Live Web Chat: Islamic Microfinance

April 23, 2013 10:30 AM to 11:00 AM EDT
Online Only, CGAP.org

A recent CGAP report notes that there are now 1.28 million clients of Islamic microfinance products globally, but 650 million Muslims live on less than $2 per day. Islamic microfinance models are gaining momentum, but there is still room for tremendous growth. Many traditional microfinance products conflict with Sharia's ban on interest-based transactions or are otherwise not in line with Islamic financial principles, so Islamic finance models could be the key to providing financial access to millions of poor Muslims.

 

On 23 April, 2013, Mayada El-Zoghbi and Michael Tarazi took questions on the growing sector of Islamic microfinance. The transcript follows:

Comments

Submitted by Salma Ait Hssayene on

I am a college student, who is very interested in microfinance. I am planning to start my own MFI in the future, and I will be starting my internship with the Grameen Bank next month.

Submitted by Imran Nafeer on

Islamic Microfinance is getting momentom. Islamic Microfinace allows to have various financial products to meet the requirements low income segments. Further, Islamic Microfinance is coupled with social and ethical aspects as well which are in line with SPM.

Submitted by badr El DIn A. ... on

Thank you for the report on Trends in Shariah-compliant microfianance, and you documentation about Sudan. I feel that there are more than what is written about Sudan need to be highlighted. Moreover, there are some pitfalls need to be corrected. As a researcher specilized in microfinance and president of Microfinance Unit of the Central Bank of Sudan I like to write a similar report about the Sudanese microfinance experience to CGAP. If you like the idea, please be in touch.

Best regards

Badr El DIn A. Ibrahim (Prof.)

President of Microfinace Unit,

Central Bank of Sudan

Submitted by Hassan on

Thank Dear Ibrahim,

According to you What is missing to establish a regional micro finance compliant with sharia in Africa?

Submitted by Dr. Saad Al-Harran on

Assamalkium Br. Prof. Badr ElDin

I hope you are fine and well. I would like read more about the work CGAP has done in Sudan so that the group can benefit from it. I would appreciate send us the link. I hope Sudanese Islamic Bank is doing well in helping small business enterprise through Islamic Microfinance.
Thank you & regards
Saad Al-Harran (Dr.)
Palmerston North
New Zealand

Submitted by Hassan on

Actually service provision of micro finance SHARIA compliant is still a problem worldwide and I still convinced that the reverse of trend is still possible. I explain for example in Rwanda we are about 2,000,000 Rwandan Muslims but we still lack a specialized institution provisioning Islamic finance service. This is a big customer base but we are obliged to be challenged with RIBA in order to survive. Actually I think even it is the case for Uganda and Burundi Tanzania and Kenya has few institution but limited in number and in area offering this service. It was observed that the Islam religion is the first growing religion in the world the same in East Africa. So we need to rethink this and not only invest a viable investment but also a sharia compliant and thus our brothers and sisters also can develop or overcome this problem of poverty. Please think about it, because we can have a regional micro finance in east africa and focus on all muslims living in this region and it is possible inshallah.

Submitted by Anonymous on

In your opinion, what is the best Sharia-compliant model for an Islamic microfinance institution?

Do you think it is easier to comply with the Sharia when you run an Islamic microfinance institution instead of running an Islamic retail, or wholesale, or investment bank?

Thank you.

Best regards,

Fawwaz Faisal
BPR Syariah Harta Insan Karimah Bekasi, Indonesia

Submitted by Anonymous on

How important do you think that the institution offering Sharia compliant products be compliant with institutional Sharia principles (HR policies, sources of funds, etc)? Do you think clients see a problem with a commercial financial institution offering Sharia compliant products?

The Murahaba is one of the more common Sharia compliant financial instruments used in microfinance. However, this instrument is better suited to larger individual clients that (1) use all of the loan funds for business purposes instead of a mix of personal and household use, (2) have a more stable established business and usually know exactly what they will purchase with the funds, and (3) have a stronger position with suppliers. What Sharia compliant products do you see most suited for smaller urban microfinance clients?

John Yancura
FINCA Jordan

Submitted by Rio Sandi on

In Indonesia, where it is the largest Moslem nation in the world, the shariah compliant methodology (system) especially for its Microfinance Institutions are so difficult to be 100% complied. The profit (revenue) sharing that is a mandatory for Shariah compliant has not been really implemented since it is so difficult to be applied. And instead Shariah MFIs in Indonesia mostly are using a similar calculation of interest rate (APR) applied in conventional banking system.

Do you think if we do business in Shariah microfinance, we should implement profit sharing mechanism or can use interest term? Moreover, why do they see it is difficult to be applied? Also, most MFIs are only providing Murabaha for the financing product and reluctantly introduce other Shariah financing products. Is it also because same reason that it is too difficult to calculate profit sharing?

Best regards,
Rio Sandi
Managing Director
Raptor Capital Management
(Fund Management Firm in Shariah Equity Investment to MFIs)

Submitted by Rakiya Dotti on

I would like to be enlightened on the Islamic models that has to do with micro finance. Also it would be a good idea if the models could be simplified and linked to contemporary economic theories/models. How can the PPI be used in the Islamic micro finance? Thank You

Submitted by Allison Ehrich ... on

What are the biggest changes in this sector right now? Where are the biggest challenges/opportunities (both in terms of geographies and markets)?

Submitted by Dr. Saad Al-Harran on

Islamic Microfinance enterprise is the future of Islamic finance. My Master students of Islamic Banking and Finance, Faculty of Business, Economics and Policy Studies, Universiti Brunei Darussalam have undertaken two studies in Brunei about the potentiality of Islamic microfinancing in the handicraft industry in assisting the development of microbusiness especially in the rural areas in the country. The first study entitled "An Islamic Microfnance Enterprise: The Financial Vehicle that will change the face of the Islamic world: The power of Salam Financing: by Dr. Saad Al-Harran & Alfred Foh Sen, Sri Anne Haji Masri, www.xlibris.com, 2008. The second study eentitled: Islamic Microfinance Enterprise Untapped potential, www.drsaadalharran.org, 2012. I hope these two studies will be implemented by the Government of Brunei so that rural people in Tutong District will benefit from it.

Dr. Saad Al-Harran
Managing Director
AlHarran Consultancy House Limited
Palmerston North
New Zealand

Submitted by Anonymous on

Respected all: It is observed that Murabaha is widely used by Islamic Banks and specially in Islamic Microfinance sector to satisfy various types of customers for financing requirements. However, Murabaha is originally a particular type of sale and not a mode of financing. It is used because some practical difficulties arises in using ideal Mode of financing like Mudarabaha/Musharakah as a "Work Around". My point is that SOP for Ideal Murabah is only dependent on continuous Due Diligence, if commodity is not remained in the risk of the institution during the later stages of agreement it will become invalid according to Shariah and will not distinguish from Interest based transaction. Under these conditions a uniform structure of Compliance is always remain volatile. We should come up with some Control mechanism in light of Structuring the mode, means margin of Re-engineering is necessary here. Please correct me if I am highlighting irrelevant and could not interpret it properly.

Usman Shaikh
Student of CIMM Course-Alhuda CIBE & Senior Manager MCB Bank Pakistan.

Submitted by Ahmedyasin on

Hello, I am from where everything is possible (Somalia). But financial institutions are absent. Now, we established Islamic Micro-finance Organization but our clients are poor of the poorest people in the world. All available funds are under the condition of interest payment and clients do not want that. So, how can we make fund raising based on Sharia to support to our clients out of poverty.

Submitted by Jessica on

Dear Mayada and Michael,
congrats on your very relevant focus note!
I would be interested to hear more about the quantitative assessment of a) the demand by micro, small and medium enterprises ("MSMEs") for Sharia-compliant finance (does a reliable methodology exist?), and b) the demand by financial institutions serving the MSME segment for Islamic refinancing (do they require it for offering Sharia-compliant finance products to their clients?).
I'm looking forward to more Q&A during the live chat tomorrow!
Kind regards,
Jessica

Submitted by Anonymous on

Dear Mayada and Michael,

first of all congrats on the enlightening focus note!
I would love to learn more about the quantitative assessment of a) the demand for Sharia-compliant finance by micro, small and medium enterprises (“MSMEs”) (does a reliable methodology exist at all?), and b) the demand for Sharia-compliant refinancing of financial institutions serving the MSME segment (do they require it in order to offer purely Islamic financial products to their clients?).

I’m looking forward to a lively Q&A session tomorrow!
Kind regards,
Jessica

Submitted by Sonia Nasim on

Hi, I am a student currently and I am exploring the topic of microfinance. I am keen to explore Islamic microfinance as an alternative to conventional microfinance and does it hold the answer to much of the debate on what is a sustanable model that would best serve not just the idea of financial inclusion but also adressing poverty. Is Islamic microfinance the solution?

Submitted by Muhammad Zubair... on

Dear Mayada El-Zoghbi and Michael Tarazi

I would like to appreciate your effort to give an detailed insight about Islamic Microfinance Industry, no doubt Islamic Microfinance Industry is growing rapidly but Islamic Microfinance Institutions do not have enough funding sources while International donor Agencies/Organization seems reluctant to support Islamic Microfinance Industry. Do you (CGAP) have any strategy to convince Donor or Funding organization to looking into this issue ??

Islamic Microfinance is an ideal tool for Poverty alleviation from the world especially from Muslim world where 44% of the world poverty reside, and Muslim remain hesitant to utilize Interest based Microfinance due to their religious belief. If we want to alleviate half of the world poverty (from Muslim world), then we should include Islamic Microfinance in poverty alleviation strategies.

Regards.
Muhammad Zubair Mughal
Center of Excellence in Islamic Microfinance – AlHuda CIBE.

Submitted by Anonymous on

Dear Mayada and Michael,

I have a few questions for today's Q&A session.

1) In your opinion, what is the major reason why Islamic microfinance has not scaled up at the same rate as conventional microfinance? Is it just due to lack of appropriate product structures that are not only Sharia'a compliant but also comparable in pricing to conventional products?

2) Do you think that Islamic microfinance can be adapted as a 'micro' version of mainstream Islamic finance? We mostly see the Murabaha model being applied by MFIs (probably since it is the most similar to the conventional model), yet Islamic finance is rich with other product types that effectively apply the risk sharing principle.

3) Why do you think Islamic investors (philanthropists, individuals, institutional or PE funds) or even DFIs/multilateral agencies have not really tapped into Islamic microfinance?

Kind regards,
Hoda Salman

Submitted by Hoda Salman on

One more question pls.

Under Sharia'a, what is the best legal structure for providing Islamic microfinance services? Should the MFI set up a separate subsidiary to provide Islamic only products?

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