Asasah Islamic Micro Finance

8/8/2019 Asasah Islamic Micro Finance

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An Introduction to

Islamic Microfinance

Muhammad Zubair MughalChief Executive Officer ,

AlHuda: Centre of Islamic Banking andEconomics

[email protected]

www.alhudacibe.com

http://www.alhudacibe.com/

http://www.alhudacibe.com/



Contents

• What is Shariah Based Microfinance ?• Difference between Conventional & Islamic MF• Demand of Islamic Microfinance Worldwide• Global Landscape of Islamic Microfinance• Islamic Microfinance Update• The Way Forward



Islam

Aqidah

(Faith & Belief)

Shariah

(Practices & Activities)

Akhlaq

(Morality & Ethics)

IBADAT(Man to God Worship)

Muamalat(Man to Man Activities)

Political Activities Economic Activities Social Activities

Banking & Financial Activities

Islam and Shariah



Sources of Fiq’h in Islam (IslamicMicro Finance)

• Quran

• Sunnah

• Ijtehad / Qiyas

• Ijama’e Ummah



Fulfillment of Financial Needs

Own Capital Others’ Capital

Equity Financing Debt Financing

• Murabahah• Ijarah•Salam & Istisna etc

• Musharakah• Modarabahah• Other Products

Human Financial Needs



Equity Financing Debt FinancingUqud al-Ishtirak(Contracts of Profit

Sharing )

Uqud al-Muawadhat(Deferred Contracts of

Exchange)Al-Mudarabah(Trustee Profit Sharing)

Al-Bai’ Bithaman (Mu)Ajil(Deferred Installment Sale)

Al-Musharakah (JointVenture Profit Sharing)

Bai’ al-Murabaha(Cost Plus Profit Sale)

Others Al-Ijarah (Leasing)Bai’ al-Salam (Commodity Sale)

Bai’ al-Istisna’ Sale on Order

External (Equity & Debt) Financing



PRODUCT TREE

Islamic Modes of Microfinance

Trade BasedModes

Partnership BasedModes

Rental BasedModes

Musharaka(Joint Venture Profit Sharing )

Mudaraba( Trustee Profit Sharing)

Murabaha(Cost Plus Profit Sale)

Musawama(Bargain sale )

Salam(Commodity Sale)

Istisna(Sale on Order)

Ijarah( Leasing )

DiminishingMusharaka

( Transfer of Ownership)



ONUS SHIFTS!!• Customer

to Halal Restaurant Owner

• Halal Restaurant Owner

to Halal Meat Supplier • Halal Meat Supplier

to Halal Abattoir / Butcher

• Customer to Islamic Banker

• Islamic Banker to Shariah Scholars



Industry Progress in Pakistan

• 6 Full fledge Banks having 239 and 12 Conventional Banks have 167 SAIBBS and 10 Su b Branchestill 1 st January , 09

•Total IB Branches = 519

Year 2001

•Meezan Bank•Al Baraka

•Meezan Bank•Al Baraka•MCB•Alfalah•SCB•Bank AlHabib•Habib AG Zur.•Metropolitan•Bank of Khyber •Soneri Bank

2002 2003

•Meezan Bank•Al Baraka•MCB

•Meezan Bank•Al Baraka•MCB•Alfalah

2 10

2007 - 09

•Meezan Bank (161)•Al Baraka (30)•MCB (8)•Alfalah(40)•SCB (11)•Bank AlHabib(4 )•HMB(4)•Bank of Khyber(16)•Soneri Bank ( 5)

•HBL(1)•Bank Islami(102)•DIB (25)•EGIBL (40)• Dawood(21)•NBP(5)•RBS (3)•Askari(18)•UBL (5)

2004 - 06

1843



Industry Progress in Pakistan



International Overview

• The size of Islamic Financial Industry has reached US$ 950 Bln.and its growing annually @ 15% per anum.

• 70 countries have Islamic Banking Institutions

• 37 Muslim countries including Bahrain, UAE, Saudi Arabia,Malaysia, Brunei and Pakistan

• 34 non-Muslim countries including USA, UK, Canada, Switzerland,

South Africa and Australia




• In Feb 1999, Dow Jones introduced the Dow JonesIslamic Market Index (DJIM) of 600 companies worldwide whose business complies with Islamic Shariah laws

• At present there are more than 170 Islamic Fundsoperational through out the world with a total fund baseof over USD 3.50 billion




• Governments of Bahrain ,Malaysia and now Pakistanhave issued Islamic Bonds (Sukuk) in order to facilitateIslamic Banks in managing their liquidity.

• Issuance of these bonds has also paved the way for Shariah compliant Government borrowings




• Institutions like Accounting and Auditing Organization for IslamicFinancial Institutions (AAOIFI) and Islamic Finance Services Board(IFSB) have been formed.

• These institutions are playing a key role in setting up andstandardizing Shariah , Financial and Accounting standards for Islamic Financial Institutions.

• Due to these collective efforts Islamic banking is now recognized byIMF, World Bank and Basel Committee.



Islamic Microfinance



Prohibition of Interest

Risk sharing

Social Development Mission

Prohibition of speculativebehaviour

Purity of contracts

Asset Based Financing

Shariah-approved activities .

Principle of Shariah BasedMicrofinance



And ALLAH has permitted trading and forbidden Riba

(Al Baqara 275 )

• Riba means any fixed or guaranteed interest payment on cash

advances or on deposits.

• Islam encourages the earning of profits but forbids the chargingof interest

Prohibition of Riba ( Interest)



Conventional

MFI Client

money

money + money (interest)

Difference Between Islamic andConventional Microfinance



Islamic

IMFI’S ClientGoods &Services

money

Difference Between Islamic andConventional Microfinance



Modes of Islamic Microfinance



For Muslim majority country great need for Islamic MF exist and large

target segment is averse to the interest based microfinance products.

Islamic Microfinance emphasize ethical, moral & social factors to

promote equality and fairness for the good of the society.Risk Sharing, individual duties, property rights and purity of contracts

are part of Islamic Microfinance

Approximately 44% conventional microfinance clients worldwide reside

in Muslim countries (Source: MF Info Ex).Asset-based – can prevent diversion of funds for consumption

Need & Compatibility



Survey Surveyed Countries Respondentspreference(%)

CGAP 08 Jordan, Algeria, and Syria 20 - 40%

PlaNet Finance 07 West Bank and Gaza 35% - 60 %USAID 02 Jordan 24.9%IFC/FINCA 06 Jordan 32%Frankfurt School of Fin & Mgmt 06

Algeria 20.7%

IFC sponsoredStudy

Yemen 40%

IFC 2007 Syria 43-46%Bank Indonesia2000

Indonesia (East Java) 49%

A recently survey Conducted by AlHuda CIBE in Azad Kashmir exhibits99% demand (4 Districts)

Demand of Islamic Micro Finance



Institution Mode of Finance7 Sudanese Islamic Banks Murabaha, mudaraba, musharaka, and

saving deposit [SIB – Productive Families]

Islamic Cooperatives and RuralBanks of Indonesia

Cooperatives – Members’ Musharaka(integrated with Zakat Fund)

Rural Banks – Various modesIslami Bank Bangladesh, SocialInvestment Bank and AlFalah &Rescue

IBB – Mostly bai muajjalSIBL - Recourse generation - Cash Waqf andFinancing through various modes

Jordan Islamic Bank Musharaka and Mudaraba

UNCDF Yemen (HMFP) Murabahah and redeemable MudarabahSanabel (12 Arab countries, 64MFIs – meeting 80% of MFneeds)

Murabaha, mudaraba, musharaka

Amana Ikhtiar Malaysia andIslamic Pawn Broking

AIM – interest free loan Al Rahnu

– short term interest free loanagainst collateral at market value

International Experience of IslamicMicrofinance



Pakistan’s Experiences

Institution Mode of FinanceAkhuwat AIM – interest free loan

Qaraz-e-Hasna

CWCD Murabahah, Ijarah, Salam & IstisnaMicroTakaful

NRSP – NWFP MurabahahMudarabah with BOK for funding Source

Khawendo Kor Murabahah but in limited scale

Islamic Relief Murabahah and Qarz-e-Hassan

KKCB Murabaha and MicroTakafulHelping HandMuslim AidTakaful Pakistan Limited

MurabahahMurabahahMicroTakaful



Products for IMFI’s



.•United States: 4•Kiva•Helping Hands•Muslim Aid

•Lariba

•Germany:2•- MuslimSociety•Switzerland:6•UK:

•- HSBC Amanah•- Muslim Aid•- Islamic Relief •- The Halal MutualInvestment Company

•Bahrain: 2

•Malaysia: 11•2 - Pure Islamic Banks(Bank Islam, BankMuamalat)•Rest - conventionalbanks

•UAE: 8•- Dubai Islamic Bank•- Abu Dhabi Islamic Bank•- HSBC Amanah

• Afghanistan: 4•- FINCA , WOCCU•- CHF• Ariana

•Kuwait: 2•- Kuwait FinanceHouse

•Iran: 8

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

•Indonesia: 4

•Sudan: 3

•Pakistan: 11•India: 3•Bangladesh:9

•Turkey: 7•- Faisal FinanceInstitution•- Ihlas FinanceHouse

• Yemen: 1

Islamic Microfinance InstitutionWorldwide



A r i a n a F i n . S e r v i c e s

F I N C AWOCCUIMFI’s in Afghanistan

CHF

Akhuwat

Muslim

Aid

N R S P

K h w e

n d o K o

rCWCD

IMFI’s in PakKKCB

Donors

Islamic Funds

PPAF

IDB MISFA

Kuwaitfund

Int’l IMFI,s

AlBaraka AIM

UNCDF

F I N CA

I s l a m i c B a n k b d

B M T i n d o n e s i a

Islamic Microfinance Updates

HelpingHands

IR T P L

M e e z a n B a

n k I s l

a m i c F u

n d

UNDPWorldBank

USAID



• FINCA loans are based on Murabaha principles,they don’t charge interest, but a Profit rate.

• Providing Shariah-compliant loans has made itpossible for FINCA to expand in areas of Afghanistan where other MFIs have been turnedaway for charging interest. According to 2007figures

• Clients: 41,213• Village Banks: 5,529• Portfolio: $8,324,142• Average loan size: $329• Staff members: 387• Clients per CO: 187

FINCA - Experience in Afghanistan



Indicators Members of Investment and Finance Cooperatives

Unit of Measure Number

D a t a Di s

a g gr e g

a t i on

Regions North East GrandTotalProvinces Balkh Jawzjan Aqcha Samanga

nBaghlan Nangarhar

Total by Province 2,634 2,612 313 1,027 830 814 8,230

G e n d e r

Male 2,267 2,070 305 961 756 737 7,096

Female 367 542 8 66 74 77 1,134

004 – 2005 WOCCU helped to establish two area-based open bond credit unions in the nf Afghanistan: Balkh and Jawzjan.In 2007 , WOCCU has established another five Investment Finance Cooperatives (IFCs)the East and South of the Country for Murabaha

WOCCU Experience in Afghanistan



• A UNDP run programme in one of the poorest areasin Syria.

• 22 self local financial institutions have beenestablished consisting of 4,691 members

• Each start up is self financed

• When ever repayment is satisfactory, UNDPprovides an additional capital injection

• Profit margin on Murabaha is 2.5%

• A source of income

• Repayment reached 100% by the end of the firstyear of operation (Brandsma, 2004)

JABAL AL HOSS, SYRIA:MURABAHA



Functions and operations are basedon fully man made principles Functions and operations are basedon Sharia’h principles

assured of pre-determined rate of interest

Promote risk-sharing betweenprovider of capital (investor) and user of funds (entrepreneurs)

Aim at maximising profit without anyrestrictions

Aim at maximising profit but subjectto Sharia'h restrictions

Creditor-Debtor relationship Partners, investor and traders, buyer or seller relationship

Based on money trading. Money is amedium of exchange and not acommodity

Encourage asset-based financingand based on commodity trading &Services

Conventional Micro Finance Islamic Micro Finance



It is almost risk free banking anddepositor has no risk of losing itsmoney because interest isguaranteed.

No right of profit if there is no riskinvolved. The profit and loss sharingdepositor may lose money in case of loss.

It can charge additional money incase of defaulters

Islamic banks have no provision tocharge any extra money from thedefaulters

Conventional Micro Finance Islamic Micro Finance

Asasah Islamic Micro Finance

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