2021 has seen most economies rebound after the COVID-19 slump but global poverty has grown. Yet many of the world’s poor remain trapped between the absence of affordable and accessible credit and the new fintech miracle. Traditional microfinance providers have been hard-hit but are recovering slowly.
Some 400 million people in the Muslim world remain unbanked, ie they lack access to formal financial services and cannot get a bank loan, make savings deposits or obtain insurance. For nearly three decades, microfinance has been the answer to their prayers but especially with conventional providers making up 99% of the global volume, it has caused significant over-indebtedness. Islamic microfinance, while growing, remains a limited option but a big push for economic recovery and empowerment through, for example, the IsDB could make a massive difference.
Review of 2021
Prior to the COVID-19 crisis, the Shariah compliant microfinance sector was less than 1% of the total microfinance industry of an estimated 140 million clients globally with a credit portfolio of over US$100 billion.
There are some 3,500 Islamic microfinance providers but the sector is still dominated by a few big players such as Akhuwat in Pakistan, Amanah Ikhtiar Malaysia in Malaysia, Islami Bank in Bangladesh or BMT Tamzis in Indonesia.
The microfinance industry was severely affected by the economic crisis that COVID-19 caused as their clients — mainly microentrepreneurs — have been unable to repay their debts while regulators imposed repayment moratoria.
The resultant liquidity meant that microfinance — often the lubricant of MSME-driven growth — was subdued.
Much of the IsDB’s US$2.3 billion rescue package was injected into healthcare in the financial services, but Islamic commercial banks and not microfinance institutions were absorbing the lion’s share.
However, it is not just the pandemic; sometimes political turmoil also can have a significant impact as the overthrowing of the Afghan government by the Taliban demonstrated. Once the dust has settled, we may see the banking and microfinance sector of the war-torn country transformed to be Shariah compliant, albeit at gunpoint. However, given the very low financial inclusion rates in the country, having Islamic products widely available should be welcomed.
Therefore, an Islamic microfinance-specific rescue package would a very welcome development, especially as microfinance is a very transaction-and-client-interaction-heavy business. The very nature of doing business in economies that have experienced structural change through COVID-19 is likely to go digital.
A 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 microfinance institutions which serve poor and vulnerable customers, perhaps solely through Qard Hasan, full cost-recovery opens up Shariah non-compliance risks under the current AAOFI interpretation. This is an urgent concern that the standard-setting body will have to address to support the adaptation and growth of the industry.
After a tough global pandemic, economic recovery at the bottom of the pyramid needs Islamic microfinance. In Muslim countries, the IsDB is well placed to lead not only through financing but also technical assistance and policy advice to push grassroots financial inclusion. Parallels from the conventional sector show that it can be a successful poverty reduction tool but more market development has to take place before it will be sustainable.