This year was an almost perfect storm — a war with a direct impact on energy prices and the grain markets, climate change wreaking havoc in Pakistan and the world still recovering from the COVID-19 pandemic. Micro and small enterprises are both bearing the brunt and hold the key to recovery.
Globally, most food is produced by small holders, and micro and small enterprises are the engine of economic growth for low-income countries. Yet over 500 million people in the Muslim world do not have a bank account and therefore cannot access capital to invest in establishing, improving or expanding a small business such as a kitchen garden or a carpentry workshop. Microfinance institutions (MFIs) have been trying to fill this financing gap, although the Shariah compliant sector is chronically under-funded and under-supported with conventional providers making up 99% of the US$124 billion market that serves over 120 million customers the world over.
Review of 2022
The Shariah compliant microfinance sector is growing and there are now some 3,500 Islamic microfinance providers. However, the sector is dominated by a few big players such as Akhuwat in Pakistan, Amanah Ikhtiar Malaysia, Islami Bank in Bangladesh or the BMTs [Baitul Mal Wat Tamwils] in Indonesia, although the latter are made up of a myriad of individual cooperatives.
Among the most dramatic events of last year were the repercussions from the regime change in Afghanistan which by decree sought to transform the banking sector, including microfinance, overnight to Shariah compliant. Obviously, such a paradigm shift cannot be effectively made at gunpoint and now a slow reform process has been initiated out of the initial chaos. Farther into central Asia, Bailyk Finance has joined Kompanion Invest as a provider of Shariah compliant microfinance, albeit on a window basis.
On a further positive note, Somalia saw the establishment of the Somali Microfinance Association with all licensed MFIs being Islamic and Shariah compliant. It is also worth noting that Iskaashi MSME Development, in collaboration with banks and MFIs, has introduced an Islamic/Shariah compliant non-profit partial credit guarantee scheme for the first time in Somalia which builds an important foundation for market development. An impact survey, perhaps the first of its kind in the country, was also carried by the MFI KIMS, evident of the accelerating change in the Somalian microfinance sector.
In The Gambia in West Africa, two fully-fledged Islamic MFIs — APS and Yonna — were opened and a conventional one established a window.
Interestingly, we did not see any significant interventions by the IsDB in the microfinance sector, even though it will be critical for continued post-COVID-19 economic recovery and transformation. The question is whether the market is now mature enough for private sector-fueled development or whether the development finance institution of the OIC member states needs to do some ‘pump-priming’.
A further major concern remains the lack of product standardization especially for Qard Hasan, on which the Islamic microfinance industry relies heavily and which is likely to be the product of choice in these challenging times.
The current AAOIFI product standard was drawn up with commercial banks in mind which have a suite of revenue-generating financial services. But for MFIs which serve poor and vulnerable customers perhaps solely through Qard Hasan, full cost-recovery opens up Shariah non-compliance risks under the current AAOIFI interpretation.
Preview of 2023
Given the large Muslim population that remains underserved by Islamic financial services in, for example, West African countries such as Senegal, Niger and Mali; in North Africa like Morocco or Tunisia; or Central Asia such as Kazakhstan, Kyrgyzstan or Uzbekistan; global Islamic microfinance is bound to grow.
Pakistan may also look at Islamic microfinance as a funding source for economic recovery as international donations have fallen well below the US$30 billion estimated to rebuild after the flood that nearly engulfed half the country. In general, climate change will also require significant adaptation at household and enterprise levels that needs to be financed. Islamic pay-as-you-go solar systems for light, electricity and irrigation could be a game changer.
Conclusion
Change is on the horizon; the question is whether it is going to be a slow bottom-up organic growth or whether we will see some top-down interventions at the national, regional or international level in the way the now-thriving conventional microfinance sector was promoted.
Dr Mohammed R Kroessin is the head of Islamic microfinance at Islamic Relief. He can be contacted at [email protected].