Financing the Poor: Towards an Islamic Microfinance
An Islamic Finance Industry Perspective
Iqbal Khan and Aamir A. Rehman
Harvard Law School - 14 April 2007
Agenda
I.
Islamic finance is an inclusive proposition
II.
Engaging the poor is not easy
III. Industry has potential to lead and address the situation
IV. Next stages
Financing the Poor: Towards an Islamic Microfinance | 2
Islamic finance is more than financial contracts
 Fundamental tenants are derived from Shariah
–
Absence of interest-based transactions
–
Avoidance of economic activity involving speculation
–
Prohibition on production of goods and services which contradict the values of Islam
 Concept is grounded in ethics and values
–
Principles akin to ethical investing
–
Emphasis on risk-sharing and partnership contracts
 Islamic finance offers an alternative paradigm
–
Asset-backed transactions with investments in real, durable assets
–
Stability from linking financial services to the productive, real economy
–
Credit and debt products are not encouraged
–
Restrains consumer indebtedness
 Islamic banking is community banking
–
Serving communities, not markets
–
Open to all-faith clients
–
Instruments of poverty-reduction are inherent part of Islamic finance – zakat & qard hasan channels
Industry is outcome of CSR and ethical principles
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Industry has not yet reached full potential
 Industry initially had to demonstrate commercial viability
–
First Islamic bank established in 1975
–
Initial market strategy focus on revenue-generating projects
 Industry is young and gaining mainstream relevance
–
Industry-building infrastructure setup as recently as 1991 (AAO-IFI)
–
Reputational risk management led to careful dealing with non-regulated charities industry
 Industry is building stakeholder connectivity
–
State-controlled waqf and zakat institutions not proactively engaged with Islamic finance
–
Regulatory hurdles imposing investment restrictions in government-owned institutions
 Islamic banking develops link to economy
–
Robust banking system enables economic development
–
Vehicle for financial and economic empowerment
–
Deepening bankable population and unlocking “dead capital”
 Responsibility of poor was sidelined for growth first
–
Industry began as MitGhamr Savings Associations (1963)
–
Nile Delta experiment to mobilise local villager savings for local socio-economic development
Islamic finance has not forgotten the poor
Financing the Poor: Towards an Islamic Microfinance | 4
I.
Islamic finance is an inclusive proposition
II.
Engaging the poor is not easy
III. Industry has potential to lead and address the situation
IV. Next stages
Financing the Poor: Towards an Islamic Microfinance | 5
Bottom of Pyramid market carries additional
responsibility
 Engaging the poor requires balance between profitable and responsible lending
–
Lending enterprise needs to be wary of debt spiral
–
Engagement programme must be self-sustaining
Lending profitably
Lending responsibly
 Despite engagement of less privileged customers
 Prevent over-indebtedness
 May not be responsible financing:
 Microfinance is good example
–
Sub-prime lending
–
Fiduciary business to uplift poor
–
Debt consolidation companies
–
Affordable lending to enable sustainability
 Bottom of Pyramid market has long been neglected
–
Market is well underserved – half of planet live on less than $2 a day¹
–
Islamic finance has ready moral and product framework to assist
–
Islamic finance can unlock bankable wealth and enable “trickle down” effect
Source: 1. HBS Bulletin March 2007
Assisting the poor is a pillar of Islam
Financing the Poor: Towards an Islamic Microfinance | 6
I.
Islamic finance is an inclusive proposition
II.
Engaging the poor is not easy
III. Industry has potential to lead and address the situation
IV. Next stages
Financing the Poor: Towards an Islamic Microfinance | 7
Islamic microfinance is a complementary initiative to
Islamic finance
New-market
innovation
Asset
orientation
Islamic finance
Microfinance
Reaches previously underbanked population
Focus on uplifting the poor
Finance based on worthiness of ventures and assets, and not based on wealth
Core concern
Routed in Shariah-compliance
Models advocate:
Equitable
Fair access to capital
- financial inclusion
- entrepreneurship
- risk-sharing through partnership financing
Microfinance mission reflects part of Islamic ethos
Financing the Poor: Towards an Islamic Microfinance | 8
Microfinance fits the spirit of Shariah-based industry
development
 Industry needs to shift from Shariahcompliant to Shariah-based
–
Mindset of consumer debt is not in Islamic spirit
–
Investment and debt for productive use is
allowed
–
Microfinance provides credit for the real
economy
Shariah-based solutions

Income-sharing products

Shift from debt-based
product offering
 Microfinance fits need of Muslim
communities
–
–
Savings &
Indebtedness
Investments
Muslim-countries in spectrum of poverty and
underdeveloped social infrastructure
Islamic microfinance will attract under-banked
and underserved “economically active” poor
 Islamic finance provides interest-free
solutions for job creation
–
Musharaka/Mudaraba PLS arrangements
–
Murabaha/Ijara commodity purchases
x
Shariah-compliant products

Letter of the law

Replicating conventional
credit service offering
Islamic microfinance supports industry morals and ground needs
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Islamic finance is a platform to build microfinance
– Create charitable funding channels for
Microfinance institution
Partnership
– Combine Islamic finance industry
synergies and distribution assistance
Philanthropic
– Bring capital market access via Islamic
finance industry and match with efficient
institutions
– Initiate joint ventures with successful,
business-run enterprises
2 3
Commercial
1 4
– Assist in building Islamic microfinance
institutions with Islamic finance products
– Use charitable endowments as start-up,
risk-free capital
– Build scale and reach of Islamic
microfinance managers
Organic
– Migrate successful models to other
markets
Industry can build commercial partnerships with Microfinance managers
Financing the Poor: Towards an Islamic Microfinance | 10
I.
Islamic finance is an inclusive proposition
II.
Engaging the poor is not easy
III. Industry has potential to lead and address the situation
IV. Next stages
Financing the Poor: Towards an Islamic Microfinance | 11
Islamic microfinance requires combined efforts
Requires institutional will
Modest capital commitment
Best-of-breed microfinance institutions
Create successful partnership formula
Financing the Poor: Towards an Islamic Microfinance | 12
Thank you
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