mahmood shafqat, sbp1 islamic microfinance– concept and products presentation by: mahmood shafqat...

Mahmood Shafqat, SBP 1

http://www.sbp.org.pk/femanual/Original%20Manual/original.htm


ISLAMIC MICROFINANCE– Concept and Products

Presentation By:MAHMOOD SHAFQATSenior Joint Director

Banking Policy & Regulations DepartmentJune 09, 2009


Outline• Concept and Principles of Islamic Finance• Permissible Modes of Finance• Benefits of Islamic Microfinance• Models of Islamic Microfinance• International Experiences• Regulatory framework for IMfBs • The Need for Islamic Microfinance in Pakistan• Islamic Banking – Strategy and Current Status• Myths about Islamic banking and Finance

3Mahmood Shafqat, SBP


Concept of Islamic Finance• Conventional MFIs deal in Money and charge

and pay interest• Islamic MFIs work within framework of

Shariah– Halal and Haraam– Prohibition of Riba, Gharar and Qimar– Socially Responsible



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Principles of Islamic Finance• Lending a virtuous act – Not a business. • Prohibition of Riba and Gharar; permission of

trading. • All gains on financing not prohibited.• Deciding Factor: nature of transaction.• Entitlement of profit: liability of risk of loss with the

capital itself; (Al Kharaj bil Daman)– Profit to be earned by sharing risk and reward of

ownership through pricing of goods, services or benefits.

– Time has value that can be discounted only through price; not in the form of interest, sometimes negative value as well.

Mahmood Shafqat, SBP


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• Usury VS Interest

• The prohibition of Interest is not limited to Islam, but it is shared by Judaism, Christianity and Hinduism.

• Some of the old testaments have rendered riba as haram (See Exodus 22:25,

• Leviticus 25:35-36, Deutronomy 23:20, Psalms 15:5, Proverbs 28:8,

• Nehemiah 5:7 and Ezakhiel 18:8,13,17 & 22:12).

Prohibition of Riba



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“ Those who devour interest become like the one whom Satan has bewitched and maddened by his touch. They have been

condemned to this condition because they say trade is just like interest, whereas Allah has made trade lawful and interest

unlawful. Henceforth, if one abstains from taking interest after receiving this admonition from his Lord, no legal action will be taken against him regarding the interest he had devoured before; his case shall ultimately go to Allah. But if one repeats the same crime even after this, he shall go to Hell, where he shall abide

forever”. Mahmood Shafqat, SBP



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“ O believers fear Allah and give up that interest which is still due to you if you are true believers; but if you do not do so then you are warned of the declaration of war against you by Allah and His

Messenger. If, however, you repent even now (and forgo interest), you are entitled to your principal; do not wrong, and no wrong will be done to you”.




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10.The same companion (�) has reported that the Prophet (]) said, “the ills of interest are a little over

70 and it is as bad as associating partners with Allah. This has been reported by Al Bazzar and he said that all the persons in the reporting chain are

those who are considered reliable by Imam Bukhari and Imam Muslim.




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16.It has been reported by Hazrat Bara bin Azib (�) that the Prophet (]) said, “interest is divided into 72

sections. The least harmful is like one who commits adultery with his mother. The worse from of interest

is to attack the honor of a Muslim”.




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Shariah Compliant Modes of Financea. Participatory Modes: i. Mudaraba ii. Musharaka iii. Diminishing

Musharakaiv. Equity Participation in

form of shares b. Trading Modes:v. Ijara or Ijara wa Iqtina vi. Murabaha vii.Musawama viii.Istijrar ix. Salam/ Parallel Salam x. Istinsa/Parallel Istisna

xi. Tawarruq (with specific prior approval of SBP)

c. Debt Based Modes:

xii.Qard

d. Others:

xiii.Wakala

xiv.Assignment of Debt (Hawala)



Options for Resource Mobilization• For IMf Banks

– Equity– Deposit Products

• Current• Saving• Term

– Lines of Credit• Qard Hassan• Musharaka/Mudaraba

– Sukuk (Islamic bonds)– Grants

• For IMf Institutions– Equity/Contribution– Lines of Credit• Qard Hassan• Musharaka/Mudaraba

– Grants– Charities



BENEFITS OF ISLAMIC MICRO FINANCE

• Shariah compliant Operations • Customer’s Need focused Products• Inherently more Prudent

• Utilization of Financing • No Return on Default• In-Built Internal Controls

• Overall Benefits to Economy• Socially Responsible and Acceptable




Models of Islamic Microfinance• Different models of IMf can be used catering

to requirements of different levels of poverty– Non-Profit based IMf – raising funds from

donations or community pools• Charity based • Self Help Groups based • Credit Union/Cooperatives model

– Commercial operations using any Islamic mode of finance

• Group based financing• Individual financing



International Experiences• Islamic Mf services available in

– Bangladesh– Indonesia– Yemen– Pakistan– Bosnia and Kosovo– Afghanistan

– Iran– Australia– Sudan– Syria– Malaysia– India, etc.



IMf Regulations in Pakistan• IBD Circular No. 5 of 2007

– Establishing Full Fledged Islamic Microfinance Banks (IMFBs) • Nationwide• Province wide• Region wide

– Islamic Microfinance Services by Full-fledged Islamic Banks • Mode 1- Islamic Microfinance Counters at Existing Branches • Mode II- Standalone Islamic Microfinance Branches & Mobile Banking• Mode III- Establishing Independent IMFBs as Subsidiaries of Banks• Mode IV- Developing Linkages with Islamic MFBs/MFIs

– Islamic Microfinance Services by Conventional Banks • Mode 1- Islamic Microfinance Counters at Existing Branches • Mode II- Standalone Islamic Microfinance Branches & Mobile Banking• Mode III- Establishing Independent IMFBs as Subsidiaries of Banks• Mode IV- Developing Linkages with Islamic MFBs/MFIs

– Islamic Microfinance Services by Conventional Microfinance Banks (MFBs)



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Shariah Compliance Mechanism

• Shariah Advisor in each IMFB– Fit and Proper Criteria– Roles and Responsibilities

• Essentials of Islamic modes• SBP Shariah Board• SBP Shariah Compliance Inspection



Gujranwala Agriculture finance survey

• About 90% of the farmers who did not take bank loans and 55% of all the respondent farmers expressed their dislike of interest based products and said that they don‟t want to take the interest bearing bank loans. Although this finding signifies the need for introduction of Islamic Agrifinance Products, however the finding may be somewhat biased as a large number of these farmers also considered lack of collaterals/defects in title deeds and non-cooperation by revenue department as the key hurdles in obtaining banks loans. Nevertheless there is substantial demand for Sharia compliant agrifinance products and if offered most of the farmers would be willing to avail the facility.



Gujranwala SME Survey• Reasons for Not Applying Loan

– About 78% of the SMEs who had never applied for bank loans were uncomfortable with the interest based loan products being extended by banks. While this may not be a conclusive evidence for the extensive demand for Islamic finance products as it is not clear that whether these respondents need the loans etc, however generally the respondents do highlight the interest (Riba) based banking products as one of the reasons for their reluctance to access bank loans.



SUCCESS STORIES IN PAKISTAN

• Akhuwat• NSRP (under Musharaka facility from BoK)• Muslim Aid• Islamic Relief• CWCD



Useful Resources• Islamic Finance for Micro And Medium Enterprises

BY IRTI & University Brunei –Feb. 2008 (www.irti.org)

• CGAP Focus Note No.49 –Islamic Microfinance, An Emerging Market Niche-August 2008 (www.cgap.org)

• Islamic Microfinance, Theory, Policy and Practice BY Islamic Relief –February 2008 (www.islamic-relief.com)

• Akhuwat (www.akhuwat.org.pk)

• Muslim Aid (www.muslimaid.org.pk)



ISLAMIC BANKING IN PAKISTAN



BRIEF HISTORY OF ISLAMIC BANKING IN PAKISTAN

• Efforts for economy wide elimination of Riba started during 1970s and most of the practical steps were taken in early 1980s, which are considered as pioneering work in the Muslim world.

• Banking and other relevant laws and regulations were amended to facilitate interest free banking system.

• Two important areas kept outside the purview of interest free banking system mainly due to lack of research in these fields, viz. Government borrowings (both local and foreign) and foreign exchange.



FAILURE OF PREVIOUS EFFORTS•Reasons– Absence of Shari’ah compliance mechanism in financial

institutions.– Non-availability of Shari’ah compliant government securities.– Ineffective enforcement of contracts and inefficient system for

early recovery.– Ineffective code of conduct for professionals.– Lack of continued research and development in the field of Islamic

finance and economics.– Inadequate training to the staff of SBP and banks.– Disoriented education system devoid of Islamic principles.– Lack of public awareness about Islamic economic system.– Adoption of free market economic (capitalistic) policies.– Social and cultural factors.– Weak Political resolve of successive governments for Islamization

of economy.



CURRENT STRATEGY

• Gradual approach for Transformation of economy– Full fledged Islamic banks be established in

Private sector– Islamic banking Subsidiaries in existing banks

be allowed– Stand alone branches for Islamic banking be

allowed in existing banks



POLICY OBJECTIVES

• Introduce, promote and implement Islamic Banking in Pakistan– as a parallel banking system – comparable and compatible to conventional banking

system and

– Shariah compliant

• In the long run let people “vote through their wallets”



SBP APPROACH

• Parallel banking system offering users similar– Functionality & Profitability– In line with their beliefs

• Provide a level playing field to Islamic Banking– Regulations– Taxation



SBP APPROACH

• Parameter based vs. Straight jacketed system – Model vs. Standard Agreements– Essentials of Islamic Modes– PLS Mechanism– Modes of Finance



INDUSTRY PROGRESS• Sept 2003 One full fledge bank and one conventional bank

with one stand alone Islamic banking branch• Currently six full fledge Islamic banks and 12 conventional

banks with Islamic Branches.• Islamic banking is available through over 514 branches/sub

branches in over 50 cities of all four provinces and AJK expected to reach over 740 till Dec. 2008.– Meezan Bank – 166, Al Baraka Islamic Bank - 30, Dubai

Islamic - 25, BankIslami - 102, Emirates Global – 40 and Dawood Islamic – 21.

– 12 Conventional banks (MCB, HBL, Bank of Khyber, Soneri, Bank Alfalah, Bank Al Habib, Habib Metropolitan, Standard Chartered Bank, Askari, NBP, UBL and RBS) with 130 Islamic Banking Branches (IBBs).


Rs. in Billion

INDUSTRY PROGRESS AND MARKET SHARE

Description Dec.03 Dec.04 Dec.05 Dec.06 Dec.07 Dec-08 *

Total Assets 13 44 71 119 206 276

% of Banking Industry 0.5% 1.5% 2.0% 2.8% 4.0% 4.9 %

Deposits 8 30 50 84 147 202

% of Banking Industry 0.4% 1.3% 1.8% 2.6% 3.8% 5.0%

Financing & Investment 10 30 48 73 138 185

% of Banking Industry 0.5% 1.3% 1.7% 2.3% 3.5% 4.8%

Full fledged Islamic Banks (IBs) 1 2 2 4 6 6

Branches of IBs 10 23 37 93 186 384

Conventional Banks with Islamic Banking branches (CBs)

3 9 9 12 12 12

Branches of CBs 7 25 33 57 103 130

Total Islamic Banking Institutions 4 11 11 16 18 18

Total No. of Branches 17 48 70 150 289 514

*Source: Annual Accounts except for 2008, which is based on Quarterly Statement of Position of Dec ember, 2008



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SBP Shariah Board• A central Shariah Board established at SBP and is fully

functional– Current membership consists of five persons

• Two Shariah scholars• A Chartered accountant• A lawyer • A banker representing the industry as well as SBP

– A consultant to the Shariah Board ,a scholar from Qum.



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SBP Shariah Board - Achievements• Formally established in December 2003• So far has held 24 meetings• Approved Essentials of Islamic Modes of Financing

and prepared Essentials for Diminishing Musharaka• Approved 9 Model Agreements• Approved and Revised Fit & Proper Criteria for

Shariah Advisors• Approved structure of Govt. Ijara Sukuk• Approved WAPDA, PIA, KSEW & NIP Sukuk structures• Approved Instructions and Guidelines for Shariah

Compliance in IBIs• Reviewed 4 AAOIFI Shariah Standard for adoption



Major International Institutions• Accg. & Auditing Organization for Islamic Fin. Inst.

(AAOIFI)

• Islamic Financial Services Board (IFSB)

• International Islamic Financial Market (IIFM)

• General Council for Islamic Banks and FIs (CIBAFI)

• International Islamic Rating Agency (IIRA)

• Islamic Development Bank (IDB)– Islamic Research and Training Institute

– Islamic Corporation for Development of Private Sector

– Islamic Corporation for Insurance of Investment & Exp. Credit



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Myths about Islamic banking

• Any Return on deposits is Riba;• Any prefixed return – Riba• Islamic banking: cost-less money available –

Approach of Businesses • Repayment of loans not a serious issue –be

waived of• Trade profit similar to interest on loans / debts• Murabaha is major mode of finance -

MudarabaMahmood Shafqat, SBP


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Myths about Islamic banking (Cont’d)

• Credit and cash market prices of a commodity must be same

• Profit margin on credit sale by banks resembles Riba.

• Sharing vs. Non Sharing instruments:– Permissibility & Priority two different

aspects• Money can be rented like other assets



THANK YOU

MAY ALLAH THE ALMIGHTY ACCEPT OUR ENDEAVOURS AND SHOW US THE RIGHT PATH,

THE PATH OF HIS LOVED ONES (AAMEEN)

Ph: 021-9212509, Fax: 021-9212506

Email: [email protected]



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