16
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
www.bqdoha.com
BQ semptember Issue.indd 16
8/29/13 10:31 AM