asasah islamic microfinance
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An Introduction to
Islamic Microfinance
Muhammad Zubair MughalChief Executive Officer,
AlHuda: Centre of Islamic Banking and Economics
zubair.mughal@alhudacibe.com
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 (Islamic Micro 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
Debt MarketEquity Market
Bai’ al-Istisna’ (Sale on Order)
Bai’ al-Salam (Commodity Sale)
Al-Ijarah (Leasing)Others
Bai’ al-Murabaha
(Cost Plus Profit Sale)
Al-Musharakah (Joint Venture Profit Sharing)
Al-Bai’ Bithaman (Mu)Ajil (Deferred Installment Sale)
Al-Mudarabah
(Trustee Profit Sharing)
Uqud al-Muawadhat
(Deferred Contracts of Exchange)
Uqud al-Ishtirak
(Contracts of Profit Sharing )
Debt FinancingEquity Financing
External (Equity & Debt) Financing
PRODUCT TREE
Islamic Modes of Microfinance
Trade Based Modes
Partnership Based Modes
Rental Based Modes
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 )
Diminishing Musharaka( 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 Sub Branches till 1st 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
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
International Overview
• In Feb 1999, Dow Jones introduced the Dow Jones
Islamic Market Index (DJIM) of 600 companies world
wide whose business complies with Islamic Shariah laws
• At present there are more than 170 Islamic Funds
operational through out the world with a total fund base
of over USD 3.50 billion
International Overview
• Governments of Bahrain ,Malaysia and now Pakistan
have issued Islamic Bonds (Sukuk) in order to facilitate
Islamic Banks in managing their liquidity.
• Issuance of these bonds has also paved the way for
Shariah compliant Government borrowings
International Overview
• Institutions like Accounting and Auditing Organization for Islamic
Financial Institutions (AAOIFI) and Islamic Finance Services Board
(IFSB) have been formed.
• These institutions are playing a key role in setting up and
standardizing Shariah , Financial and Accounting standards for
Islamic Financial Institutions.
• Due to these collective efforts Islamic banking is now recognized by
IMF, World Bank and Basel Committee.
Prohibition of Interest
Risk sharing
Social Development Mission
Prohibition of speculative behaviour
Purity of contracts
Asset Based Financing
Shariah-approved activities.
Principle of Shariah Based Microfinance
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 charging of interest
Prohibition of Riba ( Interest)
Conventional
MFI Client
money
money + money (interest)
Difference Between Islamic and Conventional Microfinance
Islamic
IMFI’S ClientGoods & Services
money
Difference Between Islamic and Conventional 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 Respondents preference (%)
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%
A recently survey Conducted by AlHuda CIBE in Azad Kashmir exhibits 99% demand (4 Districts)
Demand of Islamic Micro Finance
Institution Mode of Finance
7 Sudanese Islamic Banks Murabaha, mudaraba, musharaka, and saving deposit [SIB – Productive Families]
Islamic Cooperatives and Rural Banks of Indonesia
Cooperatives – Members’ Musharaka (integrated with Zakat Fund)
Rural Banks – Various modes
Islami Bank Bangladesh, Social Investment Bank and AlFalah & Rescue
IBB – Mostly bai muajjal
SIBL - Recourse generation - Cash Waqf and Financing through various modes
Jordan Islamic Bank Musharaka and Mudaraba
UNCDF Yemen (HMFP) Murabahah and redeemable Mudarabah
Sanabel (12 Arab countries, 64 MFIs – meeting 80% of MF needs)
Murabaha, mudaraba, musharaka
Amana Ikhtiar Malaysia and Islamic Pawn Broking
AIM – interest free loan
Al Rahnu – short term interest free loan against collateral at market value
International Experience of Islamic Microfinance
Pakistan’s Experiences
Institution Mode of Finance
Akhuwat AIM – interest free loan
Qaraz-e-Hasna
CWCD Murabahah, Ijarah, Salam & Istisna
MicroTakaful
NRSP – NWFP Murabahah
Mudarabah with BOK for funding Source
Khawendo Kor Murabahah but in limited scale
Islamic Relief Murabahah and Qarz-e-Hassan
KKCB Murabaha and MicroTakaful
Helping Hand
Muslim Aid
Takaful Pakistan Limited
Murabahah
Murabahah
MicroTakaful
.•United States: 4•Kiva•Helping Hands•Muslim Aid•Lariba
•Germany:2•- Muslim Society•Switzerland: 6•UK:
•- HSBC Amanah•- Muslim Aid •- Islamic Relief•- The Halal Mutual Investment Company
•Bahrain: 2
•Malaysia: 11•2 - Pure Islamic Banks (Bank Islam, Bank Muamalat)•Rest - conventional banks
•UAE: 8•- Dubai Islamic Bank•- Abu Dhabi Islamic Bank•- HSBC Amanah
• Afghanistan: 4•- FINCA , WOCCU•- CHF• Ariana
•Kuwait: 2•- Kuwait Finance House
•Iran: 8
•Egypt: 9•- Alwatany Bank of Egypt•- Egyptian Saudi Finance
•Indonesia: 4
•Sudan: 3
•Pakistan: 11•India: 3•Bangladesh:9
•Turkey: 7•- Faisal Finance Institution•- Ihlas Finance House
•Yemen: 1
Islamic Microfinance Institution Worldwide
Ariana Fin. Services
FINCAWOCCU
IMFI’s in Afghanistan CHF
Akhuwat
Muslim Aid
NR
SP
Khwendo Kor
CWCD
IMFI’s in Pak
KKCB
Donors
Islamic Funds
PPAF
IDB MISFA
Kuwait fund
Int’l IMFI,s
AlBaraka AIM
UNCDF
FINCA
Islamic
Bank bd
BMT indonesia
Islamic Microfinance Updates
Helping Hands
IR
TP
L
Meezan Bank
Islamic Fund
UNDP
WorldBank
USAID
• FINCA loans are based on Murabaha principles, they don’t charge interest, but a Profit rate.
• Providing Shariah-compliant loans has made it possible for FINCA to expand in areas of Afghanistan where other MFIs have been turned away for charging interest. According to 2007 figures
• 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
1,1347774668542367Female
7,0967377569613052,0702,267Male
Gender
8,2308148301,0273132,6122,634
Total by Province
Nangarhar
Baghlan
Samangan
AqchaJawzjanBalkhProvinces
GrandTotal
EastNorthRegions
Data D
isaggregation
NumberUnit of Measure
Members of Investment and Finance CooperativesIndicators
•2004 – 2005 WOCCU helped to establish two area-based open bond credit unions in the north of Afghanistan: Balkh and Jawzjan.• In 2007 , WOCCU has established another five Investment Finance Cooperatives (IFCs) in the East and South of the Country for Murabaha
WOCCU Experience in Afghanistan
• A UNDP run programme in one of the poorest areas in Syria.
• 22 self local financial institutions have been established consisting of 4,691 members
• Each start up is self financed
• When ever repayment is satisfactory, UNDP provides an additional capital injection
• Profit margin on Murabaha is 2.5%
• A source of income
• Repayment reached 100% by the end of the first year of operation (Brandsma, 2004)
JABAL AL HOSS, SYRIA: MURABAHA
Risk Sharing Insure Shariah Compliances
Poverty Alleviation
Asset Based FinancingMicro Takaful
Free from InterestFinancing
Joint ResponsibilitiesPurity of Contracts
IslamicMF
Islamic Microfinance Deal in
Functions and operations are based on fully man made principles
Functions and operations are based on Sharia’h principles
assured of pre-determined rate of interest
Promote risk-sharing between provider of capital (investor) and user of funds (entrepreneurs)
Aim at maximising profit without any restrictions
Aim at maximising profit but subject to Sharia'h restrictions
Creditor-Debtor relationship Partners, investor and traders, buyer or seller relationship
Based on money trading. Money is a medium of exchange and not a commodity
Encourage asset-based financing and based on commodity trading & Services
Conventional Micro Finance
Islamic Micro Finance
It is almost risk free banking and depositor has no risk of losing its money because interest is guaranteed.
No right of profit if there is no risk involved. The profit and loss sharing depositor may lose money in case of loss.
It can charge additional money in case of defaulters
Islamic banks have no provision to charge any extra money from the defaulters
Conventional Micro Finance
Islamic Micro Finance
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