2. Experiences in Regulating and Supervising
Muhammad Zubair Mughal
Chief Executive Officer
Alhuda centre of Islamic banking and economics
Experiences in Regulating and Supervising
Islamic Microfinance Institutions -
Pakistan as Case Study At
Regulatory and Supervisory Framework in
Islamic Microfinance
18th – 19th March, 14 - Khartoum – Sudan

3. Contents Basic Principles of Shariah Based Microfinance.
Source and Mechanism of Islamic MF Products
Type of Islamic Microfinance Institutions in Pakistan
Legal and Regulatory Structure of Islamic MFIs
State Bank of Pakistan Guidelines for Islamic Microfinance.
Shariah Compliance for Islamic Microfinance
Licensing , Reporting and Operating Criteria.
My presentation will cover following Area’s

4. Basic Principle of Shariah Based Microfinance
Prohibition of Interest
Care for the poor is a religious obligation in Islam
Asset Based Financing
Risk Sharing
Sanctity of contracts
Financing in Halal/Shariah Compliant Activities.
Micro Takaful ( Islamic Micro Insurance)
Beneficial for both Muslim and non-Muslim
This is an important principle of Islamic Microfinance, Actually, interest is forbidden in all the divine religion but Islam have strict verdict on it. Therefore Muslim hesitant to unutilized Conventional financial system and remains exclude from financial access.
It is Necessary that all contracts should be free from Gharar.
Infact, poverty alleviation is the religious obligation in Islam.e.g. Zakhat, Sadqa ( Donation ) , Tabbrumm, Fitrana , Ushre etc, which are dedicated for financial well being of Poor peoples.
Islam always encourages Asset based Financing, we have seen the recent international financial crises, and learned a lesson that financing without the backing of assets is always risky.
Risk Sharing is one of the fundamental principle of Islamic Microfinance.
Islamic Microfinance Emphasizes the Sanctity of Contracts.
Micro Takaful is a Shariah Compliant System of Risk Mitigation.
“Assisting the poor is a pillar of Islam”

5. Source of Islamic Microfinance
Overview of Islamic Microfinance Mechanism
Source of Islamic Microfinance
Islamic finance is the outcome of religion in banking
Islamic Microfinance Products Mechanism
Sources of Islamic Microfinance
Quran
Sunnah
Ijma’a (jurist consensus)
Ijtihad & Qiyas (analogy)
Lets examine how Islamic Microfinance Products originated, Basically there are Four Main sources of Islamic Microfinance product, 1) Quran-e- Pak, the holy book of Muslims, we have derived many Islamic Microfinance product from Quran-e-Pak e.g Ijarah, Bai etc, the Second source of Islamic Microfinance is Sunnah, its mean the sayings & Practiced by the Holy Prophet Hazrat Muhammad Salalah wa all he walis, Many Islamic Microfinance Product have been derived from Sunnah such as Mudarabah, Wakala, Intisna etc , Ijma’a , the consensus among Jurists, some Microfinance Product derived from Ijma’a Like Late payments charity mechanism which is being utilized in Islamic Microfinance Sector, and the last source is Ijtihad & Qiyas ( Analogy ) , Takaful or Micro Takaful is example of Ijtihad.
As per concern about Islamic Microfinance Product, I have segregated them into 4 categories for broader understanding about their mechanism. In partnership Mode, MFI’s & their clients enter into Partnership agreement for a business venture on profit and Lose sharing Mechanism. we have two Product in Partnership based mode, Musharakah & Mudarabah. In Trade based Mode, MFI’s & their Clients enter into trading agreements, the products of Trade based Modes are Murabahah, Musawamah, Salam and Instisna. There are two products in Rental based mechanism, Ijarah is Shariah Compliant mode of leasing and Diminishing Musharakah. There are some other Modes in Islamic Microfinance available, like, Qard-e-Hasan, Waqf & Zakhat, Islamic Cooperatives etc. We will discuss about these products latter on

6. Factors to be considered while doing IMF
Poverty Alleviation Element
and more….
Moral
Ethical
Social
Trainings & Quality HR
Shariah Compliant Funds
Free from Gharar
Micro Takaful
Free from Interest
Financing
Shariah Vetted Products
Shariah Compliant Investments
A Misconception removed
Islamic Microfinance is a system not the Religion, it can be utilized & operated by both Muslims and
Non-Muslim Communities for Poverty Alleviation, Social & Economic Development.
Islamic
Micro
Finance
Ensure Shariah Compliance
There are certain factors to be considered while doing Islamic Microfinance…………….
But at this stage, I would like to rectify one misconception that islamic Microfinance is for Muslims, Basically …….. So Islamic Microfinance is not only Muslim worlds but also for whole world.
Shariah Complaints funds: it is necessary for Islamic Microfinance Institution to have shariah complaint fund in Asset side & liability side.
Shariah vetted products according to AAOIFI guidelines.
Trainings & Quality HR: This is very important element for Islamic Microfinance Institutions.
Ensure Shariah Audit: There should be qualified Shariah Advisor, Shariah Review etc.
All the Financing should be free of interest.
Micro Takaful: which is the mechanism of of Shariah compliant insurance.

7. Islamic Microfinance Institution Worldwide

8. Global - Islamic Microfinance Industry
300+ Islamic Microfinance Institutions operating in 32 Countries
USD 1 billion Market Size.
Indonesia, Bangladesh, Pakistan and Afghanistan have 80% share of Global Islamic Microfinance industry (CGAP)
2 Million Active financing Clients.
Murabahah & Qarz-e-Hasan are the Major Products.
Share of Islamic Microfinance in Islamic Finance industry & Microfinance Industry is less than 1%

9. Compatibility IMF Products with MF Models
Grameen Model: Amna Iftikhar – Malaysia, Islami Bank Bangladesh Limited etc.
Village Bank Model: Sanadiq program -Jabal al-Hoss, Syria, FINCA - Afghanistan etc.
Credit Union Model: Muslim Credit Union (Tobago), The Amwal Credit Union etc.
Cooperative Model: AlBaraka MPCS – Mauritius, Al- Khair Coop. – India, Muslim Community Coop.– Australia, Karakorum Cooperative Bank – Pakistan.
Self-Help Group: Aameen Society – India
For Profit Banks/MFIs : Ghana Islamic Microfinance Banks – Ghana, HSBC Amanah – U.K, Bank Islami - Pakistan `

10. IMF’s Product for all Level of Poverty
and more….
Salam, Istisna and other products
Non-Poor
Transitory Non-Poor
Qarz-e-Hasan, Murabahah, Ijarah, Mudarabah
Transitory Vulnerable
Transitory Poor
There are certain factors to be considered while doing Islamic Microfinance…………….
But at this stage, I would like to rectify one misconception that islamic Microfinance is for Muslims, Basically …….. So Islamic Microfinance is not only Muslim worlds but also for whole world.
Shariah Complaints funds: it is necessary for Islamic Microfinance Institution to have shariah complaint fund in Asset side & liability side.
Shariah vetted products according to AAOIFI guidelines.
Trainings & Quality HR: This is very important element for Islamic Microfinance Institutions.
Ensure Shariah Audit: There should be qualified Shariah Advisor, Shariah Review etc.
All the Financing should be free of interest.
Micro Takaful: which is the mechanism of of Shariah compliant insurance.
Chronic Poor
Zakat, Sadqa, Ushar
Extremely Poor

11. Legal & Regulatory Framework
The legal and regulatory framework of
Islamic micro-finance
Pakistan as Case Study

12. Pakistan Population - 180 million Muslim population - 97%
GDP – USD billion
Per Capita Income – USD 1260
Category – Lower Middle Income
Poverty Rate – 22.3% (less than USD 1.25/ per day)
Microfinance Industry – Developing
Lack of Funding (Least interest of Donors) in Islamic microfinance while demand of Islamic Microfinance is rising
Source: World Bank (website)

13. Pakistan - Islamic Microfinance Industry
14+ Islamic Microfinance Institutions operating in Pakistan
350 + Branches of IMFI’s
500,000+ Active financing Clients.
Murabahah & Qarz-e-Hasan are the Major Products.
Micro Takaful, Micro Saving, Branchless Banking etc.

14. Pakistan - Islamic Microfinance Industry
Institution
Islamic Microfinance Products
Akhuwat
Qaraz-e-Hasna, MicroTakaful, Grants
Ihsaas Trust
Murabaha, Musharakah, Salam
Asasah
Mudaraba, Musharaka
Muslim AID
Murabaha
Islamic Relief
Murabaha and Qarz-e-Hassan
Wasil Foundation
Murabaha, Ijarah, Salam & Istisna MicroTakaful
HHRD
Murabaha, Mudarabah
NRDP
Qard-e-Hasana, Murabaha
NRSP
Murabaha - Mudarabah with BOK for funding Source
Naymet
Bank Islami, Farz Foundation.
BOK, etc.
Qard-e-Hasana, Murabaha, Salam

15. Pakistan & Islamic Microfinance Industry
Innovation:
Micro Takaful
IT Integration (Mobile Banking) in Islamic Microfinance
Livestock Product with Islamic Microfinance operation
Micro energy & Micro Saving products
Challenges:
Unavailability of Shariah Compliant fund
Reluctance of Donor Agencies for Islamic Microfinance
Accounting & I.T systems., Rating Agencies.
Law and order in Northern part of Pakistan
Future Prospects:
Rapid growth of IMFIs with high acceptability from the Muslim community.
Govt. Interest and IDB Support
AlHuda Centre of Excellence in Islamic Microfinance

16. Type of Islamic Microfinance Institutions in Pakistan
MFIs, IMFIs, NGO’s, Rural Support Program: Registered and Supervised by SECP under Companies’ Ordinance 1984 (Section 42)
Trust, Foundations, Waqf, Cooperatives etc: under joint companies ordinance 1861
Microfinance Bank: Regulated by State Bank of Pakistan
Islamic Banks/Banks with having IMF operation: Regulated by SBP
According to legal and regulatory aspects, we can categories Pakistan’s Islamic Microfinance Industry into 4 categories.

17. State Bank of Pakistan Guidelines for Islamic Microfinance Business by Financial Institutions
Option 1
Establishment of Full-fledged Islamic Microfinance Bank (IMFBs)
Option 2
Islamic Microfinance services by Full fledged Islamic banks
Option 3
Islamic Microfinance services by conventional banks
Option 4
Islamic Microfinance services by conventional microfinance banks (MFBs)

18. Establishment of Full-fledged Islamic Microfinance Bank (IMFBs)
Option 1
Establishment of Full-fledged Islamic Microfinance Bank (IMFBs)
Licensing
Nation wide Microfinance Banks;
Province wide Microfinance Banks;
Region wise Microfinance Banks;
District wide Microfinance Bank
Application Compliance with Legal framework and Prudential regulations
Bank draft of PKR 500,000 by applicant
Appointment of Shariah Advisor by applicant according to fit and proper criteria of SBP.
Shariah vetted Products along with product structure and its beneficial use.
Ensure the Expertise, Shariah Compliance Mechanism, Quality HR, Policies, Manual, Procedure etc.

19. Islamic Microfinance services by full-fledged Islamic Banks
Option 2
Islamic Microfinance services by full-fledged Islamic Banks
Mode 1 - Islamic Microfinance counters at existing branches
Mode 2 - Stand alone Islamic Microfinance branches and mobile banking
Mode 3 - Independent IMFBs as subsidiary of MFBs
Mode 4 - Developing linkages with IMFBs and IMFIs

20. Islamic Microfinance services by Conventional Banks
Option 3
Islamic Microfinance services by Conventional Banks
Mode 1 - Microfinance counters at existing branches
Mode 2 - Stand alone Islamic Microfinance branches and mobile banking
Mode 3 - Establishing Independent Islamic MFBs as Subsidiaries of conventional Banks
Mode 4 - Developing linkages with IMFBs and IMFIs

21. Islamic Microfinance services by Conventional Microfinance Banks
Option 4
Islamic Microfinance services by Conventional Microfinance Banks
Eligibility Criteria:
Shariah Advisors Particulars (SAP) according to the fit and proper criteria of SBP
Shariah Compliant Deposit and Financing Products.
Infrastructure and Logistic requirements
Required changes in Memorandum and Articles of Association allowing the acceptance of deposits on PLS basis
Segregation of Funds (Islamic and conventional)
Set up Separate Islamic Microfinance division (IMD)

22. Establishment of Islamic Microfinance Division (IMFD)
Policies
Procedures/ Practices
Shariah Compliance
Capital Adequacy
Cash Reserves and Statutory Liquidity Requirement (SLR)
Financing need, source and utilization
Products mechanism
SOPs/ Manuals
Risk management
Compliance with SBP directives,
Role and responsibilities
Human Resource Training periodically

23. Compliance to be ensured by IMFI in:
System and Control
Internal Audit
Accounting Records
Utilization of Conventional Branch Network

24. Shariah Compliance Shariah Supervisory Board at Central Bank /SECP
Internal Shariah Advisor
Shariah Audit/Shariah Review
Shariah supervision of Islamic Microfinance Network

25. AlHuda Center of Islamic Banking and Economics
160 B, Ahmad Block, New Garden Town, Lahore - Pakistan.
Ph: (92-42) , Fax: (92-42)