MICROFINANCE IN ISLAM

1. MICROFINANCE IN ISLAM Presented by Dr Mohammed Obaidullah Senior Economist. Islamic Research & Training Institute Islamic Development Bank Group Jeddah, Saudi Arabia 12th Course in Intermediate Islamic Economics, Fall 2010

2. Microfinance & Islamic Finance Origin; Mission; Goals; Strategies Ethical Alternatives for Alleviation of Poverty and Exploitation; Redistribution of Income & Wealth Provision of Financial Services: Credit; Equity; Savings; Transfers; Insurance Enterprise Development: Livelihood & Growth Enterprises The Sustainability Argument & Mission-Drift 12th Course in Intermediate Islamic Economics, Fall 2010

3. Models of Islamic Microfinance Models in Both Conventional & Islamic Domains: • Joint-Liability-Groups (JLG) • Self-Help-Groups (SHG) • Village-Banks • Credit-Unions • ROSCAs • Pawning 12th Course in Intermediate Islamic Economics, Fall 2010

4. Models of Islamic Microfinance Uniquely Islamic Models: • Qard Hasan Funds • Baitul-Mal-wa-al-Tamweels (BMTs) • Zakah Funds • Awqaf-Based Institutions • Composite Models 12th Course in Intermediate Islamic Economics, Fall 2010

5. A COMPOSITE ISLAMIC MICROFINANCE PROGRAM MONETARY ASSETS WAQF PHYSICAL ASSETS MICRO SAVINGS IBF TRUST TAMWEEL FOR PROFIT FINANCING ECONOMICALLY ACTIVE MICRO TAKAFUL ZAKAH FUND SKILLS TRAINING SAFETY NET QARD HASAN ECONOMICALLY INACTIVE GUARANTEE 12th Course in Intermediate Islamic Economics, Fall 2010

6. Issues in MicrofinanceRole of Charity • Use of Donor Funds - Zakah, Sadaqa, Awqaf - for Relief & Basic Needs Fulfillment (Encourage Dependency & Culture of Delinquency?) • Skill Improvement (Mismatch with Market Needs?) • Guarantees (Encourage Credit Indiscipline?) • Start-up Equity (For Institutions Only?) • Cost Absorption (Unfair Competition to Private Capital?) 12th Course in Intermediate Islamic Economics, Fall 2010

7. Issues in MicrofinanceRole of Charity Insights from Important Studies • Hashmi & Rosenberg(2006) • Ajaz Khan (2008): Case of Islamic Relief • Ascharya (2008): Case of BMTs • Habib Ahmad (2008) • IRTI (2008): Case of Rural Development Scheme of IBBL • Harper (2008): Case of Akhuwat 12th Course in Intermediate Islamic Economics, Fall 2010

8. Issues in MicrofinancePricing of Financing Products • Price-Cost-Profit Relationship in Microfinance • Transparency in Pricing • Price Ceilings 12th Course in Intermediate Islamic Economics, Fall 2010

9. Issues in MicrofinancePricing of Financing Products 12th Course in Intermediate Islamic Economics, Fall 2010

10. Issues in MicrofinancePricing of Financing Products Total Cost is relatively FLAT with respect to Loan Size; Flatter in case of IsMFIs What happens if Client is Charged a Fee (e.g. Islamic Pawning) that is Proportional to Loan Size or a Profit Rate as in case of For-Profit Mechanisms, such as, Murabaha, Ijara, Salam and Istisna ? 12th Course in Intermediate Islamic Economics, Fall 2010

11. Issues in MicrofinancePricing of Financing Products Revenue, costs & profits R1 R C C1 X1 X Loan Size 12th Course in Intermediate Islamic Economics, Fall 2010

12. Issues in MicrofinancePricing of Financing Products • MFIs would avoid below-break-even financing. The problem would exist even in case of Qard where only actual costs may be recovered. • Alternatively, MFIs would charge a higher price for smaller loans (to the detriment of poorer clients); The break-even point would shift upwards to the left making smaller loans viable. • Use of charity funds would bring down the cost curve, resulting in a similar outcome without raising the price. • Is regulatory ceiling on price (max the mark-up rate on Murabaha) also a solution? 12th Course in Intermediate Islamic Economics, Fall 2010

13. Portfolio Yield Issues in MicrofinancePricing of Financing Products R X Loan Size 12th Course in Intermediate Islamic Economics, Fall 2010

14. Issues in MicrofinanceDebt vs. Equity • Debt should be Avoided • Debt is Computationally Simple; Less Demanding; May Degenerate into an Addiction - Multiple Lending Led to Recent MF Crisis • Partnership-Based Structures Inherently More Robust; More Ethical & More Proactive to Client Needs • Complexity with Equity-Based Financing • Empirical Studies: Lack of Product Diversification in IsMF 12th Course in Intermediate Islamic Economics, Fall 2010

15. Issues in MicrofinanceWomen Only Approach • Pros: More Honest; Responsible; Loyal; Caring for Family; Less Resistant to Social Action • Cons: Social Tensions; Misuse of Funds by Husband; Lack of Business Acumen Small increases in access to income may be at the cost of heavier workloads for women, increased stress and their health. Without substitute care for small children, the elderly and disabled, and provision of services to reduce domestic work many programs reported adverse effects (Linda Mayoux, 2002) • Holistic Empowerment of Family; Not Women Alone 12th Course in Intermediate Islamic Economics, Fall 2010

16. Issues in MicrofinanceNew Products Case Study IDB IsMF Program in Guinea Mudharabah and Salam Financing: Over 75 Percent Assisting poor groups to establish around 2500 small Mudaraba Funds (Average amount of US$11,000 per Fund) for promotion of Microenterprises in poor communities in most regions of Guinea Salam Financing Contributed to Solve Issues of : • Marketing; َQuality & Competition through: • Establishment of Marketing companies; Training Programs and Institutions & International contracts 12th Course in Intermediate Islamic Economics, Fall 2010

17. Issues in Microfinance New Products Case Study IDB IsMF Program in Guinea • 500 Women Working in Almond Treatment and Packing for Export • 500 Women Working in Couscous Production and Packing for Export • 500 Women Working In Oregano(zaatar) Treatment and Packing For Export Production Marketed In Western Countries 12th Course in Intermediate Islamic Economics, Fall 2010

18. THANK YOU 12th Course in Intermediate Islamic Economics, Fall 2010