Micro-Credit Financing and Poverty Alleviation

Top 20 FREQUENT WORDS

microfinance 126 islamic 98 sharcah 44 management 42 compliant 37 financial 37 fund 33 finance 32 development 25 institutions 24

conventional 19 funding 19 funds 19

assistance 17 loan 17 loans 16 model 16 profit 16

DOCUMENT KEY POINTS

• the implication of this paper is that shar Ycah compliant microfinance is best provided by non banking institutions which in the case of the wak lah model may have links to the waqf and zak h authorities
• abstract microfinance schemes have been operational since the s however they mostly involve conventional finance whereas many low income muslims would prefer to have shar Ycah compliant finance

• first would islamic microfinance be best provided by specialist shar Ycah compliant financial institutions or by existing islamic and conventional banks second are credit unions organized through co operatives the way forward or are commercial institutions such as banks or investment companies preferable microfinance is often approached idealistically as it is designed to help the poor

• indeed with the failure of state organizations to meet the credit needs of the poor informal microfinance often flourished in these societies as the commercial banking sector is found to be typically weak and seldom innovative
• it has been able to make small loans of less than viable by keeping down operating expenses to less than percent of the value of its loans and has a mere

• although the provision of alternatives to exploitative lending is applauded there is the issue of whether these are sustainable if they conflict with the values and beliefs of local muslim communities
• simply extending materialism and consumerism into poor rural communities and urban shanty town settlements could actually undermine social cohesion by raising false expectations which could not be fulfilled resulting in long term frustration and possible social discontent or even economic crime

• the shar Ycah compliant equivalents of conventional debt facilities might include qare al asan interest free loans the only type of permissible loan under shar Ycah law mur ba ah mark up trade finance salam forward purchase credit and isti n project financing as well as the facilitation of operational leases ij rah which eliminates the need for micro enterprises to tie up their scarce capital resources in equipment or buildings
• potential islamic microfinance instruments islamic finance is usually provided through shar Y cah compliant instruments that have their origins in fiqh jurisprudence but which have been adapted to be viable in the modern world and in particular competitive with conventional products

• an alternative to this can be tawarruq whereby the acquisition of a commodity is financed through mur ba ah under which the client is required to sell the commodity for cash to the bank or its agent
• any ambiguity could result in disputes that are likely to be costly for those involved in both financial and emotional ter miss islamic financial contracts being linked to real transactions are usually designed for specific purposes

• a wak lah agency model as an alternative to prevailing microfinance models as islamic microfinance finance involves charitable assistance such as qare asan interest free loans which require subsidies or cross subsidies can grant aid be harnessed and zak h funding be used for this purpose structures that might be appropriate for the inclusion of zak h or ngo donor funding as the grant element of a financial package are a possible way forward

• the concern would be if there was any exploitation of participants by the management as there is the potential for a conflict of interest with participants losing out if management remuneration is excessive or not transparent
• figure the wak lah model microfinance agency participants financial disbursements tabarruc donation management company repayments management fee microfinance fund under wak lah model seed capital zak h fund or ngo donor agency source flow chart adapted by the author from a tak ful structure

• with conventional lending this is implemented through the pricing of the funds ie the interest rate which determines the equilibrium between the demand for and the supply of funds

• clients with shar Ycah compliant deposits with conventional banks offering these facilities have the assurance from the shar Ycah boards of these banks that their funds are segregated from the other liabilities and assets of the bank and that they will only be used for financing through shar Ycah compliant structures for purposes that are al l

• with mue rabah the return will be related to the bank s profitability or in the case of a specified mue rabah deposit the profit generated by the project that the funding is used for
• but this would imply it was regulated as a bank which would mean there was reduced flexibility over disbursements and less discretion over asset holdings plus additional costs of developing robust systems for regulatory compliance including possibly paying to be rated

• the priorities of the shar Ycah scholars should be to firstly ensure that all contracts issued by the microfinance organization were shar Y cah compliant and secondly that all asset holdings were also shar Ycah compliant
• in practice these exclusions make little difference to microfinance institutions as their members are unlikely to be involved in production of ar m ite miss the major concern here is with distribution where the finance is for small retail establishments

• with supplier credits it is normal to charge an additional sum for the deferred payments but the difficulty with this from a shar Ycah perspective is that the retailer or distributor involved extensively in offering such credit is acting like a conventional bank
• companies are excluded if their outstanding debt exceeds one third of their capitalization or if interest accounts for more than one third of income because of extensive holdings of conventional savings deposits or bonds

• as such the actual amount earned by each of the parties will fluctuate from year to year depending on the profitability of the fund and the projects being supported
• making development assistance sustainable through islamic microfinance figure the mue rabah model shareholders investors microfinance clients profit share subscription microfinance management company finance profit share investment microfinance fund under mue rabah model source flow chart adapted by the author from a tak ful structure

• the third difference between the mue rabah and the wak lah model is that with the latter some of the funding came from zak h or ngos but with the former this is not the case
• this creates a further incentive for the management company as the rabb al m l to ensure the fund perfor miss it is justifiable to designate the microfinance clients as mue rib rather than rabb al m l as their purpose in seeking funding is to embark on or further develop their entrepreneurial activity

• conclusion although this paper is largely conceptual and theoretical there are a number of existing shar Ycah compliant microfinance schemes notably those operated by bank simpanan nasional in malaysia the aceh relief aid schemes in indonesia the hodeidah microfinance program in yemen and the undp mur ba ah based microfinance initiatives at jabal al hoss in syria

• habib ahmed has written a useful paper waqf based microfinance realizing the social role of islamic finance islamic research and training institute islamic development bank jeddah march
• islamic banking principles applied to microfinance case study a hodeidah microfinance programme yemen united nations capital development fund new york january dhumale r

• draft guidelines for provision of islamic microfinance services and products by financial institutions state bank of pakistan karachi
• secretariat national sme development council strengthening enabling infrastructure to support sme development bank negara press release kuala lumpur august th

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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

21

Published Date

2106-02-07 09:28:15

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