IsDB Microfinance

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islamic 189 microfinance 182 zakah 103 financial 102 waqf 102 based 77 financing 76 micro 75 funds 72 poverty 66 hasan 60 qard 60 profit 54 institutions 52 services 49 ismfi 47 bai 46 cash 45 finance 45 model 44

DOCUMENT KEY POINTS

islamic norms and microfinance best practices
management of zakah funds

bai muajjal based microfinance by islamic bank bangladesh list of figures figure model of microfinance using islamic not for profit modes figure composite model of islamic microfinance
islamic micro savings products in indonesia box

hence the contradictions wealth of an arab prince has been described thus he is the proud owner of a car studded with diamonds worth several million dollars a ship worth million dollars a personal jet aircraft and a palace with more than roo miss on the other hand billions of human beings on the same earth are deprived of clean and healthy drinking water

since its inception more than a quarter century ago islamic banking has manifested itself in various regions and in various for miss there are islamic banks in the corporate sector in the unorganized sector in the government sector etc

what about the maqasid al shariah are these forgotten in the pomp and show of the world of high finance it is in this background that merit of this monograph on micro finance in islamic perspective must be judged
but what about the egalitarian social and economic objectives of islam what about claims of superiority of islamic model over capitalistic model on grounds of equity and justice

financial exclusion is aggravated by failure on the part of conventional microfinance programs to give due importance to the religious sensitivities of musli miss for poverty alleviation efforts to succeed in these societies there is need for an appropriate model that is rooted in islam and conforms to beliefs cultures of the muslim clients
i am also thankful to my dear colleagues at ibf net a brothers shafeeq and azad a and to dr ausaf amad president ibf net in particular for undertaking a thorough review of the manuscript and making many useful suggestions for improvements that i have tried to incorporate in the text

muslim societies fare far worse than the rest of the world in the matter of addressing the problem of poverty
billion people stretching from senegal to the philippines a comprising six regions north africa subsaharan africa the middle east central asia south asia and southeast asia

they need a range of services including credit savings money transfer facilities and insurance in many for miss micro credit micro credit as offered by conventional microfinance institutions mfis in muslim countries violates the fundamental prohibition of riba that the islamic shariah mandates
emergencies include personal crises like sickness or injury the death of a bread earning member or the loss of employment and theft as also natural calamities and disasters like earthquakes floods and famines

micro insurance poor people like other persons but probably more intensely face a variety of risks and uncertainties such as death or sickness of the bread earning member in the family or loss of crops livestock and housing due to natural calamities
to serve poor people well microinsurance must be responsive to priority needs for risk protection easy to understand and affordable

to sum up microfinance implies provision of financial services to poor and low income people whose low economic standing excludes them from formal financial syste miss access to services such as credit venture capital savings insurance remittance is provided on a micro scale enabling participation of those with severely limited financial means
a livelihood survival enterprise is said to be one into which the entrepreneur is often pushed for want of more profitable alternatives whereas one is attracted or pulled into a growth viable enterprise by considerations of profitability and is an entrepreneur by choice

the following are the key characteristics of livelihood enterprises o the enterprise is often one of many part time or seasonal enterprises undertaken to supplement family income
as distinct from livelihood enterprises growth enterprises usually involve the moderately poor or the graduated poor who have been largely successful in coming out of extreme poverty and destitution and are seeking to move upwards

members of these small groups are trained regarding the basic elements of the financing and the requirements they will have to fulfill in order to continue to have access to funding
the main point of departure of microfinance from mainstream finance systems is its alternative approach to collateral that comes from the concept of joint liability

a number of variants of the model exist but the key feature of the model is group based and graduated financing that substitutes collateral as a tool to mitigate default and delinquency risk
the model involves an implementing agency that establishes individual village banks with about thirty to fifty members and provides external capital for onward financing to individual members

it appears therefore that there is nothing in the microfinance models that makes them fundamentally inconsistent or incompatible with the islamic values a subsequent chapter provides more details on implementation of the above models in a shariah compliant manner

to sum up the principles broaden the definition of microfinance from microcredit to provision of an array of financial services such as savings insurance and remittance
microcredit may not always be the answer to development proble miss other kinds of support facilities may work better for people who are so destitute that they are without income or means of repayment

in an islamic system far greater priority is given to the needs of the chronically poor than those of the poor or the moderately poor or the not so poor
sustainability through a shift from a charity based donor dependent approach to a market based for profits approach emphasizing systemic efficiency and transparency and restricting use of donor funds to capacity building

the safety nets may then be linked with microfinance programs so that the same individuals may move through several stages a from abject penury to a stage where they are able to meet their consumption needs then to a stage where they come to acquire necessary technical and entrepreneurial skills for setting up microenterprises and then to a stage where they are able to obtain required funds from micro financing institutions mfis and have the microenterprises up and running

in traditional male dominated muslim societies the funds provided to women end up with the male members in the family while the women themselves end up carrying the business and financial risk

chapter islamic approach to poverty alleviation all principles or laws in islam owe their origin to its holy book a the quran and the sayings and deeds of its prophet peace be upon him encapsulated in books of hadith
islamic jurists have unanimously held the view that it is the collective obligation fard kifayah of a muslim society to take care of the basic needs of the poor

economic empowerment while islam strongly encourages charity from the giver s point of view it seeks to minimize dependence on charity from the beneficiary s point of view and restricts the benefits to flow to the poorest of poor and the destitute who are not in a position to generate any income and wealth
he the prophet asked have you nothing in your house he the man replied yes a piece of cloth which we wear or which we spread on the ground and a wooden bowl from which we drink water

he the prophet asked twice or thrice who will offer more than one dirham another man said i shall buy them for two dirha miss he the prophet gave these to him and took the two dirhams and giving them to the man of the ansar he said buy food with one of them and hand it to your family and buy an axe and bring it to me
access of the poorest of the poor to the program the prophet peace be upon him was the spiritual as well as the political leader of the muslims and he was accessible to the poor and the needy at all times for economic and financial assistance

direct involvement of the program in capacity building in the runup to income generation and technical assistance to the beneficiary commitment of top management of the program this part of the hadith demonstrates a unique form of commitment and involvement on the part of the prophet peace be upon him in the program of poverty alleviation
transformation of unproductive assets of the beneficiary into income generating ones through rigorous valuation on the basis of price discovery through auction method involvement of the larger community in the process often the poor own high market value assets such as land in a prime city location without being able to derive income or benefit from the asset

as the holy quran asserts o ye who believe when you deal with each other in transactions involving future obligations in a fixed period of time reduce them to writing and let a scribe write down faithfully as between the parties the import and significance of this verse is often not fully understood
when someone remarked how often you seek refuge from heavy debt he replied when a man gets into debt he speaks and tells lies and he makes a promise and breaks it bukhari and muslim

it should be noted however that group guarantees tied with financial interests may soon degenerate into group tyranny and oppressive behavior by economically and socially stronger members of the group unless group formation and activity is accompanied with inculcation of islamic spirit of solidarity brotherhood and cooperation
whoever contracts a debt intending to repay it allah will repay it on his behalf and whoever contracts a debt intending to waste it allah will bring him to ruin bukhari

the idea of cooperation in essence highlights the need to ensure organization wide good governance irrespective of its form and the importance of taking care of rights of all stakeholders
similarly this norm appears to favor cooperation as a principle shaping the organizational structure and apparently points to a member based structure as the preferred choice over other organizational forms in the islamic framework

c want of knowledge jahl with regard to the characteristics of the price or of the subject matter such as the vendor saying to the potential buyer i sell you a piece of cloth which is in my home
f two sales in one transaction such as selling one article at two different prices one for cash and one for credit or selling two different articles at one price one for immediate remittance and one for a deferred one

how does this compare with the islamic approach to dealing with the poor and alleviating poverty islamic approach to alleviate poverty involves a charity based intervention inherent in the institutions of zakah and sadaqa to take care of consumption needs of the extremely poor and the destitute and create a social safety net
islamic norms and microfinance best practices while poverty eradication remains a cherished goal of islam and microfinance best practices is there a degree of commonality too in their approaches and strategies to poverty alleviation as mentioned in section

it provides for the basic conditions of sustainable and successful microfinance blending wealth creation with empathy for the poorest of the poor
it favors equity based and cooperationbased models in contrast to mechanisms that create and perpetuate debt

large donations from international donor organizations have either provided the initial capital or helped meet the deficits of non government organizations in the development sector at least in the initial stages of their operations

the offerings zakah given for the sake of allah are meant only for fuqara poor and the masakeen needy and ameleen a alaiha those who are in charge thereof and muallafat ul quloob those whose hearts are to be won over and for fir riqaab the freeing of human beings from bondage and for al gharimun those who are overburdened with debts and fi sabeelillah for every struggle in allah s cause and ibn as sabil for the wayfarer this is an ordinance from allahand allah is all knowing wise

scholars note that the hadith in which prophet muhammad peace be upon him is reported to have said zakah is to be collected from the rich and paid to the poor a highlights the significance of this category
finally the eighth category ibn as sabil son of the road the way farer denotes any person who is far from his her home who because of circumstances beyond his her control does not have sufficient means of a livelihood at his her disposal

islamic law provides for elaborate rules relating to estimation of zakah base amount of wealth on which zakah is levied and the rates of levy that vary with forms of wealth
thus it rules out payment of zakah as a general contribution to a welfare fund to cover its administrative overheads and insists on ensuring actual flow of funds to the eligible individual beneficiaries

in their zeal to bring about economic empowerment proponents often tend to undertake large investments in education health care and other social welfare projects benefiting the poor the not so poor and even the rich or engage in financing of microenterprises resulting in drying up of funds for meeting immediate consumption needs of the poorest of the poor

it gives an interesting example of a group of peasants operating a chicken husbandry program financed through interest free loans by rumah zakat to illustrate the difference in the paradig miss when the peasants were asked why they proposed chicken husbandry program instead of a program related farming management or the development of agricultural sector they said that the agricultural sector was not promising a better life for the peasantry

those who venture are confronted with the possibility of remaining in debt for extended periods if liberal waivers are not granted to them in case of inability to pay in the true spirit of qard hasan
in case of existence of undistributed surplus a highly unlikely scenario in the presence of large scale poverty in muslim societies these may be invested for temporary periods but must avoid high risk avenues

the institution of waqf draws its inspiration from the spirit of giving contained in quranic verses such as you shall never attain piety righteousness until you give from what you love it is reported that with the revelation of the aforementioned verse a large number of companions of the prophet peace be upon him began making awqaf of their best and most valuable properties

it is pertinent to note that rules of waqf have historically evolved with the primary purpose of protecting and preserving the waqf which is a gift to the almighty often from usurpers corrupt practices of mutawallis or external aggressors and also to protect the original purpose and stipulations of the founder waqif

do the rules of awqaf permit development of awqaf property according to the resolutions of islamic fiqh academy india at its tenth fiqh seminar on awqaf issues held in october at mumbai india in a situation where the income of a waqf is quite sufficient it is not suitable to sell it off just for the purpose of generating more and more income because there is ample risk of loss of the original waqf

the total amount of rent paid to the waqf constituted the profit and was divided into three parts the first part was used to finance the charitable purpose for which the waqf was established in the first place the second part was used for administrative expenses and the last part was added to the original capital so as to protect it from inflation
if waqf is to play a catalytic role in poverty alleviation through education training leading to skills improvement and capacity building then one clearly sees merit in the following possibilities as examples waqf of use of a building for ten years waqf of copyrights of books by an author waqf of subscription to a research journal for five years waqf of a known percentage of salary every month for five years and so on

it is pertinent to note here that many islamic charities prefer these waqf type organizational forms due to a variety of reasons such as absence of waqf specific laws lack of clarity and unnecessary rigidities with local waqf laws where they exist ease and convenience in dealing with officials conversant with mainstream laws and regulations avoiding government interference and control of waqf properties and the like

a c who is it that will lend allah a qard hasan which he will multiply for him the lender many times and for him shall be a generous recompense a c verily those who give sadaqa men and women and lend to allah a qard hasan it shall be increased manifold to their credit and theirs shall be an honorable good reward

further charging the borrower on the basis of actual operational costs also requires that any excess charge may be refunded back to the borrower after the actual operational costs are ascertained at the end of the accounting period
as experience has shown linking credit invariably to microenterprises may prove to be counterproductive and the current thinking favors a financial services approach to tackling poverty that does not distinguish between borrowing for consumption or productive purposes

qard hasan funds can be divided into at least four categories family qard hasan funds workplace qard hasan funds community or village qard hasan funds and large qard hasan funds

microa savings cash waqf donor physical assets qard hasan waqif microfinance self help muzakki group economically microa takaful active skills training zakah fund economically safety net inactive guarantee figure model of microfinance using islamic not for profit modes the model may be described in terms of activities as follows
a non profit model of microfinance so far we have discussed three major non profit modes of islamic microfinance a zakah awqaf and qard hasan

groups members are encouraged to form a takaful fund to provide micro insurance against unforeseen risks and uncertainties resulting in loss of livelihood sickness and so on the distinguishing feature of this model not hitherto discussed is the use of kafala as a guarantee mechanism at the group or individual level
leveraging philanthropy monetary waqf for micro finance paper presented to a symposium on islamic micro finance at harvard law school harvard university in april

the members of such groups do not belong to the extremely poor or the destitute category and are in a position to create wealth for themselves for the islamic microfinance institution ismfi and for the society
as discussed in chapter one the poor need a range of microfinance services such as micro savings micro credit micro equity micro takaful and micro remittance

it may be noted here that islamic micro savings products modeled after the contracts of wadia and qard do not allow any excess over and above the principal either as a stipulation in the contract or even as a unilateral gift by the microfinance institution that is not customary

it should be noted here that when the savings products are remunerated on the basis of revenue sharing rather than profit sharing the underlying shariah mechanism is no longer the classical mudaraba but perhaps resembles the classical wakala or joala contract under which the depositor appoints the microfinance institution to manage its funds and considerable flexibility remains in the matter of prescribing the method and quantum of reward for the microfinance institution
micro credit the islamic alternative to interest based conventional loan is tradebased or lease based credit that permit the ownership and or use of commodities or physical assets needed for productive enterprise while deferring the payments to future time periods

islamic micro savings products in indonesia in indonesian rural and microfinance the islamic rural banks called bprs and islamic savings and loan cooperatives called bmt play a significant role
bprs artha fisabilillah offers three mudaraba savings products all voluntary and withdrawable at any time which differ only by target group one remuneration free savings product for religious purposes and a fixed deposit product with different maturities

the latter means a situation where the ismfi has not taken the physical delivery of the commodity yet it is in control of the commodity with all the rights liabilities and risks including the risk of destruction
unlike profit sharing mechanisms bai muajjal does not require the client to maintain written records that are often unavailable at the micro enterprise level or if available the client may be unwilling to share them

rds uses bai muajjal where the bank is supposed to purchase the commodity required by its client from the vendor and resell the same to the client at a profit as the shariah compliant mode of financing
it is perhaps not a sensible idea to finance an income generating asset through bai muajjal for a hungry man without finding a way to meet his immediate need a food for him and his family

in a conventional financial lease the lessor transfers substantially the risks and rewards incidental to the ownership of the leased assets to the lessee even while the title of the leased asset may or may not eventually be transferred to the lessee
while the checks and balances in terms of adequate documentation showing ownership and constructive possession are relatively easy to put in place in case of mainstream ifis where financing involves large amounts and transactions are fewer in number the same is extremely difficult in the context of microfinance

thus the leased asset remains in the risk of the lessor throughout the ijara period in the sense that any loss damage or loss caused by the factors beyond the control of the lessee shall be borne by the lessor
other modes of extending credit besides the above there are several other interesting modes of extending credit that have been developed and are in use in mainstream islamic finance

unlike conventional microfinance where defaults may result in additional interest payments and or rescheduling of loan and prepayment may result in rebates islamic modes do not admit the possibility of any payment in excess of the original amount of debt
islamic scholars generally permit the ismfi to impose a penalty on the defaulting client to act as a deterrent against willful default but such penalty must be donated to a charity

the ismfi called rabb al mal is the owner of the capital and the micro entrepreneur called mudarib is responsible for the management of the business and provides professional managerial and technical expertise for initiating and operating the business enterprise or project
mudaraba may also be an unrestricted one mudaraba al mutlaqa in which case the mudarib may invest the capital provided in any business he deems fit

in order that these services are provided in a riba free manner scholars insist that the quantum of fee is delinked from the quantum of funds involved and is based on the costs incurred in the process of offering the services
even in the hypothetical situation that profits were known the borrower has to repay a different amount each period and the loan officer has to collect a different amount each period

program carefully identifies the poorest of the poor and the destitute who are economically inactive and directs a part of zakah funds towards meeting their basic necessities as grant seeks to provide a safety net microa savings cash waqf donor physical assets fora profit waqif microfinance self help muzakki group economically microa takaful active skills training zakah fund economically safety net inactive guarantee figure composite model of islamic microfinance
financing is provided using a combination of for profit debt based modes such as bai muajjal ijara salam istisna or isijrar or equitybased modes such as mudaraba or musharaka or declining musharaka

some of the unique features of this model are i musharaka type structure owned and managed by the poor ii financing based on the concept of murabaha a high profit rates with net profits shared among members iii good governance through committees with sound election and voting procedures iv project management team responsible for creating awareness of microfinance practices training of committee members v financial management of the funds based on standardized by laws and statutes this section draws heavily on framework for developing islamic microfinance services policy paper irti islamic development bank jeddah saudi arabia
in the middle east north africa mena region several successful experiments have been undertaken recently i the sanadiq project at jabal al hoss in syria ii the mu assasat bayt al mal in lebanon and the iii hodeidah microfinance program in yemen

vi financially viable operations with repayment rates close to cent percent vii equal access to both men and women as owners and users viii sanadiq apex fund for liquidity exchange and refinancing and ix support from undp in the form of matching grant equal to minimum share capital of village fund

islamic microfinance institutions in indonesia may be placed in three categoriesthe microfinance divisions of islamic banks the islamic rural banks bprs a subcategory of the rural banks bpr and the islamic financial cooperatives that are not part of the formal financial sector
at the grassroots level the baitul maal wat tamweels bmts are a large network of over two thousand institutions serving millions of poor indonesian musli miss these bmts are floated by a wide variety of organizations including islamic banks bprs and are at times backed by islamic organizations such as nahdatul ulama and muhamadiyah that currently have over hundred million members

islamic microfinance institutions ismfis in indonesia have displayed their sustainability and robustness in the face of grave financial crises even when the mainstream banks had to depend on governmental assistance to tide over serious financial proble miss it should be noted that indonesian bmts at the grassroots largely fall outside the financial regulatory mechanism since they operate as member based cooperative organizations similar to a musharaka structure without governmental assistance or intervention

technically it means exposing oneself to excessive risk and danger in a business transaction as a result of uncertainty about the price the quality and the quantity of the countervalue the date of delivery the ability of either the buyer or the seller to fulfil his commitment or ambiguity in the terms of the deal thereby exposing either of the two parties to unnecessary risks
bai salam a sale in which payment is made in advance by the buyer and the delivery of the goods is deferred by the seller

a musharaka contract is similar to a mudaraba contract the difference being that in the former both the partners participate in the management and the provision of capital and share in the profit and loss
istijrar same as bai istijrar istisna refers to a contract whereby a manufacturer contractor agrees to produce build and deliver a well described good or premise at a given price on a given date in the future

shariah refers to the corpus of islamic law based on divine guidance as given by the quran and the sunnah and embodies all aspects of the islamic faith including beliefs and practices
technically it refers to the a premium that must be paid by the borrower to the lender along with the principal amount as a condition for the loan or an extension in its maturity

zakah the amount payable by a muslim on his net worth as a part of his religious obligations mainly for the benefit of the poor and the needy
it is an obligatory duty on every adult muslim who owns more than a threshold wealth

about the author dr mohammed obaidullah is the founder of ibf net the islamic business and finance network the international institute of islamic business and finance iiibf the institute of microfinance and development imad and the manara development initiative india

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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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Number of Pages

75

Published Date

2008-11-08 11:49:32

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IsDB Microfinance

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