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Transcript of Islamic Microfinance-An Inclusive Approach With Special Reference to Pakistan Muhammad...

  • 8/3/2019 Islamic Microfinance-An Inclusive Approach With Special Reference to Pakistan Muhammad Khaleequzzaman Associate Professor School of Islamic Banking & Finance Internationa

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    Islamic Microfinance-An inclusive

    Approach with Special Reference toPakistan

    Pfeiffer University Colloquium on Microfinance: Banking on theFuture Exploring Microfinance as Service,

    North Carolina, USA

    30th September 2011

    Presented By:Muhammad Khaleequzzaman

    Associate Professor/ConsultantSchool of Islamic Banking and Finance

    International Islamic University Islamabad Pakistan

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    Contents

    Poverty and gap analysis

    Issues of microfinance

    Why Islamic microfinance?

    Demand for Islamic microfinance

    Some experiences and products of Islamic microfinance

    Compatibility of Islamic framework with microfinanceprinciples

    Issues relating to MFIs and Islamic banks

    Recommendations for mainstreaming sustainable Islamicmicrofinance

    Islamic Microfinance-An inclusive Approach with Special Reference to Pakistan

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    Poverty and Gap Analysis

    Islamic Microfinance-An inclusive Approach with Special Reference to Pakistan

    Incidence of Poverty

    Planning Commission GoP (2009) 24.5%

    Task Force on Food Security 36.1%

    UNDP HPI-1 Pakistan 77th among 108

    LDCs

    MF Industry Assessment-Pakistan [22.3% + 22.5%vulnerable = 44.8%]

    Financial Access (Access to Finance Study 2009)

    Formally Served 12%(Female: 4%)

    Informally Served 32%

    Financially Excluded 56%(Female: 68%)

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    Poverty and Gap Analysis

    Islamic Microfinance-An inclusive Approach with Special Reference to Pakistan

    Microfinance SpreadMicrofinance Providers [PMN Network] 29 MFIs

    Coverage Econ. Survey 3% [1.6 mil. Poor]

    Coverage PMN 18% [I mil. Poor]

    Coverage Microwatch 13

    Estimated Cost to Reach 3.0 mil. target [3 times of presentcoverage]

    US$ 600- to 700 million (Rs. 49 to 57 billion) PMN

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    Islamic Microfinance-Sustainability &Mainstreaming [M. Khaleequzzaman]

    Issue of Microfinance (Contd..)

    Ambiguous financial transactions

    Flat rates of interest

    Un-explained fees

    Hidden charges, etc.

    High cost debt economy than real economy

    Separates finance from real economy

    Absence of cooperation from MFI when clients businessloses

    De-capitalization of funds in high inflation economies

    Islamic Microfinance-An inclusive Approach with Special Reference to Pakistan

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    Islamic Microfinance-Sustainability &Mainstreaming [M. Khaleequzzaman]

    Issue of Microfinance (Contd..)

    Exclusion of certain segments from development process

    Self-exclusion by Muslim populations due to prohibition ofinterest Interest based financial services become irrelevant

    Poorest of the poor can not technically access MF

    Women in gender segregated societies cannot benefit from

    MFIs, hence lose empowerment opportunity

    Value neutral system

    Without much concern of ethics

    Risk transfer instead of risk sharing

    Emphasis on debt instead of trade comparatively more chancesof mis-utilization of funds

    Islamic Microfinance-An inclusive Approach with Special Reference to Pakistan

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    Why Islamic Microfinance?

    Interest is prohibited primarily to render justice

    Interest is transgression into the wealth of borrower as moneyis sterile and cannot re-produce

    Interest determined ex-ante Unjust distribution of productionresults

    In Islamic finance, primarily, profits determined ex-post

    Financial institutions shares business results Economic inefficiencies of interest are obvious

    Mounting cycles of high cost debt more likely find leakageshence unproductive mixed impact on poverty alleviation

    Risk sharing and asset building focus of Islamic financeprovides link between finance and economic activity Resultis entrepreneurship and real sector transformation

    Islamic Microfinance-An inclusive Approach with Special Reference to Pakistan

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    Why Islamic Microfinance?

    Islamic finance facilitates inclusion

    Religious and faith based settings mark the need for Islamicfinance

    Muslim populations self-excluded owing to prohibition findaccess to microfinance programs

    Poverty alleviation programs of Islam are indiscriminating

    where non-enterprising poorest of the poor are also includedthrough support of zero return Qarz Hassan (beneficence loan)and Zakat(religious tax on wealthy Muslims)

    Islamic finance promotes investment climate

    MFI being partner of entrepreneur, greater expertise isavailable to entrepreneur in terms of availability of information,

    skills, efficiency and profitability

    In view of risk management and asset building focus, Islamicfinance exhibits systemic as well as individual advantagesover conventional finance establishing strong link betweenfinance and economic activity

    Islamic Microfinance-An inclusive Approach with Special Reference to Pakistan

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    Why Islamic Microfinance? (Contd..)

    Islamic finance offers more efficient social capital MFI and clients are considered one unit than separate entities as in

    conventional finance

    Moral and ethical values embodied in religious teachings result in exitof negative social capital

    Islamic Microfinance-An inclusive Approach with Special Reference to Pakistan

    Negative SocialCapitalNegative SocialCapital

    MFIy Sense ofsocialresponsibilityy Justicey

    Risk sharing

    Clientsy Joint Liabilityy InformationdisclosureySelf-esteemy Necessity ofrepayment

    -Deceit andCoercion

    -Mistrust

    Idleness/Niggardliness

    -SelectionBias

    -Inefficiency

    -WillfulDefault

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    Is there any demand for Islamic Finance, after all?

    Surveying Organization Surveyed Country(ies) Preference (%)for Islamic MF

    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 sponsored Study Yemen 40%

    IFC 2007 Syria 43-46%

    Bank Indonesia 2000 Indonesia (East Java) 49%

    NRSP Azad Kashmir (Pakistan) 90%

    Islamic Microfinance: An Emerging Market Niche, Focus Note No. 49, CGAP, Washington DC, 2008

    Islamic Microfinance-An inclusive Approach with Special Reference to Pakistan

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    Islamic Microfinance - A Tool for Financial

    Inclusion [M. Khaleequzzaman]

    Institutions Mode of Finance

    7 Sudanese Islamic Banks Murabaha, mudaraba, musharaka, and savingdeposit [SIB Productive Families]

    Islamic Cooperatives and RuralBanks of Indonesia

    Cooperatives Members Musharaka(integrated with Zakat Fund)

    Rural Banks Various modes

    Islami Bank Bangladesh, SocialInvestment Bank and AlFalah &Rescue

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

    Jordan Islamic Bank Red/able Musharaka

    UNCDF Yemen (HMFP) Murabahah and Mudarabah

    Sanabel (12 Arab countries, 64

    MFIs meeting 80% of MFneeds)

    Murabaha, Mudaraba, Musharaka

    Amana Ikhtiar Malaysia andIslamic Pawn Broking

    AIM interest free loan

    AlRahnu short term interest free loanagainst collateral at market value

    Some experiences in Islamic Microfinance International

    Islamic Microfina