Islamic Micro-finance the Problems Faced and Their Solution

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ISLAMIC MICROFINANCE:

PROBLEMS FACED & THEIR SOLUTION

Dr Mohammed Obaidullah

Islamic Research & Training Institute

Islamic Development Bank Group

9th Distance Learning Course in Islamic Finance, Spring 2009



PLAN OF PRESENTATION

Poverty & Exclusion in Islamic World

Islamic Microfinance Development:

yMicro Perspectives

yMeso Perspectives

yMacro Perspectives




POVERTY IN ISLAMIC

WORLD

Lowest Five among IDB member countries

account for over half a billion (528 million) of

the world·s poor (with incomes below $2 aday)

Lowest Ten account for over 600 million of

the world·s poor.

Indonesia alone accounts for 129 million -

over half of its population




EXCLUSION IN THE ISLAMIC

WORLD

72 percent of people living in Muslim-majority

countries do not use formal financial services

(Honohon 2007).

In 31 countries two-third or more do not have

access to formal financial services

In 21 countries three-fourth or more do not have

access to formal financial services

In 17 of the member countries four-fifth or more

of their adult population do not have access to

formal financial services




WHAT THE POOR IN MUSLIM

SOCIETIES NEED

Micro-credit

Micro-equity

Micro-savingsMicro-transfers

Micro-insurance

That do not violate their fundamentalbeliefs and cultures




WHAT THE POOR IN MUSLIM

SOCIETIES NEED

Total estimated global outreach of IsMFI

industry of only 380,000 customers that accounts

for only one-half of one percent of total

microfinance outreach. Supply is very concentrated in a few countries,

with Indonesia, Bangladesh, and Afghanistan

accounting for 80 percent of global outreach.

Demand is strong. In Jordan, Algeria, and Syria,

20²40 percent of respondents cited religious

reasons for not accessing conventional

microloans. (CGAP Survey, 2008)




WHAT IS EXPECTED OF ISLAMIC

MFIS

Poverty Alleviation Approach Based on

Charity

Economic Empowerment

Debt Avoidance

Cooperation & Solidarity

Family Cohesiveness

Shariah Compliance of Contracts




MICRO PERSPECTIVES

Alternative Models

1. Grameen Model

2. Village Banking Model

3. Credit Union Model

4. SHG Model

5. Rural Financial System

All models have been experimented with

varying successes.




MICRO PERSPECTIVES

Diverse Organizational Structures:

1. Informal MF Providers

2. Member-Based Organizations

3. Non-Government Organizations

4. Formal Financial Institutions

5. Commercial Banks

Need to develop an integrated structure by

establishing linkages




MICRO PERSPECTIVES

Lack of Product Diversification

Need for a Financial Engineering Approach

to Product Development

1. Deposit Products based on Mudaraba

2. Range of Financing Products based on

Mudaraba, Musharaka (Diminishing),

Murabaha (Istijrar), Salam (Value-

Based), Ijara

3. Micro-Takaful




MICRO PERSPECTIVES

Poor Linkages with Banks and Capital

Markets

Create Shariah Compliant

1. Credit Guarantee Mechanism

2. Securitization




MICRO PERSPECTIVES

Shariah Compliance

1. Shariah Boards

2. Fiqhi Issues

3. Divergent Perceptions

4. Confidence of Users

Collective Resolution of Shariah Issues




MESO PERSPECTIVES

Transparency and Information

High-quality auditors and rating agencies, creditbureaus, reliable information software - scarcelyavailable to Islamic MFIs

Existing MF-specific agencies expand scope toinclude Islamic MF; or existing agencies for

mainstream IFIs to absorb MF services;Proactive role of donors in development of Islamic MF rating




MESO PERSPECTIVES

Education and Training

Lack of trained manpower, handful of resource

centers and education and training providers

Create a cadre of microfinance experts by

imparting training to persons with diverse

experiences such as, in banking, finance,

investments, entrepreneurship development and

community development




MESO PERSPECTIVES

Payment Systems

Only large Islamic FIs have access to

electronic payment systems

MFIs working for the poor may work throughthe larger Islamic FIs by forging allianceswith them




MESO PERSPECTIVES

Networking

No regional or global network exclusively for

Islamic MF

Existing networks can expand their scope;

New networks for Islamic MF can be created

also covering zakah and awqaf organizations




MESO PERSPECTIVES

Technical Assistance

Voluntary giving is yet to be institutionalized

in many member countries to ensure

sustainability of benefits

Re-organize awqaf for all forms of technical

assistance and capacity building




MACRO PERSPECTIVES

Role of Government

Governments perform poorly in direct

provision of microfinance

Need for a policy environment that allows

a range of MF providers to coexist and

compete to offer higher-quality and lower-cost services to large numbers of poor

clients.




MACRO PERSPECTIVES

Role of Government

Ensure macroeconomic stability

Keep inflation in check

Curb speculative forces in financial

markets

Liberalize financial market rates Integrate awqaf and zakah in national

policy




THE WAY FORWARD

Concerted Efforts by A LL Stakeholders

Cooperatives-NGOs: Efficient management of

community assets, Combine social and economic

agenda effectively,

IFIs: Recognize MF with distinct risk-returns,undertake direct and indirect financing, linkage

with grass-root NGOs, Facilitate capital market

participation of MFIs

Awqaf: Preserve and develop community assets,undertake technical assistance

Government Agencies: Create supportive policy and

regulatory environment for MFIs




THE WAY FORWARD

Proactive Role of Multilateral Development

Institutions

Micro Level: Participate in equity, undertake

refinancing, promote credit-guarantee andtakaful

Meso Level: Develop knowledge base, undertake

training of trainers, encourage networking,

promote credit rating

Macro Level: Assist member countries to create

supportive regulatory and policy environment




THANK YOU


Documents

Islamic Micro-finance the Problems Faced and Their Solution