How Islamic Microfinance can Facilitate Rural Finance At 6TH Global Islamic Microfinance Forum In Nairobi, Kenya NOVEMBER 8TH 2016 PRESENTED by FARIDA TAHIR MANAGING DIRECTOR/CEO GRASSROOT MICROFINANCE BANK, NIGERIA www.grassrootmfb.org

Content nten Definition – Microfinance and Islamic microfinance • Sources of Islamic microfinance • Islamic Microfinance Contracts • Global overview of Islamic microfinance • The need for Islamic microfinance in rural areas • Opportunities and challenges of Islamic microfinance • Current position of rural finance in Nigeria • How Islamic microfinance can facilitate rural finance

Definition of microfinance “Microcredit, or microfinance, is banking the un-bankable, bringing credit, savings and other essential financial services within the reach of millions of people who are too poor to be served by regular banks, in most cases because they are unable to offer sufficient collateral. In general, banks are for people with money, not for people without.” (Gert van Maanen), Microcredit: Sound Business or Development Instrument, Oikocredit , 2004) Microfinance refers to an array of financial services, including loans, savings and insurance, available to poor entrepreneurs and small business owners who have no collateral and wouldn't otherwise qualify for a standard bank loan. Most often, microloans are given to those living in still-developing countries who are working in a variety of different trades, including carpentry, fishing and transportation

Definition ISLAMIC MICROFINANCE Islamic microfinance differs from conventional microfinance in that it must adhere to the same principles as Islamic finance, which is structured to provide products for Muslim customers that are in compliance with the code of ethics and conducts laid out under sharia law. It utilizes a range of models to avoid elements forbidden under sharia, namely interest (riba) and uncertainty and deceit (gharar). Financial instruments are therefore designed to provide funds in a manner that avoids both interest payments while still taking into consideration the need to cover overhead and the cost of financing if the MFI is to be sustainable, and shares the risk of the investment between the financier and recipient or places it on the MFI alone.. IMF is also defined as the provision of financial services to the poor subject to certain conditions laid down by “Islamic Jurisprudence”.

Objectives of Islamic microfinance The fundamental objectives of Shari’ah (Maqasid Sh ariah) aims to achieve the following: Protection of Religion (Al-Din) Protection of Life (Al-Nafs) Protection of Family (Al – Nasl) Protection of Intellect or Mind (Al ‘Aql) principles Protection of Property (Al-Mal) Thus, these are the principles upon which IMF was derived. It is to ensures wealth creation, distribution and redistribution of resource employment generation, financial inclusion and poverty alleviation.

SOURCES OF ISLAMIC MICROFINANCE Primary Sources - Quran - Sunnah Secondary Sources - Ijma’a (jurist consensus) - Ijtihad & Qiyas (analogy) - Others Let’s examine how Islamic Microfinance Products originated, Basically there are Four Main sources of Islamic Microfinance product, 1) Quran-e- Pak, the holy book of Muslims, we have derived many Islamic Microfinance product from Quran-e-Pak e.g Ijarah, Bai etc, the Second source of Islamic Microfinance is Sunnah, its mean the sayings & Practiced by the Holy Prophet Hazrat Muhammad Salalah wa all he walis, Many Islamic Microfinance Product have been derived from Sunnah such as Mudarabah, Wakala, Intisna etc , Ijma’a , the consensus among Jurists, some Microfinance Product derived from Ijma’a Like Late payments charity mechanism which is being utilized in Islamic Microfinance Sector, and the last source is Ijtihad & Qiyas ( Analogy ) , Takaful or Micro Takaful is example of Ijtihad. As per concern about Islamic Microfinance Product, I have segregated them into 4 categories for broader understanding about their mechanism. In partnership Mode, MFI’s & their clients enter into Partnership agreement for a business venture on profit and Lose sharing Mechanism. we have two Product in Partnership based mode, Musharakah & Mudarabah. In Trade based Mode, MFI’s & their Clients enter into trading agreements, the products of Trade based Modes are Murabahah, Musawamah, Salam and Instisna. There are two products in Rental based mechanism, Ijarah is Shariah Compliant mode of leasing and Diminishing Musharakah. There are some other Modes in Islamic Microfinance available, like, Qard-e-Hasan, Waqf & Zakhat, Islamic Cooperatives etc. We will discuss about these products latter on

Islamic micro finance contracts

Global overview of islamic microfinance Over 300 Islamic microfinance Institutions operate in 32 countries USD 1 billion market size. Indonesia, Bangladesh, Pakistan and Afghanistan have 80% share of Global Islamic microfinance industry (CGAP) Over 2 million active financing clients. Murabahah & Qarz-e-Hasan are the major Products. Share of Islamic microfinance in Global Islamic finance industry & Microfinance Industry is less than 1%

THE NEED FOR ISLAMIC MICROFINANCE IN RURAL AREAS Islamic asset-based financing can prevent diversion of funds for consumption Almost one-half of the 56 IDB member countries in Asia and Africa are classed as United Nations Least Developed Countries (LDCs), with poverty rate on the increase Approximately 46% conventional microfinance clients worldwide reside in Muslim countries Financial inclusion, rising poverty in rural areas, high unemployment in rural areas , religious obligation Large target segment is averse to the interest based microfinance products. Islamic Microfinance have proven track record that it deals with long lasting & complete solutions for sustainability. Offer effective alternative to informal lenders as “shail” system Will provide opportunity for poor or small farmers to produce, be self employed given the required capital and inputs.

OPPORTUNITIES AND CHALLENGES OF ISLAMIC MICROFINANCE Islamic microfinance’s exclusion of interest could alleviate a major criticism of conventional microfinance which has to do with high interest rates charged on loans Population of 1.2b, female 50%, unbanked/excluded 80% (Gautam Vir), poverty rate about 44% (world bank 2012) Market opportunities Unemployment rate (SA 26%, NGR 24%, Kenya & averaging 35% in north Africa) Limited number of Islamic microfinance institutions Regulatory challenges Lack of knowledge and awareness of IMF systems   Regulatory challenges – frameworks, intervention funds, absence of halal instruments for investments.

CURRENT POSITION OF RURAL FINANCE IN NIGERIA AND OTHER AFRICAN COUNTRIES Few no of financial institutions are located in rural areas Adoption of technology to provide services to farmers e.g solar system, mobile banking, agent Rural urban migration Non availability of products to support IMF in rural areas Decaying Infrastructural development Bias to conventional finance due to ‘riba’ as contained in the holy Qur'an 2:276 (And Allah has permitted trade and prohibits interest”)  

HOW ISLAMIC MICROFINANCE CAN FACILITATE RURAL FINANCE Taking banking closer to the poor (rural banks) Providing Shariah compliant products and services Investment in rural urban transportation Provide warehousing facilities Create market linkages Provision of entrepreneurship trainings and skills acquisition, sensitization/awareness creation, facilitate group formation, Provide added services under ‘wakala contract’ e.g marketing and sales representatives, electronic banking, other payment services etc Address gender disparity to enable considerable financial inclusion and sustainability.  

CONCLUSION It is very important for (stakeholders) to note that given the huge task ahead of us, solutions to financial needs in rural Africa must be curved around specific and general demands of individuals and the market environments. The religious beliefs, customs and values of the people we serve are a MUST to consider when reaching out to them. The poor and other marginalized groups are complex being to deal with, yet their needs are very important to address in order to facilitate growth and development of our societies.

Wallahu `Aalam Thank you f.tahir@grassrootmfb.com +2348038361330, +2348175443912