Creating an Islamic Microfinance Model - by Sajjad Chowdhry
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2006-11-21 03:58:48 UTC
Creating an Islamic Microfinance Model - The Missing Dimension

By Sajjad Chowdhry,
Posted on Nov 18, 2006

The recent awarding of the Nobel Peace Prize to Dr. Muhammad Yunus and
the Grameen Bank of Bangladesh highlights a new awareness of the potential
and power of microfinance programs. What's more, the Nobel committee has
validated the link between poverty alleviation and peace saying, "Lasting
peace can not be achieved unless large population groups find ways in which
to break out of poverty."

This admission gives credence to the growing movement to promote socially
responsible/ethical ventures - both large and small. But given this emphasis
where is Islamic finance in the world of microfinance?

Missing the point of economic development

Most economic development projects focus on grandiose infrastructure or
industrial projects. While jobs are a necessary outcome the process of
empowering individual producers to become economically self sufficient is
usually not a part of the equation. In the process we end up with large
ventures that may provide jobs to thousands in the local population but only
tangentially. In other words, an oil refinery which requires skilled labour
will only hire workers that have experience or that have the capacity to be
trained for work in the refinery. Or we give people their fish but don't
teach them to fish themselves.

What is Microfinance?

Microfinance is usually defined as the provision of financial services and
products to those whose low economic standing excludes them from
conventional financial institutions or programs. These can include
microcredit, small scale venture capital, savings, and some forms insurance.
Access to each of these services is provided on a micro-scale allowing those
with severely limited financial means to participate.

Theoretically, the main point of departure for microfinance from
conventional credit/finance systems comes from the concept of joint
liability. In this concept a group of individuals form an association to
apply for financing. Members of these small groups are trained regarding the
basic elements of the financing and the requirements they will have to
fulfil in order to continue to have access to funding.

Financings are disbursed to individuals within the group after they are
approved by other members in the group. Repayment of the financing (a loan
in this example) is a joint responsibility on all of the group's members.
In other words they share the risk. If one defaults, the entire group's
members suffer. It's a rudimentary but effective credit scoring mechanism
that may mean a temporary suspension from the program and therefore no
access to financing for the group or other penalties. In most cases,
microfinance programs are structured to give credit up to a maximum amount
and require repayment within a short time period - usually a few weeks or at
most a few months.

How Microfinance changed development

When the first modern microfinance experiments were being conducted in the
1960s and 1970s, the dominant development programs focused on a particular
aspect toward which donor resources could be directed. For example, a farmer
needing seeds to plant for produce was given seeds for cash crops or he was
given loans at interest rates below market to lessen the financial burden of
repayment. But what was not happening was the grass roots support of people
who aspired to be self sufficient but did not have a ready business idea or

What Dr. Muhammad Yunus of Bangladesh started in the mid to late 1970s was
to focus on people who generally did not have the means to fund a new
business or craft. Inspired by the terrible Bangladesh famine of 1974, he
made a loan of $27 to a group of 42 families enabling them to create small
items for sale without the heavy burdens of repaying moneylenders who
charged exorbitant rates of interest.

This effort gave individuals and families the financial fuel they needed to
stand on their own feet without the repressive burden of repaying
moneylenders beyond their means. Borrowers used loan proceeds to buy raw
materials to manufacture products for sale in the market; purchase livestock
to sell milk/eggs; or open small shops.

Rice-husking: a popular business with Grameen Bank borrowers. Image:
Grameen Bank

7000 Micro-Finance Institutes serving 16 million poor people - World
Bank estimate

Total Turnover for MFI's estimated $2.5-$7 billion. Repayment Rates of

US$ 21.6 Billion needed to provide microfinance to 100 million of the
world's poorest families
- Microcredit Summit estimate

The World Bank now estimates that there are over 7000 microfinance
institutions, serving some 16 million poor people in developing countries.
The total cash turnover of MFIs world-wide is estimated at US$2.5 billion
and the potential for new growth is outstanding. The Microcredit Summit
estimates that US$21.6 billion is needed to provide microfinance to 100
million of the world's poorest families.

Other estimates tell us that worldwide, there are 13 million microcredit
borrowers, with USD 7 billion in outstanding loans, and generating repayment
rates of 97 percent; growing at a rate of 30 percent annual growth. Despite
all this less than 18% of the world's poorest households have access to
financial services (Grameen Foundation USA).

Similarities between IF and Microfinance

So we now return to where we started - where is Islamic finance in the world
of microfinance? If Islamic finance is growing so rapidly all over the world
why don't we hear about it more in microfinance circles? After all, both
systems advocate entrepreneurship and risk taking through partnership
finance. They are also forms of finance which represent unconventional
solutions to financial needs, focusing on cash-poor but promising business
activities. And most importantly, both Islamic finance and microfinance
theoretically start from egalitarian approaches as they are open to all
customers with different and sometimes coinciding needs without setting any
apparent restriction to different categories of clientele.

But it's interesting to note that Islamic Finance principles are still not
widely adopted by conventional microfinance and microcredit institutions.
According to Dr. Abbas Mirakhor, Executive Director of the IMF:

"[An] important function of Islamic finance that is seldom noted . is the
ability of Islamic finance to provide the vehicle for financial and economic
empowerment . to convert dead capital into income generating assets to
financially and economically empower the poor..."

Of note in this regard is a theoretical framework for a mudarabah based
microfinance program which was advanced by Atif Raza in the Summer 2005
issue of Islamica Magazine. (see related links)

Why this state of affairs?

Why has Islamic finance not been seen more widely in the micro-finance

According to Mayadeh al-Zoghbi, a microfinance professional ??, Islamic
finance principles are difficult to implement on a profit and loss sharing
basis in rural settings. They require long-term involvement by the
microfinance institutions (MFI) in the form of technical/business assistance
which raises the cost of implementation.

In addition, there is too much uncertainty in profit/loss sharing models for
MFIs to be able to understand and predict their present and future cash
flows. Therefore, in microfinance too, as in the world of high finance,
Islamic debt and leasing instruments dominate.

For example, the Hodeida Microfinance Programme in Yemen based its
endeavours on a Murabaha model citing its ease of use. A case study of the
program cited that the use of Murabaha "eliminates the need for written
records, often unavailable at the micro enterprise level or if available (20
percent of HMFP clients keep books), the client may be unwilling to share
them." Other reasons to prefer Murabaha over equity based financing methods

. a well-defined contract exists, with pre-defined amounts
. there is no opportunity for abuse on the part of the client through
inaccurate or false record-keeping. i.e. falsely claiming losses where there
were profits
. a fixed contract creates a less complicated process and a lower
implementation cost to the institution

According to the United Nations Human Settlements Programme (UN Habitat),
"Microfinance services, including some compliant with Islamic law (Shari'ah)
in the Arab region, tend to be limited to credit for enterprise... The most
commonly used Islamic transaction is one in which the MFI [microfinance
institution] purchases goods at the request of the 'borrower' and then sells
the goods to the 'borrower' for a fee to cover administrative costs, with
repayments in instalments (Murabaha)."

My conversations with Ms. Al-Zoghbi and other microfinance professionals
yielded few results for MFIs using Islamic finance. In fact, in addition to
the Hodeida Programme in Yemen the only other bona fide attempts at applying
Islamic finance to microfinance were limited to Akhuwat in Pakistan and the
Mali-North Program.

Bridging the Gaps

In many ways, the world of microfinance has followed the conventional world
in its use of Islamic debt based instruments to limit risk while being able
to more easily anticipate returns.

While on the surface this is understandable, the curious part of the puzzle
is that microfinance is already more structurally aligned to applying
Islamic equity financing structures. As mentioned previously, microfinance
programs are based on group sharing of risk and personal guarantee while
maintenance of trust and honesty is tied to the availability of future

This model should allow for the inclusion of a Musharaka based model, or in
the least, a model of collective guarantee. MFIs which look to implement
Islamic finance in their programs can also develop Mudarabah based programs
on the contours proposed by Atif Raza Khan in a Summer 2005 issue of
Islamica Magazine. In short, MFIs can find Islamic finance a natural fit in
their programs - both debt and equity based.
2006-11-21 18:28:08 UTC
Post by VognoDuut897
Creating an Islamic Microfinance Model - The Missing Dimension
Bangladesh's Crying Need - A Tradition Of Graceful Transfer Of Power
Thru Elections .....

US Assistant Secretary Of State Issues Stern Warning To Bangladesh
Regime During Dhaka Visit .....


Daily Star, Dhaka, Bangladesh
Saturday, January 28, 2006

Rocca Terms Next Polls Critical
Only level playing field will give winners legitimacy

The visiting US Assistant Secretary of State for South Asian Affairs
Christina Rocca yesterday termed the next elections critical for
Bangladesh and called for a 'level playing field' and free, fair polls
with participation of all political parties to ensure the winners'

"Elections next year are so critical that only a level playing field
and elections that are free and fair will give the winners legitimacy,"
she told a crowded media conference at the American Center in the city,
wrapping up her 3-day visit yesterday.

On the government-opposition conflicts over election issues, Rocca
said, "Our hope is that parties will manage to deal together in order
to close together on the day of election so the people of Bangladesh
can choose."

About opposition's threat to abandon the election if the government
does not accept their reform proposals, she said, "Our hope is that all
parties will participate in the elections and the principle of level
playing field will be maintained to give legitimacy to winners."

About reform of the caretaker government system as demanded by the
opposition, the US assistant secretary said, "It is not US policy to
get into internal politics of a country."

She said Bangladesh can be proud of its tradition of democracy, of
having three consecutive free and fair elections and peaceful turn over
of power and of its people who are very vibrant about their democratic

Suggesting that the opposition hold debates in parliament, she said,
"There is more to a strong democracy than elections: We would also like
to see the opposition contribute to public debate in a meaningful way
through public institutions such as parliament rather than disruptive
means such as hartal."

About her meetings with government officials and leaders of the major
political parties, she said all would agree that Bangladesh faces some
important challenges right now and that overcoming those challenges
will require joint efforts by all the parties concerned.

"One of the most immediate challenges right now is countering
terrorism. The JMB bomb attacks in Bangladesh demonstrate that
terrorism is a global problem that confronts us all," she noted.

Pledging US assistance to combat terrorism, Rocca said, "We would like
to see the government arrest and convict those responsible, and we are
prepared to offer assistance as requested."

Asked if it would be possible for the government to curb militancy
effectively keeping Jamaat as an ally, she said there are lots of
allegations, but Jamaat chief Nizami, whom she met yesterday morning,
clearly stated that they strongly oppose militancy and this kind of

"We hope that they [Jamaat-e-Islami] would continue to oppose this
violence and they would join in countering terrorism," she added.

On the possibility of establishing a US-Bangladesh counter-terrorism
bureau, she said they are discussing it to see how the US could provide
further assistance to enhance Bangladesh's capability. This discussion
virtually started right after 9/11, she said, adding presently the USA
is providing technical assistance and training to Bangladesh.

"Bangladesh is a strong ally in the war on terrorism... We are working
since after 9/11 ... We are trying to work out a framework," she told
the media.

Asked about the concerns expressed Wednesday by a visiting EU troika
over a possible rise in minority repression in the run-up to the
elections, she said, "I cannot predict what will happen in future. But
it is extremely important that the religious minorities are protected
and we hope no violence will be unleashed against the minorities."

Asked about the letter of President George W Bush to Prime Minister
Khaleda Zia, Rocca said in it the president appreciated the
anti-militancy drive of the Bangladesh government. President Bush, she
said, also expressed the hope that strong efforts would be made to
bring it to its logical conclusion and perpetrators of the violence
would be prosecuted and punished.

The president also hoped for a free and fair election in Bangladesh,
Rocca added.

Asked why President Bush is not coming to Bangladesh during his
upcoming visit to India and Pakistan, the US high official said there
is no specific reason. "He is now on a very tight schedule and has very
little time."

On whether the US is contemplating sanctions if Bangladesh fails to
implement the anti-money laundering act as reported by The Daily Star,
Rocca said, "We hope that the money laundering act will be complete,
but the word [sanction] never crossed my lips.

I don't know how they got that word."

She also denied the report of $100 million US aid to Bangladesh to
upgrade its capacity to deal with terrorism.

On a question about the assassination of Shah ASM Kibria, Rocca said
she visited the wife of the late Kibria in the morning and offered deep
condolence on behalf of her government. "I hope that the perpetrators
of the heinous act would be brought to justice in a transparent way,"
she added.

In her opening remarks at the conference, the US assistant secretary
said, "Bangladesh can be proud of its tradition of democracy, but
maintaining that tradition requires constant diligence." She said
supporting democracy is one of America's top priorities around the
world. So, the US wants to do what it can to help Bangladesh maintain
and strengthen its democracy.

She said Bangladesh faces the challenge of achieving an economic growth
that will be shared by all sectors of the society. Americans would like
to see Bangladesh grow economically and believe that trade is the most
effective motor of economic development.

"Bangladesh is very close to achieving levels of growth that would lead
to real poverty reduction," she observed, adding many experts believe
that corruption is a huge drag on the economy that prevents Bangladesh
from achieving that level of growth.

About her visit, Rocca said this is probably her last visit here in the
capacity of assistant secretary and, "I think that the fact that I am
taking this opportunity to visit Bangladesh is an indication of how
important Bangladesh is to the US government."


US Assistant Secretary Of State Issues Stern Warning To Bangladesh
Regime During Dhaka Visit .....


Daily Star, Dhaka, Bangladesh
Friday, January 27, 2006

Curb terror finance, militancy to skirt US sanctions - Rocca tells

The US yesterday asked Bangladesh to take several steps including
curbing militancy and terror financing so that it does not face
sanctions under the US Terrorist Financing Act.

The visiting US State Department Assistant Secretary for South Asian
Affairs Christina Rocca yesterday said Washington is deeply concerned
about the rise of militancy and human rights scenario in Bangladesh and
wants to see quick and positive solutions to the problems.

Rocca conveyed the concerns of her government to the prime minister,
foreign minister and state minister for home affairs during separate
meetings yesterday. She said the United States also wants to see that
the next general elections are held in time.

She categorically asked State Minister for Home Affairs Lutfozzaman
Babar to immediately arrest Jamaa'atul Mujahideen Bangladesh (JMB)
chief Shaekh Abdur Rahman and his associate Siddiqul Islam alias Bangla
Bhai, operations commander of Jagrata Muslim Janata Bangladesh.

The US government strongly asked Bangladesh to stop money laundering,
as it believes the militants are getting their funds through such
unlawful channels.

Sources said the US has suggested several steps including routing money
laundering and sharing information with each other to avoid sanctions
dictated by its Terrorist Financing Act.

Sources said, under the proposed information-sharing programme, Dhaka
will provide Washington with any information it seeks about any
individual or organisation and vice versa. Both the countries will
share information and intelligence for the interest of each other. The
Bangladeshis to be involved in the information sharing will be trained
in the USA.

Rocca, who flew in Dhaka yesterday morning on a two-day official trip,
handed over a letter from US President George W Bush to Prime Minister
Khaleda Zia, in which President Bush expressed the hope that the next
general elections will be held on schedule with participation of all
political parties.

The US assistant secretary held separate meetings with Foreign Minister
M Morshed Khan, Foreign Affairs Adviser Reaz Rahman and Foreign
Secretary Hemayetuddin as part of what was described as "normal
consultations on bilateral cooperation between Dhaka and Washington".

She will meet Leader of the Opposition and Awami League President
Sheikh Hasina at her Sudha Sadan residence at 11:00am today.


In her meeting with State Minister Babar, Rocca said her government,
which is providing assistance to train up Bangladeshi law enforcers,
offers further assistance to fight militancy in the country.

Emerging out of the meeting at Babar's office in the afternoon, Rocca
did not answer any query of the journalists. But, Babar said, "They are
concerned about militancy, especially the JMB."

"You should try to nab them [Abdur Rahman and Bangla Bhai]," Babar
quoted Rocca as saying, adding, "They are ready to support us."

Talking to the media later, Babar also said President Bush in his
letter acknowledged and appreciated the government's efforts to fight
militancy. "They [US government] have shown happiness and satisfaction
at the steps we have taken against terrorism."

About the modality of US assistance in fighting militancy, Babar said
the US government is already sharing information with and providing
training to Bangladesh Police. The training of the police concentrates
mainly on dealing with money laundering and interrogation.

"They have given them training time and again and have proposed some
more courses. The US also has offered to train our trainers," Babar

When Rocca inquired about the proposed Anti-Terror Financing Act, Babar
told her the progress is satisfactory.

Asked, the state minister said they did not discuss counter-terrorism
or any US proposal to give $10 crore.

Rocca also expressed concern about the human rights condition in
Bangladesh. "They did not mention anything specifically but said we
should give attention to aspects of human rights," said Babar.

"Bangladesh is not only a functioning democracy but also a role model
for Muslim countries," Foreign Secretary Hemayetuddin quoted Rocca as
saying during her meetings with top foreign ministry officials.

Briefing reporters, Hemayetuddin said the US assistant secretary
exchanged views on terrorism and highly appreciated the way some recent
incidents staged by a "group of extremists" were handled.

"Rocca was very appreciative of the government's anti-militant
crackdown and hoped that this effort would continue," he said. The
foreign secretary said Bangladesh has steady cooperation with the USA
against terrorism and the government is determined not to show any
mercy and to break down the militants network and bring the terrors to

Asked about structured cooperation to enhance Bangladesh's capability
in combating terrorism, Hemayetuddin said Rocca would discuss certain
areas of cooperation with the state minister for home affairs.

According to him, talking on the next general elections, Rocca said
Bangladesh's track records show people's total commitment to democratic
process and she is hopeful that the elections would be held on schedule
and as per the constitutional provisions.

The foreign secretary said both the sides reached a complete agreement
on the existing excellent bilateral relations and continuing the
present cooperation. "We were urged to continue our efforts to increase
bilateral trade and cooperation in economic and other areas," he said.

Meanwhile, official sources said the US assistant secretary held
one-to-one talks with the foreign minister at his office prior to the
formal meeting. The exclusive meeting lasted for about 20 minutes.

2006-12-12 01:19:09 UTC
Post by VognoDuut897
Creating an Islamic Microfinance Model - The Missing Dimension
Bangladesh's Un-Islamic Grameen Bank Charges 20% Interest ("Riba") On
Loans? .....

O ye who believe! fear Allah and give up what remains of your demand
for usury if ye are indeed believers. 2: 278
2006-12-12 06:30:00 UTC
...you may need to interpret this in conduction with the relevant Fatwa and
Halal update.
Post by n***@bigmailbox.net
Post by VognoDuut897
Creating an Islamic Microfinance Model - The Missing Dimension
Bangladesh's Un-Islamic Grameen Bank Charges 20% Interest ("Riba") On
Loans? .....
O ye who believe! fear Allah and give up what remains of your demand
for usury if ye are indeed believers. 2: 278
2006-12-12 23:28:41 UTC
On Tue, 12 Dec 2006 17:30:00 +1100, "Torpedo" <***@unknown.com>

...you may need to interpret this in conduction with the relevant
Fatwa and
Halal update.
Post by n***@bigmailbox.net
O ye who believe! fear Allah and give up what remains of your demand
for usury if ye are indeed believers. 2: 278
2014-11-30 09:47:31 UTC
We are also interested in islamic microfinance model to change the lives of poor in india in shariah compliant way. We would love to be associated on organisational level for the cause to take it forward.
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