Islamic Microfinance Workshop by Muhammad Khaleequzzaman

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loan 395 islamic 372 microfinance 364 loans 236 relief 167 borrowers 162 programme 152 programmes 119 business 78 policy 77 theory 75 financial 73 bosnia 69 herzegovina 69 borrower 67 financing 66 income 65 repayment 63 officers 60 repayments 58

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islamic microfinance theory policy and practice islamic relief is dedicated to alleviating the poverty and suffering of the world s poorest people published by islamic relief worldwide rea street south birmingham b lb united kingdom C islamic relief worldwide

lending methodologies individual or group loans murabaha loans given by islamic relief mudaraba loans given by islamic relief qard hasan loans given by islamic relief potential negative impacts of microfinance minimalist or credit plus programmes
disbursing loans and collecting repayments where to work how to decide whether to approve or reject a loan where should the loan be disbursed should we remind borrowers when repayments are due

conclusion bibliography appendix organogram of islamic relief s microfinance programmes appendix financial landscape appendix business loan application form appendix housing loan application form appendix loan agreement appendix guarantor s statement appendix administrative ban appendix promissory note appendix borrowers declaration appendix job descriptions appendix interviews appendix classifying loans in default
islamic microfinance theory policy and practice what should we do when borrowers fail to repay on time how many loans should each loan officer have should we give loans to men or women

introduction programmes that provide credit and savings services have been promoted in recent years by governments international development organisations as well as local non governmental organisations ngos and grassroots bodies as a key strategy for alleviating poverty in lowincome countries and increasingly also within poor communities in high income countries and helping to achieve the millennium development goals mdgs a indeed was designated as the a year of microcredit by the united nations

typically the characteristic features of microfinance programmes are that a c loans are usually relatively short term less than months in most instances and generally for working capital with immediate regular weekly or monthly repayments a they are also disbursed quickly after approval particularly for those seeking repeat loans
what is microfinance microfinance refers to making small loans available to poor people especially those traditionally excluded from financial services through programmes designed specifically to meet their particular needs and circumstances

poor people are often unable to provide the types of traditional collateral required by banks such as deeds for property they may be illiterate and unable to complete the application forms the distance to the nearest bank may be too far for them to travel both to complete the application forms as well as to make regular repayments the size of loans required by poor people and the costs incurred in analysing and processing such loan applications may make them economically unattractive to banks or poor people may be unemployed or without a regular or verifiable sources of income

the issue of monitoring and evaluating the performance of microfinance programmes with respect to both the service provider itself as well as on the lives of borrowers is explored in chapter
following this introductory chapter chapter provides a brief introduction to islamic financing principles and lending methodologies that need to be considered when designing and operating an islamic microfinance programme

principles of islamic finance this chapter introduces the principles of islamic finance and also attempts to provide a brief introduction to the different islamic lending methodologies which tend to be far more interesting and complex than techniques used in conventional western lending which largely rely on charging interest
this does not imply in any way that capital is free of charge or that it should be made available without any cost or that there should be absolutely no return on capital

thus if the borrower s venture is unsuccessful through no fault of his or her own it is unfair for the lender to consider a fixed rate of return or demand repayment while if the borrower earns a very high rate of profit on the venture it is unfair that the lender should receive only a small proportion of the profit even though he she may well have provided the majority of the finance for the venture
islamic microfinance theory policy and practice a c it is not permitted to sell what one does not own a therefore short selling selling something that one does not own in the hope that it can be bought cheaper at a later date is impermissible

if you do not take notice of war from allah the absolute prohibition of interest in the quran is a command to establish an economic system from which all forms of exploitation are eliminated in particular the injustice of the financier being assured of a positive return without doing any work or sharing in the risk while the entrepreneur in spite of management and hard work not being assured of a positive return
islamic microfinance theory policy and practice there are several passages in the quran which quite clearly condemn the practice of riba those who devour riba will not stand except as he stands who has been driven to madness by the touch of satan a allah has permitted trade and forbidden riba a allah will deprive riba of all blessing o ye who believe fear allah and give up what remains of your demand for riba if you are indeed believers

these include the entrepreneur submitting an application in detail describing the commodity to be purchased the financier buying the commodity and physically taking possession and the entrepreneur having the right to refuse to accept the commodity when offered sale by the financier
to ensure that this technique is not abused and remains shariah compliant the bank of sudan s sharia council for example issued a fatwa in establishing key requirements that had to be met in order for a murabaha contract to be legal stiansen

at the end of the production cycle or season the costs of production are deducted from the revenue and a certain percentage is earmarked for management fees while the rest is divided between the partners according to their percentage investment in the share capital or other agreed division
it is clear that even though business and trade in islam is based on ease and leniency in formulating financing arrangements it is important to try and follow the rules of one school of thought and not to combine the views of two or more madhabs in a way that is not valid

profits are shared between the farmer and the bank in such a way that the farmer is first paid of the net profit as compensation for his management and then the remaining is shared between the bank and the farmer on a pro rata basis based on each partner s respective share in the equity
islamic microfinance theory policy and practice the main difference between musharaka and mudaraba is that under the latter the entrepreneur offers his or her labour and skills only without any contribution in cash or kind and any losses are borne entirely by the financier

in pakistan the maximum service charge on loans for a given period is calculated using the following formula from ahmad service charge e a x where e administrative expenses during the year a average assets during the year who should receive qard hasan loans the practices of various islamic lenders differ in this respect
qard hasan the quran clearly encourages muslims to provide qard hasan or benevolent loans to those who need them who is he that will give allah qard al hasan for allah will increase it manifold to his credit

the price paid by the bank to the client is called the sale price and is a given percentage of the value of the stocks sold to the bank
other islamic financing mechanisms other lending contracts used in islamic financing and that can perhaps be used in microfinance programmes include musaqat which is a specific type of musharaka contract for orchards in which the harvest is shared among all the equity partners according to their contributions

however in the case of a borrower s failure to repay the loan at the agreed time it is permitted to ask the guarantor to repay on the borrower s behalf or to effect the sale or transfer of collateral used to secure the loan
suffice at this stage to remember that islamic lenders need to exercise care when considering whether they have adequate guarantees in place when deciding to finance a project as there is no penalty for late payment under islamic law although religious advisory boards of certain banks have accepted fines for late payments as being in conformity with islamic law see for example soliman for a discussion in the egyptian context

since the primary purpose of microfinance programmes is to provide loans for the poor for investment in productive activities in order to increase their income it is necessary to ask are profitable productive activities actually possible in the local context do the targeted poor people have the necessary skills to engage in income generating activities since poverty is often characterised by fluctuations in income and earning power often influenced by the seasonality of the rural economy the primary need may not be for an increase in income but rather for security of access to an income when it is required
furthermore if a microfinance programme is to succeed it also needs to be competently planned and managed therefore it is also necessary to consider the question will the implementing organisation be sufficiently competent to administer such a programme it should be noted that islam discourages debt heavy debt in particular as much as possible a indeed it is something that is considered to have a serious and direct effect on a muslim s belief or conviction because it can lead to negative consequences

the mission statement of the housing loans programme in bosnia herzegovina is as follows the aim of the housing loans programme is to provide loans for the repair and reconstruction of war damaged housing as well as the construction of new houses
the prophet muhammed peace be upon him also said whoever dies free from three things a arrogance cheating and debt a will enter paradise tirmidhi and the soul of a believer is held hostage by his debt in his grave until it is paid off tirmidhi

formulating the terms and conditions of the loans the method of delivery and how it fits in with the overall financial structure for potential borrowers should be based on information derived from assessments of the financial landscape that is the range of credit savings and other financial services on offer by all other financial intermediaries
it is critical therefore to conduct a market assessment when designing and launching a microfinance programme and thereafter continually reappraise the services on offer in relation to those offered by other financial intermediaries appendix shows for example the costs of obtaining a loan from islamic relief in comparison with other microfinance organisations as well as commercial banks in bosnia herzegovina

although each loan officer is not restricted as to the area he she can take an interest in in fact they are encouraged to take an interest in other regions and programme performance in general applications for loans from specific geographical areas must come through the loan officers responsible for that particular region

all staff working in islamic relief s microfinance programmes receive on the job training and are encouraged to have a broad understanding of the main issues that affect all aspects of their work a it is important that changes and suggestions as to how work can be improved come from below as much as from above
it is important to emphasise that successful implementation of even the most clear and welldesigned microfinance policies and programmes ultimately depends upon the extent to which programme staff understand and accept and perhaps even identify with theses policies

the creation of first islamic start and the ssed has acted to separate microfinance activities from islamic relief s other work in bosnia and herzegovina kosovo and pakistan respectively which included the reconstruction of houses schools and clinics sponsorship of orphans and emergency food distribution
investigating the possibility of other credit and savings initiatives a roscas and partnerships with other financial intermediaries it may be that instigating a microfinance programme is not the best way to assist poor people even when the aim is to increase their access to small loans

when an individual loan is disbursed to a member the group issues a cheque against its group savings account for the totality of the loan that in the event of wilful default the bank has the ability to cash
each member also pays an initial pounds to join the group and a further pounds each time they wish to make a loan application and both fees are added to the group savings account

thirdly it was felt that potential borrowers had an image of islamic relief as an essentially humanitarian organisation that provided donations particularly since all potential borrowers received a monthly stipend from islamic relief rather than as a developmental organisation or financial intermediary and that under the circumstances it would be difficult to convince borrowers to repay
in the next chapter we provide practical examples of how the islamic lending methodologies introduced in chapter can be applied to providing microfinance

even when they do have property the cost of offering it as collateral for a loan may be too expensive thus in bosnia herzegovina for example the presiding court must assess the value of the property in cases where it is offered as collateral as is frequently the case with commercial banks and charges around euros for the privilege of doing so

it is important to stress that when the financier provides the goods they are also then held responsible by borrowers for the quality of those goods this is especially problematic in the case of livestock were it is easy for the borrower to blame the poor quality of the animal as the cause of non repayment
islamic microfinance theory policy and practice furthermore many entrepreneurs are individualistic they may not like working in groups and they may also compete with each other and be unwilling to share confidential information with potential competitors there is also increasing evidence of the negative impacts on individual group members from group lending for example see rahman

as the above examples intimate microfinance programmes may face expansion problems and high administrative costs due to the additional efforts required from loan officers in locating purchasing and re selling goods to borrowers a it is not difficult when the number of loans is small but when there are hundreds of loans to be disbursed it becomes very time consuming for loan officers
islamic relief pakistan employs specialist procurement officers and it is they rather than loan officers who are responsible for purchasing and delivering the financed ite miss furthermore this financing technology is also relatively expensive when there are potential borrowers retail outlets for example who wish to acquire a large number of small

due to the nature of the murabaha loans it is easier to finance the purchase of one large commodity rather than many small ite miss interestingly islamic banks who use this financing technique tend to keep large inventories of property cars and other products in demand by borrowers and they are actually hybrid institutions combing the functions of a bank and a trading company

in comparison while the microfinance programmes in bosnia herzegovina and kosovo have given a significant number of mudaraba and in particular murabaha loans the majority of the loans they give can be classified as qard hasan loans
in bosnia herzegovina all loans are given in cash either at islamic relief s offices or with local loan coordinators in the field whereas in kosovo borrowers are issued with a loan confirmation receipt which they can then present at a local bank to receive their loan in cash

she used the loan to stock her shop with basic foodstuffs and household ite miss throughout the duration of her loan she was always prompt and on time with her repayments and successfully repaid all instalments after months
during this time her shop has grown and now stocks a range of food and retail ite miss she has also managed to buy a small generator that she uses to provide electricity for her home and shop when there are power shortages

microfinance programmes that target women borrowers may actually be merely using women as unpaid debt collectors mediating between credit lending organizations and male family members and in the process increasing women s dependency on men and increasing the level of domestic conflict when men invest the loan monies poorly or fail to meet repayments

additional support such as training and technical assistance is needed to enhance their enterprises and productivity a indeed the addition of training components has been justified as a means of guaranteeing effective use of credit and improvements in productivity and income for borrowers as well as being necessary to overcome a variety of non financial barriers that borrowers may encounter
however it is more difficult to use the distinction between minimalist and creditplus microfinance programmes when describing shariah compliant programmes since such initiatives typically involve the sharing of risk and may involve the provision of technical input in the loan financed venture by the financier the sharing of profits and loss etc

the following is a list of selection criteria that the business loans programme in pakistan employs a c applicants may be male or female a c applicants should be over years of age a c applicants should have been living in the programme target area for at least the previous two years
by establishing and adhering to clear selection criteria we can ensure that those targeted are in fact reached and those who fall outside the selection criteria are excluded

a c loan officers should analyse the technical economic and social feasibility of the proposal as well as the extent to which the application matches the microfinance priorities of the organisation
guidelines for assessing loan applications although loan officers should have a certain amount of discretion in selecting prospective borrowers there are a number of procedural measures and considerations that loan officers should consider when undertaking selection

for example islamic relief s microfinance programme in bosnia and herzegovina decided that it did not want to authorise a loan to a farmer who wanted to rear poultry in small cages because loan officers felt that it involved unnecessary cruelty and suffering to animals even though such a venture was highly profitable

loan officers should not make promises to borrowers rather they should clearly state that it is the loan approval committee who will take the decision to approve or reject the loan in either event prospective borrowers should be informed relatively quickly of the final decision a certainly no more than a couple of days at most
essentially the questions in the questionnaires are concerned with establishing an overall profile of the potential borrower through information on their demographic socioeconomic and business characteristics as well as details on the effective and potential demand for loans debt burden and repayment capacity

indeed there is a relevant hadiths anas ibn malik reported that the prophet peace be upon him said when one of you grants a loan and the borrower offers him a dish he should not accept it and if the borrower offers a ride on an animal he should not ride unless the two of them have been previously accustomed to exchanging such favours mutually

islamic relief does not pay haji samir but he does draw satisfaction from helping people in his community to receive loans and develop their economic activities at the same time he has gained a certain level of prestige as being islamic relief s loan coordinator and assisting the community
however the purchase of new homes parcels of land upon which to build or major upgrading of a current residence often represent sums of money that require relatively long loan terms to keep repayments within the reach of poor families

many programmes have shown that loans for consumption purposes are popular a and therefore respond to a real need of the poor a and also that they are viable in financial ter miss consumption loans by reducing the vulnerability of poor people provide them with security
although new income may not be generated by directly by the loan we should remember that at the same time funds may be released because rent for example will no longer be paid by the borrower

if it is approved usually by consensus then the borrower is immediately informed and asked to visit islamic relief s offices or the local loan coordinator to collect and complete the necessary accompanying loan documents such as guarantor s forms and a date is fixed for disbursement
disbursing loans and receiving repayments this chapter examines some of the practical issues associated with deciding in where a microfinance programme should work how to approve and reject proposals how loans should be disbursed and what should be done when borrowers fall behind with repayments

where should the loan be disbursed where the loan is disbursed and who should be present when it is disbursed depends largely on the type of loan that is given
this is not entirely uncontroversial since it could be argued that an institution that focuses its efforts on repeat loans may help a smaller number of people to become less poor but will not reach out to a larger number of people who may need smaller initial loans

if the borrower is genuinely unable to meet his or her repayments due to circumstances unforeseen at the time they received their loan then an islamic financing programme has an obligation either to wait until such time as the loan can be repaid re schedule the loan repayments or simply forgive the remainder of the loan
however while this is accepted and causes few problems in bosnia herzegovina in kosovo by contrast it is a last resort and not encouraged since security is a concern and loan officers are reluctant to carry significant amounts of cash on their person when travelling in the field

however the legal process can take several years before the court reaches a verdict and even if judgement is in favour of the microfinance programme it can take several years more for the court to actually implement the decision this is for example the reality in bosnia herzegovina
at the same time since it is usually islamic relief s policy not to advance new loans in a community if existing borrowers are unwilling to repay their instalments the loan coordinator other borrowers and especially potential new borrowers also tend to exert peer pressure on anyone who is unwilling to repay

islamic microfinance theory policy and practice villages some distance away not only from each other but also from the organisation s offices whom loan officers must visit to collect repayments and when loans are given for activities which require significant analysis from loan officers then the number of loans per loan officer will obviously be much less
microfinance programmes have also been shown to contribute significantly to women s empowerment and it is also the case that there is a strong correlation between improving women s welfare and improving the welfare of other vulnerable members of the household such as children

interestingly according to the bpk islamic relief s microfinance programme has the highest repayment rate of among all credit institutions in kosovo despite the fact that it is working in the poorest region of kosovo and among the poorest borrowers of that region to whom formal financial intermediaries such as banks are unwilling to lend
islamic relief s microfinance programme in kosovo uses off the shelf computer software namely the quickbooks accounting package while the microfinance programme in bosnia herzegovina uses tailor made computer software created by a specialist programmer who has worked with various microfinance organisations

how can a microfinance institution calculate its level of financial self sustainability a simple calculation can give an indication of how far the total costs of a microfinance programme are being covered by the income earned of total costs covered by income generated income earned during months total costs during months x total costs should include all the costs associated with operating the microfinance programme such as staff salaries fuel expenditure etc

how can the success or failure of microfinance programmes be measured the information on financial indicators generated through computer software packages and sustainability calculations can provide useful insights into measuring the relative success of a microfinance programme and in particular on the institutional health of the organisation
other financial criteria such as number of loans to femaleheaded households loan size the purposes for which the loan is ostensibly used average loan size number of loans per employee etc are also useful indicators of a programme s relative success

furthermore since the mission statement of many ngo microfinance programmes is to alleviate poverty in recent years many programmes have explicitly linked their activities to contributing to one or more of the mdgs as well by encouraging a process of transformation in the lives of borrowers and their communities whether a programme contributes to alleviating poverty or not is ultimately the criterion by which the programme s success should be judged

what is the impact of the programme s products and services on borrowers both programme staff and borrowers should be made aware that the information they collect and the opinions they give are taken into account a this way they are not only motivated to collect data but also feel valued
this method of examining impact has several advantages in particular it enables the microfinance institution to better understand why borrowers behave as they do and how the changes occur in their lives and businesses as well as examine changes in aspects such as self esteem self confidence gender and community relations

finally it is worth mentioning that the information gathered in impact assessment should actually be used to assist in making decisions on how to improve products service or organisational structure a after all if the information is not to be used it is not worth collecting in the first place
it is important to stress that impact assessment procedures should not overburden staff or borrowers with an excessive amount of studies and reporting clearly it is not possible to ask every question or investigate everything especially for a relatively small microfinance organisation with a few hundred or even a couple of thousand borrowers

herein lies the dilemma to promote financial sustainability or achieve significant scale and outreach in fact it is likely that a mix of loan technologies will actually promote the financial sustainability of the microfinance organisation ensure significant scale and outreach as well as provide the most appropriate type of financing to microentrepreneurs a we should not always assume that all entrepreneurs actually desire or will necessarily benefit from the same type of financing mechanism
in contrast other financing mechanisms such as qard hasan and murabaha although generally less risky and less demanding in terms of technical input and expertise and despite the fact that greater numbers may be administered at any one time generally offer lower returns and often barely cover the cost of their disbursement

rather each microfinance programme needs to be tailored specifically to meet complex local realities prevalent within each country or even different regions within a country the needs of microentrepreneurs and the complexity and nature of ventures to be financed

alamgir microfinancial services and poverty alleviation in bangladesh a comparative analysis of secular and islamic ngos in m

the rise and decline of the islamic banking model in egypt in the politics of islamic finance by c
wilson eds edinburgh edinburgh university press

secondly since the fee is the same regardless of the size of the loan disbursed the paperwork involved for a small loan is the same as the paperwork for a large loan if islamic relief were to actually increase the fee through incorporating staff salary costs it would make it relatively more expensive for poorer borrowers who seek small loans to access our service

family members living with you and for whom you are economically responsible for children include ages no name relationship do they contribute to household income a
islamic microfinance theory policy and practice appendix business loan application form should be translated into local language to be completed by loan officer a

have you received a loan in the past please include details such as amount period of loan if successfully repaid any problems with repayments d

where and to whom do you plan to sell your products and services e

family members living with you and for whom you are economically responsible for children include ages no name relationship do they contribute to household income a
islamic microfinance theory policy and practice appendix housing loan application form should be translated into local language to be completed by loan officer a

other observations please include any other information that you feel will be relevant to this application loan officer responsible for completing application signature of loan officer date of loan application loan decision signature of microfinance coordinator date of approval
are you the legal owner of the apartment house where you wish to use the housing loan e

in case of approving a loan for the purchase of goods or equipment on behalf of the loanee and after qualitative and quantitative receipt of the same the loanee has no right to any subsequent claims as to the condition or state of the goods or equipment provided

if a repayment instalment is not made according to the timetable of repayments detailed in article of this loan agreement the loan agreement will be considered cancelled and the rest of the loan is to be repaid immediately
all parties state that they have carefully read this agreement and understood the meaning of all the provisions of this agreement and are signing it to express their acceptance

a promissory note certified and signed by issuer and guarantors
statement on choice of the equipment

i will allow mikro first islamic bosnia herzegovina to use this statement in the above mentioned case to deduct my salary from my employer until such time as the loan is completely repaid

repayment of the loan in the amount of in words will be implemented through an administrative ban in favour of the lender mikro first islamic bosnia herzegovina account number call for number account code loan will be repaid in monthly rates with per month in words starting from until until such time as the loan has been completely repaid
if we do not obey properly this administrative ban or if we do not forward it immediately to another company in which a person is employed we promise to compensate for all costs incurred or any other harm that might be caused to mikro first islamic bosnia herzegovina in this way

specifically i accept all responsibilities to repay the loan according to article of kpl kosovo penal law for manipulation and article of kpl for untruthful declaration when signing a contract for loan

to represent first islamic bih and or islamic relief in meetings and communication with external organisations in all activities pertaining to the microfinance programme
to ensure that first islamic bih and or islamic relief comply at all times with all legislation and reporting criteria pertaining to our microfinance activities

thus if the borrower is a woman market stallholder and states that her business has expanded since she started receiving loans from islamic relief we can ask supplementary questions such as whether she sells more products than before whether she can now pay wholesalers in cash and receive better quality products rather than receive inferior goods on credit whether she stocks more products than before whether she has better premises etc

islamic microfinance theory policy and practice appendix classifying loans in default in kosovo islamic relief has to classify loans in default according to the criteria laid out by the banking authority of kosovo bpk and set aside reserve funds to cover loans in default

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AlHuda Material\islamic micro

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islam finance bankable contract client profit purchase financial asset microfin risk sale transact price murabahah busi sharia goodasset payment invest

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73

Published Date

2008-02-13 13:12:30

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Islamic Microfinance Workshop by Muhammad Khaleequzzaman

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