what is islamic micro finance
TRANSCRIPT
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What is Islamic Microfinance?Making it a Sustainable Reality
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Agenda
Presentation: 45 min
Q&A: 30 min
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Section 1: Global Microfinance Context (Part 1)
Global Microfinance Drivers/ Opportunities
What is Microfinance?
Landscape key players
Impact & Challenges
Agenda
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What is Islamic Microfinance?
Key Islamic Microfinance drivers/ Opportunities
Landscape Key players/ geographies
Impact, Challenges & Opportunity
Section 2b: Islamic Microfinance -- Part 2 to be delivered at the next session
Islamic Microfinance core models
Islamic Microfinance structures
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Summary
MICROFINANCEBanking for the poor
Big need exists However poverty alleviation is too big a
promise; Industry is growing but showing signs of problems
(*primarily excess lending and aggressive collection; akin to
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However many success stories, best practices developing and
growing. Problems should be removed.
Islamic Microfinance in infancy making finance accessible to
many low-income Muslims and with universal potential.
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Global Microfinance Drivers
1. Addressing FINANCIAL EXCLUSION of low-income global population:Globally 49 percent of adults have deposit accounts in formal financialinstitution*
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Source: Financial Access 2010 Report, by CGAP and World Bank
19% of developed world adults do not have bank accounts
72% of adults in the developing world do not have accounts
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Global Microfinance Drivers
1. Addressing FINANCIAL EXCLUSION of low-income global population:Globally 49 percent of adults have deposit accounts in formal financialinstitution*
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Source: Financial Access 2010 Report, by CGAP and World Bank
An estimated 72 percent of people living in Muslim-majority
countries do not use formal financial services(CGAP Islamic Microfinance Note 2008)
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2. Addressing needs of MICRO-ENTERPRISES:Micro-enterprises have historically lacked access to financial productsand services. Microfinance institutions have emerged to serve the
smallest of these enterprises, while banking institutions have typically
concentrated on large corporations.
Global Microfinance Drivers
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Source: Access Finance, World Bank, JANUARY 2010 | ISSUE No. 30
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Unmet demand for finance is large, but the exact
2. Addressing needs ofMICRO-ENTERPRISES
1. FINANCIAL EXCLUSION oflow-income global population
Global Microfinance Drivers
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num er or even a roug u cre e num er asbeen hard to pin down, with estimates ranging from
half a billion people to three billion.*
*Financial Access 2010 Report, by CGAP and World Bank
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What is Microfinance?
Microfinance services low
income groups (extreme
poor, moderately poor-
main clients), mostly not
served by commercial
1. Low-income population
2. Microenterprises
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banks.
Services offered are Credit
facilities, savings account,
money transfers,
remittances, insurance and
even investment
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What is Microfinance?
Pioneered the group-basedresponsibility model but other
models exist*
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* Other models: Village model; Coop; Self-help groups (SHGs)
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Landscape: Key Players
MIX Global 100 -- As a group, surveyed institutions
represented nearly 85 percent of the known pool of
microfinance borrowers, serving 72 million borrowers
with 37 billion USD in loans and holding 22 billion USD in
deposits from 67 million microfinance clients. (MIX 2010
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Report)
Microfinance Information Exchange, Inc. access to
financial and social performance information, including
quarterly results, on more than 2,000 MFIs in the
developing world covering 92 million borrowers.
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Landscape: Key Players
Top 100 Microfinance
Institutions in the World:
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and top performers in each
of three areas: outreach,
efficiency, and
transparency
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Landscape: Key Players
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Landscape: Key Players
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Impact
Poverty alleviation: Many studies indicate positive
impact over the last twenty years, as well as some
findings that suggest limited or negative impact.
Example:
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Since Kiva was founded in 2005:
680,458 Kiva lenders
$279 million in loans
98.93% Repayment rate
Work with:
146 Field Partners 450 volunteers around the world
60 different countries
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Shortcomings
Social fallout: Family issues
High interest rates: Loan sharks, 30%, 40% even 60%+ Per year
Excessive lending/ over indebtedness: Major defaults in India
Aggressive debt collection: The past five years have seen the
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aggress ve se ng o oans o o en era e v agers, o owe yequally aggressive debt collection. As a result, the past decade
witnessed more than 200,000 farm suicides in India. Reports Indias
leading rural journalist, The Hindus P. Sainath: Those who have
taken their lives were deep in debt.
Exclusion: Poorest of the poor; Self-exclusion due to prohibition ofinterest for Muslims
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Key Islamic Microfinance Drivers
Indonesia, Bangladesh, Pakistan, Nigeria and Egypt - account for over half a billion(528 million) of the worlds poor with incomes below $2 a day or national poverty
line.
Needs of the poor in Islamic countries are for the most part the same as the poor in
other societies approximately 44 percent of conventional microfinance clients
worldwide reside in Muslim majority countries*.
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-use formal financial services (CGAP Report 2008)
A number of IFC-commissioned and other market studies suggest a strong demand
for Islamic microfinance products: Surveys in Jordan, Algeria, and Syria, for example,
revealed that 2040 percent of respondents cite religious reasons for not accessing
conventional microloans. (CGAP Report 2008)
There is also a category of Muslim clients who use conventional products but preferIslamic ones and tend to switch over once Islamic products become available. (CGAP
Report 2008)
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Key Islamic Microfinance Drivers
Islamic microfinance has the
potential to expand access to
finance to unprecedented levels
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throughout the Muslim world.
CGAP Islamic Microfinance: An Emerging Market Niche, Aug 2008
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What is Islamic Microfinance?
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
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an socia goa s. Bot a vocate inancia inc usion. Bot invo veparticipation by the poor. There are however, some points of
difference between the two. *
* Intro. to Islamic Microfinance, Mohammed Obaidullah, IIBF
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What is Islamic Microfinance?
Islamic Approach to Poverty Alleviation:*6) Sharia Compliance of Finance Contracts: All contracts in Shariah must be free from certain
forbidden elements. A brief overview of relevant norms is provided below:
Freedom from Riba: Allah has permitted trade and forbidden riba. (2:275) Prohibition of
interest (riba) is the central tenet of the system. Conventional interest on loans or savings, as a
fixed return without sharing any risk, is considered unjust. Risk sharing: Because interest is
prohibited, suppliers of funds become investors instead of creditors. The provider of financial
capital and the entrepreneur share business risks in return for shares of the profit.
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* Intro. to Islamic Microfinance, Mohammed Obaidullah, IIBF
Freedom from Gharar: The concept of gharar has been broadly defined by the Islamic scholars
in two ways. First, gharar implies uncertainty. Second, it implies deceit.
Shariah approved activities: Muslims cannot profit from activities considered immoral. For
example, investing in businesses dealing with alcohol, gambling, casinos, pornography, or
weapons of mass destruction is not allowed.
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What is Islamic Microfinance?
Forms of contracts (to be discussed in detail in Part II of presentation)
Micro-credit
MURABAHA(Cost plus profit sale)
Micro-savings
MUDARABA-BASEDaccounts
Micro-transfer Micro-Insurance
TAKAFUL
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IJARA(Leasing)
MUDARABA(investment partnership;
trustee profit sharing
MUSHARAKA(JV profit sharing)
QARD HASAN
MURABAHA-BASED termdeposit accounts
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Micro-credit
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What is Islamic Microfinance?
A FRAMEWORK
Core Islamic
Financing contracts
Poverty Alleviation
Responsibility
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Micro-transfer
Micro-insurance Target Audience/
Need
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Islamic Microfinance: Landscape
Currently Islamic microfinance is concentrated in a few countries, with
Indonesia, Bangladesh, Pakistan and Afghanistan ranking in the top.
According to the 2008 Consultative Group to Assist the Poor (CGAP)
survey, Islamic microfinance accounts for about 0.5 per cent. of global
microfinance despite a global Muslim population of about 1.2 billion.
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,information on over 125 institutions and contacted experts from 19
Muslim countries. The survey and a synthesis of other available data
revealed that Islamic microfinance has a total estimated global outreach
of only 380,000 customers.
CGAP survey identified that over 70 percent of the products offered are
Murabaha. Islamic MFIs generally offer only one or two Sharia-compliant
products.
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The Consultative Group to Assist the Poor (CGAP), Deutsche Bank, IslamicDevelopment Bank (IDB) and Grameen-Jameel partnered to address new
microfinance models with Shariah compliancy through an Islamic
Microfinance Award.
130 banks from 43 countries and Microfinance Institutions (MFIs)
Islamic Microfinance: Landscape
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Winner: Al Amal Microfinance Bank of Yemen (AMB)
Tameer Micro Finance Bank Ltd (TAMEER) - Pakistan
Tanzania eco Volunteerism (TeV) - Tanzania
Bina Insan Sejahtera Mandiri (BISMA) - Indonesia
Centre for Women Co-operative Development (CWCD) - Pakistan
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Indonesia Report: Why is Growth of Islamic Microfinance Lower than Conventional?* Out of 2200 some rural banks only 92 are Islamic but started in 1990s. Out of 40,000
microfinance cooperative, 3000 were Islamic (2003) 54.4% of respondents preferred
Islamic MFI rather than conventional MFI (45.6%).
Most of clients were Muslim and they preferred to choose Islamic MFIs, however in
reality they chose MFI based on economic (low interest rates, low collateral and size
of loan) and non-economic factors (such as quality of services variables easiness,
Islamic Microfinance: Landscape
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speed, nearness, method and loan officers profile).
BRI as a government supported entity has the biggest adoption. (conventional) BRI is
a biggest five MFIs in the world (Microcredit Year, 2005) in terms of clients and their
loans.
As the MFIs clients prefer Islamic MFI compared to conventional, the demand for
Islamic microfinance can be enhanced if the level of their economic and non-
economic factors can be brought to the levels of conventional MFIs.
* Paper presented by Dian Masyita (PhD research scholar in Islamic Finance, Durham University, UK), Habib Ahmed (Professor of Sharjah Chairin Islamic Law and Finance at the Durham University, UK) at 8th International Conference on Islamic Economics and Finance
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Islamic Microfinance: Opportunity
Operational Efficiency/ Risk Management
Opportunity for integrating Zakah and Awqaf with
for-profit Shariah-compliant microfinance needs to
be develo ed
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Use of Qard hasan
Introduction of micro-Takaful
Islamic Microfinance for all globally
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Business Media Research Advisory
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Rafi-uddin ShikohE: [email protected]
W: advisory.dinarstandard.com
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Questions
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nswers