Waqf-Based Microfinance, Realizing the Social Role of Islami
From HodHood
Contents
Top 20 FREQUENT WORDS
islamic 150 waqf 99 mfi 92 mfis 78 funds 65 financing 63 risk 52 based 49 microfinancing 49 assets 46 costs 45 institutions 43 returns 42 financial 41 credit 38 microfinance 33 income 31 development 29 finance 29 economic 28 profit 28
DOCUMENT KEY POINTS
- waqf based microfinance realizing the social role of islamic finance habib ahmed islamic research and training institute islamic development bank group p
- org paper written for the international seminar on integrating awqaf in the islamic financial sector singapore march
- section presents the basic model of a waqf based islamic mfi pointing out how it resolves the sustainability proble miss this is followed by a section that discusses the scope of operations and issues related to managing risks in waqf based islamic mfis
- these sadaqah can be religious like establishing a mosque or for social purposes like building a house for the wayfarer or digging of river canal or a sadaqah gave during his her life that continues giving its benefits after his her death
- a third of the profit was used to cover administrative costs a third for charitable purposes for which the waqf was created and the remaining third was added to the original endowment to protect the real value from inflation
- similarly there were waqf of grain to be used as seeds and forms of waqf to provide loans to persons who need financing and providing services and supplementary income to low income people
- can worsen both the adverse selection and moral hazard proble miss physical constraints inhibit the financial institutions to gather information on their prospective clients and once credit is advanced it is difficult to monitor the use of the funds
- bennett points out some barriers that accentuate the asymmetric information problems in case of smaller enterprises in developing countries
- loan repayment by an individual member of a group is the collective responsibility of all the members in the group and default by a member disqualifies all members to get new loans
- most mfis have various forced savings progra miss sometimes mfis also extend credit to individuals for building houses and to a group or center for collective enterprise
- in the absence of deposits other than savings of beneficiaries bulk of the funds of the mfis is from external sources
- note that these costs can be further divided as those incurred at the field level and those that are incurred away from the field costs at head office and regional offices
- using the definitions of costs and income from equations and in equation we can write the profit of a mfi as il nl oc if f iss the effect of an increase in the interest rate on loans il on the profit will be positive if the resulting increase in income offsets the decrease in income due to lower repayment rate
- we see from the above discussion that while conventional mfis have been able to solve the problem of credit risk by introducing social collateral by forming groups and weekly repayments it has not successfully resolved the problems of moral hazard and economic viability
- a subsidy dependence index sdi developed by yaron indicate that in grameen bank would have to increase its lending interest rate by an additional percent in order to breakeven without subsidies hashemi
- the islamic mfi can provide part of the financial capital to produce an output and in return low risk and risk free are used to identify these class of assets would include either deposits in islamic banks on placement in murabahah funds
- table balance sheet of a waqf based islamic mfi asset liability cash c savings deposits d assets a qard hasan deposits q low risk assets f waqf certificates s microfinancing m takaful reserves t loansqard q profit equalizing reserves p investments i reserves economic capital v murabahah ijarah capital waqf w salam stisna mudarabah musharakah mfis need to create some special reserves to insure against the risks arising from negative shocks
- given the small scale nature of the operations of the microentrepreneurs it may be difficult for the islamic mfi to use either sale based or partnership modes of financing
- sustainability of waqf based islamic mfi see ahmed for a discussion on the responses from a field survey on problems of using islamic modes of financing in microfinancing
- while islamic mfis will pay returns on funds coming from external sources like deposits and beneficiary savings the waqf component of funds will significantly reduce the financial costs and improve financial viability of the institution
- operational and risk m anagement issues of waqf based mfi due to the nature of the instruments and legal requirements a waqf based mfi will face certain unique operational and risk management issues
- as for the legal requirement that the corpus of the waqf should remain intact the easiest way to do this is to invest the endowment in some safe low risk instruments and use the returns for financing purposes
- for example if there is a waqf endowment of usd million earning an average rate of return of percent an islamic mfi can provide finance of an average amount of usd to poor entrepreneurs if only the returns are used
- as costs of microfinancing operations are shared between qard and investments proportionately s percent of the operating costs will be accounted for in arriving at the net returns on investments i
- assuming to be the proportion of investments i financed by deposits the remaining percent will be financed by waqf funds
- similarly as of the investment i is financed from waqf funds the returns from this component of financing will be rmw ieli from equations we can get the total expected net income from investments i for the mfi as rm r md rmw iel i note that rm is the net returns to the mfi from microfinancing as net returns on qard equals zero
- as long as the mfi have accumulated enough takaful t and profitequalizing p reserves to cover the expected losses l d the depositors can expect a positive yield on their deposits and the mfi will be able to mitigate the withdrawal risks
- figure portfolio allocation into low risk assets and microfinancing ra el a r f rf rf r el a el a using the definition of rf rf f and equation we get
- this is shown by a movement of the of the low risk asset return curve from rf to rf reducing the proportion of low risk assets further from to
- the expected loss for the waqf funds elw used in microfinancing is el w eli elq where el i and elq are define in equations a and b
- other approaches to funding mfi operations while the paper proposes the use of a waqf based mfi to finance the poor some other sources of funds can be used to further enhance the scope of islamic microfinancing
- the operating costs of providing microfinance in case of islamic banks will be much smaller than mfis and these institutions will provide microfinance from existing branches and not incur any extra fixed costs rent utilities etc
- as islamic modes of financing involve transfer of real assets goods use of these instruments by these institutions can lessen the problem of diversion of funds to non productive
- building up capacity for banking with the poor the grameen bank in bangladesh in schneider hartmut editor microfinance for the poor development centre of the organization for economic cooperation and development oecd paris
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DOCUMENT WORD ANALYSIS
Main Category
- AlHuda Material\riba
KeyWords
islam financ bankand asset fund mfi inflated financi mfis profit contract invest risk return increase price credit usuria waqf costly
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- Waqf-Based Microfinance, Realizing the Social Role of Islami
DOCUMENT REFERENCES
Number of Pages
22
Published Date
2106-02-07 09:28:15
