presented by dr mohammed obaidullah senior economist. islamic research & training institute...

Presented byPresented by

Dr Mohammed ObaidullahDr Mohammed ObaidullahSenior Economist. Islamic Research & Training InstituteSenior Economist. Islamic Research & Training Institute

Islamic Development Bank GroupIslamic Development Bank GroupJeddah, Saudi ArabiaJeddah, Saudi Arabia

12th Course in Intermediate Islamic Economics, Fall 2010

Microfinance & Islamic Finance

Origin; Mission; Goals; StrategiesEthical 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-Drift12th Course in Intermediate Islamic

Economics, Fall 2010

Models of Islamic Microfinance

Models in Both Conventional & Islamic Domains:

Joint-Liability-Groups (JLG)Self-Help-Groups (SHG)Village-BanksCredit-UnionsROSCAsPawning


Models of Islamic Microfinance

Uniquely Islamic Models: Qard Hasan FundsBaitul-Mal-wa-al-Tamweels (BMTs)Zakah FundsAwqaf-Based InstitutionsComposite Models


IBF TRUSTIBF TRUST

ZAKAH FUNDZAKAH FUND

MONETARY ASSETS

WAQF

PHYSICAL ASSETS

MONETARY ASSETS

WAQF

PHYSICAL ASSETS

MICRO SAVINGSMICRO SAVINGS

MICRO TAKAFULMICRO TAKAFUL

TAMWEEL FOR PROFIT FINANCING

TAMWEEL FOR PROFIT FINANCING

SKILLS TRAININGSKILLS TRAINING

GUARANTEEGUARANTEE

SAFETY NETQARD HASANSAFETY NET

QARD HASAN

ECONOMICALLYINACTIVE

ECONOMICALLYACTIVE

A COMPOSITE ISLAMIC MICROFINANCE PROGRAM


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


Issues in MicrofinanceRole of CharityInsights from Important StudiesHashmi & Rosenberg(2006)Ajaz Khan (2008): Case of Islamic ReliefAscharya (2008): Case of BMTsHabib Ahmad (2008)IRTI (2008): Case of Rural Development

Scheme of IBBLHarper (2008): Case of Akhuwat


Issues in MicrofinancePricing of Financing Products

Price-Cost-Profit Relationship in MicrofinanceTransparency in PricingPrice Ceilings



Component

$100 Loan $1000 Loan

$100 Qard $1000 Qard

Financial Costs

10% 10% 0% 0%

Loan Loss 2% 2% 2% 2%

Operating Costs

50% 15% 50% 15%

Total Costs 62% 27% 52% 17%



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 ?




Loan Size

XX1

C1

C

R

R1

Issues in MicrofinancePricing of Financing ProductsMFIs 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?




Loan Size

X

R

Issues in MicrofinanceDebt vs. EquityDebt should be AvoidedDebt 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 FinancingEmpirical Studies: Lack of Product

Diversification in IsMF12th Course in Intermediate Islamic


Issues in MicrofinanceWomen Only ApproachPros: More Honest; Responsible; Loyal; Caring

for Family; Less Resistant to Social ActionCons: Social Tensions; Misuse of Funds by

Husband; Lack of Business AcumenSmall 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


Issues in MicrofinanceNew Products Case StudyIDB IsMF Program in Guinea

Mudharabah and Salam Financing: Over 75 PercentAssisting 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 :o Marketing; َQuality & Competition through:o Establishment of Marketing companies; Training

Programs and Institutions & International contracts


Issues in Microfinance New Products Case StudyIDB 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


THANK YOUTHANK YOU


presented by dr mohammed obaidullah senior economist. islamic research & training institute...

Documents

intermediate islamic

islamic pawning

case of islamic reliefascharya

conventional islamic

unionsroscaspawning12th

saudi arabia12th course

r th course

case of akhuwat