The Islamic Microfinance - PowerPoint Presentation

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The Islamic Microfinance

Initiatives around the Globe & Role in Poverty Alleviation

Dr. Haroon ur Rashid Khan

King Abdulaziz University,

Jeddah, Saudi Arabia

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Sysco Solutions, SAS, FranceSlide3

Microfinance

Microfinance is the process of providing financial services, making small loans to people who would not otherwise have access to savings or credit facilities.Small loans for small entrepreneursSlide4

Microfinance in Muslim World

72 % people living in Muslim-majority countries don’t use formal financial services (Honohon 2007).Even when available, some view them incompatible with Islamic financial principles. In recent years, some microfinance institutions (MFIs) - low-income Muslim clients …consistent with Islamic principlesEmergence of Islamic microfinance as a new market niche.Slide5

Islamic Principles

IMF cannot just imitate conventional microfinance programsIn IMF return on capital is allowed,capital participates in the productive process andexposed to business risk.Material finality. Investment activity. No contractual exploitation. Slide6

Islamic Finance Market

Over 800 Sharia-compliant institutions-75 countries (KPMG ). 292 banks (fully Islamic institutions & those with Islamic subsidiaries), 115 Islamic investment banks and finance companies, and 118 insurance companies. Industry’s total assets worth almost US$ 1 trillion (2014).Slide7

What is Islamic Microfinance (IMF)

Islamic or ‘Shariah-compliant’, microfinance provision of financial services for low-income populations conforming Islamic financing principles.  Islamic finance is simply ethical finance.One of the most important Islamic financing principles money is not an earning asset in and of itself.Slide8

IMF

IMF--confluence of two rapidly growing industriesCombine principle of social justice with financial servicesGiving millions of Muslims access to finance Combining Islamic social principle of caring for the less fortunateEmphasize human development as well as profit maximizationSensible risk managementLink real economic activity to financing structure.Islamic microfinance is still in its infancy, business models are just emerging. Slide9

IMF Initiatives around the Globe

IMF estimated global outreach only 0.5-1% of total outreach. 92% of Sharia-compliant loans are concentrated in East Asia, Pacific and MENA regions.   82% of IMF in just three countries: Bangladesh, Sudan, and IndonesiaPakistan recently climbing the ladder with programs like AkhuwatSlide10

Types and Outreach of IMF

Cooperative Village Banks (Syria) NGOsRural bank (Bank Perkreditan Rakyat Syariah or BPRSs-Indonesia)NBFIsCommercial BanksBanks Downscaling and Expanding Product LineTadhamon Islamic Bank (Yemen)Noor Islamic Bank (UAE)Allianz Life (Indonesia)Islamic Bank Bangladesh Limited (Bangladesh)Slide11

Opportunities

Conventional MF products --successful in Muslim countries Yet, not fulfilling the needs of many Muslim clientsHuge potential -Islamic countries, Asia and Africa huge potential – untapped resourcesMillions of Muslims required access to financeApprox. 44% of conventional MF clients worldwide reside in Muslim countriesIslamic principle of brotherhood (Akhuwat)Scope well beyond the Muslim worldSlide12

IMF and Poverty Alleviation:

AssumptionsPoverty alleviation is a worthy goal.Islamic microfinance can help alleviate poverty.Slide13

You may ask…

With the Islamic finance industry pushing $1 trillion, why have we not seen larger scale social investment?Should Islamic finance “innovation” include innovative ways to alleviate poverty? Because an institution is “Islamic” does this meanit has a particular obligation to invest in economic or community development?How does the concept of Islamic microfinance operate to serve the goal of poverty alleviation?Slide14

Why now?

With the Islamic finance industry pushing $1 trillion, why have we not seen larger scale social investment?Islamic Finance industry development and awarenessMicrofinance industry development and awarenessFinancial crisisAttention to business ethicsAttention to human capitalIs available in developing worldNeeds support from developed economiesSlide15

Innovation?

Should Islamic finance “innovation” include innovative ways to alleviate poverty?EntrepreneurshipDistribution of wealthSocial development goalsFinancial structuresRepayment incentivesWhy not?Slide16

Special obligation?

Because an institution is “Islamic” does this mean it has a particular obligation to invest in economic or community development? Social and human development goals of IF, but…Corporate social responsibility (Friedman)Does “Islamic” refer only to financial structures?Not everyone agreesSlide17

Poverty alleviation?

How does the concept of Islamic microfinance operate to serve the goal of poverty alleviation?“I think that there is a common goal in Islam and microfinance which can be summarized in making people self reliant, enterprising and self respecting. A solution to achieve the target of poverty eradication is by practicing microfinance in an Islamic way.” (a common man)Slide18

Challenges

Unable to tap fully the market potentialMarket research based and proven business models :Build Sustainable Business Models for Performance bench marks (Good example of Akhuwat)Product DiversityOperational efficiency & Risk management (peer pressure rather collateral)Capacity Building and community educationFunding sources :Leveraging Zakat and Islamic Funds and donationsRegulatory framework to reduce High transaction costsAsymmetric informationOne suggestion…Slide19

Where?

Currently most Islamic microfinance is located in the developing world.We believe that the model should be developed in the developed world.Slide20

Why?

Transaction costs are very high; stricter regulation will discipline the industry to lower transaction costs; these efficiencies can be transferred to the developing world. Donor fatigue: Funding sources available in the developed world through locals concerned with community and economic development.Integration and acceptance into Western societySlide21

In sum…

“If they take money from charity, they use the money to live. Therefore, they will keep on asking for more charities. When small loans are given to them they try to find ways to generate income out of it to solve the actual root of the problem which is income generation.” ( a common student)Slide22

Thanks a lotSlide23

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