ISLAMIC MICROFINANCE: PROBLEMS FACED & THEIR SOLUTION Dr Mohammed Obaidullah Islamic Research & Training Institute Islamic Development Bank Group 9 th Distance Learning Course in Islamic Finance, Spring 2009

PLAN OF PRESENTATION Poverty & Exclusion in Islamic World Islamic Microfinance Development: Micro Perspectives Meso Perspectives Macro Perspectives 9 th Distance Learning Course in Islamic Finance, Spring 2009

POVERTY IN ISLAMIC WORLD Lowest Five among IDB member countries account for over half a billion (528 million) of the world’s poor (with incomes below $2 a day) Lowest Ten account for over 600 million of the world’s poor. Indonesia alone accounts for 129 million - over half of its population 9 th Distance Learning Course in Islamic Finance, Spring 2009

EXCLUSION IN THE ISLAMIC WORLD 72 percent of people living in Muslim-majority countries do not use formal financial services (Honohon 2007). In 31 countries two-third or more do not have access to formal financial services In 21 countries three-fourth or more do not have access to formal financial services In 17 of the member countries four-fifth or more of their adult population do not have access to formal financial services 9 th Distance Learning Course in Islamic Finance, Spring 2009

WHAT THE POOR IN MUSLIM SOCIETIES NEED Micro-credit Micro-equity Micro-savings Micro-transfers Micro-insurance That do not violate their fundamental beliefs and cultures 9 th Distance Learning Course in Islamic Finance, Spring 2009

WHAT THE POOR IN MUSLIM SOCIETIES NEED Total estimated global outreach of IsMFI industry of only 380,000 customers that accounts for only one-half of one percent of total microfinance outreach. Supply is very concentrated in a few countries, with Indonesia, Bangladesh, and Afghanistan accounting for 80 percent of global outreach. Demand is strong. In Jordan, Algeria, and Syria, 20–40 percent of respondents cited religious reasons for not accessing conventional microloans. (CGAP Survey, 2008) 9 th Distance Learning Course in Islamic Finance, Spring 2009

WHAT IS EXPECTED OF ISLAMIC MFIS Poverty Alleviation Approach Based on Charity Economic Empowerment Debt Avoidance Cooperation & Solidarity Family Cohesiveness Shariah Compliance of Contracts 9 th Distance Learning Course in Islamic Finance, Spring 2009

MICRO PERSPECTIVES Alternative Models 1. Grameen Model 2. Village Banking Model 3. Credit Union Model 4. SHG Model 5. Rural Financial System All models have been experimented with varying successes. 9 th Distance Learning Course in Islamic Finance, Spring 2009

MICRO PERSPECTIVES Diverse Organizational Structures: 1. Informal MF Providers 2. Member-Based Organizations 3. Non-Government Organizations 4. Formal Financial Institutions 5. Commercial Banks Need to develop an integrated structure by establishing linkages 9 th Distance Learning Course in Islamic Finance, Spring 2009

MICRO PERSPECTIVES Lack of Product Diversification Need for a Financial Engineering Approach to Product Development 1. Deposit Products based on Mudaraba 2. Range of Financing Products based on Mudaraba, Musharaka (Diminishing), Murabaha (Istijrar), Salam (Value- Based), Ijara 3. Micro-Takaful 9 th Distance Learning Course in Islamic Finance, Spring 2009

MICRO PERSPECTIVES Poor Linkages with Banks and Capital Markets Create Shariah Compliant 1. Credit Guarantee Mechanism 2. Securitization 9 th Distance Learning Course in Islamic Finance, Spring 2009

MICRO PERSPECTIVES Shariah Compliance 1. Shariah Boards 2. Fiqhi Issues 3. Divergent Perceptions 4. Confidence of Users Collective Resolution of Shariah Issues 9 th Distance Learning Course in Islamic Finance, Spring 2009

MESO PERSPECTIVES Transparency and Information High-quality auditors and rating agencies, credit bureaus, reliable information software - scarcely available to Islamic MFIs Existing MF-specific agencies expand scope to include Islamic MF; or existing agencies for mainstream IFIs to absorb MF services; Proactive role of donors in development of Islamic MF rating 9 th Distance Learning Course in Islamic Finance, Spring 2009

MESO PERSPECTIVES Education and Training Lack of trained manpower, handful of resource centers and education and training providers Create a cadre of microfinance experts by imparting training to persons with diverse experiences such as, in banking, finance, investments, entrepreneurship development and community development 9 th Distance Learning Course in Islamic Finance, Spring 2009

MESO PERSPECTIVES Payment Systems Only large Islamic FIs have access to electronic payment systems MFIs working for the poor may work through the larger Islamic FIs by forging alliances with them 9 th Distance Learning Course in Islamic Finance, Spring 2009

MESO PERSPECTIVES Networking No regional or global network exclusively for Islamic MF Existing networks can expand their scope; New networks for Islamic MF can be created also covering zakah and awqaf organizations 9 th Distance Learning Course in Islamic Finance, Spring 2009

MESO PERSPECTIVES Technical Assistance Voluntary giving is yet to be institutionalized in many member countries to ensure sustainability of benefits Re-organize awqaf for all forms of technical assistance and capacity building 9 th Distance Learning Course in Islamic Finance, Spring 2009

MACRO PERSPECTIVES Role of Government Governments perform poorly in direct provision of microfinance Need for a policy environment that allows a range of MF providers to coexist and compete to offer higher-quality and lower- cost services to large numbers of poor clients. 9 th Distance Learning Course in Islamic Finance, Spring 2009

MACRO PERSPECTIVES Role of Government Ensure macroeconomic stability Keep inflation in check Curb speculative forces in financial markets Liberalize financial market rates Integrate awqaf and zakah in national policy 9 th Distance Learning Course in Islamic Finance, Spring 2009

THE WAY FORWARD Concerted Efforts by ALL Stakeholders Cooperatives-NGOs: Efficient management of community assets, Combine social and economic agenda effectively, IFIs: Recognize MF with distinct risk-returns, undertake direct and indirect financing, linkage with grass-root NGOs, Facilitate capital market participation of MFIs Awqaf: Preserve and develop community assets, undertake technical assistance Government Agencies: Create supportive policy and regulatory environment for MFIs 9 th Distance Learning Course in Islamic Finance, Spring 2009

THE WAY FORWARD Proactive Role of Multilateral Development Institutions Micro Level: Participate in equity, undertake refinancing, promote credit-guarantee and takaful Meso Level: Develop knowledge base, undertake training of trainers, encourage networking, promote credit rating Macro Level: Assist member countries to create supportive regulatory and policy environment 9 th Distance Learning Course in Islamic Finance, Spring 2009

THANK YOU 9 th Distance Learning Course in Islamic Finance, Spring 2009