Presented by Dr Mohammed Obaidullah Senior Economist. Islamic Research & Training Institute Islamic Development Bank Group Jeddah, Saudi Arabia 12th Course in Intermediate Islamic Economics, Fall 2010

Microfinance & Islamic Finance Origin; Mission; Goals; Strategies Ethical Alternatives for Alleviation of Poverty and Exploitation; Redistribution of Income & Wealth Provision of Financial Services: Credit; Equity; Savings; Transfers; Insurance Enterprise Development: Livelihood & Growth Enterprises The Sustainability Argument & Mission-Drift 12th Course in Intermediate Islamic Economics, Fall 2010

Models of Islamic Microfinance Models in Both Conventional & Islamic Domains: Joint-Liability-Groups (JLG) Self-Help-Groups (SHG) Village-Banks Credit-Unions ROSCAs Pawning 12th Course in Intermediate Islamic Economics, Fall 2010

Models of Islamic Microfinance Uniquely Islamic Models: Qard Hasan Funds Baitul-Mal-wa-al-Tamweels (BMTs) Zakah Funds Awqaf-Based Institutions Composite Models 12th Course in Intermediate Islamic Economics, Fall 2010

IBF TRUST ZAKAH FUND MONETARY ASSETS WAQF PHYSICAL ASSETS MONETARY ASSETS WAQF PHYSICAL ASSETS MICRO SAVINGS MICRO TAKAFUL TAMWEEL FOR PROFIT FINANCING SKILLS TRAINING GUARANTEE SAFETY NET QARD HASAN SAFETY NET QARD HASAN ECONOMICALLY INACTIVE ECONOMICALLY ACTIVE A COMPOSITE ISLAMIC MICROFINANCE PROGRAM 12th Course in Intermediate Islamic Economics, Fall 2010

Issues in Microfinance Role of Charity Use of Donor Funds - Zakah, Sadaqa, Awqaf - for Relief & Basic Needs Fulfillment (Encourage Dependency & Culture of Delinquency?) Skill Improvement (Mismatch with Market Needs?) Guarantees (Encourage Credit Indiscipline?) Start-up Equity (For Institutions Only?) Cost Absorption (Unfair Competition to Private Capital?) 12th Course in Intermediate Islamic Economics, Fall 2010

Issues in Microfinance Role of Charity Insights from Important Studies Hashmi & Rosenberg(2006) Ajaz Khan (2008): Case of Islamic Relief Ascharya (2008): Case of BMTs Habib Ahmad (2008) IRTI (2008): Case of Rural Development Scheme of IBBL Harper (2008): Case of Akhuwat 12th Course in Intermediate Islamic Economics, Fall 2010

Issues in Microfinance Pricing of Financing Products Price-Cost-Profit Relationship in Microfinance Transparency in Pricing Price Ceilings 12th Course in Intermediate Islamic Economics, Fall 2010

Issues in Microfinance Pricing of Financing Products Component$100 Loan$1000 Loan$100 Qard$1000 Qard Financial Costs 10% 0% Loan Loss2% Operating Costs 50%15%50%15% Total Costs62%27%52%17% 12th Course in Intermediate Islamic Economics, Fall 2010

Issues in Microfinance Pricing of Financing Products Total Cost is relatively FLAT with respect to Loan Size; Flatter in case of IsMFIs What happens if Client is Charged a Fee (e.g. Islamic Pawning) that is Proportional to Loan Size or a Profit Rate as in case of For-Profit Mechanisms, such as, Murabaha, Ijara, Salam and Istisna ? 12th Course in Intermediate Islamic Economics, Fall 2010

Issues in Microfinance Pricing of Financing Products 12th Course in Intermediate Islamic Economics, Fall 2010 Loan Size Revenue, costs & profits XX1 C1 C R R1

Issues in Microfinance Pricing of Financing Products MFIs would avoid below-break-even financing. The problem would exist even in case of Qard where only actual costs may be recovered. Alternatively, MFIs would charge a higher price for smaller loans (to the detriment of poorer clients); The break-even point would shift upwards to the left making smaller loans viable. Use of charity funds would bring down the cost curve, resulting in a similar outcome without raising the price. Is regulatory ceiling on price (max the mark-up rate on Murabaha) also a solution? 12th Course in Intermediate Islamic Economics, Fall 2010

Issues in Microfinance Pricing of Financing Products 12th Course in Intermediate Islamic Economics, Fall 2010 Loan Size Portfolio Yield X R

Issues in Microfinance Debt vs. Equity Debt should be Avoided Debt is Computationally Simple; Less Demanding; May Degenerate into an Addiction - Multiple Lending Led to Recent MF Crisis Partnership-Based Structures Inherently More Robust; More Ethical & More Proactive to Client Needs Complexity with Equity-Based Financing Empirical Studies: Lack of Product Diversification in IsMF 12th Course in Intermediate Islamic Economics, Fall 2010

Issues in Microfinance Women Only Approach Pros: More Honest; Responsible; Loyal; Caring for Family; Less Resistant to Social Action Cons: Social Tensions; Misuse of Funds by Husband; Lack of Business Acumen Small increases in access to income may be at the cost of heavier workloads for women, increased stress and their health. Without substitute care for small children, the elderly and disabled, and provision of services to reduce domestic work many programs reported adverse effects (Linda Mayoux, 2002) Holistic Empowerment of Family; Not Women Alone 12th Course in Intermediate Islamic Economics, Fall 2010

Issues in Microfinance New Products Case Study IDB IsMF Program in Guinea Mudharabah and Salam Financing: Over 75 Percent Assisting poor groups to establish around 2500 small Mudaraba Funds (Average amount of US$11,000 per Fund) for promotion of Microenterprises in poor communities in most regions of Guinea Salam Financing Contributed to Solve Issues of : o Marketing; َ Quality & Competition through: o Establishment of Marketing companies; Training Programs and Institutions & International contracts 12th Course in Intermediate Islamic Economics, Fall 2010

Issues in Microfinance New Products Case Study IDB IsMF Program in Guinea 500 Women Working in Almond Treatment and Packing for Export 500 Women Working in Couscous Production and Packing for Export 500 Women Working In Oregano(zaatar) Treatment and Packing For Export Production Marketed In Western Countries 12th Course in Intermediate Islamic Economics, Fall 2010

THANK YOU 12th Course in Intermediate Islamic Economics, Fall 2010