International Seminar on Financial Inclusion for Central Asia, the Caucasus, and South Asia 12-14 July 2011,

Urumqi, PR China

Islamic Microfinance

Muhammad Zubair Mughal

Chief Executive Officer AlHuda Centre of Islamic Banking and Economics

www.alhudacibe.com

Contents

Principles of Shariah Based Microfinance Source of Islamic Microfinance Mechanism Elements of Islamic Microfinance (IMF) The Products in Islamic Microfinance Need & Compatibility of IMF Products Islamic Microfinance Institutions Worldwide Need Assessment of IMF in South Asia, Caucasus& Central Asia Opportunities & Challenges Faced by IMF Sector A Case study from Pakistan

Principle of Shariah Based Microfinance

Islamic Micro finance - as sub-set of Islamic Economic/Financial System Care for the poor is a religious obligation in Islamic Law. Prohibition of Interest Asset Based Financing Risk Sharing Sanctity of contracts Financing in Halal/Shariah Complaint Activities. Prohibition of speculative behaviour Micro Takaful ( Islamic Micro Insurance)

Assisting the poor is a pillar of Islam

Overview of Islamic Microfinance Mechanism Source of Islamic Microfinance Mechanism Islamic finance is the outcome of religion in banking

Sources of Shariah in Islamic Finance

Islamic Financing Products for Microfinance Sector

Quran Sunnah Ijmaa (jurist consensus) Ijtihad & Qiyas (analogy)

Elements of Islamic Microfinance

and more. Poverty Alleviation Moral Ethical Social Element A Misconception removed Micro Takaful Islamic Free from Microfinance is a Asset Based Interest Financing Financing system not the Religion, it can be Islamic utilized by both Insure Shariah Micro Risk Sharing Compliances Muslims and Finance Non-Muslim Communities for Purity of Joint Poverty Alleviation, Contracts Responsibilitie s Social & Economic Poverty Development. Alleviation

The Products in Islamic Microfinance Murabahah - Cost Plus Sale

Literally it means a sale on mutually agreed profit. also known as cost plus sales, it is one of the most widely used instruments for short-term financing where the MFI undertakes to supply specific goods or commodities, incorporating a mutually agreed contract for resale to the client at a mutually negotiated margin. It can be utilize for Purchase of raw material, equipment, agri. Inputs, Consumer goods, Vehicle, Houses etc in Microfinance Sector.

Musharaka - Partnership
Musharakah means a relationship established under a contract by the mutual consent of the parties for sharing of profits and losses in the joint business. Musharka can be used for Microenterprise setup, Small productive projects, Working capital financing, etc

Mudaraba - Partnership
A trustee-type finance contract under which one party (MFI) provides the capital for a project and the other party ( Client) provides the labor/Skill. Profit sharing is agreed between the two parties to the Mudarabah contract and the losses are borne by the provider of funds

Salam Forward Sale

Salam means a contract in which advance payment is made for goods to be delivered later on. The seller undertakes to supply some specific goods to the buyer at a future date in exchange of an advance price fully paid at the time of contract. Salam is ideal product for Agricultural Financing.

Contd

The Products in Islamic Microfinance

Istisna - Manufacturing contract
A pre-delivery financing instrument used to finance projects where commodity is transacted before it comes into existence. It is an order to manufacture and payment of price, unlike Salam, is flexible, where price may be paid in advance, or in installments or on delivery of good. Istina May Utilize small manufacturing Business, for production use, entrepreneur Development sectors etc.

Ijara Islamic Lease

Letting on lease. Sale of a definite usufruct of any asset in exchange of definite reward. It is an arrangement under which the Islamic Micro Finance Institution lease equipments, light Vehicles, Instruments, buildings or other facilities to a client, against an agreed rental.

Diminishing Musharka Diminishing Partnership

Dinishing Musharka is a form of Musharakah where the financier and his client participate in a joint commercial enterprise or property. This attains the form of undivided ownership of both the financier and the client. Over certain period the equity of financier is purchased by the client. This is an ideal product for Housing Finance sector, but also utilize for other ventures as well.

Other Models
Qard-e-Hassana Model, Waqf Model, Zakhat Model, Cooperative Model, Micro Takaful ( Islamic Micro insurance )

Need & Compatibility

Islamic MF is Compatible with All Conventional MF Models & Products. Approximately 44% conventional microfinance clients worldwide reside in Muslim countries (Source: MF Info Ex). Islamic Microfinance emphasizes ethical, moral & social factors to promote equality and fairness for the good of the society. Islamic Asset-based Financing can prevent diversion of funds for consumption. For Muslim majority countries great need for Islamic Micro Finance exists and large

Need & Compatibility

Islamic Microfinance usually deals with long lasting & Complete solutions for Sustainability. Islamic Microfinance Products improve the entrepreneurship Skills of Microfinance beneficiaries e.g: Mudarabah, Musharaka, Salam etc. Proven tool for increased access to the financial services

Demand for Islamic Micro Finance Research Studies by International Institutions.

Survey by CGAP 08 Surveyed Countries Jordan, Algeria, and Syria PlaNet Finance 07 West Bank and Gaza USAID 02 Jordan IFC/FINCA 06 Jordan Frankfurt School of Algeria Fin & Mgmt 06 IFC sponsored Yemen Study IFC 2007 Syria Bank Indonesia Indonesia (East Java) 2000 AlHuda-CIBE Pakistan (4 Districts) Respondents Preference (%) 20% - 40% 35% - 60 % 24.9% 32% 20.7% 40% 43%-46% 49% 99%

Islamic Microfinance Institution Worldwide

Germany:2

.
United States: 6
Helping Hands Helping Hands ISNA Lariba

UK:
- HSBC Amanah - Muslim Aid - Islamic Relief - The Halal Mutual Investment Company

- Muslim Society

Switzerland UAE: 8 :6 - Dubai Islamic Bank - Abu Dhabi Islamic Bank Kuwait: 2 - HSBC Amanah - Kuwait Finance Bahrain: 2 House Family Bank Afghanistan:
- FINCA , WOCCU - CHF Ariana

Egypt: 9
- Alwatany Bank of Egypt - Egyptian Saudi Finance

Iran: 8Pakistan: 14 India: 3 Bangladesh: Turkey: 7 - Faisal Finance 9

Institution Malaysia: 11 - Ihlas Finance - Pure Islamic Banks 2 House (Bank Islam, Bank

Sudan: 13

South Africa
Awqaf SA

Yemen: 11

Muamalat) Rest - banks

Indonesia: 133 Muaritius

AlBaraka MPCS

IMFIs Worldwide: 300 * in Countries: 32

Some Islamic Microfinance Institutions - Worldwide

Countries
Indonesia Bangladesh Afghanistan Pakistan Malaysia India Azerbaijan Egypt Syria Lebanon

Islamic Microfinance Institutions

Microfinance Divisions of Islamic Banks (Islamic Rural Banks) Islamic Financial Cooperatives referred as bait Maal wat Tamwil (BMT) Islamic Bank Bangladesh, Social and Investment Bank,Al-Fallah and Rescue FINCA (Qard Hasan), WOCCU, Ariana Financial Services etc. Akhuwat , HDF, Islamic Relief, CWCD, Farz Foundation ,HHRD etc Amina Iftikhar, AICMEU, Bait un Nasr Mit Ghamar Project Sanadiq project , Jabal al Hoss Muassat Bayat Al-Mal

Yeman
Sanabel Yemen Jordan

Hodeidah Microfinance Program

Different MF working on Islamic Microfinace UNCDF Yemen (HMFP) Jordan Islamic Bank

Islamic Microfinance institutions Pakistans Experiences

Institution
Akhuwat CWCD NRSP KPK Khawendo Kor Islamic Relief KKCB Helping Hand for RD Muslim Aid Takaful Pakistan Limited

Mode of Finance
AIM interest free loan Qaraz-e-Hasna Murabahah, Ijarah, Salam & Istisna MicroTakaful Murabahah Mudarabah with BOK for funding Source Murabahah but in limited scale Murabahah and Qarz-e-Hassan Murabaha and MicroTakaful Murabahah Murabahah MicroTakaful

Need Assessment of Islamic Microfinance for Central Asia, the Caucasus, and South Asia
Central Asia South Asia Caucasus

Central Asia * Muslim Countries Population

Kazakhstan
Kyrgyzstan Tajikistan Turkmenistan Uzbekistan

8,822,000
4,734,000 5,848,000 4,757,000 26,469,000

56.4
86.3 84.1 93.1 96.3

South Asia * Muslim Countries Population Bangladesh 145,312,000 Bhutan 7,000 India 160,945,000 Maldives 304,000 Nepal 1,231,000 Pakistan 174,082,000 Sri Lanka 1,711,000 28,072,000 Afghanistan

% 89.6 1 13.4 98.4 4.2 96.3 8.5 99

** Caucasus * Muslim Countries Population Armenia Azerbaijan Georgia Stavropol Krai Krasnodar Krai 1,000 8,765,000 423,000 -

% <0.1 99.2 9.9 -

* According to 2009

** Appropriate data is not available for North Causasus

Need Assessment of Islamic Microfinance for Central Asia, the Caucasus, and South Asia

FINDINGS
Total Population of South Asia, Central Asia & Caucasus are 1,684 M, out of them 562 M are Muslims which are 33.4 %, and shows a big Demand of Islamic Microfinance Products for Financial Inclusion because Muslim are reluctant to move Interest based MF System. IMF is beneficial for Muslim as well as for NonMuslims. According to World bank*, South Asia is home to half the world's poor, where Muslim population is 32% of total population, which shows immediate need of Islamic Microfinance there. Islamic Banking and Finance is emerging in South Asia, Central * Source World Bank South Asia Asia & Caucasus which will

Challenges faced by Islamic Microfinance

Non - Availability of Donor/Shariah Compliant Sources of Funds Need to develop a uniform regulatory and legal framework for the Islamic Microfinance Institutions. Lack of Quality HR in Islamic Microfinance Sector. Standardization of Islamic Microfinance Products. Reluctance in Research & Implementation of New Products, as only (Murabahah) is serving almost 80% of Islamic Microfinance Industry. Development of Shairah Expertise towards the Growth of Islamic Microfinance.

Opportunities for Islamic Microfinance

Islamic Microfinance effectively erases the Social and Moral Hazards International Islamic Microfinance Network for an effective interface and Coordination among IFMIs. Expansion of Market where the Conventional MFIs face limitations especially in Muslim Majority Countries AlHuda Islamic Microfinance Help Desk is offering all Islamic Microfinance Solution. A Trend in diversion of donors funds to more ethical objectives A perfectly sustainable system with goal of Poverty alleviation.

Case Study: AKHUWAT - Pakistan

Established: 2001 Model: Qarz-e- Hassan Number of Browers: 94,104 Families Loans Utilized by Males Entrepreneurs : 68,000 Loans Utilized by Female Entrepreneurs : 27,304 Amount Disbursed: PKR 1,08,85,07,742 Recovery Rate: 99.85% Average Loan. : 25,000 PKR Products Range: Family Enterprise Loan, Education Loan, Liberation Loan, Marriage, Emergency Loan, Housing Loan. Number of Branches: 54 (in 30 Cities )

* Data upto. 30th April, 2011

What is required?

When there is a will, there is way!

Thank you for listening with patience

Muhammad Zubair Mughal Chief Executive Officer AlHuda Centre of Islamic Banking and Economics
Zubair.mughal@alhudacibe.com www.alhudacibe.com