The Islamic Microfinance Initiatives around the Globe & Role in Poverty Alleviation Dr. Haroon ur Rashid Khan King Abdulaziz University, Jeddah, Saudi Arabia & Sysco Solutions, SAS, France

MICROFINANCE  Microfinance is the process of providing financial services,  making small loans to people who would not otherwise have access to savings or credit facilities.  Small loans for small entrepreneurs

MICROFINANCE IN MUSLIM WORLD  72 % people living in Muslim-majority countries don’t use formal financial services (Honohon 2007).  Even when available, some view them incompatible with Islamic financial principles.  In recent years, some microfinance institutions (MFIs) -  low-income Muslim clients …consistent with Islamic principles  Emergence of Islamic microfinance as a new market niche.

ISLAMIC PRINCIPLES  IMF cannot just imitate conventional microfinance programs  In IMF return on capital is allowed,  capital participates in the productive process and  exposed to business risk.  Material finality.  Investment activity.  No contractual exploitation.

ISLAMIC FINANCE MARKET  Over 800 Sharia-compliant institutions-75 countries (KPMG ).  292 banks (fully Islamic institutions & those with Islamic subsidiaries),  115 Islamic investment banks and finance companies, and  118 insurance companies.  Industry’s total assets worth almost US$ 1 trillion (2014).

WHAT IS ISLAMIC MICROFINANCE (IMF)  Islamic or ‘Shariah-compliant’, microfinance  provision of financial services for low-income populations  conforming Islamic financing principles.  Islamic finance is simply ethical finance.  One of the most important Islamic financing principles  money is not an earning asset in and of itself.

IMF  IMF--confluence of two rapidly growing industries  Combine principle of social justice with financial services  Giving millions of Muslims access to finance  Combining Islamic social principle of caring for the less fortunate  Emphasize human development as well as profit maximization  Sensible risk management  Link real economic activity to financing structure.  Islamic microfinance is still in its infancy,  business models are just emerging.

IMF INITIATIVES AROUND THE GLOBE  IMF estimated global outreach only 0.5-1% of total outreach.  92% of Sharia-compliant loans are concentrated in East Asia, Pacific and MENA regions.  82% of IMF in just three countries:  Bangladesh, Sudan, and Indonesia  Pakistan recently climbing the ladder  with programs like Akhuwat

TYPES AND OUTREACH OF IMF  Cooperative  Village Banks (Syria)  NGOs  Rural bank (Bank Perkreditan Rakyat Syariah or BPRSs-Indonesia)  NBFIs  Commercial Banks  Banks Downscaling and Expanding Product Line  Tadhamon Islamic Bank (Yemen)  Noor Islamic Bank (UAE)  Allianz Life (Indonesia)  Islamic Bank Bangladesh Limited (Bangladesh)

OPPORTUNITIES  Conventional MF products --successful in Muslim countries  Yet, not fulfilling the needs of many Muslim clients  Huge potential -Islamic countries, Asia and Africa huge potential – untapped resources  Millions of Muslims required access to finance  Approx. 44% of conventional MF clients worldwide reside in Muslim countries  Islamic principle of brotherhood (Akhuwat)  Scope well beyond the Muslim world

IMF and Poverty Alleviation: Assumptions Poverty alleviation is a worthy goal. Islamic microfinance can help alleviate poverty.

YOU MAY ASK…  With the Islamic finance industry pushing $1 trillion, why have we not seen larger scale social investment?  Should Islamic finance “innovation” include innovative ways to alleviate poverty?  Because an institution is “Islamic” does this mean  it has a particular obligation to invest in economic or community development?  How does the concept of Islamic microfinance operate to serve the goal of poverty alleviation?

WHY NOW? With the Islamic finance industry pushing $1 trillion, why have we not seen larger scale social investment?  Islamic Finance industry development and awareness  Microfinance industry development and awareness  Financial crisis  Attention to business ethics  Attention to human capital  Is available in developing world  Needs support from developed economies

Innovation? Should Islamic finance “innovation” include innovative ways to alleviate poverty? Entrepreneurship Distribution of wealth Social development goals Financial structures Repayment incentives Why not?

Special obligation? Because an institution is “Islamic” does this mean it has a particular obligation to invest in economic or community development? Social and human development goals of IF, but… Corporate social responsibility (Friedman) Does “Islamic” refer only to financial structures? Not everyone agrees

Poverty alleviation? How does the concept of Islamic microfinance operate to serve the goal of poverty alleviation? “I think that there is a common goal in Islam and microfinance which can be summarized in making people self reliant, enterprising and self respecting. A solution to achieve the target of poverty eradication is by practicing microfinance in an Islamic way.” (a common man)

CHALLENGES  Unable to tap fully the market potential  Market research based and proven business models :  Build Sustainable Business Models for Performance bench marks (Good example of Akhuwat)  Product Diversity  Operational efficiency & Risk management  (peer pressure rather collateral)  Capacity Building and community education  Funding sources :Leveraging Zakat and Islamic Funds and donations  Regulatory framework to reduce High transaction costs  Asymmetric information  One suggestion…

WHERE?  Currently most Islamic microfinance is located in the developing world.  We believe that the model should be developed in the developed world.

WHY?  Transaction costs are very high; stricter regulation will discipline the industry to lower transaction costs; these efficiencies can be transferred to the developing world.  Donor fatigue: Funding sources available in the developed world through locals concerned with community and economic development.  Integration and acceptance into Western society

In sum… “If they take money from charity, they use the money to live. Therefore, they will keep on asking for more charities. When small loans are given to them they try to find ways to generate income out of it to solve the actual root of the problem which is income generation.” ( a common student)

Thanks a lot

AlHuda CIBE FZ LLE - U.A.E P: , AlHuda Center of Islamic Banking & Economics - Pakistan Ph: (92-42) , Fax: (92-42) Website: