The Role of Islamic Microfinance in Poverty Alleviation Karen Hunt-Ahmed DePaul University April 9, 2011

Assumptions Poverty alleviation is a worthy goal. Islamic microfinance can help alleviate poverty.

You may ask… With the Islamic finance industry pushing $1 trillion, why have we not seen larger scale social investment? Should Islamic finance “innovation” include innovative ways to alleviate poverty? Because an institution is “Islamic” does this mean it has a particular obligation to invest in economic or community development? How does the the concept of Islamic microfinance operate to serve the goal of poverty alleviation?

Why now? With the Islamic finance industry pushing $1 trillion, why have we not seen larger scale social investment? Islamic Finance industry development and awareness Microfinance industry development and awareness Financial crisis Attention to business ethics Attention to human capital Is available in developing world Needs support from developed economies

Innovation? Should Islamic finance “innovation” include innovative ways to alleviate poverty? Entrepreneurship Distribution of wealth Social development goals Financial structures Repayment incentives Why not?

Special obligation? Because an institution is “Islamic” does this mean it has a particular obligation to invest in economic or community development? Social and human development goals of IF, but… Corporate social responsibility (Friedman) Does “Islamic” refer only to financial structures? Not everyone agrees

Poverty alleviation? How does the the concept of Islamic microfinance operate to serve the goal of poverty alleviation? “I think that there is a common goal in Islam and microfinance which can be summarized in making people self reliant, enterprising and self respecting. A solution to achieve the target of poverty eradication is by practicing microfinance in an Islamic way.” (DP/BIBF student)

Islamic Finance and Microfinance: Similarities Combine principle of social justice with financial services: worldwide trend Sensible risk management Link real economic activity to financing structure. Emphasize human development as well as profit maximization. Outcome benefits society.

Challenges to IslMF Community education High transaction costs Funding sources Legal structures Asymmetric information One suggestion…

Chicago Islamic Microfinance Project, NFP Karen Hunt-Ahmed Cynthia Shawamreh

CIMFP Mission Revitalize economically depressed neighborhoods in Chicago Offer Shariah-compliant equity and debt based microfinance Promote community health, education and well being of women and children Demonstrate the capacity of alternative financing models to have a positive social and economic impact Promote higher education of Islamic finance and Microfinance

Vision: meet challenges Administered by professors and students at a Chicago- based university to maximize transaction cost efficiencies Provide students with direct practical training experience in the Islamic finance industry. Revolving investment financing fund (the “Fund”) o Individual community members o Community groups o Foundations o Corporate donations Pro bono legal support (SNR Denton; Mayer Brown) Supportive services to encourage successful business development and build community and reduce information asymmetry

Islamic Vision "Islamic" part of it is related to: o financing structures, but also to o the idea of building community through empowering people who don't have access to conventional banking. o Customers don't have to be Muslim. o It is also (we hope) good public relations to have an "Islamic" organization involved in economic development.

Where? Currently most Islamic microfinance is located in the developing world. We believe that the model should be developed in the developed world.

Why? Transaction costs are very high in the US; stricter regulation will discipline the industry to lower transaction costs; these efficiencies can be transferred to the developing world. Donor fatigue: Funding sources available in the developed world through locals concerned with community and economic development. Integration and acceptance into US society

In sum… “If they take money from charity, they use the money to live. Therefore, they will keep on asking for more charities. When small loans are given to them they try to find ways to generate income out of it to solve the actual root of the problem which is income generation.” (DePaul/BIBF student Jan. 2011)

Thank you!