The document discusses the potential for Islamic microfinance to help address poverty through the Islamic finance industry. It notes that while Islamic finance has grown commercially, engaging the poor in a responsible way remains a challenge. The industry has tools like zakat and qard hasan that could help finance the poor. The document advocates for Islamic microfinance as a complementary initiative, using partnerships between Islamic finance and existing microfinance organizations to help uplift communities in need.

1. Financing the Poor: Towards an Islamic Microfinance An Islamic Finance Industry Perspective Iqbal Khan and Aamir A. Rehman Harvard Law School - 14 April 2007

2. Islamic finance is an inclusive proposition Engaging the poor is not easy Industry has potential to lead and address the situation Next stages Agenda

3. Islamic finance is more than financial contracts Industry is outcome of CSR and ethical principles Fundamental tenants are derived from Shariah Absence of interest-based transactions Avoidance of economic activity involving speculation Prohibition on production of goods and services which contradict the values of Islam Concept is grounded in ethics and values Principles akin to ethical investing Emphasis on risk-sharing and partnership contracts Islamic finance offers an alternative paradigm Asset-backed transactions with investments in real, durable assets Stability from linking financial services to the productive, real economy Credit and debt products are not encouraged Restrains consumer indebtedness Islamic banking is community banking Serving communities, not markets Open to all-faith clients Instruments of poverty-reduction are inherent part of Islamic finance – zakat & qard hasan channels

4. Industry has not yet reached full potential Islamic finance has not forgotten the poor Industry initially had to demonstrate commercial viability First Islamic bank established in 1975 Initial market strategy focus on revenue-generating projects Industry is young and gaining mainstream relevance Industry-building infrastructure setup as recently as 1991 (AAO-IFI) Reputational risk management led to careful dealing with non-regulated charities industry Industry is building stakeholder connectivity State-controlled waqf and zakat institutions not proactively engaged with Islamic finance Regulatory hurdles imposing investment restrictions in government-owned institutions Islamic banking develops link to economy Robust banking system enables economic development Vehicle for financial and economic empowerment Deepening bankable population and unlocking “dead capital” Responsibility of poor was sidelined for growth first Industry began as MitGhamr Savings Associations (1963) Nile Delta experiment to mobilise local villager savings for local socio-economic development

5. Islamic finance is an inclusive proposition Engaging the poor is not easy Industry has potential to lead and address the situation Next stages

6. Bottom of Pyramid market carries additional responsibility Assisting the poor is a pillar of Islam Engaging the poor requires balance between profitable and responsible lending Lending enterprise needs to be wary of debt spiral Engagement programme must be self-sustaining Bottom of Pyramid market has long been neglected Market is well underserved – half of planet live on less than $2 a day ¹ Islamic finance has ready moral and product framework to assist Islamic finance can unlock bankable wealth and enable “trickle down” effect Source: 1. HBS Bulletin March 2007 Lending profitably Despite engagement of less privileged customers May not be responsible financing: Sub-prime lending Debt consolidation companies Lending responsibly Prevent over-indebtedness Microfinance is good example Fiduciary business to uplift poor Affordable lending to enable sustainability

7. Islamic finance is an inclusive proposition Engaging the poor is not easy Industry has potential to lead and address the situation Next stages

8. Islamic microfinance is a complementary initiative to Islamic finance Microfinance mission reflects part of Islamic ethos Microfinance Islamic finance Reaches previously under-banked population Focus on uplifting the poor Models advocate: - financial inclusion - entrepreneurship - risk-sharing through partnership financing Routed in Shariah-compliance Fair access to capital Equitable Core concern New-market innovation Finance based on worthiness of ventures and assets, and not based on wealth Asset orientation

9. Microfinance fits the spirit of Shariah-based industry development Islamic microfinance supports industry morals and ground needs Industry needs to shift from Shariah-compliant to Shariah-based Mindset of consumer debt is not in Islamic spirit Investment and debt for productive use is allowed Microfinance provides credit for the real economy Microfinance fits need of Muslim communities Muslim-countries in spectrum of poverty and underdeveloped social infrastructure Islamic microfinance will attract under-banked and underserved “economically active” poor Islamic finance provides interest-free solutions for job creation Musharaka/Mudaraba PLS arrangements Murabaha/Ijara commodity purchases Shariah-compliant products Shariah-based solutions Savings & Investments Indebtedness Income-sharing products Shift from debt-based product offering Letter of the law Replicating conventional credit service offering x

10. Islamic finance is a platform to build microfinance Assist in building Islamic microfinance institutions with Islamic finance products Use charitable endowments as start-up, risk-free capital Industry can build commercial partnerships with Microfinance managers Create charitable funding channels for Microfinance institution Combine Islamic finance industry synergies and distribution assistance Bring capital market access via Islamic finance industry and match with efficient institutions Initiate joint ventures with successful, business-run enterprises Build scale and reach of Islamic microfinance managers Migrate successful models to other markets 3 Philanthropic Commercial Partnership Organic 4 1 2

11. Islamic finance is an inclusive proposition Engaging the poor is not easy Industry has potential to lead and address the situation Next stages

12. Islamic microfinance requires combined efforts Create successful partnership formula Best-of-breed microfinance institutions Modest capital commitment Requires institutional will

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