MODELS OF ISLAMIC MICROFINANCE Dr Mohammed Obaidullah Economist Islamic Research and Training Instit

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MODELS OF ISLAMIC MICROFINANCEDr Mohammed
ObaidullahEconomistIslamic Research and
Training InstituteIslamic Development Bank
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ISLAMIC FINANCE MICRO FINANCE

• Islamic economic goals of
• equality, fairness, social solidarity through
  risk sharing, property rights, and the sanctity
  of contracts
• entrepreneurship, partnership, income generation
  through productive activity for poverty
  alleviation
• are consistent with elements of MF
• A successful marriage of both in Islamic
  Microfinance should reinforce each other

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DISCONTENTS OF IF MF IN PRACTICE

• Islamic financial services industry has shown
  little interest in MF and poverty alleviation
  aiming for Shariah compliance in form not in
  spirit
• Conventional MF industry has shown inadequate
  interest in religious and cultural sensitivities
  also largely excludes the poorest of the poor
• Islamic MF for enhancing financial inclusion

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ISLAMIC MF EXPERIMENTS

• MENA Sanadiq at Jabal al-Hoss, Syria Muassasat
  Bayt Al-Mal in Lebanon Hodeidah Program in Yemen
  
• SOUTH ASIA IBBL, SIBL in Bangladesh Akhuwat in
  Pakistan Manara in India
• SOUTH-EAST ASIA Amana Ikhtiar Malaysia BPRS,
  BMTs in Indonesia
• CENTRAL ASIA FINCA in Afghanistan
• SUB-SAHARAN AFRICA Azaouad Finance in Northern
  Mali

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ISLAMIC MF A COMPOSITE APPROACH

• Market-Based For-profit modes
• Debt-Based Finance (Murabahah, Bai-Muajjal,
  Ijarah, Salam, Istisna)
• Equity-Based Finance (Musharakah and Mudarabah)
• Remittance (Hawalah) Guarantee (Kafalah)
• Insurance (Takaful)
• Deposit Products (Mudarabah, Qard, Wadiyya)
• Linked with non-profit modes
• Mission-Based Charity (Zakah, Sadaqa, Awqaf),
  Zero-Return Loans (Qard-Hasan)

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ISSUES IN FOR-PROFIT MODES

• Agency Problems with Partnership/ Equity-based
  Financing Complexity
• Apparent Similarity between Debt-based Modes and
  Conventional Loans
• Charging of Penalties for Defaults and
  Delinquencies
• Earning Fee on Hawala, Kafala
• Adapting classical Islamic contracts to modern
  Islamic microfinance is easier than for
  mainstream Islamic finance

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ISSUES IN NON-PROFIT MODES

• Zakah and Sadaqa to Meet Consumption Needs of the
  Destitute
• Establish Takaful Providers
• Establish Credit Guarantee Providers
• Permanence of Assets Created Under Awqaf
• Technical Assistance and Capacity Building
  through Awqaf
• Qard Hasan Funds
• Constraints with Zakah, Awqaf and Qard

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ISLAMIC MF CHALLENGES WAY FORWARD

• Islamic FI and MF Role of Credit Guarantee
  Providers (Based on Kafala or Restricted Zakah)
• Capital Market Participation by Islamic MFIs
  (Structuring MF Funds based on Mudarabah or
  Islamic Securitization of Ijara Receivables)
• Infrastructure Adequacy (Is Exclusiveness
  Desirable?)
• Supportive Role of Regulator Role of Donors and
  Multilateral DFIs