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  • 1. Mainstreaming Islamic Microfinance An Inclusive Approach Muhammad Khaleequzzaman Head Islamic Banking School of Islamic Banking & Finance International Islamic University Islamabad Pakistan

2.

  • Contents
    • Poverty and gap analysis
    • Issues of microfinance
    • Role of Islamic microfinance for inclusion Case of Islamic Microfinance
    • Review of some Islamic banking products for use in microfinance
    • Mainstreaming Issues and some recommendations

Mainstreaming Islamic Microfinance An Inclusive Approach 3.

  • Poverty and Microfinance Landscape
    • Incidence of Poverty
      • PRSP (2003) 32.1%
      • Economic Survey (2009) [PC: 24.5% TFFS: 36.1%
    • Financial Inclusion (Access to Finance Study 2009)
      • Formally Served 11%
      • Informally Served 33%
      • Financially Excluded 56%
    • Microfinance Providers[PMN Network] 32
    • Coverage as % of Potential Poor Population
      • Economic Survey 3% 1.6 m Active Borr.
      • PMN 18% 1.0 m Active Borr.
      • Microwatch 13%
    • To reach 3.0 million target, US$ 600- to 700 million (Rs. 49 to 57 billion) is required [PMN 2007]

Mainstreaming Islamic Microfinance An Inclusive Approach 4.

  • Issue of Microfinance
    • Weakening Social Collateral
      • Hidden transcript Some women borrowers committed suicide
      • [ Rahman, A., Micro Credit Initiatives . Who Pays?, World Development, Volume 27, No.1, 1999.]
      • Poorest are rarely looked after
      • [Hashemi, S, and Rosenberg, R. Graduating the poorest ..CGAP, Washington DC, USA. ]
      • Mistargetting/Program officers bend rules in unobservable way
      • [Baker, J. L, Evaluating the Impact of Development Projects on Poverty- ., The World Bank, Washington DC., 2000. ]
      • Brokerage raises cost of already expensive transaction
      • [Barki, Husna, & Shah, Mehr, The Dynamics of Microfinance Expansion in Lahore, PMN, and ShoreBank Islamabad, Pakistan, 2007 ]
      • Violation of social collateral by lenders themselves
      • [ Bastelaer, Does Social Capital Facilitate the Poors Access to Credit? .., The World Bank Washington, USA]{list is long}

Mainstreaming Islamic Microfinance An Inclusive Approach 5.

  • Issue of Microfinance
    • Sustainability
      • Most of the programs are not sustainable in Pakistan
      • Overall Operational and Financial Sustainability records at 89% and 74%, respectively.
      • High interest rates eats up sustainability of clients
    • Transparency
      • Flat interest rates, un-explained fees, hidden charges
    • High Cost Debt Economy than Real Economy
      • Separates finance from real economy
      • Absence of cooperation when client loses
    • Exclusion
      • Self-exclusion due to prohibition of interest
      • Poorest of the poor and Women in gender segregated societies

Mainstreaming Islamic Microfinance An Inclusive Approach 6.

  • Role of Islamic Microfinance helps resolving Issues
    • 1. Developing social capital among clients and MFI instead of clients only

Mainstreaming Islamic Microfinance An Inclusive Approach Negative Social Capital

  • MFI
  • Fard al Kafayah
  • Adl
  • Ihsan
  • Clients
  • JointLiab.
  • Info. Discls.
  • Self-esteem
  • Payment

Social Capital Reinforcement -Deceit and Coercion -Mistrust -Idleness- Selection Bias - Inefficiency -Willful Default Negative Social Capital 7.

  • 2. Meeting Demand For Islamic Microfinance (20-98%)

Mainstreaming Islamic Microfinance An Inclusive Approach A recently conducted survey in Azad Kashmir exhibits 99% demand(4 Districts) 49% Indonesia (East Java) Bank Indonesia 2000 43-46% Syria IFC 2007 40% Yemen IFC sponsored Study 20.7% Algeria Frankfurt School of Fin & Mgmt 06 32% Jordan IFC/FINCA 06 24.9% Jordan USAID 02 35% - 60 %West Bank and Gaza PlaNet Finance 07 20 - 40% Jordan, Algeria, and Syria CGAP 08 Respondentspreference (%)Surveyed Countries Survey 8.

  • Role of Islamic Microfinance helps resolving Issues
    • 3. Promoting Entrepreneurship
      • Debt not allowed in Islam as usual practice
      • Asset creation and entrepreneurship is promoted
    • 4. Transparency and Sanctity of Contracts
      • Islamic values prevent violation of contract and require disclosure of full knowledge relating to financial transaction

Mainstreaming Islamic Microfinance An Inclusive Approach 9.

  • Mainstreaming Islamic Microfinance:
  • Issues for Mainstreaming
    • Regarding MFIs
      • Limited number of IMFIs (i.e. 4 6)
      • Limited resource base of IMFI
      • Ineligibility of collecting savings
      • Product concentration in Murabaha
      • Capacity building of MFI
      • Sharia advisory
    • Regarding Islamic banks
      • Perception about microfinance as high risk area
      • Informal sector environment
      • Absence in rural areas
      • Absence of credit guarantee scheme

Mainstreaming Islamic Microfinance An Inclusive Approach 10.

  • Mainstreaming Islamic Microfinance:
  • Some Recommendations
  • 1. Downscaling Islamic Banks
    • Corporate Social Responsibility:Fard al Kafaya
    • Business case: Profits and high rate of recovery
    • Limitations: Informal sector/regulatory implications, absence in rural areas
    • Possible Course of Action:
      • Phase I:
        • Linkage with MFIs [Mudaraba or Musharaka]
        • Urban Operation through Islamic MF Division or Cell
      • Phase II
        • Linkage continues
        • Extension of branches in rural areas

Mainstreaming Islamic Microfinance An Inclusive Approach 11.

  • Mainstreaming Islamic Microfinance:
  • Some Recommendations
  • LINKAGE

Mainstreaming Islamic Microfinance An Inclusive Approach ShariaAdvisory &Technology Transfer Islamic Bank MF NGO MF NGO MF NGO Clients Clients Clients Clients Clients Clients Clients Clients Clients Savings Financing 12.

  • Mainstreaming Islamic Microfinance:
  • Some Recommendations
  • 2. Downscaling Commercial Banking and Establishing IMFBs
    • SBP Guidelines
      • Full-fledged Islamic Microfinance Banks (IMFBs)
      • Islamic Microfinance Services by Full-Fledged Islamic Banks
      • Islamic Microfinance Services by Conventional Banks
      • Islamic Microfinance Services by Conventional Microfinance Banks