1. Akbar Peer Bhoy College Of Management
MICRO FINANCING AS A TOOL OF POVERTY ALLEVIATION IN ISLAMIC PERSPECTIVE
Ausaf Ahmad
Presentation at
Akbar Peer Bhoy College Of Management
Mumbai
August 28, 2008

2. In the name of Allah, The Most beneficent, The Most Merciful.

3. AN IRONY
It is estimated that it would require US $21 billions to provide micro finance to world’s poorest 100 million families. Ironically, only if worlds seven richest family got together, they could wipe out global poverty from their combined wealth.
Alas, the world does not go by Charity alone.

4. Wealth of an Arab Prince
A Car Mercedes SL 600 studded with diamonds, worth 4.5 million $
A ship worth 500 million dollars
A personal Boeing 747
A palace worth 100 million dollars with 317 rooms and five kitchens.
Four kitchens specializing in Arab, Lebanese, Continental and Asian cuisine

5. A world of Contradictions
Appalling oceans of poverty along with the islands of prosperity.
Two billion people do not have access to clean and safe drinking water.
Two billion people do not have access to electricity and drainage facilities.

6. WHY MICRO FINANCING?
Financial intermediation between savers and investors.
Mismatch between the preferences of savers and investors.
Problems of Moral Hazards
Problems of Adverse Selection
Problems of collateral and enough return
Solutions: Specialized agencies
Micro Financing

7. WHAT IS MICRO FINANCING?
Micro financing is a term used for providing financial services such as micro credit, micro saving and micro insurance to Poor people.
Credit worthiness, Profitability and Bankable projects? [ Poor people do not have collaterals].
Poor people could be relied to repay the loans
Market mechanism could be used productively to improve the economic conditions of the poor.

8. Two billion people do not have access to electricity and drainage system
Two billion people do not have access to clean drinking water

9. A SHORT HISTORY
1864 Wilhelm Raiffeisen’s German Village Experiment, Rural financing.
1900 Alphonse Desjardin, Quebec experiment.
1963 Mitghamr project
1970s Grameen Bank, Bangladesh
International Institutions, NGOs, Multinational Banks.

10. What is an NGO?
A non governmental organization (NGO) is a legally constituted organization created by private persons or organizations with no participation or representation of any government. In the cases, in which NGOs are funded totally or partially by governments, NGOs maintain their non governmental status so far it excludes government representatives.

11. GRAMEEN BANK Owned by the poor borrowers
Esablished in 1976 in Jobra, Bangladesh
Incorporated in 1983 by Special law
No collateral, No Legal instruments, Only group or joint Liability.
Responsibility of repayment with the individual borrower. 97% women borrowers.

12. GRAMEEN BANK
23000 branches, works in 75,000 villages, Total staff over 21,000
Total loans disbursement TK 310 billion. Repaid TK 277 billion, 33 billion outstanding. Recovery Rate 98.5 per cent.
100 percent loans financed from own deposits.
Group of Five. All are denied credit if one defaults.

13. GRAMEEN BANK Interest Rates:
Fixed for Micro credit programs 11% Income generating loans 20%
Housing loans 8%
Student loans 5%
Struggling Members Zero %
Deposit rates – 12%

14. GRAMEEN BANK
Housing loans, Micro enterprises loans, scholarships, Higher education loans,
17 companies in Grameen Network e.g. Grameen Phone, Telecom, communication, Cybernet, Software, IT Park, Information Highways, Udog, Knitwear, Textiles, Shiksha, Bayopar Vikas, Grameen Trust etc.

15. CRITIQUE OF GRAMEEN MODEL
Usurious : high interest rates
Exploitative
Benefits large corporation

16. NEEDS FOR MICRO FINANCE IN INDIA
With branches of commercial banks, branches of regional rural banks and 100,000 branches of cooperative banks, banking is out of reach for millions.
75 million household depend on money lenders.
90 percent in Rural India have no access to institutional credit.
Micro credit can change lives.

17. Limitations Of The Corporate Sector to Provide Islamic Finance
The organized corporate sector REQUIRES:
Large Capital
Large size of Market
Favorable Political Climate
Institutional and Legal Framework
Negative Mental block against Islamic banking is a big barrier against it in the Muslim Minority countries.

18. INTEREST FREE FINANCIAL INSTITUTIONS IN INDIA
More than 200 institutions, mostly loan societies and investment companies.
Operating in the unorganized sector
Misnomer to describe them as Islamic Banks
Societies registered under Societies Act. Many remain unregistered.
Different sources of funds
Lack control and regulation due to absence of legal framework.
Non Banking Financial Companies and Islamic Investment Companies.

19. Interest Free Financial Institution in India
Interest Free Credit Associations
Interest Free Financial Companies
Investment Funds

20. Interest Free Credit Associations
Mostly established in late 70 and 80s. Coincides with employment upsurge in the Gulf
Concentrated in South India: Karnataka, kerala, AP and Chinnai.
Motivation: Avoid Riba
Registration: Charitable Societies or unregistered.

21. Interest Free Credit Associations II
Sources of Funds: Different for Charitable Societies, Cooperative Societies,
Size of Capital involved: Difficult to tell
Business Practices:
- Deposit taking
- Providing Loans
- Leasing?

22. SWOT ANALYSIS OF IFCAs Strength: Grass Root organizations
Micro Financing
Weakness:
Unorganized Sector
Lack of professionalism
Lack of regulation (security)
Opportunity:
Mobilization of hidden resources
Threat:
Disintegration, competition, liquidation on legal grounds

23. Islamic Financial Companies
Al Ameen (Bangalore)
Al Falah (Delhi)
Al Mizan (Chinnai)
Al Najeeb, (Bijnor, U.P.), Muslim Fund
Al Idafa (Mumbai)
First three have been closed by the RBI for non compliance

24. SPIRIT OF COOPERATION Democratic Participation One person One vote
Open membership
Cooperative Education
Cooperate with other organizations.

25. REMEDIES Require Legal Framework Professionalism Transparency
Accountability
Productivity and Efficiency.
Needs to be organized