The Islamic finance industry, if it is committed to greater poverty alleviation and social equity, needs to promote the greater development of microfinance. Our non-profit organization believes that a non-denominational microfinance based on Murabahah leading to Musharakah provides the best way to provide microfinance while introducing innovation in the microfinance area. By promoting non-denominational microfinance, Islamic financial institutions will be able to both promote economic development and a greater understanding of the Islamic financial system among both Muslims and non-Muslims. This will reap the dividends of greater awareness of the industry that is necessary to provide for future growth. The use of Shariah-based group microfinance involving Musharakah will also promote greater understanding about how Islamic financial institutions can implement profit-and-loss sharing instruments that are more difficult to do successfully when lending to individuals. BLAKE GOUD: Executive director,
Islamic finance industry can promote micro and SME financing by entering joint venture arrangements between banks and customers; for example, via Mudarabah and Musharakah contracts. Such contracts should alleviate the burden on customers to raise required (equity) capital, which has been a depressing factor in growing business in the microfinance and SME sectors. The Islamic finance industry should examine ways of providing self-liquidating financial facilities on the lines of trade financing and cash management products. This would allow Islamic financial institutions to take short-term manageable credit risk exposures, and at the same time, allow microfinance/SME customers to raise needed working capital financing. ASIM M BASHARULLAH: Head, corporate and investment banking, Al Rajhi
In a poll conducted recently, it was found that over 70% of the people polled (Muslims in many Muslim & Gulf countries) feel that Islamic banks are for the RICH!! The Quran teaches that wealth should be reinvested and it states “you should not circulate money amon you the rich and the rulers” in order to establish an elite leadership of the rich! Unfortunately, that is not the case these days. Islamic banks should start from the grassroots of the communities by working as what the US has; community banks, that gather the assets and reinvest such assets back in the communities. In addition, there should be a regulatory body — maybe the Shariah Board and local bank regulators — that makes sure of the implementation of a regulation that is available in the US called CRA (Community Reinvestment Act), which not only checks on the reinvestment back in the community but also the even-handed flow of financing to all social layers from the poor to the rich in a fair way. DR YAHIA ABDUL RAHMAN: Founder, the LARIBA System
By its nature, Islamic finance is very suitable for microfinancing-type projects. The investments are typically in a tangible business venue and have a high level of social responsibility attached to them. There is a wide range of structures in Islamic finance that lend themselves to microfinance initiatives, with partnership contracts such as Musharakah and Mudarabah potentially being the most suitable. Microfinanciers tend to have a close relationship with their clients, which makes partnership ultimately viable. The bank will not only supply money but also the expertise related to the setting up and successful running of a company. It is highly likely that the client will initially only put in expertise and take their profit share. However, from experience with conventional microfinance, it appears that the entrepreneurs are likely to want to obtain full ownership over their business which could become a feature of the contract. Looking at a US$100 investment, a suggested structure could be as follows:
The advantage of this is that it provides a form of security to the entrepreneur and encourages savings to be built up. The entrepreneur should, however, be free to use other funds (e.g. excess profits) to repurchase units. DR NATALIE SCHOON:
There is minimal Islamic microfinance at present, as major institutions such as Grameen Bank of Bangladesh provide only conventional loans. Islamic products such as Murabahah, Ijarah and diminishing Musharakah can be used for microfinance, and there are some examples of this in Syria, Yemen and the Sudan. The challenge with microfinance is to ensure it is sustainable and that the administrative costs are not excessive. With small amounts of finance, the costs are higher per unit of funding than they are for large amounts. Usually, microfinance requires a subsidy to be viable. Waqf endowments could be used for such subsidies, as could zakat receipts, but structures for this have yet to be developed. Too often, there is a rather idealistic approach taken by some of the advocates of expanding microfinance, but the challenges are practical. The aim is to lift the beneficiaries out of poverty so that they can qualify for cheaper collateral-based financing. This is difficult to achieve, and even Grameen Bank has only enjoyed limited success in this regard. PROFESSOR RODNEY WILSON: Director of postgraduate studies, Durham University
Islamic finance is based on shared risk and return, making microfinance a natural market to lead with by investing in capital and sharing management expertise. The Islamic finance industry must continue to develop profit loss products in the microfinancing area. The Islamic finance industry should take the lead by placing a benchmark of 10% of assets to be used for microfinancing projects. With excess liquidity and shareholders’ expectations, most Islamic financial institutions focus on more lucrative higher returns and larger deals which leave out the microfinancing industry. OMAR KALAIR: CEO and president, UM Financial Canada
I have been working for three years with a Scottish charity — Nordic Enterprise Trust — on our “Hanseatic Microfinance Initiative”, which has been part funded by the Norwegian government. This initiative is aimed at the “micro” scale enterprises which are pervasive around the Nordic and Baltic Seas, and the EU’s “Northern Periphery”, but the resulting tools are of general application. We have developed two partnership-based mechanisms: the “Guarantee Society” and the “Capital Partnership”, both using the UK Limited Liability Partnership (LLP) as a cross-border framework. The former consists of a mutual guarantee of bilateral interest-free “trade” credit, backed by provisions made into a “Default Pool”. The latter consists of revenue or production sharing between investors and users of investment in respect of productive assets — in particular property and renewable energy projects— held in trust. Both of these mechanisms will be operated on a “Not for Loss” basis by partner service providers and both will be immediately recognizable by Muslims as the basic building blocks of Islamic finance. And of course, both are entirely unaffected by the ongoing “credit crunch”.
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