1. INTEREST FREE MICRO FINANCE FOR THE MARGINALIZED PEOPLE
ROLE OF ISLAMIC FINANCE
AUSAF AHMAD
Hyderabad

2. In the name of Allah The most beneficent and the most Merciful

3. Irony of modern finance
More than three billion people live below poverty line
More than two billion do not have safe water to drink
It has been estimated that it would require only $21 bn. to provide micro finance to world’s 100 million most poor families. Poverty could be eradicated from the face of earth if seven richest families could get together.
The world does go by charity alone.

4. Major concerns during this presentation
Why Micro Financing?
What is Micro financing?
Why interest free micro finance?
Some Major Experiments:
Emergence of Islamic Banking, MitGhamr Project
Grameen Bank Project
Micro Financing in India
Cooperatives and Micro financing

5. WHY MICROFINANCING?
Financial Intermediation between savers and investors
Mismatch between the preferences of savers and investors
Problems of Moral hazards
Problems of Adverse Selection
Specialized agencies
Failures of organized finance
Emergence of Micro financing

6. WHAT IS MICRO FINANCING?
Micro financing is a term used for providing financial services such as micro credit, micro savings and micro insurance to poor people.
Standard finance, credit worthiness, profitability and bankable projects ( Poor people do not have collaterals)
Poor people can be relied to pay loans
Group liability as a collateral
Market mechanism can be productively used to improve the economic conditions of the poor.

7. Micro financing: A short history
1864 Wihelm Raiffesen’s German village Experiment of rural financing
1900 Alphonsoe Desjardin: Quebec Experiment
1963 Mitghamr (Egypt) Project
1970 Grameen Bank (Bangladesh)
1980 onwards: International institutions, NGOs, Multinational banks, financial companies: Widespread acceptability of the idea

8. GRAMEEN BANK: INTRODUCTION
Established in 1976 in Jobra, Bangladesh by Dr. Mohammed Younus
Incorporated in 1983 by Special law
Owned by poor borrowers
No Collaterals, No legal instruments, No group or joint liability
Responsibility of repayment with the individual borrowers, 97% borrowers are women.

9. GRAMEEN BANK: Present status
Number of branches 2000, works in 75,000 villages, Total staff : More than 21,000
Total loans disbursement TK310 bn. Repaid: 277 bn. Outstanding: TK 33 bn. Recovery rate: 98.5 Percent
Loans financed 100 percent from own deposits
Group of Five, All denied credits if some one defaults

10. Grameen bank: Structure of Interest rates
Fixed for Micro Credit programs 11 %
Housing loans %
Students loans %
Struggling members Zero
Deposit rates – 12%

11. GRAMEEN BANK: fUNCTIONS
Housing loans, Micro enterprise loans, Scholarships, Higher education loans,
17 Companies in Grameen Network: Grameen phone, Telecom, Communications, Cybernetics, Software, IT Parks, Information highways, Udyog, Knitwear, Textiles, Shiksha, Bayopar Vikas, Grameen Trusts etc.

12. CRITIQUE OF GRAMEEN MODEL
Usurious: High interest rates
Exploitative
Benefits large corporations
Harms family relationships as Grameen model focuses the female members of the house holds only.

13. NEED FOR MICROFINANCE IN iNDIA
With branches of commercial banks, branches of regional rural banks, 100,000 branches of cooperative banks, banking and finance is still out of reach for millions.
More than 75 million households are still dependent on money lenders
More than 90 percent rural population has no access to institutional credit
Micro Finance can change lives of millions. !

14. MICRO CREDIT AGENCIES IN INDIA
NABARD (National Bank for Agriculture and Rural Development)
India Together
ARCOD (Association for Rural Community and Development)
VMCS (Village Micro Credit Services)

15. Islamic micro financing
The emergence of Islamic banking removes biggest objection (interest) against modern banking
The objective of Islamic banking and micro financing coincide. From the objective point of view, Islamic financing techniques are well suited to micro financing.
Relevance of Mitghamr project
Modern Islamic banks are in the corporate sector, touching only upper crest of the society. Islamic banking movement has yet to benefit from cooperative principles.

16. Islamic microfinance institutions
Tip of the Iceberg. Only a few institutions. Examples:
Al Khair Cooperative Society
All India Council of Muslim Economic Upliftment
Bair al Nasr Housing Society (Now defunct)
Beit al Mal

17. Features of islamic societies
Mostly in the organized sector
Mostly unregistered.
Mobilizes small savings from small wage earners
Develop saving habits and frugality
Small investment
Interest free loans in times of distress
Advance of loans against collaterals (Mosly rahn of Jewelry, house, or land)
Reorganization of Islamic finance institutions along the cooperative lines.

18. Principles of cooperative movement
Democratic Participation and Control
Open Membership
Cooperative Education
Cooperative Cooperation

19. Advantages of Cooperatives
Insulation from Competition from the corporate sector
Less regulated, More Incentives
More elastic with respect to size
More amenable to different purposes
More decentralized
Less paper work

20. ADVANTAGES OF MICRO FINANCING
Channelization of individual initiatives and voluntary efforts: Working through self help groups
NABARD STUDY FINDINGS
Value of assets increased by 72 %
Average borrowing increased from Rs 4,000 to Rs. 8,000 per borrower with 70% loans for income generating activities.
Household income increased by 33%

21. PRE REQUISITES OF SUCCESS
Professionalism
Rate:
Responsibility
Accountability
Transparency
Efficiency

22. Thank you for your patience !!
MAY ALLAH BLESS YOU ALL!
Thank you for your patience !!