Islamic Microfinance

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Islamic Microfinance Innovations
Opportunities in Underdeveloped CountriesApril
25, 2012Alhuda-CIBE TrainingsAvari Towers,
Karachi

• PRESENTED BY
• Mohsin Adhi
• Director
• Alfa Adhi Securities (Pvt) Ltd

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Microfinance

• Key Features
• Lend to poor
• Do not take security
• Prefer saving over borrowing
• Small short term loan
• Cost converting interest rates
• Group appraisal and guarantee
• Prefer women customers over men

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Microfinance

• Riba (Haraam)

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Need of Islamic Microfinance

• IN THE WORDS OF QURAN
• Who is he that will loan to Allah a beautiful
  loan, which Allah will double unto his credit and
  multiply many times? It is Allah that giveth
  (you) Want or plenty, and to Him shall be your
  return. (2245)

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• Allah has permitted trade and forbidden riba.
  (2275)
• Allah will deprive riba of all blessing, but will
  give increase for deeds of charity and Allah
  does not love the ungrateful and unjust. (2276)

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• O believers, fear Allah and forgo the interest
  that is owing, if you really believe. (2278)
• If you do not, beware of war on the part of Allah
  and His Apostle. But if you repent, you shall
  keep our principal. Oppress none and no one will
  oppress you. (2279)

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• O Muslims, Do not devour riba, doubling and
  redoubling it and fear (the punishment) of Allah
  that you may be successful. (3130)
• What you provide with the prospect of an increase
  through the property of (other) people, will have
  no increase with Allah yet what you give in alms
  and charity, seeking the countenance of Allah,
  (will increase) it is these who will get a
  recompense multiplied. (3039)

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Islamic Microfinance

• Opportunities
• Muslim population
• 1.2 billion
• Stretching from Senegal to the Philippines
• Six regions (North Africa, Sub-Saharan Africa,
  the Middle East, Central Asia, South Asia, and
  Southeast Asia)

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• Indonesia 129 million people are with incomes
  less than merely 2per day
• Bangladesh and Pakistan account for 122 million
  each followed by India at approximately 100
  million Muslims below poverty line.
• According to survey conducted by Consultative
  Group to Assist the Poorest (CGAP) Islamic
  microfinance accounts for about 0.5 of global
  microfinance despite 1.2 billion Muslim
  population.

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Two Approach of Islamic Microfinance

• Welfare Based Approach
• Institutional / Commercial Approach

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Welfare Based Approach
SOURCE Introduction to Islamic Microfinance
(Mohammad Obaidullah)
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Institutional / Commercial Approach
SOURCE Introduction to Islamic Microfinance
(Mohammad Obaidullah)
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Ammanah Ikhtiar Malaysia Case Study

• Established in 1988
• 99 of customers are women
• In 1999, 8.5 of Malaysia population was under
  poverty line. But in 2004 it dropped to 5.7.

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• In 1988, 283 members of AIM were surveyed, 70
  with significant increase in monthly household
  income from RM 142 to RM 220 per month.
• In 2005, AIM efficiency improved, as has been
  able to achieve 186 growth in monthly household
  income i.e. from RM 326 to RM 932.

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Economic activities

• Production
• Construction/building materials (concrete blocks)
  
• Food (bakery, snack (nuts), fast food,
  traditional food
• Agriculture
• Furniture
• Jewellery
• Handicrafts (batik)
• Fishing /fishing equipment
• Cattle breeding (goat, cow)
• Ceramic (traditional ceramic vase)
• Manufacturing
• Traditional medicine

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• Trading
• Cosmetics
• Direct selling (dinnerware, mattresses, etc)
• Jewellery (gold)
• Electronics (oven)
• Textiles and apparels
• Grocery items
• Newspapers
• Stationeries
• Scrap metal
• Paint products
• Cigarettes
• Health products
• Used cars

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• Services
• Grass cutting
• Plumbing
• Laundry
• Car/motorcycle workshop
• Welding
• Sewing/tailoring
• Café/food stall (burger)/drink stall (sugar cane,
  soy bean, roselle)
• Wedding accessories rental
• Barber/hair cut service
• Babysitting
• Food catering
• Children nursery
• Recycling products
• Cobbler
• Selling pre-paid card

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Four Models of Microfinance

• Grameen Bank Model
• Village Bank Model
• Credit Union Model
• Self Help Groups

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Grameen Bank Model

• Bangladesh based model
• Pioneer of Micro financing
• Intensive fieldwork required
• Group based borrowing
• Each member guarantee each other loan
• Graduated financing which serve as collateral as
  a tool to mitigate default risk

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Village Bank Model

• Latin America and Africa
• Implementing agency
• Village bank
• Performance based competition amongst Village
  bank encourages savings, loan repayment and
  capital injections
• Jabal-al-Hoss Syria implemented this Model

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Credit Union Model

• Mutuality
• Non-profit financial cooperative owned and
  controlled by its members
• Membership based on common bond
• Mobilize savings and provide loan for productive
  activities
• An apex body provide training and monitor their
  financials
• Sri Lanka Baitul Maal wat Tamweel, Indonesia

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Self Help Groups

• Originated in India
• 10 to 15 members, homogenous in terms of income
• Pool members savings and use it for lending
• External funds to supplement internal resources
• Supported by NGOs
• Objective is to attain self sustainable
  institution

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Activity

• Would you like to become entrepreneur?
• Would you like to invest in business generating
  halal income?
• Think of person who you know has skills but lack
  of funds.
• Would you like to support such person financially
  and share profit with him / her?

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How NGOs are doing it?

• Al Khidmat Video

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Proposed Model
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Islamic Microfinance Management Company (IMMC)

• Listed
• Operate like Mutual Funds as its units can be
  traded accordingly
• Attract investors who want to invest in small
  business
• Collaboration with NGOs
• Monitor financial performance

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NGOs Task List

• Identify low income bracket families
• Register them as members
• Train them

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Advantages

• Halal income for investors
• Poverty alleviation
• Promote entrepreneurship
• Facilitate home based industries
• Facilitate savings of the new entrepreneurs
• Objective is to attain self sustainable families

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Why Islamic? Why not Conventional Microfinance?

• Opportunities for hereafter
• Being Muslims Islamic Microfinance has more
  chances of acceptability adaptibility
• Other underdeveloped non-muslim nations can
  replicate this mode of finance
• Help promote religion

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References

• Allen Overy LLP, Islamic Microfinance Report,
  25 FEBRUARY 2009, International Development Law
  Organization
• Kiran Siddiqi, Potential of Islamic Microfinance
  in Pakistan, 2008
• Mohammed Obaidullah, Introduction to Islamic
  Microfinance, IBF NET The Islamic Business and
  Finance Network, 2008.
• Norma Md Saad, Selecting High-income Generating
  Activities for Micro-entrepreneurs The Case
  Study of Amanah Ikhtiar Malaysia, International
  Journal of Humanities and Social Science, Vol. 1
  No. 5 May 2011.
• Pakistan Microfinance Review 2010 (Annual
  Assessment of Industry), Pakistan Microfinance
  Network, Edited by Ali Shahrukh Pracha.