'The challenge of Islamic microfinance programming for poverty reduction and development: The Islamic Relief experience' Atallah FitzGibbon ISLAMIC RELIEF WORLDWIDE

Overview - Introducing Islamic Relief Worldwide - Objectives of I-MF for IRW - The Islamic Relief microfinance experience - The challenge for Islamic microfinance - The Way Forward

Introducing Islamic Relief Worldwide Established 1984 Network of 13 national organisations Field offices in 28 countries 1400 staff worldwide UK income £64m

Islamic Relief Worldwide Main Working Sectors Emergency & Relief Projects Food Distribution Medical Aid Tents, Clothes & Blankets School Bags Shelter & Rehabilitation Water Supply Development Projects Educational Programmes Health & Nutrition Income Generation (IMF) Water & Sanitation Long-term Reconstruction Orphans, Children & Families One-to-One Sponsorship Child Rehabilitation Projects Seasonal Projects Qurbani Ramadhan

The Islamic Relief experience Objectives of Islamic Micro-finance for IRW - Poverty reduction - Providing access to ethical finance - Empowerment - Sustainable livelihoods (Core pillar of IRW strategy )

The Islamic Relief experience Basic features – compared with conventional MF Retaining the basic operational format of MFIs Social mobilization (group – individually) Weekly/Monthly repayments Coupled often with social development (sustainable livelihoods) Distinguishing features of IRW I-MF: Sources of Funds external sources (IDB, QC, IICO, DfID, Scottish Government etc.) but also sadaqah, general donations (and awqaf) from the IR family Use of funds (Mode of Financing) Qard hasan Sale based and hiring modes (murabahah) Profit-sharing modes (Musharakah and mudarabah)

The Islamic Relief experience Islamic micro-finance rationale for IRW: Shari’ah compliant: meets with donor, beneficiary and IR ethical standards Mitigating Credit Risk CR mitigated primarily by social collateral and also group savings Mitigating Moral Hazard Murabaha: as asset/good given instead of cash, chances of diversion and default decreases Mudaraba/Musharaka: monitoring & auditing Economic Viability Zero capital costs (donor funding) Variable administrative costs Murabaha: high transaction cost Mudaraba/Musharaka: enterprise support, monitoring & auditing cost

The Islamic Relief experience 12 years, 3 continents, many delivery approaches: Group-based social collateral (Africa, South-Asia) I ndividual entrepreneur micro-financing (Eastern Europe)

The Islamic Relief experience CASE STUDY 1: ‘FIRST ISLAMIC’ IN BOSNIA - IR Bosnia & Herzegovina registered a specialist microfinance organisation, called First Islamic in early Business, Social and Housing: Musharaka (7.5%) - Orphan housing and Education: Qurd Hasan (5%) loans delivered ( ) - Average loan size: € Collateral: Two guarantors and community reference - Repayment: Initially 93%, now fluctuating

The Islamic Relief experience CASE STUDY 2: ISLAMIC MICROFINANCE & ENTERPRISE DEVELOPMENT IN PAKISTAN - IR targeted ultra-poor in Balochistan and Kashmir in the beginning of Credit-plus: business start-up loans, vocational training, enterprise development support -167 small enterprises supported thus far -15% profit share on murabaha-based sales transactions, PKR 1000 as processing charge for qard hassan - Repayment: ongoing

The Islamic Relief experience CASE STUDY 3: SUDAN ISLAMIC MICROFINANCE PROJECT - Islamic Relief signed an agreement with the Savings and Social Development Bank (SSDB) in 2006 to jointly fund a small business and agriculture loans programme in Sudan -The scheme targets widows, specifically the mothers of orphans sponsored by IR - Murabaha (15%) as Group loan - Collateral: personal guarantors, group savings accounts, as well as co-signers and community recommendations - Repayments are made at SSDB branch offices (repayment: 99%

The Islamic Relief experience CASE STUDY 4: CREDIT PLUS MICROFINANCE IN BANGLADESH - IRB has started IMF project for widows as an early exit strategy for sponsorship programme in Business, Agriculture, livestock, poultry: Qurd Hasan (4%) individual loans delivered ( ), 100% are female - Average loan size: €200 – €300 - Group formation, Social mobilisation, entrepreneurship training, business support, technical assistance, marketing support - Collateral: Individual savings - Repayment: 100%

Evaluating the Islamic Relief I-MF experience Micro-financing sustainability: financing model Murabaha Mudaraba Musharaka 80% Qardh Hasan 10%

Evaluating the Islamic Relief I-MF experience Micro-financing sustainability: ‘business’ model Low High But cost recovery vs. rate of return suitability for poverty reduction Cost recovery plus suitability for poverty reduction High

Micro-financing sustainability: poverty reduction Evaluating the Islamic Relief I-MF experience High Sustainable in certain markets But not suitable for poorest market segment Cost recovery plus poverty reduction Low Qardh Hasan Lacks sustainability leading to the capital erosion Low

The challenge for Islamic Relief General issues - Limited access to sustainable finance is key constraint to growth Using I-MF within a poverty reduction framework reduces commercial viability - Over-reliance on murabaha - limiting innovation - Scalability of existing models?

The challenge for Islamic Relief -‘ Product’ streamlining whilst retaining cultural appropriateness - Variance in Shari’ah compliance mechanisms Fiqhi differences between S-Asia, S-E Asia, MENA and West Africa - Different accountancy/Shari’ah audit standards

The way forward - R&D (poverty reduction impact assessment) - Product innovation (where to go from murabahah) - exploring alternative delivery strategies (e.g. sustainability through awqaf?) The challenge for Islamic Relief

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