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bq | Finance | Islamic Microfinanc
GCC
Gaining Momentum Islamic microfinance may not be in demand in the GCC, but with over 300 institutions serving 1.6 million clients globally, its market size is estimated at $ 1 billion By Shereen D’Souza, Doha
Microfinance is possibly one of the most powerful tools for poverty eradication in the present day. It provides financial assistance to the poor and low-income segments of the society, thereby ensuring that a good majority of any society can be considered bankable. Sharia compliant finance has taken over the banking sector by storm, especially in the Middle East, and broadened the scope for investment by Muslims multi-fold. The global Islamic finance industry is sized over USD 1.35 trillion with a steep rise in the number of Islamic financial institutions, according to The Banker. Islamic microfinance seeks to bridge the gaps between the principles of Islamic banking and microfinance. This emerging market niche was in its infancy several years ago, but although it has picked up worldwide, giving financial investment and protection opportunities to the less fortunate members of the Muslim society, this region still suffers from a lack of patronage. Several institutions do support microfinance in general, but analysts argue that there are several obstacles to the growth of this industry. Islamic microfinance and conventional microfinance Islamic microfinance differs from conventional microfinance in certain ways, while sharing its principal economic and social aims. Islamic banking as a system of financial management is rooted in the sharia: Islamic canon law derived from the Quran: the Hadith (the collected pronouncements of the
Prophet Mohammed PBUH); and the Sunna (the Prophet Mohammed’s practices), as well as different schools of jurisprudence. The Islamic finance system is largely based on the principles of ‘adl’ (social justice) and ‘ihsan’ (benevolence) and microfinance acts as a catalyst to these.
Given that Silatech has a seed capital of USD 100 mn (provided by His Highness Sheikh Hamad bin Khalifa Al Thani, the Father Emir of Qatar), it is likely it will potentially fund Islamic microfinance initiatives In Islamic banking, interest (riba) is expressly proscribed. Other core proscriptions are gharar (deception or ignorance in transactions through nondisclosure); maisir (gambling and certain types of speculation); and investment in a range of banned activities or products. Islamic microfinance complies with these ethical provisions and cannot finance activities such as pig farms, microbreweries or bars. The unique features include qard-ul-hasan (an interest free
benevolent loan to the poor); zakat, the compulsory annual contribution to the poor; sadaqah (charitable donations); waqf (religious endowments); and al-rahnu (Islamic pawn broking). Islamic finance principles forbid conventional forms of interest, which are predetermined, and which the working partner (or the borrower) is liable to pay, regardless of the performance of the enterprise. The sharia requires that the lender does not get interest but shares in the risks and rewards of a venture. Riba was expressly proscribed to promote social cohesion and to curb the exploitation of the poor by money lenders. “Islamic financing modes circumvent this type of exploitation as the products used do not involve bank interest, although there are mark-ups charged on murabaha (cost-plus sale with deferred re-payment) or profit shared in mudaraba and musharaka (joint venture),” says Mohammed Kroessin, global microfinance advisor for Islamic Relief UK. In conventional microfinance products and services, interest can easily be avoided by creating microfinance hybrids distributed on the basis of the Islamic contracts of mudaraba (profit sharing), musharaka, and murabaha. In comparison to regular Islamic finance products, Islamic microfinance providers are relatively low. Around 1.28 million people world over use Islamic microfinance services, a four-fold increase since 2006, a CGAP report reveals. An estimated 72 providers in
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bq | Finance | Islamic Microfinanc
the MENA region represent a mere 28 percent of the total number of providers, said the report. A majority of clients using Islamic microfinance services reside in Bangladesh, Sudan, Malaysia and Indonesia. Other countries with the highest number of active clients include Lebanon, Yemen, Iraq, Syria, Egypt, Jordan and Saudi Arabia, in that order. Most related surveys mention only the UAE, due to the recent Islamic microfinance forums and conferences held there, and Saudi Arabia in passing. The Islamic Solidarity Fund for Development (ISFD), the poverty alleviation arm of the Islamic Development Bank (IDB) Group in Saudi Arabia has set up a fund for this purpose with a principal target capital of USD 10 billion. They also recently committed USD 500 million to microfinance development through its Microfinance Support Program (MSP). It is also interesting to note that an IFC-commissioned market study revealed that in Yemen, around 40 percent of the poor demand Islamic microfinance, irrespective of the prices.
An estimated 72 providers in the MENA region represent a mere 28 percent of the total number of providers
Hindrances to growth With an estimated 650 million Muslims surviving on less than USD 2 per day (Obaidullah and Tariqullay 2008), there is an enormous scope for a major expansion of the Islamic microfinance industry. Finding suitable Islamic business models could be the key to providing financial access to these millions. However, there are various challenges this industry faces. Islamic banking has failed to tap the potential of Islamic microfinance. What is lacking is a
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deeper base of market research and sustainable business models. Islamic institutions need to come up with unconventional ways to reduce costs and pull in customers with attractive pricing strategies. Although there may be large numbers in the un-bankable segment, they may however question the Islamic authenticity of the products being offered. According to the CGAP report, Islamic finance sometimes suffers from the perception that it is simply a “rebranding” of conventional finance and doesn’t truly reflect the principles of Islam. Greater efforts need to be made to increase collaboration between financial experts and sharia experts on product authenticity. There is also a lack of awareness among the low-income groups. Efforts should be made to educate them on the existence of these products and their compliance with the sharia laws. According to Dr Saleh Malaikah, CEO of Salamah Takaful of the UAE, a major problem is that Muslim countries “lack the regulations and legislative frameworks that emanate from our own requirements.” Islamic microfinance remains underdeveloped as a distinct asset class. One of the main concerns is that many initiatives are dependent on aid, raising questions about their sustainability in the long term. To address this, Islamic microfinance institutions in general need to diversify their portfolio of products, including savings, money transfer and insurance. Some Islamic microfinance models already encourage savings, starting at USD 5 per month, reveals a report from the Economist Intelligence Unit. “Islamic microfinance is rapidly gaining acceptance in Muslim and non-Muslim countries due to its remarkable performance in poverty eradication; because of which, this industry is making quick progress. According to our careful estimate Islamic microfinance market’s worth has reached USD 1 billion,” explained Muhammad Zubair Mughal, CEO of AlHuda Centre of Islamic Banking and Economics (CIBE), while addressing the International Islamic Finance conference organized in Abu Dhabi, UAE in April this year. He added that currently more than 300 Islamic microfinance institutions are offering their services to 1.6 million clients in almost 32 countries. “Due to Islamic microfinance’s significant role in reducing poverty, international donor institutions and multilateral organizations have clearly explained their policies in different countries to further strengthen Islamic microfinance, which will ensure the quick advancement of Islamic microfinance in near future. If we look at the last 10 years of this industry, it can be observed that with the passage of time Islamic banking, sukuk, takaful and Islamic fund have progressed quickly. In the next three years Islamic microfinance will progress more quickly as compared to other Islamic financial products.” Qatar at a glance A majority of Qatar’s population includes low and middle-income
migrant workers. There is no domestic market for Islamic microfinance yet. Qataris have access to local conventional financing and Muslim workers from the low-income segment are tied to their employers and hence would not be able to start their own businesses. The report from the Economist Intelligence Unit discloses that the Qatari government provides substantial grants to show solidarity and support its mediation initiatives in countries like Yemen, Sudan and some Palestinian territories. The report also mentioned that although Qatar provides a substantial amount of relief and development aid, both on a government basis and through a network of quasi-state and independent charities, there is little evidence of giving specifically to microfinance charities. Silatech, a non-profit social enterprise, focused on supporting job creation for young Arabs in one of its first ventures in June 2009. It partnered with the Al-Amal Microfinance Bank in Yemen to develop a micro-credit fund for young entrepreneurs aged between 18-30 years. Silatech also partnered with the Syrian Ministry of Labour and Social Affairs to create a fund for young Syrian budding entrepreneurs. Given that Silatech has a seed capital of USD 100 mn (provided by His Highness Sheikh Hamad bin Khalifa Al Thani, the Father Emir of Qatar), it is likely it will potentially fund Islamic microfinance initiatives. The Qatar Authority for Charitable Activities regulates and co-ordinates the activities of charities and a number of its members have international mandates which suit Islamic microfinance. The Islamic Daawa Organisation’s focus includes economic development, as do two endowments - the Jassim Bin Jabr Organisation and the Eid Charity. The two Islamic banks in Qatar, Qatar Islamic Bank and Qatar International Islamic Bank, both have extensive international operations in countries where Islamic microfinance products already exist or might be developed.
Islamic finance sometimes suffers from the perception that it is simply a “rebranding” of conventional finance and doesn’t truly reflect the principles of Islam The EIU report reveals that several banks in Qatar have international networks developed to provide financial services for expatriate workers from countries such as India, Pakistan, Indonesia and the Philippines, which may attract them to Islamic microfinance in these countries either though the corporate zakat fund or on a commercial basis. Lead image photography: Bosco Menezes
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