Al – Huda Training Programme Training Workshop – Islamic Microfinance NIBAF, SBP – Islamabad 7 – 8 March, 2008

1. Al – Huda Training ProgrammeTraining Workshop – Islamic MicrofinanceNIBAF, SBP – Islamabad 7 – 8 March, 2008 SESSION – 1 Muhammad Khaleequzzaman

2. Training Workshop – Islamic Microfinance CONTENTS • Incidence of Poverty and Low Economic opportunity • Microfinance – A tool for poverty alleviation • Islamic Microfinance Shariah compliant way of poverty alleviation • Principles of Islamic Finance

3. Training Workshop – Islamic Microfinance Incidence of Poverty and Low Economic opportunity The Poverty Reduction Strategy Paper (PRSP) – 2003 • 32.1% of the total population living below poverty line. • Adding the transitory vulnerable poor raises the incidence to 52.5%. • Larger proportion of poor living in rural areas. Economic Survey 2007 • 23.9% of total population living under poverty line. • Adding the transitory vulnerable poor, the incidence rises to 44.4%.

4. Training Workshop – Islamic Microfinance Incidence of Poverty and Low Economic opportunity • Low economic and financial opportunity limits capacity of the poor to utilize their skills for income generation. • Lack of access to financial services restricts to undertake business pursuits for self employment. • Only less than 3.0% of poor have access to affordable financial services; credit, savings, and insurance [Bangladesh 75%] • In Pakistan, some 40 institutions (MFBs, MFIs, MFDs/MFUs of commercial banks and leasing corporations, RSPs, NGOs, and PPAF) could provide only around Rs. 7.0 billion to I.0 million active borrowers upto 2007.

5. Training Workshop – Islamic Microfinance Microfinance – Considered a tool for poverty alleviation: • Microfinance – A programme offering non-collateralized small loans/finance to poor households to foster self-employment and income generation. • Microfinance – A range of financial services such as deposits, loans, payment services, money transfers, and insurance. • The Micro Credit Summit held in Washington, DC (2-4 February 1997) defined Micro Credit as: - “Programs (which) extend small loans to poor people for self-employment projects that generate income, allowing them to care for themselves and their families”

6. Training Workshop – Islamic Microfinance Microfinance – Characteristics: • Size of Loan/Finance • Short Term Working Capital • Repayment Schedules • Social Collateral [Joint liability, Peer pressure, Peer support] – Grameen innovation • Recovery of full cost [Bank moving to the doorstep] • Gender focus [Women better managers for financial and non-financial matters: Bring better impact] • Savings [Compulsory vs. Voluntary] • Insurance[Risk mitigation]

7. Training Workshop – Islamic Microfinance Outreach and Sustainability Problem: • Sustainability is derived from • Operating and financial viability, • Extended outreach [growth of clients, range of financial services, retention rate], • Repayment performance, and • Permanence of services. • Most programmes are not sustainable due to: • Under-capitalization of MFIs/Donor – driven practices, • Exorbitant rates of interest, • Ignorance of religious & cultural values, and • Failure of social capital [multiple borrowing, hidden transcripts, commission agencies, marginal impact, etc.]

8. Training Workshop – Islamic Microfinance Most Microfinance Programmes are not financially sustainable in Pakistan:

9. Training Workshop – Islamic MicrofinanceMicrofinance Program’s Sustainability

10. Training Workshop – Islamic Microfinance Outreach and Sustainability Problem: Case of Islamic Microfinance: Islamic microfinance provides mechanism through which Shariah compliant products and services are offered to the clients (not necessarily Muslim) • Islamic banks have ignored the business opportunity • MFIs have not opted for product diversification • Islamic microfinance initiatives are very few, those too, subjected to a number of limitations: • Paucity of funds • Product concentration • Shariah advisory • Lack of commercial orientation/scale problem

11. Training Workshop – Islamic Microfinance Conclusion and way ahead: • Islamic and conventional banks to consider downscaling • MFBs and MFIs need to diversify and practice Islamic products and services • Product range to be expanded to develop equity base of the micro enterprises • SBP guidelines on Islamic microfinance to be implemented • Full-fledged Islamic Microfinance Banks (IMFBs) • Islamic Microfinance Services by Full-Fledged Islamic Banks • Mode 1- Islamic Microfinance Counters at Existing Branches • Mode II- Standalone Islamic Microfinance Branches & Mobile Banking

12. Training Workshop – Islamic Microfinance Conclusion and way ahead: • Mode III- Establishing Independent IMFBs as Subsidiaries of Banks • Mode IV- Developing Linkages with Islamic MFBs/MFIs 3. Islamic Microfinance Services by Conventional Banks: • Microfinance Counters at Existing Branches • Standalone Islamic Microfinance Branches & Mobile banking • Establishing Independent Islamic MFBs as Subsidiaries of conventional Banks • Developing Linkages with Islamic MFBs/MFIs 4. Islamic Microfinance Services by Conventional Microfinance Banks

13. Training Workshop – Islamic Microfinance BLANK SLIDE

14. Training Workshop – Islamic Microfinance Principles of Islamic Finance 1. Prohibition of Riba: Riba means excess [discrepancy in barter] – Predetermined/fixed/time related excess Exploitation/Injustice • An increment on loan received by the lender (benefit of delay) - Riba al Nasi’ah (Riba al Jahiliyyah, Quranic Riba) • Discrepancy appropriated through exchange of goods (excess arising from weight, counting or measure) -Riba al Fadl Caution:There is no difference between bank interest and Riba’. Resolutions of: • The Azhar Islamic Research Academy Egypt, • The Council of Islamic Ideology Pakistan, and • The Islamic Fiqh Academy of OIC have concluded that: The bank interest in all its forms is Riba

15. Training Workshop – Islamic Microfinance Principles of Islamic Finance 1. Prohibition of Riba: Prohibition in Shariah: A. Qur’an (condemns riba and contrasts it with charity) • Surah al-Room – [Undesirability of Riba was revealed where Allah (SWT) conveyed His displeasure on such transactions] • Surah al-Nissa – [In response to provocations of Jews and recounting their sins, including charging of Riba, Allah (SWT) tells them about the punishment and rewards for the clear minded] • Surah Aale-Imran – [Riba was expressly prohibited for the Muslims]

16. Training Workshop – Islamic Microfinance Principles of Islamic Finance 1. Prohibition of Riba: Prohibition in Shariah: A. Qur’an 4. Surah al-Bqarah – [In response to adversaries of Islam’s question of paralleling profit and Riba, Allah (SWT) permitted sale and prohibited Riba, and that the matter of already charged Riba was with Allah] 5. Surah al-Baqarah-[Declaration of war from Allah (SWT) and His Prophet (PBUH) against those who disobey the prohibition, and all previous Ribavi transactions were entitled to receive principal only, and that to give the debtor grace period until he can manage to clear the dues against him]

17. Training Workshop – Islamic Microfinance Principles of Islamic Finance 1. Prohibition of Riba: Prohibition in Shariah: B. Ahadith Ahadith relate to the following subjects: • Prohibition of Riba [various parties to Ribawi transaction, incest with one’s own mother] • Consequences of indulging in Riba[…Night of Ascendance to Heavens…, violators subject to the curse] • Forms of Riba in loans and other transactions […Varily/Indeed Riba was in lending, …exchange of radi with burney dates…, trade of gold with silver…Riba al Fadl]

18. Training Workshop – Islamic Microfinance Principles of Islamic Finance 1. Prohibition of Riba: Prohibition in Shariah: B. Ahadith Ahadith relate to the following subjects: • Creditor and debtir relationship […not to accept any gift or ride from borrower…, …even minute benefit transferring from debtor to creditor…] • Outstanding debt, the necessity of repaying the debt […all sins would be forgiven except o/s debt…, …dishonour and punishment for willful defaulter…, …allowance of repayment time for genuine defaulter…]

19. Training Workshop – Islamic Microfinance 2. Profit belongs to one who beard responsibility: These two interrelated characteristics are expressed in the Prophet (PBUH)'s saying "al kharaj bi al daman “ –entitlement of gain is linked to the responsibility for loss. 4. Variable return: Profit Sharing Principle (PSP) or the Profit and Loss Sharing Principle (PLSP). • Mudarabah – Profit sharing principle, Mudaribs liability limited • Musharakah – Profit and loss sharing principle, loss to the capital • Protection of traders’ rights: eg. Prohibition for purchasing goods out of the market

20. Training Workshop – Islamic Microfinance 5. Asset backed financing: 6. Prohibition of speculative transaction: Gharar, Maysir Ghararis the sale of probable items whose existence or characteristics are uncertain. Such risky nature of trade is similar to gambling. Examples: • Bay al Mukhadarah – eg. Selling fruit before they ripen • Bay al Samak fi’l Ma – eg. Selling fish in the water • Bay Safqatan fi Saqfah – eg. Two sales in one sale ie. Price of Rs. 10 in cash or Rs. 15 on credit Prohibition is for excessive risk. Therefore degree of gharar matters. When uncertainty enters into speculation, it is not permitted.

21. Training Workshop – Islamic Microfinance • Prohibition of executing two mutually inconsistent contracts OR contingent contracts 8.Prohibition of Outbidding: Interfering in a sale transaction already agreed between two persons 9. Prohibition fraud and deception (Khilabah and Ghishish): 10. Permissibility as a general rule:

22. Training Workshop – Islamic Microfinance Conventional vs. Islamic Finance

23. Training Workshop – Islamic Microfinance REFERENCE SLIDES

24. Training Workshop – Islamic Microfinance Principles of Islamic Finance Hhadith – Sahih Muslim: …Dates for dates, …..,…..,….like for like, equal for equal, hand to hand, …. Two permissions follow two prohibitions: 1. Sales within single type, unequal exchange, with or without delay: Riba al fadl.Money should be used as medium of exchange 2. Exchange among listed goods, with or without equality, but with delay: Riba al nasia [wheat and rice so that wheat now and rice later OR gold now or silver late]. Goods can be sold on credit for gold and silver. CREDIT SALE IS ALLOWED IF GOODS EXCHANGE WITH MONEY

25. MUSHARAKAH P&L DISTRIBUTION B’s Capital 100% 75% OB A’s Share of Profit B’s Share of Profit 50% 50% N 25% 75% R 90% 10% M OA 25% 100% A’s Capital