Islamic Credit & Micro Finance

Top 20 FREQUENT WORDS

loan 69 service 38 hmfp 36 income 31 microfinance 30 loans 29 client 28 clients 27 portfolio 27 june 26 murabaha 25 credit 22 islamic 22 banking 18 fixed 18 programme 18 disbursement 17 cash 15 institution 15 costs 14 installments 14 mfi 14 percent 14 yield 14

DOCUMENT KEY POINTS

• we acknowledge with gratitude the support of the undp regional bureau for arab states particularly mister ali al za tari the continued support of cgap and the work of miss deena burjorjee from sum who provided clear direction and commitment to the project
• this study brought new energy to a microfinance community interested in exploring how islamic banking principles joined with microfinance best practices might open avenues to serve poor and low income households who may not consider traditional interest based commercial loans

• social economic and religious restrictions have often led to creative ways of adapting principles of microfinance to the realities of the environment
• introduction although microfinance has been utilized in almost all parts of the world some areas regions work especially hard to adapt certain basic microfinance tenets to their own unique circumstances

• when profit sharing is the source of return as in the first two methods the lender is actually an investor taking on a portion of the business risk of the enterprise
• types of islamic banking islamic financial practices are founded on the belief that money is not an earning asset in and of itself and therefore cannot earn interest

• group members are not confined to the same loan amounts or the same activities although loan amounts need to be within the range of the cycle set by hmfp

• however when the project management described details of the transaction most of these speakers felt the product did adhere to the murabaha methodology and retracted their statements
• although traditional banking products have been available in yemen for many years and are still the predominant type of finance many people especially the poor have been reluctant to take credit in part due to religious beliefs

• as murabaha is not an islamic banking product which requires profit sharing its use eliminates the need for written records often unavailable at the microenterprise level or if available percent of hmfp clients keep books the client may be unwilling to share them

• the service charge or agreed cost of the buy sell service is a fixed amount based on the expected term of the loan and frequency of installments
• amortization of service charge principal as interest the concept of paying for the time value of money is not considered in murabaha the question of amortization does not exist

• thus service charge is capitalized on the balance sheet through the lifespan of the loan and normally included in the portfolio outstanding account
• loan disbursement client account a cash a deferred income l installment payment cash a client account a also including service charge due but not paid ie late

• the service charge is received at the end of the loan period thus murabaha income is credited only at the end of the loan and not over the life of the loan
• until principal is paid in full then service charge cash a client account a deferred income l murabaha income i a asset l liability i income in most traditional mfis interest income is not capitalized as an asset on the balance sheet upon disbursement of the loan

• the nature of the swings in disbursements at hmfp which are heavy during the holiday religious periods coupled with the unique nature of the service charge occurring at the end of the loan means that as the portfolio grows or contracts the yield changes regardless of how the portfolio is performing in terms of quality
• this approach is in contrast to a traditional mfi where the client is charged not only interest on the remaining outstanding or late principal installment but in some institutions a penalty interest or fee could be charged

• nonetheless other incentives for repayment remain in place v attraction of the possibility of additional larger loan v programme is rigorous about going after delinquent borrowers v regular equal installments enforce discipline among borrowers the primary element monitored for credit quality at the field level is arrears which can include service charges receivable near the end of the loan term
• operational issues monitoring and risk management portfolio quality and the eventual recovery of the loan are determined by the credit process ranging from promotion screening application analysis approval pre loan through post disbursement management such as collection delinquency follow up and qualification for additional loans

• performance efficiency the nature of murabaha financing is such that although much of the other costs of lending and followup are incurred as in conventional microfinance the additional cost of the buy sell mechanism clearly adds to the programme s operating costs
• to minimize the impact of these concerns certain levels of cash disbursement require more than one field officer present or they restrict their disbursement to a small number of clients thereby carrying only cash for three to four transactions

• the number of loanees who finished loans in the first six months of january to june and then obtained new loans either during that period or in the following six months july to december is shown in table
• although mfis are likely to have certain investments at any one time hmfp s sizeable pre funding meant that income from investments over the january through june period and the june through december period was

• gender number of finished number of renewed client loans in first half of loans retention ratio male female total the number of loanees who finished their first loan in the first six months of january to june and then obtained new loans either during that period or in the following six months july to december is shown in table along with the retention rates for subsequent loan cycles
• retention rates june through december by gender and by loan loan gender number of number of client retention finished loans in renewed loans ratio first half of male female male female male male male total table shows that women are marginally more likely to obtain a new loan with a percent retention ratio through all levels of loans

• the most often reported reasons were the following v programme refused the client v reached self sufficiency v worried they were not going to be able to comply with loan terms v emergency or problems in business home v activity stopped v clients have other duties v service charge was too high although this study was not scientific or systematic it does point to some recurring issues
• there could be many reasons for dropout including attitudes to being in debt nature and importance of the business to the client perhaps the cost of the credit and the seasonality of the activities

• tables and outline some of the similarities and differences between ideal practices of a traditional mfi and those of an mfi practicing relatively strict islamic banking practices as in the case of hmfp

• table

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DOCUMENT WORD ANALYSIS

Main Category

AlHuda Material\islamic micro

KeyWords

islam microfin financial institute bankable finance developed service fund countries member NA republic regular program credit loan muslim rate access

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DOCUMENT REFERENCES

Number of Pages

19

Published Date

2106-02-07 09:28:15

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