance. To achieve that purpose
effectively the Banking Supervision Department established Micro Finance Unit to cater for
promoting microfinance through banks and non-banks institutions. The Micro Finance Unit also
reuqired to play the role of facilitator bbetween Islamic microfiance providers and government and
non-government technical resources. the mian objectives of Micro-Finance Unit is to assist in
developing collaboration and coordination among microfiance providers and offering them whole sale
financing based on the Central Bank of Sudan guidences.
The central bank of Sudan played an instrumental role in alleivating poverty through
promoting Islamic microfinance as a part of financial sector development. Moreover, the central bank
dirct the the Sudanrse banks to allocate 12% out of thier total lending to the micro-fiance projects as
part of the Central Bank policy. The CBOS has also given more emphasis on reducing the extreme
poverty particularly in the rural sector-marginalized farmers, artesian-vendors, household sector and
other alike disadvantages groups in the community.
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Paper 14
Using Subsidy Dependence Index for Regulating and Supervising Microfinance Institutions: A Pakistan’s Case
Hina AlmasResearch Scholar, MS Economics & Finance,
International Institute of Islamic Economics (IIIE), International Islamic University Islamabad (IIUI), Pakistan.
Muhammad Mubashir MukhtarResearch Assistant, Center for Entrepreneurial Development (CED),
Institute of Business Administration (IBA), Karachi, Pakistan.Corresponding author: Tel: +92-333-3147454;
Email: [email protected]
AbstractMicrofinance provides strength to boost the economic activities of low income group people and thus contributes to alleviate their poverty. Research has highlighted the role of microfinance institutions in reducing the sufferings of poor. Issue of Sustainability of microfinance institutions has received the attention of researchers in the last few decades. In Pakistan microfinance institutions have been facing challenge of trade-off between targeting the poor and achieving financial sustainability. This paper investigates the level of Subsidy Dependence of eight different microfinance institutions working in Islamabad and Rawalpindi. The sample institutes comprise of conventional and Islamic microfinance institutions. While numerous researches have been done in other countries on exploring this issue, no such study has yet been done in Pakistan especially in Rawalpindi/Islamabad. In measuring the subsidy dependence this paper uses Subsidy Dependence Index (SDI) model proposed by Yaron (1992). Data have been drawn from financial statements of MFIs from the year 2006 to 2012, available at mix market website and annual reports of MFIs. Findings of this study highlight the level of self-sufficiency and self- sustainability level of microfinance institutions and extent to which these MFI has reached its target clientele through achieving the social objectives it was set to achieve. SDI can play a vital role as a supervisor and regulatory tool for Islamic Microfinance Institutions.
Introduction
Microfinance sector has been considered as an effective tool for poverty reduction. However
microfinance sector has been currently facing many challenges specially mission drift. When
microfinance institutions focus their attention on social objectives like poverty reduction, they have to
face the risk of financial unsustainability. MFIs need to be economically viable and sustainable in the
long run but at the same time they must consider economic implications of long term sustainability,
which are not being considered, (Srinivasan et al., 2006).
The microfinance revolution and the remarkable development of the Microfinance industry in
scale and scope raise demands for increased justification on the utilization of scarce public funds. In
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order to allocate these resources in the most efficient way, performance evaluation should reveal an
accurate and meaningful picture of the performance of MFI in term of reaching the objectives desired
by society and the efficiency in developing products and services to the target recipients, (Yaron and
Manos 2008).
While a vast amount of literature exists on the trade-off between outreach depth and financial
sustainability, much less research has been done in the field of how successful MFIs designed their
institutions to bridge the trade-off, (Woller 2004).
MFIs must grow in both the outreach and financial sustainability dimensions if they are to
achieve their social objectives like poverty reduction. In case of Pakistan MFIs are facing the
challenge of tradeoff between achieving financial sustainability and targeting the poor. Empirical
evidence from other countries states that if MFIs have to serve the poor in remote rural areas, it may
be difficult for them to achieve financial self-sufficiency due to higher transaction costs. The
underlying research aims to investigate this issue in Pakistan context. In such a case, some level of
subsidy may be justified if they can be shown to be more effective than alternative strategies to reduce
poverty. Nonetheless, MFIs should strive to achieve financial sustainability by reducing operational
costs. The higher the degree of self-sufficiency, the greater the extent to which an MFI can leverage
donor and government funds to expand outreach.
This paper initially explains the background including detailed view of current methodologies
for measuring performance of MFIs in Pakistan as well as their objectives and limitations. Further on
it gives a description of SDI and overview of literature across the world related to this research. It then
develops and calculates SDI on a sample of eight MFIs working in Islamabad and Rawalpindi,
including both conventional as well as Islamic MFIs.
Setting the Context
Background: Detailed View of Current Methodologies
Below is a detailed view on some current methodologies for evaluating MFIs,
Techniques Objective Limitations
Difference-in-Difference (DID) To assess the impact of microfinance program on various outcomes.
Failure to take into account externalities and spillover effects, and the differencing nets out the effect of the comparison group.
Stochastic Frontier Analysis (SFA)
To estimate cost function for MFIs
This method inherently renders biased coefficients.
Operational Self Sufficiency To indicates whether enough OSS only covers operating
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Techniques Objective Limitations
(OSS) revenue has been earned to cover the MFI’s direct costs, excluding the cost of capital but including any actual financing costs
income and operating expenses along with a provision of loan loss. But it does not include cost of capital, which can depict a real picture of the financial sustainability of the MFIs.
Financial Self Sufficiency (FSS) To portray financial health of MFIs.
FSS measure tends to underestimate the subsidy dependence of the MFI
SDR To compare subsidy with revenue both from loans and from investments
The Break Even Condition In depth economic analysis of the institution.
Data Envelopment Analysis (DEA)
To measure cost efficiency of MFIs
It cannot control measurement errors and other random effects
The Return on Assets (ROA) and the return on equity (ROE)
To evaluate the performance of MFIs
They ignore the subsidies received by MFIs and opportunity cost of capital
Discounted Cash Flow (DCF) method
To measure performance of MFIs
It requires the implementation of a different data collection system to that which the organization uses to generate its financial statements
Economic Value Added (EVA) To measure the amount by which the profit made by the firm exceeds the return required by the suppliers of capital
It requires accounting figures are adjusted so that profit is measured more accurately
SDI To measure the self-sustainability level of the MFI
SDI compares subsidy only with revenue from lending even though MFIs also get revenue from investments in non-loan assets such as treasury bills.
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General Overview of SDI:
Subsidy Dependence Index (SDI) was initially proposed by Yaron (1992). It assesses and quantifies
subsidy dependence with a single number and also measures the extent to which the lending interest
rate or profit rate would have to be raised in order to cover all operating costs if any subsidies the
MFIs receive were to be uncovered (Hulme and Mosley 1996: 43). SDI highlights the cost to society
of subsidizing the MFI, relative to the interest plus fees or profit plus fees paid by the target clientele
to the MFI. According to Yaron (1992), SDI is calculated as ratio of subsidy and loan portfolio
multiplied by lending rate of interest. SDI = S / (LP * i)
where:
SDI = Index of subsidy dependence of the MFI
S = Annual subsidy received by the MFI (see below)
LP = Average annual outstanding loan portfolio of the MFI
i = Weighted average yield earned on the loan portfolio of the MFI.
The amount of the annual subsidy received by the MFI is defined as:
S = A(m - c) + [(E * m) - P] + K
where:
S = Annual subsidy received by the MFI
A = MFI concessionary borrowed funds outstanding (annual average)
m = The assumed interest rate that the MFI would have to pay for borrowed funds if
access to concessionary borrowing was eliminated.
c = Weighted average annual concessionary rate of interest actually paid by the MFI on
its annual average concessionary borrowed funds outstanding
E = Average annual equity
P = Reported annual profit before tax (adjusted, when necessary, for loan loss provisions,
inflation, and so on)
K = The sum of all other annual subsidies received by the MFI (such as partial or
complete coverage by the state of operational costs of the MFI).
Literature Review
Social objectives of microfinance are defined as “the effective translation of an institution's social
goals into practice in line with accepted social values; these include sustainably serving increasing
number of poor people, improving the quality and appropriateness of financial services and improving
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the economic and social conditions of clients”0 . With these two objectives microfinance can be an
effective way for poverty alleviation and for achieving social and economic impact. Social
performance is being measured by using some variables as proxies like number of borrowers, average
loan size, percentage of female borrowers etc.
The microfinance industry is characterized by a “schism” (Murdoch 2000) which spurs debate
between two streams of thought. On the one hand are institutionalisms who focus on achieving
financial self-sufficiency by outreach in scale (targeting more the marginally poor), while on the other
hand, welfarists emphasize outreach in depth and social impact and attribute an important role to
subsidies. While institutionalists regard "subsidized" institutions as inherently inefficient (Murdoch
1999, Hollis 1998), welfarists argue that all crucial microfinance innovations came from flag-ship
institutions such as Grameen Bank, ACCION and FINCA which were heavily dependent on donor
funding at the time of innovation (Woller, Dunford, Woodworth 1999).
Despite the fact that there is a common understanding on the importance of financial
performance and gradual strive towards sustainability (Tucker 2001), the debate goes on with regard
to fulfilling the promise of microfinance in reaching out to the “poorest” of the poor. Various surveys
such as the one conducted in Bolivia (Navajas 2000) show that the majority of households reached by
MFIs were near the poverty line. That means that they rather reached the marginally poor than the
very or rural poor.
This opened the debate on the depth of outreach and Schreiner (1999) aided discussions by
proposing a framework which defines the six dimensions of outreach such as worth, cost, depth,
breadth, length, and scope. Depth of outreach he argues is the preference of society towards recipients
of funds. As direct measurement through income or wealth is difficult, Schreiner (1999) proposes
indirect proxies for depth such as gender (women are preferred) and location (rural is preferred).
Deepening outreach accordingly means to extend services to women and to remote rural
areas. Rural finance however usually triggers high transaction costs and increased risk due to
dispersion (Mayer and Buchenau 2007). High transaction cost and risk thus often serve as argument
by those focusing on sustainability against reaching out to remote rural areas. During the past ten
years considerable concern arose over the increasing emphasis on financial performance as this often
served as legitimization for drifting from the original social mission in servicing the very poor.
The significant development of the Microfinance industry resulted in a broad spectrum of
“Microfinance institutions” ranging from organizations who regard social objectives only as
byproducts to those who focus on translating their missions into practice (Dunford, 2000).
Measurement of success of microfinance institutions accordingly depends on the intent (mission) and
design of the MFI, the selection of specific target segments and the responsiveness of products and
services to the needs of the client segments selected by the MFI. The design of appropriate
0 http://www.microfinancegateway.org/p/site/m/template.rc/1.11.48260
189
methodologies to translate mission into practice while gradually achieving cost recovery and subsidy
independence accordingly is of utmost importance (Ledgerwood, 1999; Nitin, 2001).
MFIs must grow in both the outreach and financial sustainability dimensions if they are to
achieve their social objectives like poverty reduction. In case of Pakistan MFIs are facing the
challenge of tradeoff between achieving financial sustainability and targeting the poor. Empirical
evidence from other countries states that if MFIs have to serve the poor in remote rural areas, it may
be difficult for them to achieve financial self-sufficiency due to higher transaction costs. In such a
case, some level of subsidy may be justified if they can be shown to be more effective than alternative
strategies to reduce poverty. Nonetheless, MFIs should strive to achieve financial sustainability by
reducing operational costs. The higher the degree of self-sufficiency, the greater the extent to which
an MFI can leverage donor and government funds to expand outreach.
O’Brien (2006) suggests that in the face of the commercialization of the microfinance
industry, MFIs should adopt the valuation method used by the for-profit sector, the discounted cash
flow (DCF) method. The advantage of the DCF method over traditional accounting measures is that it
recognizes and focuses on the opportunity cost of capital. However, as it is based on cash flows and
not on accounting data, the DCF method requires the implementation of a different data collection
system to that which the organization uses to generate its financial statements. Alternatively, the
economic profit approach, a concept well-familiar to sophisticated managers, also considers the
opportunity cost of capital, while utilizing existing accounting data to calculate profit.
The most popular performance measure, which is based on the economic profit approach, is
the economic value added (EVA) suggested by Stewart (1991). EVA is calculated as the adjusted
capital employed multiplied by the difference between the adjusted return on capital and the weighted
average cost of capital for the firm. It measures the amount by which the profit made by the firm
exceeds the return required by the suppliers of capital. EVA also requires that accounting figures are
adjusted so that profit is measured more accurately. Indeed, Tully (1993) notes that unlike traditional
accounting measures of performance, EVA is not distorted by accounting rules.
Financial sustainability indicates that income from the microfinance services should be
greater than the cost of providing services. Therefore, self-sufficiency is an indication for the financial
sustainability of the MFIs. As the microfinance industry matures, the definition of the self-sufficiency
has commenced to slender and currently sustainability refers only two levels of sustainability by the
most of the people associated with this industry (Ledgerwood 1999: 216-17). These are Operational
Self Sufficiency (OSS) and Financial Self Sufficiency (FSS).
OSS indicates whether enough revenue has been earned to cover the MFI’s direct costs,
excluding the cost of capital but including any actual financing costs. Since all MFIs do not incur
financial cost equally, hence for the sake of simplicity, financing cost excluded. FSS on the other hand
portray the actual financial health of MFIs. It is clear from the definition that OSS only covers
operating income and operating expenses along with a provision of loan loss. But it does not include
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cost of capital, which can depict a real picture of the financial sustainability of the MFIs. Thus, FSS
includes cost of capital (adjusted) apart from the components in OSS. Vinelli (2002) defines FSS as
income derived from operations divided by the operating expenses incurred, thus excluding revenue
from subsidies. On the other hand Pollinger et al (2007) refers self-sufficiency as to organizations that
can survive and add to their asset base wholly on the basis of income derived from their lending and
related operations
It is useful to analyze the break even condition for a financial institution in general and MFIs
in particular. The reason behind adoption of breakeven condition is that without analysis of breakeven
it is difficult to have an in-depth economic analysis of the institution. It thus demands for estimation
of expected level of price of financial products. A break even condition for any financial institution
over a period of time simply indicates that income of the institution should be at least equal to the
expenditure. For analysis of the same, the method as adopted by Hulme and Mosley is considered
(Hulme and Mosley 1996: 17-26).
Subsidy is a crucial factor in analyzing sustainability of microfinance in general and MFIs in
particular. Majority of microfinance programs in the world are subsidized in different ways,
sustainability of the programs poses a question in the mind of academics and researchers. Even front
line institution like Grameen Bank of Bangladesh may experience a high repayment rate, but also
depends on subsidies due to higher value towards social sector (Morduch 1999). It is observed from
the experience of the Philippines that although replication of Grameen type MFIs can be sustainable
with substantial increase in outreach, but it is at the cost of subsidy (Seibel and Torres 1999). Subsidy
syndrome thus considered attention from very beginning by researchers like Yaron, Hulme and
Mosely, Khandker, etc. who constructed index to examine the subsidy dependence of the MFIs. The
rationality of this index is to examine the social cost associated with such subsidies and to highlight
the harmful effects of subsidies to credit (Yaron 1992).
Subsidy Dependence Index (SDI) as first developed by Yaron assesses and quantifies subsidy
dependence and also measures the extent to which the lending interest rate would have to be raised in
order to cover all operating costs if any subsidies the MFIs receive were to be uncovered (Hulme and
Mosley 1996: 43). Consequently the notion of a subsidy free break-even rate for MFIs provides the
argument for the upward revision in interest rates to poor borrowers. SDI as calculated by Yaron is a
fraction of subsidy and loan portfolio multiplied by lending rate of interest. The most interesting
calculation part of the index is subsidy where it comprises of a number of cost revenue and cost
components. A modified version of the formula was devised in by Hulme and Mosley (1996) where
they used new notations and simpler to calculate.
SDI shows subsidy dependence of an MFI and in calculating the index from the earning point
of view only income from loan portfolio is considered. But in reality sources of earning of a MFI is
not confined only to interest or profit income but it considers income from investment. Moreover,
since cost component involves in case of all these segments of earning, thus SDI seems to be narrow
191
in calculating subsidies. Khandker therefore proposes Subsidy Dependence Ratio to have a better
understanding on the financial health of the institution. The basic rationality for taking this ratio is
based on the argument of Kahndakar and Khalily (1995), which stated that as the SDI compares
subsidy only with revenue from lending even though MFIs also get revenue from investments in non-
loan assets such as treasury bills.
Measurement Models: Results and Findings
In measuring the magnitude of subsidy dependence of respective microfinance institutions, this paper
uses subsidy dependence index model developed by Yaron (1992). For calculation of SDI, it is
necessary to aggregate all subsidies received by all MFIs and compare it to total loan revenues, being
the product of the bank’s on lending interest rate or profit rate (I) and the average annual loan
portfolio (LP). This can be mathematically expressed as:
SDI = S/LP*i
Where SDI is the index of subsidy dependence; LP is the average outstanding loan portfolio and i is
the weighted average on lending rate paid on loan portfolio.
The amount of the annual subsidy received by the MFI is defined as:
S = A(m - c) + [(E * m) - P] + K
where:
S = Annual subsidy received by the MFI
A = MFI concessionary borrowed funds outstanding (annual average)
m = The assumed interest rate that the MFI would have to pay for borrowed funds if
access to concessionary borrowing was eliminated.
c = Weighted average annual concessionary rate of interest actually paid by the MFI on its
annual average concessionary borrowed funds outstanding
E = Average annual equity
192
Data was collected from microfinance institutions financial statements available online at Mix Market
website and from the annual reports. SDI for different MFIs from year 2006 to 2012 was calculated.
The sample contained seven conventional microfinance banks and one Islamic microfinance institute.
The SDI results are given below:
KASHF Bank
NRSPBank
Khushali Bank
First Microfinance Bank
Pak Oman Micofinance Bank
KASHF Foundation
BRAC-AK
Akhuwat (Islamic)
2006 - 0.0181 -0.0047 0.0102 -0.01740 - 0
2007 - - 0.0137 0.0073 0.0127 -0.05838 - 02008 0.01165 - -0.050 0.0123 0.0962 0.059511 0.00056 0.03682009 0.06086 - 1.1070 0.0051 1.6412 0.342643 -2.6395 0.02442010 0.20818 0 0.78179 0.0424 -0.023 0.000629 -0.02006 0.04002011 0.12055 0.095 0.1837 0.0276 1.6458 -0.17589 0.04568 0.000122012 0.04487 -0.091 0.0714 0.0006 2.6923 -0.14432 0.04681 0.00012
2004 2006 2008 2010 2012 20140
0.050.1
0.150.2
0.25
KASHAF BANK
year
SDI
2004 2006 2008 2010 2012 2014
-0.15-0.1
-0.050
0.050.1
0.15
NRSP
YEARS
SDI
INCREASING TREND DECRESING TREND
2004 2006 2008 2010 2012 2014-0.5
0
0.5
1
1.5
KHUSHALI BANK
YEARS
SDI
2004 2006 2008 2010 2012 2014-0.02
0
0.02
0.04
0.06
FMF BANK
YEARS
SDI
INCREASING TREND INCREASING TREND
193
2004 2006 2008 2010 2012 2014-1
0
1
2
3
POMF BANK
YEARS
SDI
2004 2006 2008 2010 2012 2014
-0.3-0.2-0.1
00.10.20.30.4
KASHAF FOUNDATION
YEARS
SDI
INCREASING TREND DECREASING TREND
2004 2006 2008 2010 2012 2014
-3
-2
-1
0
BRAC-AK
YEARS
SDI
2008 2009 2010 2011 2012 20130
0.02
0.04
0.06
AKUWAT BANK
YEARS
SDI
INCREASING TREND DECREASING TREND
Results show that subsidy dependence of most MFIs increased from 2006 to 2012 except NRSP,
Kashaf Foundation and Akuwat Bank. The value of SDI near zero shows a bank is performing well
and utilizing the subsidy received in optimal way. The trends for other MFIs have fluctuated and held
an increasing line showing a not so well performance in SDI context. To keep the value near zero the
banks have to increase the interest or profit rate.
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Conclusion
Subsidy Dependence Index gives another dimension of measuring the performance of MFIs by
focusing on optimal usage of public funding. As a preliminary study in this line, SDI has immense
potential to be incorporated in Islamic MFIs and base the regulation and supervision in it. Further on
another measuring tool such as ‘Outreach Index’ should be calculated in parallel to SDI, in order to
give a more comprehensive picture of attainment of social objectives of IMFIs.
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Paper 15
The Effectiveness of Microfinance Projects Run Graduates
Dr. Kassim Al Fakiy ‘aliy JadullahLescturer in Economics
Faculty of BusinessSudan University of Sciences and Technology
الخريجين تشغيل لمشروعات األصغر التمويل فاعلية
( للعلوم السودان بجامعة األعمال حاضنات حالة دراسةم2013-2010والتكنولوجيا )
الله. جاد علي الفكي قاسم د
المقدمة : أوال السودان كغيره من الدول النامية يواجه بكثير من الصعوبات
والتحديات االقتصادية والتي انعكست في معدالت متزايدة من التضخم ، أفضت إلى نسب عالية من البطالة ليس فقط من حيث المقارنة
بالمتاح من فرص العمل ، بل أيضا من خالل تزايد أعداد الراغبين والقادرين على العمل خاصة وسط الشباب والخريجين والذين تتزايد
31م فقط 1945أعدادهم عاما بعد عام ، حيث كان عددهم في العام ألف خريج ، كل150م أكثر من 2012خريجا وبلغ هذا العدد في العام
ذلك في اقتصاد اتجه نحو الخصخصة بتطبيق سياسة التحرير حيث فتح المجال واسعا للقطاع الخاص(1)م1992اإلقتصادي منذ العام
وتسارعت وتيرة التخلص من وحدات اإلنتاج في القطاع العام بالبيع لبعضها ودمج بعضها في بعض والتخلص من فائض العمالة فيها ، عليه
فإن المشكلة التي تسعى هذه الورقة المقدمة إلى تسليط الضوء عليها مفادها التزايد المضطرد في اعداد الخريجين وطالبي العمل في
ظل قلة فرص العمل المتاحة، وذلك بسبب عدم توسيع مواعين االقتصاد في المجالين العام والخاص بالقدر الذي يستوعب الكم الكبير
من الخريجين مما ترك فجوة مستمرة من البطالة إنداحت بآثارها السالبة على المجاالت االقتصادية واالجتماعية والسياسية مما استدعى
تقديم معالجات عاجلة وفاعلة لها عن طريق التمويل األصغر لمشروعات الخريجين. وتهدف الورقة إلى مناقشة هذا الموضوع من
198
خالل دراسة حالة لحاضنات األعمال بجامعة السودان للعلوموالتكنولوجيا، وذلك من خالل التركيز على األهداف اآلتية:-
تقييم مدى فاعلية التمويل األصغر لمشروعات تشغيل الخريجين-1.
التعرف على تجربة جامعة السودان في حاضنات األعمال لتحديد-2 مدى فاعليتها وتحقيقها ألهدافها الرامية إلى المساهمة في
التشغيل الذاتي للخريجين. تقديم مقترحات لمعالجة المشكالت المتعلقة بالتمويل األصغر-1
الموجه نحو مشروعات تشغيل الخريجين. وتسعى الورقة أيضا إلى اختبار فرضية مفادها أن عدم سهولة
إجراءات وضمانات منح التمويل األصغر وتركيز البنوك على استرداد األموال المقترضة باالضافة لإلرباح اضعف األستفادة من األموال المخصصة مقارنة بالمقترضة فعليا مما أنعكس سلبا في
تحقيق التمويل األصغر لغاياته. لتحقيق األهداف أعاله واختبار الفرضية إتبعت الورقة المنهج
واإلستنباطي ألكتناف غموض الحقائق واستخالص النتائج وصفيا مدعمة بالمؤشرات الكمية والكيفية المتاحة، حيث بدأت الورقة بإستعراض اإلطار المفاهيمي للتمويل األصغر ثم تاله ذلك دور
المشروعات الصغير في التنمية بالتركيز على حاضنات األعمال ودراسة حالة لحاضنة األعمال بجامعة السودان وأختتمت الورقةباستخالص وعرض النتائج التي وضعت على أساسها التوصيات .
األصغر: للتمويل العملية والممارسة المفاهيمي اإلطار : ثانيا يعد التمويل أحد فروع النظرية اإلقتصادية وهو يركز على وصف
وتحليل أساليب التمويل المتعددة ، ويعرف التمويل بأنه )فن أو علم أو نظام معالجة القضايا المالية في الدولة أو الشركة وتدبير األموال
يعتبر التمويل األصغر من الخدمات المالية(2)( والقروض وتنظيم إدارته التي تقدم للفقراء الناشطين اقتصاديا والمحتاجين لرؤوس األموال
الصغيرة رغبة منهم في اإلعتماد على أنفسهم بعد الله بتأسيس العمل الحر لتحقيق الكسب المشروع والحالل ، هذا المفهوم يؤكد على أن
التمويل األصغر بمثابة مجموعة من الخدمات المالية )وليس تقديم اإلئتمان فقط(وذلك من اجل تفعيل انشطة األعمال التجارية وخدمات االدخار بجانب إن التمويل األصغر يساعد على زيادة الدخل وتخفيض
نسبة البطالة وزيادة الطلب على السلع والخدمات .199
يعد التمويل األصغر توسطا ماليا على المستوى المحلي ويشمل التسليف وودائع االدخار وكل أشكال الخدمات المالية ، ويعرف بأنه
نظام لتوفير اإلئتمان واإلدخار والتمويالت والخدمات المالية مثل خدمات الودائع والقروض والدفعيات والتأمين للفقراءالناشطين
اقتصاديا وزيادة دخولهم وتحسين مستوى معيشتهم وتقديم المشورة الفنية لهم لزيادة النشاط االستثماري ومساعدة األفراد على توزيع
دخولهم ما بين االستهالك واالستثمار وإختيارهم لفرص االستثمارالمناسبة لهم من بين العديد من الفرص المتاحة أمامهم .
األصغر / التمويل أهمية : ثالثا تعتبر المشروعات الصغيرة الممولة عبر التمويل األصغر وسيلة
رئيسية من وسائل مواجهة المشكالت اإلقتصادية واالجتماعية وقد لعبت دورا فاعال في الطفرة اإلقتصادية لدول شرق أسيا كما لعبت
دورا كبيرا في تحقيق النهضة الصناعية في دول أوروبا وذلك لقدرتها على زيادة اإلنتاجية في اإلقتصاد القومي نسبة إلرتباطها الوثيق مع
مختلف القطاعات اإلنتاجية والخدمية في المجتمع، وبما أن اإلقتصاد يواجه بكثير من التحديات والمعوقات في حراكه المتصل’ السوداني
صوب بلوغ غايات النهضة الشاملة ، فإن توجيه التمويل األصغر نحو المشروعات الصغيرة والمتوسطة يمكن أن تكون من أكثر الوسائل
فاعلية في تحقيق التنمية الشاملة بأبعادها اإلجتماعية واإلقتصادية م والذي أشار إلى أن2005ويؤكد ذلك نتائج المسح الصناعي للعام
% من مجموع المنشآت93المنشأت الصغيرة في السودان تمثل العاملة وهذا القدر الكبير من المنشآت الصغيرة تنتج بالطبع قيمة
مضافة ال يستهان بها للدخل القومي بجانب مساهمتها في توفير فرص العمل لعدد كبير من السكان الناشطين اقتصاديا ويسهم التمويل
االصغر بذلك في معالجة مشكلة البطالة . إلتبار ذلك عمليا نقف على تجربة واقعية للتمويل االصغر للتأكد من فاعليتة وذلك من خالل
التركيز على تجربة جامعة السودان في حاضنات االعمال لتحديد نقاط الضعف والقوة فيها، وصوال إلبراز المنافع التى حققتها
التجربة.لتقويمها للتأكد عن مدي تحقيقها الهدافها الرامية الى توسيع فالحاضنة هى’فرص العمل للخرجين من خالل حاضنات األعمال
مؤسسات تعمل على دعم المبادرين الذين تتوافر لهم األفكار الطموحة والدراسة اإلقتصادية السليمة ، وبعض الموارد الالزمة
لتحقيق طموحاتهم ، بحيث توفر لهم بيئة عمل مناسبة خالل السنة األولى من عمر المشروع لزيادة فرصة النجاح من خالل إستكمال النواحي الفنية واإلدارية بتكلفة رمزية ودفع صاحب المشروع إلى
200
التركيز على جوهر العمل ، وذلك إلى فترة محددة تتضاءل بعدهاالعالقة لتتحول إلى مبادرة جديدة.
ويمكن تعريف حاضنة األعمال بأنها المشروع الذي يقدم الخبرة ، والمعدات ، والدعم التوجيهي ورأس المال لألعمال الجديدة التي هى
على وشك البدء ومن هذا التعريف يمكن أن نالحظ أن حاضنات األعمال تختص باألعمال والمشروعات الصغيرة التي تسمىبالحاضنات لتقديم أنواع المساندة لألعمال الصغيرة مثل :-
كله أو بعضه.المالالقروض واإلعانات : رأس -التسهيالت: اآلالت والمعدات ، واألجهزة ، واألدوات الضرورية .- الخدمات : تأخذ شكل شبكة الفرص ، واإلستشارات الفنية-
.( 3)والقانونية واإلقتصادية والتسويقية بدأت الفكرة بتمويل المنتجين في المصارف السودانية من خالل البنك
م، ثم تاله بنك االدخار1959الزراعي السوداني وذلك في العام م وبنك الشعب التعاوني وبعدها إنداحت1974السوداني في العام
الفكرة على باقي البنوك السودانية وتم تدعيم وتقنين الفكرة من خالل السياسات النقدية والتمويلية لبنك السودان ، والتي تشير إلى توظيف نسبة من الموارد المالية للمصارف للتمويل األصغر خاصة لألسر المنتجة ، ويتضح ذلك جليا في صياق السياسة حيث جاء في
بندها الثالث : تمشيا مع سياسة الدولة لمحاربة الفقر وتخفيض معدالته ينبه بنك السودان المركزي المصارف إلى أهمية التمويل
األصغر ، ويشجعها في تقديم التمويل لتنمية الشرائح الضعيفة وذلك %من إجمالي محفظة التمويل في كل وقت( ، أما في10في حدود
م فقد طرأ تغيير في النسبة حيث جاء في البند الثالث2007العام ايضا أن بنك السودان المركزي يشجع المصارف اإلسالمية والتقليدية
% كحد أدنى من محفظة التمويل في أي وقت12على تخصيص نسبة لقطاع التمويل األصغر والحرفيين ، وذلك في إطار توجيه المزيد من
الموارد للتخفيف من حدة الفقر ، هذا التطور في المدلول والمصطلح نتاج إلستراتيجية التمويل األصغر التي تبناها البنك المركزي منذ تلك
م خصص بنك2010- 2006في الفترة من الفترة وحتى تاريخه ، مليون جنيه سوداني لتنفيذ البرنامج التجريبي350السودان مبلغ
مليون دوالر تقريبا وتم إختيار عدد168للتمويل االصغر أى يعادل ثمانية بنوك هي البنك الزراعي السودانى ، مصرف اإلدخار والتنمية
اإلجتماعية ، مصرف المزراع التجاري ، بنك الثروة الحيوانية ، مصرف التنمية الصناعية ، بنك التنمية التعاوني اإلسالمي ، بنك العمال
الوطني والبنك العقاري السوداني ومؤسستين ماليتين هما مؤسسة التنمية اإلجتماعية والية الخرطوم ومؤسسة التنمية اإلجتماعية والية
كسال بجانب مؤسسة الشباب للتمويل االصغر ومؤسسة الجزيرة201
مليون162للتمويل االصغر وبلغ إجمالى التمويل لهذه المؤسسات .(4) مليون دوالر60جنيه أي يعادل
بلغ إجمالى مبلغ محفظة التمويل االصغر التراكمي للبنوك حتي عام مليون دوالر، وفي146 مليون جنيه أي ما يعادل 395م مبلغ 2010 200م تم تكوين محفظة أمان للتمويل االصغر برأس مال 2011العام
مليون دوالر وهي مساهمة بين المصارف75مليون جنيه أي ما يعادل % ، قدرت محفظة25وديوان الزكاة حيث ساهم فيها بما يعادل
م وفق النسبة المحددة من بنك2012التمويل األصغر للمصارف للعام مليون297 مليون جنيه أي مايعادل 832%( مبلغ 12السودان )
.(5)دوالر رغم األموال الكبيرة المتاحة للتمويل األصغر إال أن الممارسة الفعلية للتمويل األصغر تشير إلى أن التجاوب مع هذه السياسة على
االرض يبدو ضعيفا عمليا من خالل االستخدام لهذه الموارد والذي دعم هذا اإلتجاه(6)%( 12% من السقف المتاح)4-1يتراوح ما بين
اإلنتقاد الذي وجهه السيد/ النائب األول لرئيس الجمهورية حينها األستاذ على عثمان محمد طه على التطبيق العملي لتجربة التمويل األصغر
على أرض الواقع وإعتبر بأنها أصبحت توظف في اإلنتاج الذي ال يحمل القيمة المضافة وذلك لدى مخاطبته اجتماع وزراء الشئون اإلجتماعية بالوالية ، حيث ذكر أن اإلنطباع السائد هو أننا نسمع ضجيجا وال نرى
مليار جنيه تم تخصيصها لمشروعات20طحينا وأضاف بأن أكثر من التمويل األصغر بالبنوك ، البد أن يكون فيها نسبة وتناسب بين التمويل والنشاط حتى ال يهدرالمال ، ووجه بإيجاد معالجات عاجلة حتى يحقق
التمويل األصغر أهداف البرنامج وينزل على أرض الواقع ، فالتمويل األصغر ينبغي أن يوظف التوظيف األمثل من خالل المشروعات
ويعزى ضعف التطبيق العملي(7)اإلنتاجية التي تحقق القيمة المضافة لتجربة التمويل األصغر إلى تخوف المصارف من التعثر بجانب التكلفة
فالتمويل’ اإلدارية العالية والعوائق اإلجتماعية واإلقتصادية والثقافية األصغر هزم من قبل المصارف من خالل تمسكها بالضمانات من
طالبي التمويل فضال عن أن بعض البنوك لم تسهم بصورة كبيرة في توفير التسهيالت بل ركزت في منح التمويل للقادرين على السداد من
، وبالنظر(8)شرائح المجتمع المختلفة ولم تهتم بالشرائح الضعيفة للرؤية التقويمية لتجربة التمويل األصغر في اإلتجاه اآلخر تحدث المدير
التنفيذي لصندوق تشغيل الخريجين بوالية الخرطوم السيد/ الكامل محمد إبراهيم قائال : رغم تعثر تجربة التمويل األصغر الخاصة
بالخريجين في بدايتها ولكن واقع الحال يشير إلى نجاح العديد من. (9)مشاريع التمويل األصغر
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لها / العملي والتطبيق األعمال حاضنات فكرة :رابعااالعمال/ حاضنات مفهوم أ
الحاضنة هى المكان الذي يوفر للشباب وبالخصوص الخريجين الراغبين في إقامة مشروعات جديدة، وتقوم الحاضنة بتقديم خدمة
كاملة من المساعدات تتمثل في المكان المناسب لبدء المشروع وتقديم الدعم الفني واإلداري ألصحاب المشروعات سواء في مرحلة
بدء النشاط أو في أثناء المزاولة والمتابعة والتسويق كما تساعد الحاضنة أيضا في اإلسراع ببدء النشاط للمشروع وزيادة فرص نجاح أصحاب المشروعات الصغيرة وتأهيلهم للدخول في سوق العمل بعد
إكسابهم المهارات الفنية واإلدارية الالزمة بعد فترة تخرجهم من.(10)الحاضنة
ويشير مفهوم حاضنات األعمال إلى نوع من التنظيمات اإلدارية التي تهدف إلى تنمية وتدعيم مشروعات األعمال الصغيرة خالل
الفترات األولى لبدء نشاط هذه المشروعات والتي تعتبر من أكثر الفترات صعوبة في حياة المشروع ، وعادة ما يتم إنشاء حاضنة
األعمال بهدف تقليل التكاليف المرتبطة بإقامة مشروعات األعمال مع زيادة فرص هذه المشروعات في تحقيق النجاح باإلضافة إلى تحقيق
الترابط واإلتصال بين المشروع الناشئ و المشروعات القائمة والجامعات ومراكز البحث والخبراء العاملين في نفس المجال . يتبين
من ذلك أن حاضنة األعمال ما هى إال مكان محدد يعمل على إستضافة المشروعات الجديدة حتى تصل إلى مرحلة النضوج واإلستقرار ، هذا المكان وفر مجموعة من التسهيالت واإلمكانات والخدمات المختلفة
بأقل تكلفة ممكنة وفي نفس الوقت يسمح للمشروعات بإقامةالعالقات مع جميع العناصر .
األعمال/ لحاضنات التاريخي التطور : ب بدأت فكرة حاضنات األعمال في الواليات المتحدة االمريكية كأسلوب للتنمية اإلقتصادية يهدف إلى اإلستفادة من بعض المباني
القديمة باإلضافة إلى خلق وظائف في المناطق التي أختيرت بسبب)تدهور بعض الصناعات الكبرى مثل صناعة الحديد والصلب في الغرب
في تلك الفترة كانت حاضنات األعمال تهدف فقط إلى توفير مكان،(11 مناسب إلستقبال المشروعات ولكن عندما أظهرت الدراسات في بداية الثمانينات من القرن العشرين أن المشروعات الصغيرة التي
عامل هى صاحبة اإلسهام األكبر في تقليل20تعمل بعدد يقل عن نسبة البطالة على مستوى اإلقتصاد القومي وليس المشروعات الكبيرة كما كان يعتقد. عليه ظهر اإلهتمام الكبير بالمشروعات
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الصغيرة وبدأت الجهود تتجه نحو إنجاحها حيث بلغ عدد الحاضنات في م1973 حاضنة في عام 13الواليات المتحدة االمريكية حوالي
حاضنة بحلول98وتضاعف هذا العدد عدة مرات حيث اصبح عددها م ، باإلضافة1994 حاضنة في العام 468م ثم وصل إلى 1985عام
إلى ذلك فقد إزداد أيضا عدد الشركات األعضاء في الحاضنات, حيث شركات عام4كان متوسط عدد الشركات في الحاضنة الواحدة
شركات ثم بدأت تنتشر الحاضنات بعد ذلك9م أصبح حوالي 1992. (12)في العديد من دول العالم
واهدافها/ األعمال حاضنات أنواع :ج تشتمل حاضنات األعمال على كل الحاضنات األكاديمية
والحاضنات العامة في غالبية دول العالم ، حيث تساعد الحاضنات األكاديمية على اإلستفادة من الدراسات التي يتم إعدادها في مراكز
البحث العلمي من ناحية كما تساعد أيضا على خلق فرص عمل للخريجين ، أما الحاضنات العامة فتعمل بصفة عامة على تنمية
لذلك تكون’اإلقتصاد المحلي وإنعاش السوق وإيجاد فرص عمل أهدافها ذات طبيعة قومية . لذلك يمكن تصنيف حاضنات األعمال أيضا
على حسب نوع النشاط الذي تمارسه المشروعات المرتبطة بها ، فنجد بعض الحاضنات التي تستضيف مشروعات تعمل جميعا في نفس
النشاط أو تعمل في مجموعة من المشاكل التي توجهها. نجد إن حاضنات االعمال توفر للمشروعات الصغيرة الناشئة
فرصة النمو السريع داخل الحاضنة كما أنها في نفس الوقت تحسن من فرص نجاحها فيكون أداؤها أقوى عند خروجها من الحاضنة، ويرجع
ذلك إلى أن الحاضنة توفر باإلضافة إلى المكان المجهز مجموعة من الخدمات واإلستشارات المتكاملة سواء كانت مالية أو إدارية أو قانونية
أو فنية، كما توفر أيضا فرصة التفاعل مع المشروعات األخرى ذات الظروف المشابهة سواء كانت تعمل في نفس المجال أو في مجاالت
أخرى. عليه يمكن القول بأن الحاضنات تهدف إلى تقديم الدعم
:- (13)للمجتمع وذلك ومن خالل اآلتي .زيادة عدد المشروعات مما يؤدي إلى إنعاش اإلقتصاد ويؤدي1
ذلك إلى تنمية اإلقتصاد . .زيادة فرص العمل وتقليل نسبة البطالة التي تمثل هاجسا كبير2
لغالبية دول العالم . .تشجيع الصناعات المحلية وتشجيع التنمية اإلقتصادية3
المستدامة..زيادة معدالت الدخل في المجتمع المحلي .4
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.تدعيم وتشجيع المشروعات التي تحتاج إليها السوق المحلية5مع تحديد المكان المناسب إلقامة هذه المشروعات .
.تشجيع المجموعات أو الفئات التي تمتلك الخبرات الكافية6 إلقامة مشروعات األعمال حتى تصبح مجموعات أو فئات
منتجة . .تنسيق األبحاث والدراسات التي تقوم بها الجامعات ومراكز7
البحث العلمي .مواجهة اآلثار اإلقتصادية واإلجتماعية الناتجة عن تطبيق8
سياسات الخصخصة . .نشر وتنمية مفهوم المشروعات الخاصة بين الفئات ذات9
الخبرة المحدودة في هذا المجال . .توجيه رجال األعمال نحو المشروعات عالية التكنولوجيا10
والمشروعات التي تهدف إلى حماية البيئة . .تدعيم الجهود التعاونية بين قطاع األعمال والجامعات ومراكز11
البحث العلمي والهيئات الحكومية والغرف التجارية للنهوض..بالمجتمع المحلي
تهدف الحاضنات في السودان إلى إنشاء المشروعات لتشغيل عدد من الخريجين الذين ال يجدون فرص عمل في سوق العمل وكذلك
كما تهدف إلى’فقراء المزارعين غير القادرين على تمويل أنشطتهم اإلستفادة من اإلمكانيات المادية في بعض المواقع كالجامعات التي
والتي توفر بدورها سلع اإلستهالك الضرورية’توفر مواقع للحاضنات كاأللبان والبيض واللحوم في السوق الذي تتميز فيه هذه السلع
بالندرة، ويستفيد الممول )البنك( من إستثمار أمواله في مجاالت ذات(. 14)فائدة له ولإلقتصاد الوطني
خامسا /نموذج حاضنة الطب البيطري واإلنتاجالحيواني بجامعة السودان للعلوم والتكنولوجيا
الحيواني/ واالنتاج البيطري الطب بحاضنة التعريف أالسودان : بجامعة
حاضنة الطب البيطري واإلنتاج الحيواني هى نتاج لتطور األفكار الرامية إلى التحول نحو مفاهيم عميقة لمؤسسات التعليم وتأهيل
دورها النهضوي في إحداث عمليات التغير اإليجابي للمجتمعات والمساهمة الحقيقية في حل مشكالت المجتمع بما تمتلكه هذه
الجماعات من عقول مستنيرة وما تحمله من منهج علمي ومقدرة على النظر واإلدراك وإمكانيات البحث والتدريب ، لتقديم النماذج
واألطر التي تسهم في إحداث التغيير نحو تنمية مستدامة’ وهو ذات
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النهج العلمي والتربوي لفلسفة مثل هذه المشاريع اإلنتاجية كآلية فاعلة إلستقطاب الخريجيين واستشارتهم للعمل الجاد وفق أنظمة
إنتاج تعتمد على استدارة رأس مال وتطوير المشروعات مقابل أجرنظير اإلنتاج مع التأهيل المستمر للمشروع والخريج.
وبدأت تجربة حاضنة الطب البيطري واإلنتاج الحيواني في العام م ومرت بمراحل عديدة تم خاللها تنفيذ عدد من المشروعات2006
تمثلت في :)المشروعات الصغيرة ، ومشروعات اإلستيعاب الحرفي للتدريب التحويلي والتأهيل المجتمعي(. بدأت الحاضنة كمشاركة بين جامعة السودان وبنك االسرة ،تقوم الجامعة بتوفير األرض للمشروع
ويقوم البنك بالتمويل ، فساهمت الحاضنة في نشر ثقافة العمل الحر وتهيئة الخريجين نفسيا للعمل خارج إطار الوظيفة واتضح لي ذلك جليا
من خالل الفترة التي كنت فيها مديرا إلدارة اإلستثمار بجامعة(. 15)السودان والتي تعتبر الحاضنات من روافدها
الحاضنة/ أهداف -: بتعمل الحاضنة إلى تحقيق عدد من األهداف أهمها :-
ترويج ثقافة الريادة واإلبداع واإلبتكار وتنمية مهارات العمل الحر-1.
تقديم مشاريع تحقق مبدأ التنمية اإلجتماعية .-2 توفير خدمات للجهات التمويلية وغيرها من حيث األبحاث-3
والمعرفة والتدريب واإلشراف .التأهيل والتدريب للخريجيين.-4 تحويل البحوث إلى مشاريع حقيقية تخدم المجتمع لتحقيق مبدأ-5
التنمية اإلجتماعية من خالل التنمية اإلقتصادية ألفراد المجتمع .خلق فرص عمل " تشغيل الخريجيين"-6 توفير البنية التحتية من الصناعات المغذية للمشاريع الكبيرة-7
القائمة بالفعل . تقديم مشاريع قوية للمجتمع في المستقبل قادرة على-8
اإلستمرار والتطور . تحويل قوة العمل العاطلة بالمجتمع إلى قوة إقتصادية قادرة-9
.( 16")على العطاء وتوفير الوظائف للغير " خريجيين ، حرفيين
المشروع/ تحقيق وسائل : ج تأسيس مشاريع منتجة يسهم فيها الخريج بتشغيل المشروع بأجر-1
محدد وفق اإلنتاج .
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تنمية المشروعات القائمة وتحويل بعضها إلى مشروعات منتجة-2تستقطب هؤالء الخريجيين .
إعتماد نظام التمويل األصغر للمشروعات التي تؤسسها الحاضنة-3. (17)والمشروعات الداعمة لزيادة اإلنتاج والتسويق
للحاضنة/ اإلداري الهيكل -: د الشكل الت��الي يوض��ح ويفص��ل في الهيك��ل ال��وظيفي للحاض��نة وال��ذي يتكون من مستويين يبدأ هرمي��ا بمجلس اإلدارة وتلي��ه اإلدارة التنفيذي��ة
وذلك لفاعلية الربط والمتايعة للعمل تحقيقا لألهداف .
( الهيكل اإلداري1شكل رقم )
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اإلدارة مجلس
فني مستشار قانوني الحاضنة مستشار مدير
التنفيذية اإلدارة
عالقاتعامة
إدارة المجموعا
ت إدارةتصنيع
المحاسب
وحدةاألعالف المجزرة
تصنيعاللحوم
مفوضمشتريا
ت
مفوضإنتاج
المصدر : جامعة السودان للعلوم والتكنولوجيا،كلية الطب البيطري واإلنتاجم2013م . الخرطوم 2013الحيواني – حاضنة الدواجن
نالحظ من الهيكل اإلداري للحاضنة الترابط الهرمي بين مجلس اإلدارة واإلدارة التنفيذية حيث ساعد ذلك على الضبط اإلداري ومعالجة اإلشكاالت
تأمينا للنجاحات .
المشروعات / تنفيذ منهجية -: هـ دراسة جدوي للمشروع إقتصادية تبنتها جامعة السودان للعلوم
والتكنولوجيا وتم تمويلها من بنوك التمويل األصغر " بنك األسرة " إلستيعاب الخريجين للتشغيل " والذين تم تمويلهم برأس مال تشغيلي
جماعي )انظر الجدول( ، على أن يتم سداد مبلغ األصول الثابتة في شهر وذلك بضمان أصول20 سنوات ورأس مال التشغيل في 5فترة
المشروع نفسه .
الحاضنة/ لمشروعات التقديم شروط : وأن يكون الخريج سوداني.-1 أن يكون خريج جامعة السودان للعلوم والتكنولوجيا كلية-2
البيطرة واإلنتاج الحيواني والزراعي .ال يعمل في أي مؤسسات حكومية أو خاصة .-3أن يمتاز الخريج بروح العمل الجماعي .-4
للحاضنة/ المالي الموقف تحليل : ز تم تمويل أصول مشروع الحاضنة من قبل بنك األسرة بمبلغ
مليون جنيه بصيغة المشاركة مع الجامعة والتي ساهمت1.200 % للبنك75باألرض واألصول الملحقة بها ، حيث كانت نسبة المشاركة
على أن تؤول الحاضنة بأصولها للجامعة بعد سداد’% للجامعة 25و تكلفة تمويل األصول بالبنك بعد الفترة المحددة بخمسة سنوات. في الجانب اآلخر مول بنك األسرة أيضا الخريجين جماعيا بمبلغ التشغيل
% سنويا يتم9وبصيغة المرابحة، بواقع تكلفة تمويل وصلت إلى شهر ، وهى الفترة المحددة لكل20سدادها بأقساط في فترة
مجموعة لتفسح المجال للمجموعة الجديدة للخريجين ، وهكذا يستمر
208
مفوضمبيعات
المشروع . الجدول التالي يوضح الموقف المالي للحاضنة بتفاصيله . (18)المتعددة
رقـم ( للحاضنة) 1جـدول المـالى للمـوقـف ملخـص جملة
المـبلغبالجـنية
البــراقالنجـاحالصـفـاءالمجـمــوعة
548230.00184310.00180660.00
مبلغ التمويل183260.00الممنوح للخر يجين
10أقساط 657876.6410أقساط
جملة اقساطأقساط10المرابحة
10أقساط 65787604010أقساط
جملة االقساطأقساط 10المدفوعة
جملة االقساط التى----لم تدفع
جملة اإليجاراتأيجار 15إيجار15إيجار 42000015المستحقة
جملة اإليجاراتإيجارات 7إيجارات7إيجارات2940007المدفوعة
جملة اإليجارات التىإيجارات3إيجارات3إيجارات1260003لم تدفع
جملة اإلنتاج بالطن76183274395.12394442649917.888.898.62763797.4726329.
5 جملة المبيعات2594772.1
بالجنية5951430.612020156.241972601
.371958673.0
0جملة المنصرفات بالجنية
136400.0055000.0022000.00
جملةالمدفوع 59400.00للخريجين
المصروفات الإلدارية170570.000.000.000.00للحاضنة
م2013المصدر :جامعة السودان إدارة اإلستثمار
يتضح من الجدول أعاله الفوائد المحققة من خالل مشروع الحاضنة بالنسبة للخريجين خاصة والمجتمع عامة حيث تحصل كل خريج حسب
جنيه وذلك بعد إكتمال8300النسبة المخصصة للتوزيع على مبلغ قدره 2700سداد مال المرابحة علما بأن هذا المبلغ يعادل في المتوسط
جنيه للخريج في كل فترة إنتاج ) الفترة شهرين (وتم حسابه من خالل ، في الجانب اآلخر على مستوى(19)جملة المبالغ المدفوعة للخريجين
761882المجتمع تم رفد السوق المحلي بإنتاج من الفراخ قدره
209
طنا ، وهذا يؤكد فاعلية التمويل لمشروعات حاضنة تشغيل الخريجين ويمكن زياة هذه الفاعلية من خالل تقديم تسهيالت في إجراءات
التمويل األصغر وتخفيض تكلفة التمويل التي تتحصلها البنوك كأرباح ، أو أقل من1 % لتكون رمزية وبنسبة 12 إلي 9وبنسبة تتراوح ما بين
% تحقيقا لهدف توزيع هذه الفوائد لجميع قطاعات المجتمع1 المحتاجة وبخاصة الخريجين وصوال لعدالة توزيع الثروة والدخول
وتخفيف حدة الفقر في المجتمع حتى ال يكون المال دولة بين األغنياء .
الحاضنة/ إسهامات : ح أسهمت الحاضنة بتشغيل عدد كبير من األفراد وصل إلى مائة
خريج ، كما ساهمت في إنعاش السوق المحلي71شخص منهم بتوفير فراخ للمستهلك وبأسعار معقولة بجانب الفوائد األخرى
والمتمثلة في أن الحاضنة كانت بمثابة حلقة وصل مع مراكز البحوثاألخرى .
رقم ( )2جدولالقوة العاملة في الحاضنة
العــــدد النــــــــوع الرقم الممولين1
) الخريجين (71
02 المشرفين202 الخفراء301 المدير401 المحاسب507 مجلس اإلدارة604 الترحيل706 القباضين806 العتالين9
100 المجمـــــــــوع
_ _ : ، كوكو حلة الخرطوم الحيواني واإلنتاج البيطري الطب حاضنة إدارة م2013المصدر .
يالحظ من الجدول أن الحاضنة قد أسهمت إسهاما فاعال في توفير فرص عمل لعدد مقدر من الخريجين على الرغم من قلة رأس المال
مليون جنيه سوداني1.200المستثمر في األصول والذي لم يتجاوز وهذا يؤكد فاعلية حاضنات األعمال ومساهمتها في إيجاد فرص عمل
حر للراغبين والمحتاجين إليه والناشطين اقتصاديا .
210
والتوصيات: النتائج أخيراالنتائج/ : أ
ساهمت حاضنة األعمال في تشغيل عدد مقدر من الخريجين-1( خريجا .71 شخص منهم )100وصل
ساهمت الحاضنة بإنتاج مقدر للسوق المحلي من الدجاج-2 طنا مما ساعد على توفير اإلحتياجات761882الالحم وصل
األساسية لمواطني والية الخرطوم والمحليات األخرى منالفراخ الالحم .
ساعدت الحاضنة الخريجين بتدريبهم ونشر ثقافة العمل الحر-3 وسطهم واكسابهم الثقة واإلستعداد النفسي للعمل خارج نطاق
الوظيفة التقليدية . اتضح من خالل الورقة المقدمة أن التمويل األصغر في الواقع-4
%( من محفظة التمويل12موجه رقمي من البنك المركزي ) بالبنوك والتي تم ترجمتها و تحويلها إلى أرقام نقدية محفوظة
في خزانات هذه المؤسسات ولم تستخدم بصورة فاعلة لتحقيق اهدافها الرامية إلى معالجة اإلشكاالت وإشباع الحاجات الملحة للفقراء والمحتاجين وتأكد ذلك من خالل اإلنتقاد الذي قدم من
قبل المسؤلين في الدولة. 9تعد الضمانات المطلوبة وهوامش األرباح التي تتراوح ما بين -5
% من المعوقات الرئيسية لفاعلية التمويل األصغر .12– توجد نجاحات في المشروعات الفردية )حاضنة األعمال بجامعة-6
السودان(وكثير من مشاريع التمويل األصغر مما يؤكد أن معوقات اإلنتشار للتمويل األصغر واإلستفادة منه مجتمعيا
متعلقة بالبنوك وسياساتها وليس باألفراد والمجموعات في عدمجدوى و فاعلية مشروعاتهم المقترحة والمنفذة.
التوصيات/ ب مركزة التمويل األصغر في مصرف واحد متخصص.1
ومخصص لنشاط التمويل األصغر يتبع سياسة واضحة تركز على األرباح اآلجلة للمجتمع ال األرباح العاجلة للبنوك من
خالل تقديم التمويل وحصاد األرباح عليه . تأسيس شركة مساهمة تعمل لتسويق منتجات حاضنات.2
األعمال وذلك إلبعاد المضاربين وسماسرة السوق وصوال
211
لتخفيف األعباء المعيشية عن كاهل المواطنين من خاللبيع المنتجات مباشرة للجمهور وبأسعار معقولة ومقبولة .
تخفيف هوامش أرباح البنوك على التمويل الصغير واألصغر.3 % تحقيقا ألهداف التمويل1 أو أقل من 1لتصل إلى
األصغر وتخفيفا للضايقة المعيشية عن المواطنين . العمل على التوسع في إنشاء حاضنات األعمال في.4
المجاالت المتعددة من خالل إنشاء مجمع متكامل لحاضنات األعمال واألعمال الصغيرة يلبي حاجات الراغبين في العمل وخاصة الخريجين ويوفر احتياجات المجتمع من
المنتجات المتعددة .
الهوامش قاسم الفكي على، أثر تطبيق سياسة التحرير اإلقتصادي في السودان-1
على القطاعات اإلنتاجية – الخرطوم مركز التنوير المعرفي – الخرطوم،م.2011
الصديق طلحة محمد رحمة ، التمويل اإلسالمي في السودان – التحديات-2ورؤى المستقبل ، شركة مطابع السودان للعملة المحدودة .
صالح جبريل حامد ، التمويل األصغر في السودان ، المفهوم والنماذج-3والتطبيقات .
micro finance unitبنك السودان المركزي ، وحدة التمويل األصغر -4(http:/www.mfu.gov.sd )
محمد عالء الدين عبدالقادر، البطالة، منشأة المصارف، اإلسكندرية-5م .2003
م2013الشركة السودانية لتنمية التمويل األصغر – الخرطوم -6المرجع السابق -7م.2006بنك االسرة ، الخرطوم ، مطبوعات ، -8
-جامعة السودان للعلوم والتكنولوجيا ، إدارة اإلستثمار واإلنتاج، الخرطوم9م .2013
212
م .2013-المصدر السابق ، الخرطوم 10 - جامعة السودان للعلوم والتكنولوجيا ، كلية البيطرة واإلنتاج الحيواني، ،11
.م2013حاضنة الطب البيطري واإلنتاج الحيواني م .2013- المراجع السابق ، الخرطوم 12م .2013- المراجع السابق ، الخرطوم 13- مدير إدارة اإلستثمار - جامعة السودان للعلوم والتكنولوجيا 14.2013 - المرجع السابق، الخرطوم 15 - مقابلة مع مدير حاضنة الطب البيطري واإلنتاج الحيواني- د/ أحمد النور16
2013.م2013- المصدر السابق17م2013- المصدر السابق18م2013- المصدر السابق19
213
Paper 16
Islamic Microfinance and Sukuk:A Propose Regulatory Framework for Liquidity Issue in Indonesia
Dr. Raditya SukmanaLecturer in Islamic Economic, Faculty of Economics and Business,
Universitas Airlangga, Surabaya, Indonesia
AbstractData from ministry of cooperative 2010 in Indonesia revealed that microfinance sector contributes as many as 33% out of total GDP. If it is combined with the small and medium sectors, the total contribution may reach to more than 50% of the total GDP. Moreover, the number of employment in these sectors reaches to more than 90% out of total labor in Indonesia. These figure shows that Micro, Small, and Medium enterprises (MSME) has to be put in greater attention by government, particularly for the microfinance. The most common practice of the financial institution which deals with the microfinance is cooperatives. This institution is to some extent has the same function as banks that is financial intermediaries. Despite the importance of these cooperatives for the economic growth, there are many factors that impede this institution to develop faster than the current performance. Among the problem is on the liquidity issue. The current fact has shown that many, if not all, cooperatives (both Islamic and conventional) which are the backbone of the microfinance in Indonesia are in the shortage of liquidity. The main source of funds which is coming from their respective members is not enough to finance the recipients (in this case micro enterprises). Cooperatives need to find out for more liquidity, this paper attempts to create a regulatory framework to solve the liquidity problem by utilizing the sukuk instruments (issued by government). This instrument is adopted as in many cases government issud sukuk is oversubscribed. It is expected that with the support of the sukuk, the the Islamic microfinance performance will be developed faster in the future
1.Introduction
Islamic microfinance has been put in a greater attention by many. It is continuously discussed by
academicians, researcher as well as policy makers. Moreover, the university students particularly in
Indonesia has also study this sector as part of their courses. Conferences and seminars on this issue
have also extensively been done. It discusses the past and current performances, and its future
development. Identifying the problems and proposing solution are also part of the discussion (Bank
Indonesia 2009,2010, Hamada 2010).
Among the reasons of why this sector has gained momentum is because, during the financial
crisis, such as subprime mortgage in 2008, Islamic microfinance still perform well despite many big
companies, particularly currency exposed companies, are suffering. It was not affected by the
international financial turbulence as the operation of this sector such as acquiring raw material,
214
manufacturing process and marketing the product etc are done domestically and it is not exposed to
the external factors. In short, Islamic microfinance as well as conventional microfinance act as a
buffer in the crisis.
While it successfully prevents the economy from deteriorating due to financial crisis,
microfinance particularly Islamic microfinance is not without problems. There exist various aspects
within the industries that need proper regulations. Weak institutional capacity, weak capital base and
the liquidity issue are some of the problems that require government to step in with regulations.
Weak institutional capacity relies heavily on the skill of the human resources within the
institutions. Unlike banks with strict requirement ( such as academic performance, organizational
experiences, as well as softskill ability) for recruiting staffs, microfinance institutions, to the best of
the author knowledge, are not basing on the meritocracy for recruiting staffs rather it is due to
friendship which, to large extent, do not suit with the needs.
The availability of the capital is another aspect which needs to be regulated. The limited
capital would not provide cushion for the financing/ lending risk. While in banks, the capital needed
given the risk weigthed asset is very much regulated, such that in the microfinance industry has not
been treated as an important one. Hence, it is understood that not few microfinance institutions in
Indonesia close their operation due to this factor. The availability of the capital and the liquidity
management are among the important factors to have a successful operation of the MFIs including the
Islamic MFIs (IMFIs).
The shortage of the liquidity has been in existence for quite some time, evenmore in the
recent years whereby Indonesian economic growth has performed well with the rate around 6%
annually. Given the high economic progress, the demand for financing increase significantly. This
lead to the shortage funds within the IMFIs. To come up with solution for the liquidity shortage, the
IMFIs are normally requesting funds from Islamic banks, governmental related ministries as well as
put more capital by the IMFIs owner.
This paper aims to provide regulatory framework to solve the liquidity with the support of the
Islamic capital market instrument namely Sukuk. The argument of adopting sukuk to support the
microfinance industry is due to the high performance of the Indonesian sukuk issued by government
as the other engine for the economic growth.
The structure of the paper is as follow, after the introduction, it discussed the policy
framework needed to develop the microfinance industry. It follows with the performance of the
microfinance (both Islamic and conventional) industry in Indonesia. Section four describes the
theorethical background and literature review pertaining to the study on the sukuk issuance by
government. In this case, sukuk issuance by local government in Pasir Gudang, Johor Bahru Malaysia
will be explained to accompany the theory of sukuk. Section five is the gist of this paper in which the
role and the structure of the sukuk in supporting the IMFIs is elaborated. It will end with the
215
conclusion which basically mentions the importance of government to have policy to create
significant progress for the microfinance industry with the support of sukuk.
2. Microfinance policy framework
Regulation and policy are needed to overcome the problem above. However, in designing the policy
for microfinance, the objective should be comprehensive enough to create a significant progress in the
microfinance industries. The objectives that should be existed are as follow (Central bank of Nigeria,
2011)
1.Provision of financial services to the economically active poor. There are various types of
poor. Among the classification of the poor is on the active and passive poor. The former relates with
the poor who work hard to earn living. They have a mental which strive for the best and follow the
right order rules and regulation to get a better and prosperous living. Conversely, the latter is the poor
who are the dependent. It means, they prefer not to do work and rely on the almgiving by others. In
this context, financial service is given to the active poor who is ready to run the business whereas for
the later, another approach need to be taken specific that suit with the needs.
2. Creation of employment opportunities of the active poor in the countries. Microfinance
policy should not only regulate merely on the financing but also it should accomodate on how to
create the employment opportunities. In developing the microfinance industry, government has also to
facilitate the microfinance practitioners with the information about the potential market for them by
the support of the sophisticated Information Technology. This will enable them to get the project or
job opportunities to further increase their standard of living. The reason as to why this is important is
because the marketing skill ability by the MSMEs need to be very upgraded. (Webb, Kristiani and
Olaru, 2009)
3. Linkage program between the microfinance institution with other financial institutions
(Banks). In many cases, banks do not have limited number of staffs to cater for all small amount of
loan. Moreover, the staffs which may normally handle the corporate loan, then they will find
difficulty once they handle the microfinance (micro loan). The nature and the approach are certainly
different. For that case, rather than they have to handle number of applicants for small loans, they
prefer to create a linkage program to the microfinance institutions (MFIs). The program is for the
banks to provide loans to the microfinance institutions (MFIs). The linkage will also benefit MFIs
since not few MFIs are in the shortage of liquidity. In many cases, they reject the prospective loan
applicant simply due to the unavailability of the funds.
4. Enhancement the service delivery to the micro,small and medium enterprises (MSME). The
ability to provide service delivery to the clients is different between the big Financial institution and
MFIs.Given the large amount of capital that the banks have, they can provide service needed by the
clients. Example of this is the IT service. The big banks with a sophisticated IT will enable the clients
216
to make transaction remotely. This obviously can not be done by the MFI.another approach has to be
taken to maintain the loyality of the clients.
5. Mobilization of the savings for intermediation and rural transformation. the microfinance
policy has also to require the client to have savings. Albeit the limited income by the clients
(microenterprise practitioners), the saving has to be created. This is to educate them on the importance
of saving for the future.
6. Promotion of a platform service providers to network and exchange views and share
experiences. Each microfinance practitioners have different experiences in doing businesses. Having
this situation, it is worth to have venue for exchange the ideas and networking.
3. Islamic Microfinance in Indonesia
So far there is no agreed definition on the meaning of microfinance (Mohsin, 1995) including in
Indonesia context. One of the definition of microfinance prevail in the literature is the provision of the
financial services (both savings and credit) to low income clients (Arsyad, 2006). Another definition
by Indonesian ministry of cooperatives is that microfinance can be looked in term of the number of
the employee hired. Bank Indonesia defines microfinance based on the amount of the financing given.
While there is a debateable definition of microfinance. The institution which operate microfinance has
proven to be the important engine for the economic growth.
Microfinance institutions started to be a tool for economic development since 1990 (Arsyad,
2005). The main role of this institution is to serve the financial needs for specific segment of society
which has been neglected by the commercial banks or, in general, mainstream financial institutions.
There exist various reasons as to why these banks have rejected this segment of society. Among those
various reasons is that the borrowers do not have collaterals or it is called unbankable. As the bank is
a profit oriented business, then the bank has to reduce the risk by requiring the borrower to provide
collateral. When the borrower defaulted, the bank can take over the collateral to cover the losses
occurred. Since the low segment of society commonly do not have collateral then the existence of
institution which is less strict is very much needed. This institution largely is not requiring the
customers to provide collateral when they demand credit or financing.
To the best of the author knowledge, research on Indonesian conventional microfinance has
been many ( Rosengard et all, 2007,Seibel,2008, Nugroho, 2009, Martowijoyo, 2007). Hence in this
study, conventional microfinance institution is excluded and focus only in islamic microfinance.
With regard to the Micro Small Medium enterprises (MSMEs) in Indonesia which are
supported by the microfinance institutions and also banks, their role is important for the economic
growth. Based on the data by Indonesian ministry of cooperatives, there seems to have correlation
between the existence of Micro Small Medium Enterprises (MSMEs) and the country economic
growth.
217
Table 1 provides us with some important performance indicators of the MSMEs. In the case of
Indonesia having the population of more than 200 million, the number of Micro enterprises is more
than 53 million which contributes nearly 99% out of total companies in Indonesia. Meanwhile the
numbers of small and medium enterprises are as many as 573,601 and 42,631 unit. The share of this
two enterprises are 1,07% and 0,08% out of total number of MSMEs. This means that the existence of
micro enterprises is vital.
Another important figure is on the number of labor. Number of labors who works in
microenterprises is more than 93 million which contribute more than 90 percent out of total number of
labor in MSMEs. Meanwhile number of labor in small and medium enterprises contribute about 3,55
and 2,7 out of total number of labor in MSMEs.
The most important thing from table 1 is in the lowest part which is the contribution of
MSME to GDP. MSMEs contribute as many as 57.12% out of total GDP. The disaggregate data
shows that small and medium enterprises contributes about 9,86% and 13,46% out of total GDP and
the micro enterprise contribute about 33,81 %.
Given this figures, it turns out that the development of MSME has to be seriously taken into
account by government as developing this sector may also reduce the poverty incident (Nugroho
2009, Miyashita 2000 and Obaidullah 2008). Moreover, this sector remain perform well in the case
where the crisis exist. While many big companies, which exposes to the international environment,
had to experience the unexpected condition, this micro, small and medium enterprises were working
in such a normal way as if the crisis did not exist. This may be due to the fact that this sector uses the
local resources and sell it to the local as well and hence this sector do not really expose to the
exchange rate due to the absence of the overseas trading. Even if there exist MSMEs which deal with
international community, hence it expose to the exchange rate, the impact would not be significant.
Table 1
Profile of MSME in 2010
No Indicator Unit Year 2010 %Numbers of Unit Unit Numbers Share
1 MSMEs Unit 53,823,732 99,992 Micro Unit 53,207,500 98,853 Small Unit 573,601 1,074 Medium Unit 42,631 0,08
Number of Labor Person (unit) Numbers Share1 MSMEs Person 99,401,775 97,222 Micro Person 93,014,759 90,983 Small Person 3,627,164 3,554 Medium Person 2,759,852 2,7
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Contribution to GDP Rp Billion (unit) Numbers Share1 MSMEs Rp Billion 3,466,393,3 57,122 Micro Rp Billion 2,051,878 33,813 Small Rp Billion 597,770.2 9,854 Medium Rp Billion 826,745.1 13,46
Source: Ministry of Cooperative www.depkop.go.id, retrieved February 2012
Despite the important role of the MSME to the economic growth, there exist common internal
operational problem specifically within the MFIs (both conventional and islamic). Among the main
problem that prevent the IMFI to grow faster is on the liquidity issues. The less liquid would impede
the IMFI to develop further. There are many alternative solution on this issue. However, the
cooperatives may not as easy as banks with regard to the liquidity issues.
Many of the MFIs are not in the form of banks, they are mostly cooperatives in which the
fund sources depend heavily from the saving of the members which are very limited. If this is
continued then the progress of the cooperatives will be very slow. In order to speed up the
development of the cooperatives, they have to seek other sources of funds. Financial institutions
which may provide financial support for cooperatives are rural banks or commercial bank.
Cooperatives which are based on the Islamic principles can also request funds from Islamic Rural
banks and Islamic commercial banks (Bank Indonesia 2009, 2010). However, seeking funds from
these institutions is not without cost. Due to the opportunity cost, borrowing rate is expensive for the
MFI (Ascarya & Cahyono, 2011). Given the higher demand of financing by the MSMEs, MFI has to
borrow with high rate. As a result, the profit margin for the business would not be high.
As we aware, with regard to the liquidity issue, for the commercial banks, there is central
bank which acts as the lender of the last resort. It means that if banks could not get funds from other
sources, they can rely on the central bank with a relatively competitive price. However, that is not the
case in the context of MFIs. While seeking funds from commercial bank or rural banks are costly,
they may get funding from programs created by the various governmental ministries. This program
normally needs 2 or 3 years to complete and it does not guarantee that there will be another similar
program. Hence the issue of the sustainability is the major concern as new governmental appointed
minister may have different program.
Challenge to develop the microfinance by government is how to give fair treatment for the
commercial banks and to microfinance institutions which provide lending or financing to Micro Small
Medium enterprises.
Therefore, in this case, government should provide a kind of central bank or apex for the
MFIs to enable them to get cheap sources of funds. With this cheap price, obviously the MFIs can
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lend with the relatively cheap price which lead to the economic growth as business which get
financing from IMFI also sell the product with cheap price.
In addition to the fast growth of the microfinance as well as Islamic microfinance in
Indonesia, there exists another Islamic financial instrument which has been put in more attention by
many. Retail sukuk issued by government have shown to be one of the better alternatives for the
investment. With the attractive rate and the low risk (as it is issued by government), every
governmental sukuk issuance has always been oversubscribed. This means that sukuk can be a better
alternative to raise funds.
4.Literature Review
4.1. Theoretical background (Theory of sukuk and securitization)
Sukuk has been put in greater attention in this decade, not only for the corporate to obtain funds to
expand their businesses, but also for the government as a tool to raise fund to develop the
infrastructures and facilities.
In a simple term, Sukuk can be understood as a shariah compliant bond. As we understand,
bond is debt based instrument. The issuer or the obligor is obliged to pay the interest and the principal
to bondholder on the date that has been specified upfront. Meanwhile, sukuk is not purely debt
instrument as in the case of bond, rather sukuk represents ownership of an asset or usufruct. The right
attached to the sukuk holders is not only claim on the financial term but also claim on the ownership
of an asset (depend on the type of asset securitization).
In middle ages, sukuk was widely used as means to support trade and commercial activities.
But, of course, given the current complex of financial environment, the structure of current sukuk is
very much distinct from that of the past. The current sukuk are akin, to some extent, the concept of
securitization. It is a process whereby ownership of the underlying assets is shifted to numbers of
investors via certificate which represents the proportionate value of the relevant assets.
There exist some advantages in using the securitization. Firstly, it enables to effectively use
the illiquid assets. In certain securities, originators should sell the underlying assets to the SPV
(issuer). Once it is successfully done, those assets will no longer appear in the originator financial
statement. The asset will register under the investor’s name. Therefore it allows expanding their
business without raising a new equity funds. Secondly, unlike borrowing which depend on the global
dynamic interest rate, the securitization will be another advantage since it is based on the asset level
rather than enterprise level. It means that the performance of asset determine the return paid to the
investor rather than the performance of the enterprise. Thirdly, with the developed capital market, it is
of no surprise that efficient, low cost of financing will be other advantage of securitization.
Fourthly, with the help of the information system, securitization business can improve its
performance. The issue of the capital market is on its efficiency. This has to do with the level of
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asymmetric information. If the information is disclosed at the same time (no insider information), then
the level of asymmetric information will be low which lead to the more efficient market.
Fifthly, Sukuk can be better alternative for the islamic financial institution to cater the
problem of mismatch between long term financing and short term deposit. Normally banks do not
want to finance long term project due to the characteristic of deposit as their main source of fund
which is short term in nature (the longest maturity period of deposit is 12 months). By issuing sukuk,
bank will have another source of fund, which has a longer maturity period than deposits. Sukuk period
can be designed as long as 20 years or more. Henceforth the issuance of sukuk enables the institution
to reduce the maturity mismatch. Specifically, sukuk may reduce the the issuer’s constraint of short
term liquidity and fullfill the enormous demand for infrastructure funding in Indonesia.
4.2. Mudharabah sukuk
This shariah instrument corresponds to a project or activity may adopt the concept of mudharabah
principle. Just as in its basic concept, it involves two parties namely mudharib and rabbul maal. The
former refers to the businessmen which have skill and ability on a certain project while the later is the
party which provide funds.
In applying mudharabah concept for sukuk, mudharib will be the issuer of the mudharabah
certificates. The rabbul maal in this case is the investors who subscribe the certificate. The holders of
the certificate mean that they own the assets/ project of the mudharabah and agree that whenever
profit incurred will be distributed accordingly.
The features of mudharabah sukuk are as follows:
1. It represents an ownership of specific projects.
2. The holders entitle to receive agreed upfront share of profit resulted from the projects.
3. The holders have rights to sell the certificate in the market provided that shariah requirement
is followed, particularly;
a. If the project is not yet started, then the certificate still represents money and not a
tangible asset. Consequently, in this case, the rule of Bai al Sarf has to be followed.
This rule says that exchange of gold, silver, monetary value/receivables or currencies
have to be equal for equal and the goods are homogeneous.
b. If the capital proceed is based on debt, then it must follow shariah rules on the trading
of debt.
c. All kinds of capital have to be assessed with the market value and mutual consent.
4. In this contract, there is no such thing as guarantee as it violates the main principle of
mudharabah which is profit and loss sharing. In other words, the prospectus should not have a
clause stipulated that the fixed amount of fund distributed to the holders.
5. The share is based on the profit and not on the revenue
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6. In an upturn economic condition whereby the project might earns huge profit, some portion of
the profit can be put as contingencies and later be used when the opposite situation happens.
The intention of this is merely for smoothing the profit earned by investors and this has been
approved by shariah advisors.
7. The guarantee mentioned in no 4 refer to the guarantee by either party in the mudharabah
project. However guarantee the mudharabah project still possible provided that the party
which give a guarantee is neither the mudharib nor the rabbul maal. This party should not
have any relationship at all to the mudharabah project.
4.3. Previous study
This section discuss the experience of sukuk mudharabah which has been applied in Malaysia. In
particular, this sukuk is adopted by one of the state of Malaysia namely Johor. Within this state, there
is a municipal called Pasir Gudang (PG). In 1995 this municipal wanted to raise fund to beautify the
city. The local government then made use of the sukuk mudharabah for that purpose.
Six series of different maturities mudharabah notes was issued by Special Purpose Vehicle
(SPV) namely PG Municipal Assets Berhad (PGMAB). This sukuk is rated “AAA” by Rating Agency
Malaysia (RAM),the highest rating in Islamic investment instruments. Moreover, RAM rates this
sukuk instrument as of premier quality. It means that it has highest safety capital preservation and
highest realizing expected return (Johorland, 2005).
This sukuk has some important features. Firstly, it deals with local authority (LA) in this case
Pasir Gudang Local Authority. The local authority is the tax offices which the main function is to
collect taxes particularly the property tax from the local society (individual as well as corporates).
Besides property taxes, the revenue for the municipal can be in the form of rental income, as well as
parking fines. Among these types of revenue only the property tax is compulsory made by the owners.
Moreover, the composition of the tax revenue shows that property tax collections comprise about 50-
95% of the total tax collected. Hence by using the tax stream revenue as the underlying asset, it
provides a lesser degree of uncertainty as compare to the use of other income stream such as rental
income and parking fines.
Secondly is the use of mudharabah in the sukuk structure. Previously, Islamic securities have
been predominantly with Bai’ Bithaman Ajil (BBA) which involves deferred payment sales. The use
of this BBA is debateable as the operation of this concept is close to that of the conventional concept
albait it is shariah compliance. However, rating agency in Malaysia called, Rating Agency Malaysia
(RAM) has argued that the use of mudharabah contract is a positive development in promoting
Islamic capital market in Malaysia.
In mudharabah sukuk, the development project must be existed. It means that the mudharib,
the party who have a skill, is collaborating with rabbul maal in this case investor to agree on a specific
project. The ownership of the investors is represented by the sukuk certificate that they will hold.
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However, the sukuk structure applied in Johor does not require the physical project to be
done. Rather the project is the ability of the tax officers to collect tax. In this structure, there are two
tier mudharabah for three entities namely investors, PG municipal and local authority. The first tier
mudharabah is between the investor and PG municipal who act as Special Purpose Vehicle (SPV) and
the second tier mudharabah is SPV (which act as rabbul mal) with local authority (which act as
mudharib)
Any amount receive by the local authority from the tax revenue will be shared by the local
authority and PG municipal accordingly. The portion for the PG municipal will later be distributed
between the PG municipal themselves and the investors.
The structure above can also be modified in the context of Indonesia, particularly to develop
the microfinance industry which is in liquidityshortage. In this paper mudharabah sukuk is still be
adopted. However, unlike the structure in Johor bahru which uses the tax management collection as
the project, this paper uses management of the government asset as the project. The detail explanation
will be elaborated in the following chapter.
5. Proposed sukuk structure for microfinance
As has been stated above, liquidity issue is the main obstacle in developing the microfinance and this
paper attempts to provide its solution. In order for the sukuk structure to be implemented, at least
three entities have to be existed. Those are,Investors, Special Purpose Vehicle, and Government.
Figure 1 will explain the proposed structure
Figure 1Proposed Sukuk structure
13 121 42 6 Central BMT MSMEs3 9 Bank Like 10 11 12
Investors 8 SPV Govt (CBL) BMT MSMEs
BMT MSMEs
57
Govt Asset
In this case, while SPV acts as the party which issue sukuk, goverment’s role is to develop the
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microfinance, via supporting the liquidity. In addition to these three entities, it requires Central Bank
Like (CBL) for microfinance. It is not central bank that we understand that act as the lender for the
last resort for only banks, rather CBL’s role is to act as the lender of the last resort for Islamic
cooperative0. Moreover, CBL is also the regulator for the cooperatives which include Islamic
cooperative0 (BMT). BMT act as financial intermediaries which collects funds from party who have
excess funds and distribute to other party who is in need of funds (in this case MSMEs). The process
is as follows:
1. SPV, as a one dollar company created by government to issue sukuk, set up a profit sharing
basis of mudharabah with the investors. This means that the investors act as the rabbul maal
(parties which have excess funds) and SPV act as the entrepreneur who will manage the
funds.
2. As a rabbul maal, investors contribute fund to be given to SPV
3. As a countervalue after receiving funds is for the SPV to provide mudharabah sukuk
certificate to investors. This is to evident the investors on their participations in the venture.
Hence the mudharabah part is taking place between SPV and the investors. Bear in mind that,
the obligation of the mudharabah holder is not without limit. In this case the holders’
liabilities are limited up to the amount contributed in the venture.
4. The ijarah part will take place between SPV and Govt as the owner of the asset
5. The govt asset is rented to the SPV.
6. SPV give rental fee (advanced payment) to the govt. This fee is coming from the funds
contributed by the investors.
7. During the leased period, the profit generated from the leased asset will be managed by the
SPV
8. The profit will then be given periodically to the investors as the profit form the partnership
(mudharabaha)
Basically, it requires eight sequence step in order for the sukuk to be implemented. These steps cover
from where the funds come from until the step where the fund is given to CBL like for microfinance.
However, this structure has not explained the main purpose of this study that is how sukuk can
support the liquidity shortage for Islamic cooperatives (BMTs) which deal with Islamic microfinance.
The following is the process on the role of sukuk for microfinance:
1. The advanced payment received by government is to be given to CBL that act as lender of the
last resort for Islamic cooperatives.
2. The funds will then be distributed to the Islamic cooperative or BMTs.
0The role of ministry of cooperative will be limited as this CBL is introduced. The CBL can adopt the Apex sistem. Apex operate as a lender of the last resort for the non commercial banks0In this paper, islamic cooperatives and Baitul Maal wa Tamwil is used interchangebly
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3. As the price of the sources of funds is relatively cheap, BMTs will be more able to give lower
financing rate to the MSMEs. Moreover as the loanable fund increase. BMTs have more
opportunity to provide more financing
4. The profit from the businesses will be distributed between the MSMEs themselves as well as
the BMTs.
5. Profit portion for the BMTs will be divided by the BMTs themselves and the CBL. The
payment will be the profit portion for the CBL and this has been agreed upfront.
There advantages on using this sukuk structure:
1. It promotes sukuk as the alternative for the financing as opposed to the traditional financing
from Islamic bank. The existence of the financing alternative will give more option or choices
for needed fund parties to assess the risk and return that fit with their risk profile
2. This structure is to support the real sector which is consistent with the nature of the Islamic
finance. In this case, sukuk is adopted to support the liquidity shortage experienced by many
Islamic cooperatives
3. As the intention is to support the Micro Small Medium Enterprises particularly micro
enterprises via BMTs, the negotiated profit rate given to the government (through CBL) can
be designed to be very minimum. The big portion of the profit goes to MSMEs and certainly
in the long-term MSMEs will grow faster.
4. In many ijarah sukuk, there is a step of sell and buyback. Which means government is selling
the asset in which in the maturity date, the government is buying back the same asset. This
requires the purchase undertaking and the ownership given by government is beneficial
ownership and not a full ownership. This beneficial ownership remains the issue. Although
majority has said that beneficial ownership can be applied but still there are others who
oppose it. This structure attempt to get rid of the beneficial ownership issue. This is because
government is leasing (not selling) assets to the SPV in which the government is receiving the
advanced payment in full at the beginning.
The structure above has been designed to reduce the any possible risk encounter in sukuk issuance.
For example, the asset by government is a tollway which has been used daily by the commuters hence
there is unlikely to be defaulted on the payment. This means that investors face the less risk type of
investment.
With regard to the annual profit rate earned by the Micro enterprises, the current fact shows
that the profit rate can reach to more than 40% annually0. Although the rate is quite high, the
microenterprise still gain a moderat profit. This is because Microenterprises and in general MSMEs
have to repay back the loan to BMTs quite substantial.
0 Based on the discussion by the author with the practitioner who worked in Islamic microfinance institutions
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The pertinent question would be, why the BMTs charge a high profit rate to the MSMEs? The answer
is, other than there is no collateral which create financing risk, the high profit rate is due to the high
cost of funds. This is due to the fact that BMTs get an expensive loan from commercial banks.
It is the opportunity cost by the commercial bank to give financing to MFI/BMT. The commercial
bank need to compare the profit rate charge to BMT and other secured individual borrower. If the
secured individual borrower are charged quite high profit rate, then profit rate charge to BMT will
also be high or even higher. By introducing the sukuk structure above, microfinance institution may
get a cheaper price source of funding.
Other than that, the current practice is that the microfinance institution depends on various
ministry such as ministry of cooperative, ministry of agriculture etc to get the cheaper source of
funding. However, in term of the sustainability, the programs proposed by those ministries are not
sustainable. Different ministers may have different program which may or may not support the
microfinance institutions.
With the introduction of sukuk structure above, the funds are being put as a capital in the
CBL. So there is no such case of capital which is depleted. This is because the microfinance will
return back the capital plus the profit margin.The capital can be used to provide financing to other
microfinance institutions. Hence in term of the sustainability, the structure above is sustainable.
6.Conclusion
The paper aims to provide the regulatory framework to create solution of the problem that has been in
existence in the development of microfinance. Among various problems, the liquidity shortage is the
main problem which needs to be settled down.
The field experience has shown that micro enterprise may get profit more than 40% annually,
but the overall development of the microfinance is still moderate. One of the reason is because the
microfinance institutions charge high profit rate of financing to the microenterprises. This is because
microfinance institutions get an expensive rate of financing from Islamic commercial banks.
This paper attempts to provide a cheaper price of sources of fund by introducing the sukuk
structure. Basically mudharabah sukuk is issued by SPV which act as the manager of the government
asset. The profit given to the investors will based on the profit gain by the manager. The SPV manage
the government asset can be in the form of managing the less risk business project such as managing
the infrastructure facilities etc. The less risk of the projects will certainly attract more investors to
make investment. Hence the development of the microfinance will be faster.
As for the recommendation for the government facing the high profit rate charge to MSME,
government needs to settle down this issue. This paper attempts to provide the input to the
government for that issue by adopting the sukuk concept and establishing the CBL.
226
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Paper 17
Capital Requirement and Financing Provision Regulation inIslamic Microfinance Institutions (IMFIs):
Single and Double Mandate (s)
Suhal Kusairi, Ph.D.Assoc Prof. Nur Azura Sanusi, PhD
School of Social and Economic DevelopmentUniversiti Malaysia Terengganu
Tel: +6096684541; Fax: +6096684237Email: [email protected], [email protected]
Abstract
Microfinance has tremendously developed since the last two decades indicated by huge growth in number of institution and total outstanding financing. It becomes an interesting point for academics, practitioners and regulators because the important mandate of IMFIs in the alleviation of poverty rate and provide the main financing sources of microenterprise and poor people. In addition, the consequences of various mandates of IMFIs bring to the different business structure, i.e. banking, cooperation, NGO, development agency, credit institution and rural organization. As a result, the various structures will bring to the differentiation in regulation and supervision, the activity and operation of IMFIs might be flexible but might not become effectively and efficiently. In accordance with the role of financial institution, we need the regulation and supervision which is not disrupting the industry development but it is a preparation for soundness of institution, client protection and early effort to support the best infrastructure of industry. We classified the Islamic microfinance institution into three mandates, namely development agent, business and hybrid. In addition, microfinance is normally related to lending money to poor people or microenterprise without credit history, business records or collateral. Based on all limitation of microenterprise and unique characteristics of Islamic microfinance, how to set up the effectively and efficiently regulation and supervision from three perspective agents. In this regulation framework, this paper dealing and focusing on capital requirement and financing provision. Here, regulation framework should take account the asset quality and financing technology characteristic of IMFIs and risk based in supervisory framework. We argue that these two sides is very importance for financial intermediary’s soundness and prudential regulation.
Keywords: Capital Requirement, Financing Provision, Regulation and Supervision of IMFIs
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Introduction
Microfinance has a very important role in providing financing for microenterprise, it is a major
problem due to they usually fail to get financing from standard financial institution such as
commercial bank. The reason is usually this type of business cannot meet the requirements needed by
the commercial as collateral, proper documentation and financial statements. In addition,
microfinance has also an important role in reducing poverty rate by helping the low-income
households to increase their capacity and synchronies cash flow. In this case, microfinance institution
as complements of government programs for instance subsidies a free assistance or funds.
Empirical evidence showed, world data from 2005-2010 have shown that microfinance
institutions grew about 35% of the total establishments over the world and the number of active
borrowers increase about 108%, and about 25% the world’s population is poor and only about 10%
have access to financial system services. 33.3% of the poor population is Muslim, while 72% do not
use formal financial services. Islamic microfinance represents less than 1% of global microfinance
programmes (Azmi Omar, 2012). Even thought the Islamic microfinance is lagging behind, but
without a doubt, one of main contribution of Islamic microfinance institution to economic
development is to alleviate poverty (Ahmed, 2002).
In addition, academic studies have found that microfinance institution has important role in
equitability of income distribution either through financing microenterprise or low income households
(Ahmed, 2002) and Churcil & Coster (2001). In this case, microfinance institution provides greater
opportunities to the microenterprise sector developed where they have no chances to obtain financing
from standard commercial bank. It normally requires the strict requirements such as collateral,
financial status and financial administration. Gallardo (2001) and Hoxhaj (2010) supported the
previous studies that microfinance institution focused on financing found that total assets, financing
and number of microfinance institution itself always experienced a significant increase.
Based on several studies have been conducted, the major problem is the posture of
microfinance institution where the service users have not supporting financial data, lack of collateral
and it is start up business. Thus, it exposed to a high level of risk and should be strong provision to
support the possibility failure of repayment and provide income stability to the investors or benefit to
donor. In addition, the asset structure is weak due to it is normally very dependent on the government
budget and internal or external donor. Even though, the growth is high but dependent on government
policy and the existence of the donor. In other words, microfinance institution is poor regards to the
raising fund from the third party. Asset structure should be brought up to market-oriented not to a
specific policy. If both problems cannot be solved expected microfinance industries will not achieve
stability and sustainability. Unfortunately, law and regulation infrastructure for both activity are weak
and the regulatory process is too simple and there is possibility overlap between the departments
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within a country. Nevertheless, in any case, the development of microfinance institution is very
important for the industry due to increase people's capacity, reduce poverty and develop new
entrepreneur business by a selection process and fair competition.
The efficiency of microfinance industry is a golden goal which desired by all parties involved.
Industry and microfinance market describe the distribution of economic resources and how the
industry utilized it with more transparent, efficient and equitable. The market information which is
efficient, transparent and fair is importance to all interests of the parties involved, based this
information, ability and effort the consumer will decide whether make an investment or not. It gives
learning about the possibility that all people can thrive, and then financing is not a factor for the
failure of a person or business. Microfinance industry will be like the financial industry, such as
banking, but which distinguishes only financing and investment level with occasional small. How the
regulations and laws, the level of risk, stability and equal health system are strong and healthy.
The development of regulations and laws is to ensure the microfinance operations and
activities are going well and can be controlled to ensure the interest of all parties is very important.
Experience of Malaysia the microfinance is an important instrument for poverty alleviation.
Microcredit is as complimenting the government’s effort in reducing poverty. Microfinance divided
into two; regulated microfinance providers are bank institution and non regulated microfinance
providers are NGO, cooperation etc act as conduit of government loans to target poor household on
the other hand all focused on lending activities there is no mobilization deposit or partnership from
third parties. Regulatory agency is central bank (BNM), minimum capital and capital adequacy ratio
of regulated is required.
In addition, the current rules and laws that supervising of microfinance can be divided into
three authorities, under the ministry of finance, central bank, cooperatives and other irregularities. The
regulation was not enacted for the purpose of organizing and regulating all activities and operations of
microfinance, but only to give directions are very simple and far from prudential regulation. It is not
all microfinance institutions require prudential regulations due to a lot of microfinance do not raise
funds from third parties.
Microfinance providers have sought to expand the capacity and scope by increasing the
activity and operation. One of the main problems is the weaknesses of raising funds from the third
party for instance savings, investment even donation. Generally, third-party funds is very small except
the sourced fund from financial institutions but lead to higher financing costs due to microfinance
institution act as the middle man. In addition, the financing characteristic of the creditors or partner is
very high risk cause the minimal security and support information.
Unfortunately, the rapid development of microfinance institution does not be supported by
proper regulations and laws to all activities and operations. Whereas this is very important for
microfinance institutions are efficient and effective. It is also main sources of problem in collecting
fund and financing activities due to a lot unclear and overlapping regulation so might be exposed to
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investors. Objective of this paper is to explore the existing rule and regulation of microfinance
institution and how to supervise them. Find out the specific regulation and law in financing provision
and asset requirement and the best practice how to conduct supervision. These two issues are very
importance due to these parts will ensure the return and cost operational of microfinance institution
and risk management. In addition, it is to protecting the stakeholder of both sides; investor or
depositor and creditor or partnership from the excessive risk.
Structure and Behavior of Islamic Microfinance Industry
Landscape of financial system and environment of economy affect the structure and behavior of
Islamic microfinance institution. Generally, there are five structures of microfinance institution;
commercial banks, non-banking institution, cooperation, non-government organization and
government agency. First, commercial bank provides the microcredit as an integral part of their
services provided to customers. Microfinance unit also as a substitute and meet the needs of regulators
and the part of the credit must be extended to microenterprise industries. Second, non-banking
institution in this regard is a kind of attempt to give credit to the microenterprise. Third, cooperative is
an economic institution formed by members of groups that have a specific purpose whether in
production, marketing or finance. Fourth, NGO is an organization is established by group of citizen
with the specific objective normally they involved in social issues. Fifth, government agency is
established by the government to help the government program.
Diversity forms of these institutions provide their own flexibility on Islamic microfinance
institution however maybe become less effective in the regulatory and development regulations for
lack of clarity and focus. But rules and laws is a major factor in the industry. Because of the laws and
regulations will determine their behavior stakeholders. Over the longer will be the effectiveness and
efficiency of the industry as it will affect how a resource will be used and the level of competition, in
addition to providing certainty and control to the customer.
Activity of Islamic microfinance institution is different, as the main activity of financial
intermediaries properly is to mediate between the surplus and deficit funding. Funds will be collected
from savers or investors as well as equity capital itself. Various financial instruments offered in this
fundraising, the Musharakah, Mudarabah, Ijarah, etc. The funds collected will be invested in or loaned
to certain parties usually to small businesses and the poor. Both of these can be seen as a portfolio of
assets and financing.
Each Islamic microfinance institution haves different focus of activities. There is heavily on
financing activity, some are balanced, however rare heavy on fund raising alone. Nevertheless, almost
80 percent is lending activities. In addition, microfinance institution operations are currently from
starting up to ideal one. The main problem is how these institutions get financing and otherwise major
problems small businesses how things simple they get funding. Market share of microfinance in
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Malaysia 80 percent is commercial bank, followed by non-bank institution, government agency and
cooperation. It indicates that portion for poor household and start up enterprise.
The level of competition between microfinance service providers is actually high because no
clear criteria of suppliers. Microfinance can be provided by NGOs, government agency, non banking,
cooperative banks and businesses, each of which has an objective and characteristic of each
organization. Competition, this will determine the type of microfinance system costs vary and usually
high cost because of the high financial risk. Unfortunately, SMEs actually require lower cost of
financing or to compete with non microfinance funding costs so they can compete and grow so that
they can compete with the big companies from domestic or overseas.
Table 1 shows the feature of microfinance institution in selected Asian country. Ilanto (2006)
resumed that microfinance activities are distinguished into two activities of deposit and deposit &
loan, which might be the divided into regulated and the not regulated microfinance. In addition, all
microfinance whether regulated or not regulated the central bank or a unit in central bank or
microfinance development institution themselves is regulatory agency. Every country has legal basis
which might be distinguished set out at banking and non banking institution regulation but usually as
part or diversity of their activities. There is also a country that already has its own legal basis in
specific microfinance activities, such as Pakistan and Bangladesh. There is also the legal basis as rule
development acts and it is be as part of government programs. Majority of microfinance institutions
are not apply physical collateral in lending technology but normally in form of group guarantee or
personal guarantee.
233
Table 1: MFIs Structure in Asian CountriesRegulated MFIs Non Regulated MFIs
Legal basis - Bank R/S- Non Bank R/S- Cooperative Rules- Microfinance Rules
- Bank R/S- Non Bank R/S- Cooperative Rules- Microfinance Rules
Regulatory agency - Central Bank- MF Division- Cooperative Dev
- Central Bank- MF Division- Cooperative Dev
Supervisory approach Traditional TraditionalActivity - Loan
- Deposit from public- Loan / as conduit of
government loans- Deposit from members
Minimum capital - Required- Suggestion
- Not required
Institution provider - Bank- Non Bank Institution- Cooperation
- NGO- Gov. Agency- Community
Collateral - Group guarantees- Joint guarantees- Personal guarantor
- Group guarantees- Joint guarantees- Personal guarantor
Interest rate / Ujra - Market determined + subsidies
- Fixed by government
- Market determined + subsidies
- Fixed by governmentCAP - Required - Required
- Not RequiredFinancial report to regulator Yes YesExternal audit Yes YesLoan loss provisioning - Required not specific
- Required 5%-10%, 5%-20%, 5%-50% and 100%
- Required not specific- Required 5%-10%, 5%-
20%, 5%-50% and 100%Source: Modified from Regulatory Architecture for Microfinance in Asia
Microfinance also requires any protect of the probability of loss with provide the loan loss
provisioning, certain rules of between 5% - 10%. Determination of the various benefits operation
which is the interest rate to be charged to the borrower is determined by the government or the interest
rates charged based on the market mechanism. Risk management is not fixed yet, there are
microfinance sets out the minimum capital and determined capital adequacy ratio. In terms of
reporting mechanism all microfinance institution should reported the financial statement to regulators
and conducted external audit process. Institution providers are various; commercial bank, NGOs,
government agencies and cooperation, as a result supervisory authority remains unclear between the
central bank and the department where microfinance operate.
234
Regulatory and Supervisory Framework in Financial System
Financial system consist of three components; financial institution, financial market and financial
assets. Financial institutions act as financial intermediaries for fund surplus and deficit sector. There
are various financial institutions, commercial bank, insurance company, mutual fund, finance
company and deposit and saving company. It can be separate becomes two; banking and non-bank
institution. Financial market can be divided tow major namely money and capital market. Lastly,
financial instrument is product that traded in financial market. It shows the claim to real asset of
issuer. The role of financial system is very importance in economy due to it can distribute the
economic resources to various sectors effectively and efficiently through demand and supply process.
All activities and process should regulate and supervise so all party involved fell satisfaction.
The existence and its strong, competencies and effectiveness of the regulatory and
supervisory are a priority for each of the financial system of a country and the responsibility of the
central bank. This effort is significant because financial environment is constantly changing and these
changes are sometimes very fast though existing regulations are constantly changing to follow the
changes. Therefore, central bank always ready to respond to changes in the financial system remain
competitive, innovative and soundness. Central bank is responsible for the financial system stable and
reliable payment system and high confidence of savers and investors. To make sure all this can be
achieved, maintained and developed the central bank must always adopt a principle based and risk
based supervisory regulation.
Currently, principle based regulations framework get high attention in the development and
maintains the prudential regulation in financial system. Under this framework the principle based
regulation, bank regulation has progressively shifted to the development of high level principles
standard, and an ingredients are more details in bank regulation expectations related to soundness
bank and business. It means not to reduce supervisory but regulatory focused on the ability of
institutions to risk management as compliance with detailed rules. As a result, it will produce a
stronger regulation towards market changes, as well as attention to the limitations of the basic
principles of the rule system for all through a fair differential between institutions based on the size,
complexity and risk profile. Financial institutions can be considered as a flexible framework to
determine the most appropriate way in which bank regulatory expectations in line with the their
strategy, objective and business model. The central bank believes that the framework would be more
appropriate at all times to promote and enforceable financial stability and more competitive financial
system.
Actually, this standard stipulates the supervisory related to the composition of effective board
of directors or senior management that include a independent and dependent members, appropriate
and suitable experience and education background, transparency in the recruitment process and a clear
responsibility for the operation and function of the internal oversight.
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Supervisory process at the same time also expanded to ensure the directors and chief
executive officer of the financial institution appropriately meet and perfect criteria on existing
policies. Besides that, the bank is under review with regulatory compatibility of top management to
the appointment. The Bank should be more engaged with the management of financial institutions to
the risk of development strategies and institutional influence. This makes it more effective assessment
of how top management will be relieved of responsibility in practice, while the supervision of the
deeper issues of governance in the institution.
Regulation and Supervisory Framework in Islamic Microfinance Institution
Islamic microfinance institution is a new industry and growing very fast. IMFIs give a high
expectation on the economic development and reducing of poverty rate. It is in line with two main
roles of Islamic microfinance institution, namely provide financing services to microenterprise and
help low-income households in synchronize their cash flow. So it is good momentum must be
maintained and provided good infrastructure with developed regulation and supervisory system for
establish the soundness and competitive industry. La Porta et al (1998) found that law and regulatory
framework will greatly determine the performance of the industry. He argued that it will provide
direction and guidance industry in term of corporate governance, procurement and utilization of
economic resources and market competition.
Unlike with other the financial institution such as banking, insurance, mutual fund,
microfinance industry is very simple due to it is not complicated and a lot of voids in the tributaries
rules: the acquisition and utilize of resources, and operational activities, clients and service providers
as much less detailed characteristic of capital, provision and risk mitigation management. Most
academics suggestions that microfinance should follow the standard banking industry model in term
of prudential regulation and hierarchy regulation international, regional, and country . They argued
that the some microfinance provider, investors or donors are from outside the region or country, that
why beyond the country up to the rules and to ensure the interest of investors or donors. However,
Macchiavello, (2011) did not agree due to most microfinance activities are not much related to the
international environment in financing assets or resources. They proposed specific regulations based
on the purpose of funds or donor, at present a lot MFIs refer to CGGP rules who founded
independently but under the World Bank organization.
Other issue in IMFIs is the regulation should be rest on institution or activities. Majority of
researcher gravitate to activity regulation compare with institutional regulation. They argued that the
regulation on based institution is very difficult due to a lot variability of type institution and
characteristic of IMFIs. Then it is more reasonable and simple to regulate based on the activity of
IMFIs than institutionally. According Llanto (2006) the main activities of IMFIs as look like financial
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intermediary are collect deposit, donor and or investment and provide financing to the microenterprise
and low-income household. In addition, there is issue or problem how to supervise the regulation
cause a lot authority power of the particular Institution.
Major activity of Islamic microfinance institution is collecting funds from internal and
external depositors or investors. This part is very important for financial institutions assets derived
from external parties through deposit or investment financial instruments. In Islamic finance, this
financial instrument could be created through Wadiah, Mudharabah and Musharakah contracts.
Hoxhaj (2010) and Boudriga (2009) argued that financial institution which collected funds from
external should be regulated to protect from moral hazard and adverse selection are stemming from
asymmetric information. However, discussion of this part microfinance institution faced with the
dilemma that some recommendations. Macchiavello, (2011) stated that microfinance institution
should be provided by clearly and detailed regulation to increase the opportunities of microfinance
institution to grow as complete financial intermediaries. As result, there is possibility they can
increase the amount of deposits and investments from third parties significantly which currently is
very weak. In contrast, Staschen (2006) stated that the detailed regulation relating to this collecting
funds activity is not necessary for a variety of reasons, one of the reasons is the most of microfinance
institution activities do not get financial sources from third parties, but from the government,
members and donors.
Other microfinance institution activity is financing, so far it is the main activity and seize bulk
hamper management priorities. It is not a very strange because the most microfinance institution is the
kind of government agents, NGO’s and cooperation who remain silent for implementing programs,
social reasons, which initially was to help low-income households or help increase the capacity and
increase the outreach of microenterprise to financial system especially in financing. In Islamic
finance, there are some possible contract that could be used to generate financial instruments in this
point like Ujra, Sales contract (Murabahah and Bai Bithaman Ajil) and partnership (Musharakah and
Mudharabah). In addition, a lot creditor and partner in Islamic microfinance institution is poor
documentation, financial position and collateral. As result the microfinance institution will expose to
the higher risk compare with standard commercial banks. So there is rational the microfinance
institution should focus on mitigate the risk with applied the certain regulation and provided provision
of the financing product.
No doubt, diversity type of microfinance institution causes difficulty in forming regulations
and supervisory frameworks that what IMFIs should be done or prohibited in their activities.
Therefore, regulator should define the clearly of Islamic microfinance institution, kind activities and
operation. Based on this regulation then we can be able to determine the supervision process, under
which authority should conduct the supervision process. All this kind law and regulation, the
microfinance industry is become more certainty, transparent and accountable. Finally the soundness
and sustainability of industry can organize, regulate and supervised.
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Nevertheless, good industry should provide the law and regulation towards all stakeholders to
make sure that all activities are regulated and supervised without reduces and disturbs the current
development and growth. Transparent and accountability are implemented, it will strengthen the role
of microfinance institution in assisting the government integrate the fiscal policy as well as the
possibility of microfinance institution a new monetary policy transmission are very important in the
future given the enormous opportunities in microenterprise financing as result the average market
share up to 30-40 percent of the country's financial assets and the majority of the population involved.
Proposed Asset Requirement and Financing Provision Regulation in IMFIs
Characteristics of microfinance institution are very specific. It differs than standard commercial bank
in term of asset quality. Normally, asset portfolio of microfinance institution consists of microcredit,
micro investment and fixed asset. In other side is source of fund, we call it as deposit, investment,
donor and equities. Microcredit portfolios frequently show lower delinquency than normal
commercial bank portfolios (CGAP, 1996). But MFIs has normally got higher volatility due to the
type of client and characteristic of business, especially if where management becomes puzzled from a
consistent focus on repayment performance. Thus system of trace and feedback to delinquency are
particularly critical to MFIs and suggested they should provide provision their overdue loans
somewhat progressively than conventional banks.
In addition, IMFIs have similarity in term of asset quality with conventional ones, but they
have special characteristics and philosophy in the basic idea and behaviors. There are three major
norms of Islamic system. All transactions in an Islamic system must be governed by norms of Islamic
ethics as enunciated by the Shariah, namely prohibition of riba and excessive gharar, and mutual co-
operation or Ta’awun, (Obaidullah, 2005). Financial instruments of IMFIs are defined based on the
background of a contract between the client and the borrower and IMFIs. Kusairi and Sanusi (2013)
classified into 4 main groups and each group there is some contracts. 1) Profit and loss sharing
contract, consisting of Musharakah, Mudarabah, Muzaraah, or Musharakah Mutanakisah. 2) Sale and
lease contracts; Murabahah, Istisna, or as Salam. 3) fee-based contracts such as Wakala, or Juala, and
4) benevolent debt like Qard-al Hasan. Customers should be treated based on the characteristics of the
type of business, total assets, objective, historical loan or partnership.
Unlike a standard commercial bank that has many methods to protect the safety of their credit
portfolio like high collateral, complicated documentation requirements and standards for borrowers
who have a high risk and proper risk management. Microfinance cannot conduct risk management
processes such as that because it is not possible for microenterprise and low income households. In
addition, IMFIs the advantage in simple process and the market loan segment is not meet with
collateral conditions.
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Even though, a lot of source funds from government program and international donor but the
regulations of the possibility failure of credit or investment is an importance from some perspectives
especially for IMFIs sources from third party. Donor and government require the funds are given to
IMFI should be managed well and invested in trust, accountability and generate value added to
existing funding sources. This means that the investment made by IMFI based on the concept of
financial economics that every investment should consider the risks and returns.
Minimum asset requirements and capital adequacy ratio of IMFIs is something that can be
considered when looking at the current and future expectations which IMFIs become more
independent and perfect financial intermediaries of both side the collection and usage of funds.
Minimum asset requirement is the condition entry to the industry. Currently most of the countries
applied this regulation. In addition capital adequacy is to support the risky assets generated by
management decision exposed to the credit and market risk. Although we know that currently IMFIs
more activities in borrowing funds compared with fund raising. However, IMFIs still have a social
mission of petrified funding to groups that cannot be achieved by normal commercial bank, there
should be minimal value when determined small assets in this sector. Besides that, most providers do
not have enough funds. Conversely, independent providers or depositor and investors have a lot of
capital that IMFIs should put their effort to generate deposit or investment financial instruments for
collecting capital.
There is tendency and a strong argument for allowing IMFI use more aggressive as the bank's
equity business. This is due to the huge demand and unmet by existing IMFIs. As previously
mentioned, risk factors should be considered in determining the asset. Two other factors have
considered the macro experience and data related to microfinance is very limited for all countries.
Second, because most IMFIs are not a fully financial intermediary, then the financial cost is high
enough to be exposed to bankruptcy faster than normal commercial bank. Considered all this, IMFIs
should be charged by CAR (capital adequacy ratio) higher than the existing BIS (Bank International
Settlement) which shows 8%.
In addition, the most important activities of IMFIs are the financing consist of lending and
investment technology. Loans are provided into microenterprise or low-income household that have
features more exposed to the financing risks. We know that the loans are not backed by traditional
collateral and normally required and supported be groups or personal guarantors. The lending
technology process is also without rigid credit analysis and it not supported by a strong and detailed
financial documentation. Then the financing portfolio is high risk as result of high failure. Therefore,
Gallardo (2001) suggested that MFIs should be regulated by providing provision for possibility high
failure.
Islamic financing technology might be compressed into three models: sales and lease based,
fee based contract and profit and loss based. Sales and lease based using Murabahah and Bai
Bithaman ‘Ajil contracts. Fee based using Wakalah, Ujr, Wadiah, and Tabarru contracts. Profit and
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loss based using, Musharakah, Mudarabah, Muzara’ah and Musharakah Mutanaqisah contracts.
According to Ahmad (2002) stated that these contracts would generated different risk characteristics
due to different properties of the contract. Sales and lease based is the lowest risk, fee based is
moderate risk, and profit and sharing is the highest risk.
Consequences of IMFIs features and MFIs itself, It should monitor, analyze and measure their
financing portfolio in regularly basis. Regulation of IMFIs should clearly state that requirement of
reporting regarding the current the non performing loan and investment. Financing or asset portfolio
might be categorized in to; standard, sub standard, doubtful and loss of every type of contact. The
regulator determines the requirement rate of financing provision for probabilities failure and type of
contract. We could propose the standard rate of financing provision into the measurement and give
weighted based on certain the portfolio policy that reviewed periodically. For instance table 2 states
the simulation of financing portfolio provision, the weighed for sale and lease, fee based and profit
loss sharing each 30%, 40% and 30% respectively and multiply with rate of every category of
nonperforming loan and investment for four each 5%, 20% 50% and 100% respectively.
Table 2: Simulation of Financing Portfolio Provision
Contract WeighedNPL Categories
Standard Substandard Doubtful LossSales and Lease 30% 5% 20% 50% 100%Fee Based 50% 5% 20% 50% 100%Profit and Loss Sharing 20% 5% 20% 50% 100%
Nevertheless, measurement of financing provision should be based on the basket of financing
portfolio, it’s not individually basis, and beside that all financing portfolio should provide the general
financing provision. In accordance with the characteristic of financing portfolio of IMFIs exposed to
higher risk. Then it should be recommended to be higher than normal financial institutions about 2.5
percent.
In addition, Islamic microfinance institution also has high liquidity risk compared than
commercial banks. Most microfinance clients are affected by seasonal factors and short-term;
dependent on the presence of the donor, the government program and short-term financial market that
should not be expected availability. IMFIs might be proposed prudential regulations that need to be
considered to determine liquidity risk standard.
Table 3 Application of Prudential Regulation in IMFIsRegulation Items Single Mandate Double MandatesMinimum Capital Requirement V VCapital Adequacy Ratio - VFinancing Provision V VLiquidity Provision V V
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For simplicity reason, IMFIs activities divided into focusing on financing activities only we call it as
single mandate and focusing on both financing and collecting funds we call it as double mandate.
Table 3 shows that single mandate’s IMFIs are required to fulfill the minimum capital, financing and
liquidity provision regulation. In addition, double mandate’s IMFIs are required to fulfill the
minimum capital, capital adequacy ratio, financing and liquidity provision. Argument on the
application of prudential regulation is to ensure the interest of all parties especially to protect the
client from misconduct behavior of IMFIs and provide the good infrastructure of microfinance
industry that suitable, soundness and competitive.
Llanto (2006) noted that different regulatory frameworks will have varying impacts on MFIs
and depositors. There is good and bad regulation, and more research is needed in order to determine
regulatory approaches that confer more benefits relative to costs. For microfinance regulation to be
considered effective, it must show at least the following, according to Vogel (2000). Because of the
diversity of institutes conducting or providing microfinance, less obvious or probable cause exists
overlapping between several agencies. Therefore, the argument that is strong existing regulation
should be based on the Activities of microfinance. In parallel, the supervisory appropriate and in
accordance with current requirements of the supervisory framework should be risk based supervisory
framework.
Figure 1 Supervisory Framework under Risk Based (RBSF)
241
Identify Significant Activities
Asses the Inherent Risk
Asses the operational Management
Assess the Risk Management Control Function
- Deposit - Lending
technology - Investment
- Credit performance
- Investment- Liquidity- Asset quality
- Business line- Objective- Manager
qualification & responsible
- BOD- Senior
Management- Internal audit- Shariah
compliance
Assessment of Capital & Earning
Assessment of Capital & Earning
Figure 1 states that risk based supervisory framework, started with identify the significant activities
namely lending and investment, and deposit and investment collection. Here, IMFIs utilizes the fee
based contract, sales and lease contract, profit and loss sharing, and benevolent contract. Second,
assess the risk of inherent activities at every contract. Third, assess the operation of microfinance
institution, as result, the operational risk, credit risk, market risk. We can see the process of lending
technology requirement in terms of administration, operational standards and etc. Previous
assessments focus on input and process of Islamic microfinance finance. Fourth, assessments to
decision makers or management related with human resources or capital. Top management or board
director needs to comply with appropriate standards like fit and proper qualification in terms of
education and experience, whether controlling function in the institution are in place.
Conclusion
The efficiency of microfinance industry is a golden goal which desired by all parties involved.
Industry and microfinance market describe the distribution of economic resources and how the
industry utilized it with more transparent, efficient and equitable. The development of regulations and
laws is to ensure the microfinance operations and activities are going well and can be controlled to
ensure the interest of all parties is very important. The current rules and laws that supervising of
microfinance can be divided into three authorities, under the ministry of finance, central bank,
cooperatives and other irregularities. The regulation was not enacted for the purpose of organizing and
regulating all activities and operations of microfinance, but only to give directions are very simple and
far from prudential regulation.
Characteristics of microfinance institution are very specific. It differs than standard
commercial bank in term of asset quality. Normally, asset portfolio of microfinance institution
consists of microcredit, micro investment and fixed asset. In other side is source of fund, we call it as
deposit, investment, donor and equities. Microcredit portfolios frequently show lower delinquency
than normal commercial bank portfolios. But MFIs has normally got higher volatility due to the type
of client and characteristic of business, especially if where management becomes puzzled from a
consistent focus on repayment performance.
There is tendency and a strong argument for allowing IMFI use more aggressive as the bank's
equity business. This is due to the huge demand and unmet by existing IMFIs. As previously
mentioned, risk factors should be considered in determining the asset. Two other factors have
considered the macro experience and data related to microfinance is very limited for all countries.
Second, because most IMFIs are not a fully financial intermediary, then the financial cost is high
242
enough to be exposed to bankruptcy faster than normal commercial bank. Considered all this, IMFIs
should be charged by CAR (capital adequacy ratio) higher than the existing BIS (Bank International
Settlement) which shows 8%.
Consequences of IMFIs features and MFIs itself, It should monitor, analyze and measure their
financing portfolio in regularly basis. Regulation of IMFIs should clearly state that requirement of
reporting regarding the current the non performing loan and investment. Financing or asset portfolio
might be categorized in to; standard, sub standard, doubtful and loss of every type of contact. In
accordance with the characteristic of financing portfolio of IMFIs exposed to higher risk. Then it
should be recommended to be higher than normal financial institutions about 2.5 percent.
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