This document discusses opportunities and challenges for Islamic microfinance. It notes that Islamic economic principles around equality, fairness and risk sharing align well with microfinance goals of poverty alleviation and entrepreneurship. However, Islamic financial services have focused more on religious compliance than social goals, while conventional microfinance often ignores cultural sensitivities. The document then outlines various Islamic microfinance experiments in countries like Bangladesh, Pakistan and Malaysia. It identifies issues around sustainability, transparency and excluding the poorest clients. The document concludes with recommendations for Islamic banks to partner with microfinance institutions and expand rural outreach to better meet the demand for Sharia-compliant microfinance.

1. International Conference onIslamic MicrofinanceBy :CENTER OF ISLAMIC BANKING & ECNOMICS

2. ISLAMIC MICROFINANCECHALEENGES AND OPPORTUNITIES

3. ISLAMIC FINANCE & MICRO FINANCEIslamic economic goals of;equality, fairness, social solidarity through risk sharing, property rights, and the sanctity of contracts; entrepreneurship, partnership, income generation through productive activity for poverty alleviation are consistent with elements of Micro Finance.A successful marriage of both in Islamic Microfinance should reinforce each other.

4. DISCONTENTS OF IF & MF IN PRACTICEIslamic financial services industry has shown little interest in MF and poverty alleviation aiming for Shariah compliance in form not in spirit.Conventional MF industry has shown inadequate interest in religious and cultural sensitivities; also largely excludes the poorest of the poor.Islamic MF for enhancing financial inclusion

5. ISLAMIC MICRO FINANCE EXPERIMENTSMENA: Sanadiq at Jabal al-Hoss, SYRIAMu’assasatBayt Al-Mal in LEBANONHodeidahProgram in YEMENIBBL, SIBL in BANGLADESHAkhuwatin PAKISTANManarain INDIAFINCA in AFGHANISTANAmana Ikhtiarin MALAYSIABPRS, BMTs in INDONESIAAzaouadFinance in NORTHERN MALI

6. Issues of Islamic MicrofinanceSustainabilityMost of the programs are not sustainable in PakistanOverall Operational and Financial Sustainability records at 89% and 74%, respectively. High interest rates eats up sustainability of clientsTransparencyFlat interest rates, un-explained fees, hidden charges High Cost Debt Economy than Real EconomySeparates finance from real economyAbsence of cooperation when client losesExclusion Self-exclusion due to prohibition of interestPoorest of the poor and Women in gender segregated societies

7. Role of Islamic MicrofinanceDeveloping social capital among clients and MFI, instead of clients only Meeting Demand For Islamic MicrofinancePromoting EntrepreneurshipDebt not allowed in Islam as usual practiceAsset creation and entrepreneurship is promoted Transparency and Sanctity of ContractsIslamic values prevent violation of contract and require disclosure of full knowledge relating to financial transaction

8. Issues for Islamic MicrofinanceRegarding MFIsLimited number of IMFIs (i.e. 4 – 6) Limited resource base of IMFIIneligibility of collecting savingsProduct concentration in MurabahaCapacity building of MFISharia advisoryRegarding Islamic banksPerception about microfinance as high risk areaInformal sector environmentAbsence in rural areasAbsence of credit guarantee scheme

9. RecommendationsCorporate Social Responsibility: Fard al KafayaBusiness case:Profits and high rate of recoveryLimitations: Informal sector/regulatory implications, absence in rural areasPossible Course of Action:Phase – I: Linkage with MFIs [Mudaraba or Musharaka]Urban Operation through Islamic MF Division or CellPhase – II Linkage continuesExtension of branches in rural areas

10. Thank YouCENTER OF ISLAMIC BANKING & ECNOMICSHead Office: 192- Ahmad Block, New Garden Town , Lahore, Pakistan Ph: +92-42-35913096-8, 35858990, 38407850 Fax: +92 -42-35913056E-mail : info@alhudacibe.comWeb: http://www.alhudacibe.com