islamic microfinance: lessons from good and bad practices mohammed obaidullah islamic research &...
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ISLAMIC MICROFINANCE: LESSONS FROM GOOD AND BAD
PRACTICES
Mohammed ObaidullahIslamic Research & Training Institute
Islamic Development Bank
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ISLAMIC APPROACH TO POVERTY ALLEVIATION
Charity Economic Empowerment Transparency & Accountability Debt Avoidance Cooperation & Solidarity Family Cohesiveness Contracts Free from Riba & Gharar
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INSTRUMENTS OF ISLAMIC MICROFINANCE
Not for Profit Modes: Zakah, Awqaf, Qard Hasan; Kafala; Hawala
For-Profit Modes:Participatory Modes: Mudaraba,
Musharaka, MudaraDebt-based Modes: Bai Muajjal/ Murabaha,
Ijara, Salam, Istisna, IstijrarFee-Based Modes: Wakala, Joala
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MICROFINANCE MODELS
Models in Both Conventional & Islamic Domains:
Joint-Liability-Groups (JLG) Self-Help-Groups (SHG) Village-Banks Credit-Unions ROSCAs Pawning
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MICROFINANCE MODELS
Indigenous Islamic Models: Qard Hasan Funds Baitul-Mal-wa-al-Tamweels (BMTs) Zakah Funds Awqaf-Based Institutions Composite Models
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COMPOSITE MODEL OF ISLAMIC MF
Cash WAQF
Physical Assets
Cash WAQF
Physical Assets
Economically
Active Groups
Economically
Active Groups
Donor/ Waqif/ Muzakk
i
Donor/ Waqif/ Muzakk
i
Micro-savings Micro-savings
For-Profit Microfinance
For-Profit Microfinance
Micro-takaful Micro-takaful
Economically
Inactive Individuals
Economically
Inactive Individuals
Zakah Fund
Zakah Fund
Guarantee Guarantee
Safety Net
Skills Training
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3
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1
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5
9
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GOOD & BAD PRACTICES: MODELS IN BOTH CONVENTIONAL & ISLAMIC
DOMAINS:
Simplicity Transparency Standardized procedures & documentation Higher staff efficiency and professionalism Replication of best practices from
conventional microfinance
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GOOD & BAD PRACTICES: MODELS IN BOTH CONVENTIONAL & ISLAMIC
DOMAINS:
Break-down of hiyal-based mechanisms in micro economies
Less emphasis on project viability Not for the poorest of the poor High cost of finance “Women only” approach Perpetuation of debt Low financial literacy precludes partnership-
based modes
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GOOD & BAD PRACTICES: INDIGENOUS ISLAMIC MODELS:
Institutionalization of charity and good-giving Institutionalization of voluntarism Low/ zero/ negative cost of finance Safety net + skill enhancement + business
development services Family empowerment
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GOOD & BAD PRACTICES: INDIGENOUS ISLAMIC MODELS:
Lack of transparency Poor accountability and governance
structures Low operational efficiency and high
operational costs Encouragement to continued dependency on
charity Poor linkage with formal financial system
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GOOD & BAD PRACTICES: COMPOSITE MODELS:
Combine access, sustainability and affordability considerations
Combine mission-based approach with market-based instruments
Use best-fit instruments and modes Flexible pricing and product design
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GOOD & BAD PRACTICES: COMPOSITE MODELS:
Conflicting organizational culture Conflicting policy and regulatory framework Lack of transparency Poor accountability and governance Unresolved Shariah issues
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MESO-LEVEL CHALLENGES:ABSENCE OF SUPPORTING INFRASTRUCTURE
Accounting Systems Payment Platforms Rating Agencies Training & Consultancy Providers Advocacy
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MACRO-LEVEL CHALLENGES:ABSENCE OF ENABLING ENVIRONMENT
Policies and regulations on zakah management
Policies and regulations on awqaf development
Policies to link indigenous institutions with formal financial system
Policies and regulations on Islamic finance in general and Islamic microfinance in particular
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THANK YOU