Islamic micro-finance development
Islamic Micro-finance development
Poverty alleviation and development of Islamic Financial Services Industry
(IFSI) are two key strategic objectives of the Islamic Development Bank Group in
addition to enhancing economic cooperation among the member countries. These
are also enshrined in the IsDB Vision 1440H and the OIC 10-Year Work Plan. In
implementing the IFSI development objective, during 2006 IRTI anchored the
preparation of “Ten-Year Framework and Strategies (TYFS) for Development of
the Islamic Financial Services Industry”, a joint initiative of the IsDB Group and
Islamic Financial Services Board (IFSB). After an extensive consultation process
with all stakeholders, the IFSB Council approved the document in its Meeting held
in Kuala Lumpur on March 26, 2007. During the consultation process on the TYFS
document and at the IFSI Development Forum held in Kuwait as a side activity of
the 2006 IsDB BoG meetings, and organized jointly by IsDB/IRTI, IFSB and
General Council of Islamic Banks and Financial Institutions (CIBAFI), it was
widely felt that there is a need to focus on Islamic Microfinance Development as
top priority initiative in order to align IFSI development with poverty alleviation.
Despite progress in all significant segments, the IFSI has not addressed the
challenge of poverty alleviation by making financial services accessible to the
poor. This document is being developed with a view to forming the basis for a
dialogue among the various stakeholders, including, scholars, academicians,
regulators, policy makers, the IFSI and multilateral institutions. The document uses
a structure similar to one used in the well-known study “Access to the Poor” – a
comprehensive work undertaken by the Consultative Group to Assist the Poor
(CGAP), the multi-donor consortium dedicated to advancing microfinance. The
study examines the landscape and challenges confronting Islamic microfinance at
three levels – the micro level, the meso level and the macro level and suggests
strategic initiatives as solutions to the challenges.
The document highlights the importance of microfinance as a tool to fight
poverty. It presents the “best practices” models of microfinance and the consensus
principles of the microfinance industry. It goes on to argue that diverse approaches
are needed to minimize exclusion and that the cultural and religious sensitivities of
Muslim societies must be given due emphasis in any attempt to build inclusive
financial systems in order to bring a very large segment of the world’s poor
population into the fold of formal financial systems. It undertakes an analysis of the
levels of poverty in the IsDB member countries and also juxtaposes measures of
financial access to highlight the extent of exclusion in these countries. It highlights
the Islamic approach to poverty alleviation through microfinance and underscores
the need for a dual approach: a zakah and awqaf-based charity program for the
destitute, disabled and “unbankable” and a micro-finance program of wealth
creation. Some of the principles inherent in the latter are access of the poorest of xiv
the poor to the program; careful assessment of the financial health of the poor;
enquiry blended with empathy; insistence on contribution and beneficiary stake;
transformation of unproductive assets of the beneficiary into income-generating
ones through valuation (on the basis of price discovery through auction method);
involvement of the larger community in the process; meeting of basic needs on a
priority basis and investment of the surplus in a productive asset; direct
involvement of the program in capacity building in the run-up to income generation
and technical assistance to the beneficiary; commitment of top management of the
program; technical assistance in the form of imparting requisite training to the
beneficiary for carrying out the business plan/ income-generating project;
monitoring through a time-bound schedule and impact assessment through a feedback mechanism; and finally, transparent accounting of operational results. In short, the Islamic approach to poverty alleviation is more inclusive than the conventional one. The entire gamut of Islamic financial contracts for deposit
mobilization, financing and risk management in a Shariah compliant framework are also reviewed.
The document examines Islamic microfinance at three levels – micro level
(microfinance institutions, contracts/products and resources), meso level (financial
infrastructures) and macro level (policy and regulatory framework). The landscape
is analyzed, followed by discussing the major challenges and offering strategic
solutions to the challenges.
At a micro level the major challenges to microfinance providers emanate from
their diverse organizational structures, issues relating to Shariah compliance, lack
of product diversification and poor linkages with banks and capital markets. Some
strategic initiatives are suggested as solutions, such as, a move towards collective
resolution of Shariah issues, enhancement of product range through research and
financial engineering and increased participation of banks in microfinance through
provision of credit guarantees and safety nets. Meso level initiatives constitute
provision of education and training, better coordination and networking, technical
assistance through Awqaf and Zakah Funds, provision of rating services specific to
Islamic microfinance institutions in view of their unique risks through creation of a
rating fund. Macro level initiatives constitute development of an enabling
regulatory and policy environment. It is observed that the IsDB member countries
that have Islamic-finance-specific regulations do not have micro-finance-specific
regulations with a few exceptions. A number of regulatory and policy issues have
been identified for further deliberation and implementation.
The document envisages that Multilateral institutions like the IsDB can play a
major role in micro-, meso- as well as macro-level initiatives to strengthen the
Islamic microfinance industry. Some specific initiative that would go a long way in
strengthening the Islamic MF sector are:
1. At a micro-level
i. Participate in equity of Islamic financial institutions with a view to
creating specialized MF Divisions;
ii. Create Qard al-Hasan-specific Funds to support various qard al-hasan
based microfinance institutions across the globe;
iii. Create refinance facility to act as a whole-seller of Islamic
microfinance products for a chain of Islamic and conventional
microfinance retailers;
iv. Participate in equity of takaful and retakaful companies with a view to
developing micro-takaful products and services;
v. Design a Credit Guarantee Scheme for Islamic microfinance providers;
and
vi. Promote dialogue among Shariah scholars for collective resolution of
fiqhi issues related to microfinance.
2. At a meso level
i. Develop knowledge base through research in issues pertaining to
building Islamic inclusive financial systems;
ii. Document, collate and translate best-practices from across the world of
microfinance;
iii. Undertake training and education programs to impart microfinance
related special skills to bankers and training of trainers;
iv. Encourage formation of apex and regional industry associations with a
view to develop of Islamic microfinance through human resource
development, technical assistance, operational standardization and
financial product development, facilitation of vertical and horizontal
communication among Islamic financial institutions, advocacy and
participation in policy dialogue;
v. Create Zakah and Awqaf Funds at a global level dedicated exclusively
for poverty alleviation and linked to microfinance institutions
downstream; and
vi. Help create rating mechanism in member countries for Islamic
microfinance institutions.
3. At a macro level
i. Assist member countries to develop a regulatory framework for
Islamic microfinance;
ii. Support policy makers to ensure an enabling policy framework
conducive to the development of Islamic microfinance;
iii. Support and facilitate the integration of zakah and awqaf in financial
sector reforms and
iv. Build an effective alliance and forum of Islamic microfinance
providers and other stakeholders.
Poverty alleviation and development of Islamic Financial Services Industry
(IFSI) are two key strategic objectives of the Islamic Development Bank Group in
addition to enhancing economic cooperation among the member countries. These
are also enshrined in the IsDB Vision 1440H and the OIC 10-Year Work Plan. In
implementing the IFSI development objective, during 2006 IRTI anchored the
preparation of “Ten-Year Framework and Strategies (TYFS) for Development of
the Islamic Financial Services Industry”, a joint initiative of the IsDB Group and
Islamic Financial Services Board (IFSB). After an extensive consultation process
with all stakeholders, the IFSB Council approved the document in its Meeting held
in Kuala Lumpur on March 26, 2007. During the consultation process on the TYFS
document and at the IFSI Development Forum held in Kuwait as a side activity of
the 2006 IsDB BoG meetings, and organized jointly by IsDB/IRTI, IFSB and
General Council of Islamic Banks and Financial Institutions (CIBAFI), it was
widely felt that there is a need to focus on Islamic Microfinance Development as
top priority initiative in order to align IFSI development with poverty alleviation.
Despite progress in all significant segments, the IFSI has not addressed the
challenge of poverty alleviation by making financial services accessible to the
poor. This document is being developed with a view to forming the basis for a
dialogue among the various stakeholders, including, scholars, academicians,
regulators, policy makers, the IFSI and multilateral institutions. The document uses
a structure similar to one used in the well-known study “Access to the Poor” – a
comprehensive work undertaken by the Consultative Group to Assist the Poor
(CGAP), the multi-donor consortium dedicated to advancing microfinance. The
study examines the landscape and challenges confronting Islamic microfinance at
three levels – the micro level, the meso level and the macro level and suggests
strategic initiatives as solutions to the challenges.
The document highlights the importance of microfinance as a tool to fight
poverty. It presents the “best practices” models of microfinance and the consensus
principles of the microfinance industry. It goes on to argue that diverse approaches
are needed to minimize exclusion and that the cultural and religious sensitivities of
Muslim societies must be given due emphasis in any attempt to build inclusive
financial systems in order to bring a very large segment of the world’s poor
population into the fold of formal financial systems. It undertakes an analysis of the
levels of poverty in the IsDB member countries and also juxtaposes measures of
financial access to highlight the extent of exclusion in these countries. It highlights
the Islamic approach to poverty alleviation through microfinance and underscores
the need for a dual approach: a zakah and awqaf-based charity program for the
destitute, disabled and “unbankable” and a micro-finance program of wealth
creation. Some of the principles inherent in the latter are access of the poorest of xiv
the poor to the program; careful assessment of the financial health of the poor;
enquiry blended with empathy; insistence on contribution and beneficiary stake;
transformation of unproductive assets of the beneficiary into income-generating
ones through valuation (on the basis of price discovery through auction method);
involvement of the larger community in the process; meeting of basic needs on a
priority basis and investment of the surplus in a productive asset; direct
involvement of the program in capacity building in the run-up to income generation
and technical assistance to the beneficiary; commitment of top management of the
program; technical assistance in the form of imparting requisite training to the
beneficiary for carrying out the business plan/ income-generating project;
monitoring through a time-bound schedule and impact assessment through a feedback mechanism; and finally, transparent accounting of operational results. In short, the Islamic approach to poverty alleviation is more inclusive than the conventional one. The entire gamut of Islamic financial contracts for deposit
mobilization, financing and risk management in a Shariah compliant framework are also reviewed.
The document examines Islamic microfinance at three levels – micro level
(microfinance institutions, contracts/products and resources), meso level (financial
infrastructures) and macro level (policy and regulatory framework). The landscape
is analyzed, followed by discussing the major challenges and offering strategic
solutions to the challenges.
At a micro level the major challenges to microfinance providers emanate from
their diverse organizational structures, issues relating to Shariah compliance, lack
of product diversification and poor linkages with banks and capital markets. Some
strategic initiatives are suggested as solutions, such as, a move towards collective
resolution of Shariah issues, enhancement of product range through research and
financial engineering and increased participation of banks in microfinance through
provision of credit guarantees and safety nets. Meso level initiatives constitute
provision of education and training, better coordination and networking, technical
assistance through Awqaf and Zakah Funds, provision of rating services specific to
Islamic microfinance institutions in view of their unique risks through creation of a
rating fund. Macro level initiatives constitute development of an enabling
regulatory and policy environment. It is observed that the IsDB member countries
that have Islamic-finance-specific regulations do not have micro-finance-specific
regulations with a few exceptions. A number of regulatory and policy issues have
been identified for further deliberation and implementation.
The document envisages that Multilateral institutions like the IsDB can play a
major role in micro-, meso- as well as macro-level initiatives to strengthen the
Islamic microfinance industry. Some specific initiative that would go a long way in
strengthening the Islamic MF sector are:
1. At a micro-level
i. Participate in equity of Islamic financial institutions with a view to
creating specialized MF Divisions;
ii. Create Qard al-Hasan-specific Funds to support various qard al-hasan
based microfinance institutions across the globe;
iii. Create refinance facility to act as a whole-seller of Islamic
microfinance products for a chain of Islamic and conventional
microfinance retailers;
iv. Participate in equity of takaful and retakaful companies with a view to
developing micro-takaful products and services;
v. Design a Credit Guarantee Scheme for Islamic microfinance providers;
and
vi. Promote dialogue among Shariah scholars for collective resolution of
fiqhi issues related to microfinance.
2. At a meso level
i. Develop knowledge base through research in issues pertaining to
building Islamic inclusive financial systems;
ii. Document, collate and translate best-practices from across the world of
microfinance;
iii. Undertake training and education programs to impart microfinance
related special skills to bankers and training of trainers;
iv. Encourage formation of apex and regional industry associations with a
view to develop of Islamic microfinance through human resource
development, technical assistance, operational standardization and
financial product development, facilitation of vertical and horizontal
communication among Islamic financial institutions, advocacy and
participation in policy dialogue;
v. Create Zakah and Awqaf Funds at a global level dedicated exclusively
for poverty alleviation and linked to microfinance institutions
downstream; and
vi. Help create rating mechanism in member countries for Islamic
microfinance institutions.
3. At a macro level
i. Assist member countries to develop a regulatory framework for
Islamic microfinance;
ii. Support policy makers to ensure an enabling policy framework
conducive to the development of Islamic microfinance;
iii. Support and facilitate the integration of zakah and awqaf in financial
sector reforms and
iv. Build an effective alliance and forum of Islamic microfinance
providers and other stakeholders.
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