Asasah islamic microfinance


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  • Source: Institute of Policy Studies
  • Collective Ijtamaee Ijtehad at 4.5
  • Asasah islamic microfinance

    1. 2. An Introduction to Islamic Microfinance Muhammad Zubair Mughal Chief Executive Officer , AlHuda: Centre of Islamic Banking and Economics [email_address]
    2. 3. Contents <ul><li>What is Shariah Based Microfinance ? </li></ul><ul><li>Difference between Conventional & Islamic MF </li></ul><ul><li>Demand of Islamic Microfinance Worldwide </li></ul><ul><li>Global Landscape of Islamic Microfinance </li></ul><ul><li>Islamic Microfinance Update </li></ul><ul><li>The Way Forward </li></ul>
    3. 4. Islam and Shariah Islam Aqidah (Faith & Belief) Shariah (Practices & Activities) Akhlaq (Morality & Ethics) IBADAT (Man to God Worship) Muamalat (Man to Man Activities) Political Activities Economic Activities Social Activities Banking & Financial Activities
    4. 5. Sources of Fiq’h in Islam (Islamic Micro Finance) <ul><li>Quran </li></ul><ul><li>Sunnah </li></ul><ul><li>Ijtehad / Qiyas </li></ul><ul><li>Ijama’e Ummah </li></ul>
    5. 6. <ul><li>Murabahah </li></ul><ul><li>Ijarah </li></ul><ul><li>Salam & Istisna etc </li></ul><ul><li>Musharakah </li></ul><ul><li>Modarabahah </li></ul><ul><li>Other Products </li></ul>Human Financial Needs Fulfillment of Financial Needs Own Capital Others’ Capital Equity Financing Debt Financing
    6. 7. External (Equity & Debt) Financing Debt Market Equity Market Bai’ al-Istisna’ (Sale on Order) Bai’ al-Salam (Commodity Sale) Al-Ijarah (Leasing) Others Bai’ al-Murabaha (Cost Plus Profit Sale) Al-Musharakah (Joint Venture Profit Sharing) Al-Bai’ Bithaman (Mu)Ajil (Deferred Installment Sale) Al-Mudarabah (Trustee Profit Sharing) Uqud al-Muawadhat (Deferred Contracts of Exchange) Uqud al-Ishtirak (Contracts of Profit Sharing ) Debt Financing Equity Financing
    7. 8. PRODUCT TREE Islamic Modes of Microfinance Trade Based Modes Partnership Based Modes Rental Based Modes <ul><li>Musharaka </li></ul><ul><li>(Joint Venture Profit Sharing ) </li></ul><ul><li>Mudaraba </li></ul><ul><li>( Trustee Profit Sharing) </li></ul><ul><li>Murabaha </li></ul><ul><li>(Cost Plus Profit Sale) </li></ul><ul><li>Musawama </li></ul><ul><li>(Bargain sale ) </li></ul><ul><li>Salam </li></ul><ul><li>(Commodity Sale) </li></ul><ul><li>Istisna </li></ul><ul><li>(Sale on Order) </li></ul><ul><li>Ijarah </li></ul><ul><li>( Leasing ) </li></ul><ul><li>Diminishing </li></ul><ul><li>Musharaka </li></ul><ul><li>( Transfer of Ownership) </li></ul>
    8. 9. ONUS SHIFTS!! <ul><li>Customer </li></ul><ul><li>to Halal Restaurant Owner </li></ul><ul><li>Halal Restaurant Owner </li></ul><ul><li>to Halal Meat Supplier </li></ul><ul><li>Halal Meat Supplier </li></ul><ul><li>to Halal Abattoir / Butcher </li></ul><ul><li>Customer to Islamic Banker </li></ul><ul><li>Islamic Banker </li></ul><ul><li>to Shariah Scholars </li></ul>
    9. 10. Industry Progress in Pakistan <ul><li>6 Full fledge Banks having 239 and 12 Conventional Banks have 167 SAIBBS and 10 Sub Branches till 1 st January , 09 </li></ul><ul><li>Total IB Branches = 519 </li></ul>Year 2001 <ul><li>Meezan Bank </li></ul><ul><li>Al Baraka </li></ul><ul><li>Meezan Bank </li></ul><ul><li>Al Baraka </li></ul><ul><li>MCB </li></ul><ul><li>Alfalah </li></ul><ul><li>SCB </li></ul><ul><li>Bank AlHabib </li></ul><ul><li>Habib AG Zur. </li></ul><ul><li>Metropolitan </li></ul><ul><li>Bank of Khyber </li></ul><ul><li>Soneri Bank </li></ul>2002 2003 <ul><li>Meezan Bank </li></ul><ul><li>Al Baraka </li></ul><ul><li>MCB </li></ul><ul><li>Meezan Bank </li></ul><ul><li>Al Baraka </li></ul><ul><li>MCB </li></ul><ul><li>Alfalah </li></ul>2 10 2007 - 09 <ul><li>Meezan Bank (161) </li></ul><ul><li>Al Baraka (30) </li></ul><ul><li>MCB (8) </li></ul><ul><li>Alfalah(40) </li></ul><ul><li>SCB (11) </li></ul><ul><li>Bank AlHabib(4 ) </li></ul><ul><li>HMB(4) </li></ul><ul><li>Bank of Khyber(16) </li></ul><ul><li>Soneri Bank ( 5) </li></ul><ul><li>HBL(1) </li></ul><ul><li>Bank Islami(102) </li></ul><ul><li>DIB (25) </li></ul><ul><li>EGIBL (40) </li></ul><ul><li>Dawood(21) </li></ul><ul><li>NBP(5) </li></ul><ul><li>RBS (3) </li></ul><ul><li>Askari(18) </li></ul><ul><li>UBL (5) </li></ul>2004 - 06 18 4 3
    10. 11. Industry Progress in Pakistan
    11. 12. International Overview <ul><li>The size of Islamic Financial Industry has reached US$ 950 Bln. and its growing annually @ 15% per anum. </li></ul><ul><li>70 countries have Islamic Banking Institutions </li></ul><ul><li>37 Muslim countries including Bahrain, UAE, Saudi Arabia, Malaysia, Brunei and Pakistan </li></ul><ul><li>34 non-Muslim countries including USA, UK, Canada, Switzerland, South Africa and Australia </li></ul>
    12. 13. International Overview <ul><li>In Feb 1999, Dow Jones introduced the Dow Jones Islamic Market Index (DJIM) of 600 companies world wide whose business complies with Islamic Shariah laws </li></ul><ul><li>At present there are more than 170 Islamic Funds operational through out the world with a total fund base of over USD 3.50 billion </li></ul>
    13. 14. International Overview <ul><li>Governments of Bahrain ,Malaysia and now Pakistan have issued Islamic Bonds (Sukuk) in order to facilitate Islamic Banks in managing their liquidity. </li></ul><ul><li>Issuance of these bonds has also paved the way for Shariah compliant Government borrowings </li></ul>
    14. 15. International Overview <ul><li>Institutions like Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) and Islamic Finance Services Board (IFSB) have been formed. </li></ul><ul><li>These institutions are playing a key role in setting up and standardizing Shariah , Financial and Accounting standards for Islamic Financial Institutions. </li></ul><ul><li>Due to these collective efforts Islamic banking is now recognized by IMF, World Bank and Basel Committee. </li></ul>
    15. 16. <ul><li>Islamic Microfinance </li></ul>
    16. 17. <ul><li>Prohibition of Interest </li></ul><ul><li>Risk sharing </li></ul><ul><li>Social Development Mission </li></ul><ul><li>Prohibition of speculative behaviour </li></ul><ul><li>Purity of contracts </li></ul><ul><li>Asset Based Financing </li></ul><ul><li>Shariah-approved activities . </li></ul>Principle of Shariah Based Microfinance
    17. 18. <ul><li>And ALLAH has permitted trading and forbidden Riba </li></ul><ul><li>(Al Baqara 275 ) </li></ul><ul><li>Riba means any fixed or guaranteed interest payment on cash advances or on deposits. </li></ul><ul><li>Islam encourages the earning of profits but forbids the charging of interest </li></ul>Prohibition of Riba ( Interest)
    18. 19. Conventional MFI Client money money + money (interest) Difference Between Islamic and Conventional Microfinance
    19. 20. Islamic IMFI’S Client Difference Between Islamic and Conventional Microfinance Goods & Services money
    20. 21. Modes of Islamic Microfinance
    21. 22. <ul><li>For Muslim majority country great need for Islamic MF exist and large target segment is averse to the interest based microfinance products. </li></ul><ul><li>Islamic Microfinance emphasize ethical, moral & social factors to promote equality and fairness for the good of the society. </li></ul><ul><li>Risk Sharing, individual duties, property rights and purity of contracts are part of Islamic Microfinance </li></ul><ul><li>Approximately 44% conventional microfinance clients worldwide reside in Muslim countries (Source: MF Info Ex) . </li></ul><ul><li>Asset-based – can prevent diversion of funds for consumption </li></ul>Need & Compatibility
    22. 23. Demand of Islamic Micro Finance Survey Surveyed Countries Respondents preference (%) CGAP 08 Jordan, Algeria, and Syria 20 - 40% PlaNet Finance 07 West Bank and Gaza 35% - 60 % USAID 02 Jordan 24.9% IFC/FINCA 06 Jordan 32% Frankfurt School of Fin & Mgmt 06 Algeria 20.7% IFC sponsored Study Yemen 40% IFC 2007 Syria 43-46% Bank Indonesia 2000 Indonesia (East Java) 49% A recently survey Conducted by AlHuda CIBE in Azad Kashmir exhibits 99% demand (4 Districts)
    23. 24. International Experience of Islamic Microfinance Institution Mode of Finance 7 Sudanese Islamic Banks Murabaha, mudaraba, musharaka, and saving deposit [SIB – Productive Families] Islamic Cooperatives and Rural Banks of Indonesia Cooperatives – Members’ Musharaka (integrated with Zakat Fund) Rural Banks – Various modes Islami Bank Bangladesh, Social Investment Bank and AlFalah & Rescue IBB – Mostly bai muajjal SIBL - Recourse generation - Cash Waqf and Financing through various modes Jordan Islamic Bank Musharaka and Mudaraba UNCDF Yemen (HMFP) Murabahah and redeemable Mudarabah Sanabel (12 Arab countries, 64 MFIs – meeting 80% of MF needs) Murabaha, mudaraba, musharaka Amana Ikhtiar Malaysia and Islamic Pawn Broking AIM – interest free loan Al Rahnu – short term interest free loan against collateral at market value
    24. 25. Pakistan’s Experiences Institution Mode of Finance Akhuwat AIM – interest free loan Qaraz-e-Hasna CWCD Murabahah, Ijarah, Salam & Istisna MicroTakaful NRSP – NWFP Murabahah Mudarabah with BOK for funding Source Khawendo Kor Murabahah but in limited scale Islamic Relief Murabahah and Qarz-e-Hassan KKCB Murabaha and MicroTakaful Helping Hand Muslim Aid Takaful Pakistan Limited Murabahah Murabahah MicroTakaful
    25. 26. Products for IMFI’s
    26. 27. <ul><li>. </li></ul>Islamic Microfinance Institution Worldwide <ul><li>United States: 4 </li></ul><ul><li>Kiva </li></ul><ul><li>Helping Hands </li></ul><ul><li>Muslim Aid </li></ul><ul><li>Lariba </li></ul><ul><li>Germany:2 </li></ul><ul><li>- Muslim Society </li></ul><ul><li>Switzerland: 6 </li></ul><ul><li>UK: </li></ul><ul><li>- HSBC Amanah </li></ul><ul><li>- Muslim Aid </li></ul><ul><li>- Islamic Relief </li></ul><ul><li>- The Halal Mutual Investment Company </li></ul><ul><li>Bahrain: 2 </li></ul><ul><li>Malaysia: 11 </li></ul><ul><li>2 - Pure Islamic Banks (Bank Islam, Bank Muamalat) </li></ul><ul><li>Rest - conventional banks </li></ul><ul><li>UAE: 8 </li></ul><ul><li>- Dubai Islamic Bank </li></ul><ul><li>- Abu Dhabi Islamic Bank </li></ul><ul><li>- HSBC Amanah </li></ul><ul><li>Afghanistan: 4 </li></ul><ul><li>- FINCA , WOCCU </li></ul><ul><li>- CHF </li></ul><ul><li>Ariana </li></ul><ul><li>Kuwait: 2 </li></ul><ul><li>- Kuwait Finance House </li></ul><ul><li>Iran: 8 </li></ul><ul><li>Egypt: 9 </li></ul><ul><li>- Alwatany Bank of Egypt </li></ul><ul><li>- Egyptian Saudi Finance </li></ul><ul><li>Indonesia: 4 </li></ul><ul><li>Sudan: 3 </li></ul><ul><li>Pakistan: 11 </li></ul><ul><li>India: 3 </li></ul><ul><li>Bangladesh:9 </li></ul><ul><li>Turkey: 7 </li></ul><ul><li>- Faisal Finance Institution </li></ul><ul><li>- Ihlas Finance House </li></ul><ul><li>Yemen: 1 </li></ul>
    27. 28. Ariana Fin. Services FINCA WOCCU IMFI’s in Afghanistan CHF Akhuwat Muslim Aid NRSP Khwendo Kor CWCD IMFI’s in Pak KKCB Donors Islamic Funds PPAF IDB MISFA Kuwait fund Int’l IMFI,s AlBaraka AIM UNCDF FINCA Islamic Bank bd BMT indonesia Islamic Microfinance Updates Helping Hands IR TPL Meezan Bank Islamic Fund UNDP WorldBank USAID
    28. 29. <ul><li>FINCA loans are based on Murabaha principles, they don’t charge interest, but a Profit rate. </li></ul><ul><li>Providing Shariah-compliant loans has made it possible for FINCA to expand in areas of Afghanistan where other MFIs have been turned away for charging interest. According to 2007 figures </li></ul><ul><li>Clients: 41,213 </li></ul><ul><li>Village Banks: 5,529 </li></ul><ul><li>Portfolio: $8,324,142 </li></ul><ul><li>Average loan size: $329 </li></ul><ul><li>Staff members: 387 </li></ul><ul><li>Clients per CO: 187 </li></ul>FINCA - Experience in Afghanistan
    29. 30. <ul><li>2004 – 2005 WOCCU helped to establish two area-based open bond credit unions in the north </li></ul><ul><li>of Afghanistan: Balkh and Jawzjan. </li></ul><ul><li>In 2007 , WOCCU has established another five Investment Finance Cooperatives (IFCs) </li></ul><ul><li>in the East and South of the Country for Murabaha </li></ul>WOCCU Experience in Afghanistan 1,134 77 74 66 8 542 367 Female 7,096 737 756 961 305 2,070 2,267 Male Gender 8,230 814 830 1,027 313 2,612 2,634 Total by Province Nangarhar Baghlan Samangan Aqcha Jawzjan Balkh Provinces Grand Total East North Regions Data Disaggregation Number Unit of Measure Members of Investment and Finance Cooperatives Indicators
    30. 31. <ul><li>A UNDP run programme in one of the poorest areas in Syria. </li></ul><ul><li>22 self local financial institutions have been established consisting of 4,691 members </li></ul><ul><li>Each start up is self financed </li></ul><ul><li>When ever repayment is satisfactory, UNDP provides an additional capital injection </li></ul><ul><li>Profit margin on Murabaha is 2.5% </li></ul><ul><li>A source of income </li></ul><ul><li>Repayment reached 100% by the end of the first year of operation (Brandsma, 2004) </li></ul>JABAL AL HOSS, SYRIA: MURABAHA
    31. 32. Risk Sharing Insure Shariah Compliances Poverty Alleviation Asset Based Financing Micro Takaful Free from Interest Financing Joint Responsibilities Purity of Contracts Islamic MF Islamic Microfinance Deal in
    32. 33. Functions and operations are based on fully man made principles Functions and operations are based on Sharia’h principles assured of pre-determined rate of interest Promote risk-sharing between provider of capital (investor) and user of funds (entrepreneurs) Aim at maximising profit without any restrictions Aim at maximising profit but subject to Sharia'h restrictions Creditor-Debtor relationship Partners, investor and traders, buyer or seller relationship Based on money trading. Money is a medium of exchange and not a commodity Encourage asset-based financing and based on commodity trading & Services Conventional Micro Finance Islamic Micro Finance
    33. 34. It is almost risk free banking and depositor has no risk of losing its money because interest is guaranteed. No right of profit if there is no risk involved. The profit and loss sharing depositor may lose money in case of loss. It can charge additional money in case of defaulters Islamic banks have no provision to charge any extra money from the defaulters Conventional Micro Finance Islamic Micro Finance