Taking Islamic Microfinance to Scale

23 February 2011

Today, microfinance and Islamic finance are professionalized industries with diverse products, growing client bases, and widening geographical coverage. Both have developed innovative solutions to cater to populations that are outside the fold of conventional financial access. They share objectives of providing inclusive banking through financing productive, asset-backed activity, and lay special emphasis on economic empowerment through entrepreneurship. These complimentary objectives create a ready framework for the confluence of both sectors—into a special niche industry referred to as ‘Islamic microfinance,’ which is just taking off.

High unemployment, poverty, and low levels of financial access in Muslim countries continue to create high demand for microfinance. While conventional microfinance has successfully reached large numbers of poor in Muslim countries (most notably, Bangladesh and Indonesia), there is evidence to suggest that there are many potential clients of microfinance that categorically reject products that do not comply with Islamic principles.

IFC commissioned market studies reveal that in Algeria and Jordan, approximately 20% of the poor cite religious reasons for not seeking conventional microfinance, while in Yemen and Syria, this percentage rises to 40%. In a 2008 CGAP survey, local practitioners and key informants suggested similar demand trends in Indonesia, Afghanistan, Pakistan, and the Palestinian territories, and also in Muslim majority areas of India, Sri Lanka, Brunei, Cambodia, and the Philippines.

Broadly speaking, the market for microfinance in the Muslim world can be divided into three segments: 1) individuals who will accept conventional finance products; 2) individuals who state a clear preference for Shariah-compliant finance but—due to unavailability or price differentials—accept conventional finance, and finally, 3) individuals who only use Shariah-compliant products. The ratios of these groups fluctuate by region. For example, individuals who would insist on Islamic financing(category 3) constitute far more than one third of the market in Yemen, and less than a third of the market in Bangladesh. Overall, it is estimated that roughly 2/3 of the microfinance market in the Muslim world either insists on, or prefers Islamic financing.

The 2008 CGAP survey revealed that global Islamic microfinance supply is very limited and concentrated in only a few countries (80% of the 380,000 clients of Islamic microfinance worldwide are in Bangladesh, Indonesia, and Afghanistan). Moreover, Islamic microfinance does not exceed more than .05% of total microfinance outreach. In the Arab world, MFIs that have been in the market for 7-10 years typically only reach between 2,000-7,000 active borrowers using Islamic microfinance.In direct contrast, MFIs of similar age operating in the same region reach tens and hundreds of thousands active borrowers using conventional microfinance.

Islamic microfinance offers an alternative paradigm for millions of poor people who are currently not served by conventional microfinance. In order to provide access to sustainable services on scale, it is imperative for the industry to adopt innovative and sound practices and prove that these models work. To this end, the industry requires deeper market research and a comprehensive initiative to build the capacity of players in the micro, meso and macro levels, in order to help in developing and implementing appropriate business models.

Responding to this need, CGAP, Deutsche Bank, Islamic Development Bank, and Grameen-Jameel launched the Islamic Microfinance Challenge 2010. The objective of this challenge was to canvass the industry for ideas for sustainable, scalable, and authentic Islamic microfinance business models to meet the financial needs of the Muslim poor. The competition was made open to the general public. Institutions as well as independent consultants were invited to apply, with the stipulation that applicants have the capacity to roll out a pilot project using the prize funds.

The competition generated a lot of interest and received over 130 applications from 43 countries, with the highest number from Indonesia, Pakistan, and India, respectively. Applicants included Islamic and conventional microfinance institutions (MFIs), multi-sectoral NGOs, apex institutions, consultants, and academics. A review board with expertise in microfinance practice, microfinance investment and Islamic finance, judged submissions against the criteria of profitability and scalability and Shariah-compliance.

Five applications, namely, Al Amal Microfinance Bank (Yemen), Bina Insan Sejahtera Mandiri (Indonesia), Centre for Women’s Cooperative Development (Pakistan) Tameer Bank (Pakistan), and Tanzania ecoVolunteerism (Tanzania) were shortlisted by the judges. These applicants were asked to apply to the second phase with more detailed plans on implementation.

On February 16, 2011, the sponsors named Al-Amal Microfinance Bank from Yemen as the finalist and recipient of US$ 104,000 in prize funds. Al Amal Microfinance Bank is the first microfinance bank in the Arab world to offer only Shariah-compliant products. Operating for just over two years, the bank has 15,000 active borrowers and 20,000 savers, and has captured over 25% of the Yemeni microfinance market. Al Amal’s proposal for the competition was to pilot an Islamic leasing product. The bank plans to self-fund its leasing product by relying on an Islamic investment funds product. It expects to reach operational and financial sustainability by 2012. The bank’s menu of Islamic microfinance products include group and individual financing, project, corporate, and investment financing, savings, investment funds, and insurance.

Going forward, sponsors of the Islamic Microfinance Challenge 2010 seek to engage with the broader microfinance and Islamic finance communities to find new ways to foster development and support this sector going forward. Given that the group of 2.7 billion unbanked includes a vast number of Muslims, expanding the availability of affordable and sustainable Shariah-compliant services can prove to be transformative for microfinance.


Submitted by Insih Sonia S. ... on
Assalamu Alaikum wrbkt, seemingly majority of people around the globe have really difficulties in maintaining the implementation of the scheme. Attraction to profit motive may be one major reasons for shifting the objective in the implementaion of Islamic Micro Finance Model. Hopefully we may be able to overcome this issue with the determination to proceed and strictly limits our microfinancing scheme to Shariah Compliant Model and putting aside income generation as a secondary factor. Trust is really difficult in this trend of money market operation, strong religious foundation of every microfinance agencies and its clienteles are the major factor that may contribute to its success. May Allahu Subhanallahu Ta’ala be with us all on this trend of events and help us prevent to shift the real objective of the operation from being a Riba Free Micro Financing Scheme to that of a profit oriented business financing scheme. More power to all of us who continuously try our best to make this objective succeed. Wa Bahdu Wassalam.

Submitted by Farhat Abbas Shah on
Dear Nimrah, Congratulations to you CGAP and other sponsors of the challenge. It is high time to practice Islamic microfinance and imperative to take up the restoration work in the flood-hit areas of Pakistan where the government already left the work unfinished. This challenge is also an opportunity to bridge the local and international investors. There is not any doubt about the success of Islamic Microfinance. I have a little story to narrate. About four years ago I stumbled into the microfinance sector with an absolute stroke of chance. Before that I had always dreamt of doing something for the crowded millions suffering in the ruthless clutches of poverty. Microfinance, as you all know, was supposed to be one important tool to fight this threat of poverty. I began my new assignment in this sector with all sincerity. Soon I was awakened to the fact that the conventional microfinance in most cases was producing the results directly opposite of the stated aims. I cannot doubt the intentions of the donors and investors, but it was the element of “SOOD” and off- course in the intermediary layers there was an uncontrolled abuse which in fact was further dipping the poor in a bottomless pit of misery. That was the point when I began to reflect on the causes of the setbacks in the sector. During the same period the news of failures in the worldwide conventional microfinance sector began pouring in. this also coincided with worst recession after the great depression of 1930s. By the way it began with sub-prime loan crisis and sooner than later it took over the whole developed world. Even today the whole world is reeling under this crisis with no end in site so far. The most striking realization which I had during the period, was the nature of the relationship between the client and the facilitating agency, which I observed during my work with conventional microfinance. It was a cold, business-like, kind of matter of fact type relationship. I was surprised to see the utter disregard of the facilitators towards the clients’ education, skills, abilities and plight. Here lied the root cause of the set backs which led to the painful process of defaults and subsequently late night recoveries. Having gone through this experience I further pondered upon the causes of failures and came to the conclusion that extending micro loans to the poor without evaluating the capabilities and skills is absolutely self-defeating. I also came to the conclusion that extending hard cash to the cash-starved poor creates problems instead of offering any solution. Here was the point when I, along with a few other friends, decided to enter the market with a new methodology, which we subsequently named as the Farz methodology. We had a few assets that we sold and took the plunge. Napoleon once said 25 percent of his decisions were always a leap in the dark. But to me, our decision to embark upon the partnership and asset-based microfinance was no leap in the dark. To put the long story short, our one-year pilot project produced amazing results, at a time when not only the poor microfinance clients were defaulting but even the states began their journey on the painful course of bankruptcies and defaults. Though, there can’t be a comparison between our humble organization and the mighty states, it at least gives food for thought to many as to how did we achieve hundred per cent recoveries when the mighty organizations like Grameen were faltering. The secret lies in the fact that first of all it is an interest free mode, and certainly we trained our clients, provided them with market linkages and health care before extending productive assets. Another important factor was the fact that we proceeded with our clients on partnership basis. This is the humble saga of the Farz Foundation. During the last two decades, the world has seen the biggest events of human history. The one being the worst ever recession of the west, which now seems poised to hit the poor world. The experience of the west gives us a food for thought, while embracing all that was good in the western economic structures, we should not shut the door on innovation. We usually feel comfortable to walk on a beaten path, but world has always progressed with innovations. We do not and never intended to take a leap in the dark. There is a striking similarity between the post second world war Europe and Pakistan. After the floods 20 million people have been affected. There tools and lands need repair. They need funds to kick start their productive work. They are a challenge as well as an opportunity for us. It’s a huge untapped market awaiting intelligent investors. Our one year pilot project opens a window to this new economic opening. Quite surprisingly Islamic banking and finance has witnessed about 15% growth at a time when the conventional banking was hit the hardest and is being bailed out with the huge sums, rendering the states bankrupt. Islamic Microfinance sector is also intended to play an important role in not a very distant future. By combining Islamic microfinance and rehabilitation work, we can work miracles. We all agree that investment in human capital is always of a paramount importance for any society’s development. A poverty-ridden society is always a hub of growing militancy and crime. It can effectively be countered through creating a partnership with the poor along with creating awareness among them. We also believe that the Islamic Microfinance Sector can also bridge the local investor with international financial institutions for curing our ailing economy and to have a healthy but so far an illusive growth rate. The Farz SME and Entrepreneurial village can pave our way to that desirable goal. There is no denying the fact that industrial peace is a key to the smooth running of any unit as well as the over all economy. We extend our hands to you to exploit this opportunity at the most opportune moment when millions of skilled people await our help to be reengaged in a productive process. Our country at least owes that much to us. This is not a mere dream. We have many precedents in the past when countries like Malaysia have prominently emerged on the economic map of the world. Believe me another world is possible. ………………..

Submitted by Datu Camad M. A... on
On behalf of SPMUDA, The voice of (8) million Muslim Filipinos and the leading conglomerate of Muslim NGO’s in the Philippines would like to thank the sponsors of the 2010 Islamic Micro Finance Challenge.Inshallah, no hurt feelings while we are not choosen from among the 120 participants and instead we will continue our good works with or without support in all our endeavors to fast track peace and development of Southern Philippines affected by never ending stories of war. To the winner and runner-ups, We pray for the success of your projects and we look forward to establish mutual cooperation to widen our relations into new era of mutual interest for the best future of our Muslim Ummah in the Philippines and the International Muslim communities. Shukran!

Add new comment