An Introduction to

Islamic Microfinance

Muhammad Zubair Mughal

Chief Executive Officer,
AlHuda: Centre of Islamic Banking and
Economics
zubair.mughal@alhudacibe.com
www.alhudacibe.com
 Contents

• What is Shariah Based Microfinance ?

• Difference between Conventional & Islamic MF
• Demand of Islamic Microfinance Worldwide
• Global Landscape of Islamic Microfinance
• Islamic Microfinance Update
• The Way Forward
 Islam and Shariah

Islam

Aqidah Shariah Akhlaq

(Faith & Belief) (Practices & Activities) (Morality & Ethics)

IBADAT Muamalat
(Man to God Worship) (Man to Man Activities)

Political Activities Economic Activities Social Activities

Banking & Financial Activities

 Sources of Fiq’h in Islam (Islamic
Micro Finance)
• Quran

• Sunnah

• Ijtehad / Qiyas

• Ijama’e Ummah
 Human Financial Needs

Fulfillment of Financial Needs

Own Capital Others’ Capital

Equity Financing Debt Financing

• Musharakah • Murabahah
• Modarabahah • Ijarah
• Other Products •Salam & Istisna etc
 External (Equity & Debt) Financing
Equity Financing Debt Financing
Uqud al-Ishtirak Uqud al-Muawadhat
(Contracts of Profit (Deferred Contracts of
Sharing ) Exchange)
Al-Mudarabah Al-Bai’ Bithaman (Mu)Ajil
(Trustee Profit Sharing) (Deferred Installment Sale)
Al-Musharakah (Joint Bai’ al-Murabaha
Venture Profit Sharing) (Cost Plus Profit Sale)
Others Al-Ijarah (Leasing)
Bai’ al-Salam (Commodity
Sale)
 PRODUCT TREE

Islamic Modes of Microfinance

Partnership Based Trade Based Rental Based

Modes Modes Modes

Murabaha
Musharaka (Cost Plus Profit Sale) Ijarah
(Joint Venture Profit Sharing ) Musawama ( Leasing )

Mudaraba (Bargain sale ) Diminishing

( Trustee Profit Sharing) Salam Musharaka
(Commodity Sale)
( Transfer of Ownership)
Istisna
(Sale on Order)
 ONUS SHIFTS!!
• Customer
to Halal Restaurant Owner

• Halal Restaurant Owner

to Halal Meat Supplier

• Halal Meat Supplier

to Halal Abattoir / Butcher

• Customer to Islamic Banker

• Islamic Banker
to Shariah Scholars
 Industry Progress in Pakistan

Year 2001 2002 2003 2004 - 06 2007 - 09

2 3 4 10 18

•Meezan Bank •Meezan Bank (161)

•Al Baraka •Meezan Bank
•Al Baraka •Meezan Bank •Al Baraka (30)
•Meezan Bank
•MCB •Al Baraka •MCB (8)
•Al Baraka
•MCB •Alfalah(40)
•MCB
•Alfalah •SCB (11)
•Alfalah
•Bank AlHabib(4 )
•SCB
•HMB(4)
•Bank AlHabib
•Bank of Khyber(16)
•Habib AG Zur.
•Soneri Bank ( 5)
•Metropolitan
•HBL(1)
• 6 Full fledge Banks having 239 •Bank of Khyber
•Soneri Bank
•Bank Islami(102)

and 12 Conventional Banks have •DIB (25)

•EGIBL (40)
167 SAIBBS and 10 Sub • Dawood(21)
•NBP(5)
Branches till 1st January , 09 •RBS (3)
•Askari(18)
• Total IB Branches = 519 •UBL (5)
Industry Progress in Pakistan
 International Overview
• The size of Islamic Financial Industry has reached US$ 950 Bln.
and its growing annually @ 15% per anum.

• 70 countries have Islamic Banking Institutions

• 37 Muslim countries including Bahrain, UAE, Saudi Arabia,

Malaysia, Brunei and Pakistan

• 34 non-Muslim countries including USA, UK, Canada, Switzerland,

South Africa and Australia
 International Overview
• In Feb 1999, Dow Jones introduced the Dow Jones
Islamic Market Index (DJIM) of 600 companies world
wide whose business complies with Islamic Shariah laws

• At present there are more than 170 Islamic Funds

operational through out the world with a total fund base
of over USD 3.50 billion
 International Overview
• Governments of Bahrain ,Malaysia and now Pakistan
have issued Islamic Bonds (Sukuk) in order to facilitate
Islamic Banks in managing their liquidity.

• Issuance of these bonds has also paved the way for

Shariah compliant Government borrowings
 International Overview
• Institutions like Accounting and Auditing Organization for Islamic
Financial Institutions (AAOIFI) and Islamic Finance Services Board
(IFSB) have been formed.

• These institutions are playing a key role in setting up and

standardizing Shariah , Financial and Accounting standards for
Islamic Financial Institutions.

• Due to these collective efforts Islamic banking is now recognized by

IMF, World Bank and Basel Committee.
Islamic Microfinance
 Principle of Shariah Based
Microfinance
 Prohibition of Interest

 Risk sharing

 Social Development Mission

 Prohibition of speculative
behaviour

 Purity of contracts

 Asset Based Financing

 Shariah-approved activities.
 Prohibition of Riba ( Interest)

And ALLAH has permitted trading and forbidden Riba

(Al Baqara 275)

•Riba means any fixed or guaranteed interest payment on cash

advances or on deposits.

•Islam encourages the earning of profits but forbids the charging

of interest
Difference Between Islamic and
Conventional Microfinance

Conventional
money
MFI Client

money + money (interest)

Difference Between Islamic and
Conventional Microfinance

Islamic

IMFI’S Goods & Client

Services

money
Modes of Islamic Microfinance
 Need & Compatibility

 For Muslim majority country great need for Islamic MF exist and large
target segment is averse to the interest based microfinance products.
 Islamic Microfinance emphasize ethical, moral & social factors to
promote equality and fairness for the good of the society.
 Risk Sharing, individual duties, property rights and purity of contracts
are part of Islamic Microfinance
 Approximately 44% conventional microfinance clients worldwide reside
in Muslim countries (Source: MF Info Ex).
 Asset-based – can prevent diversion of funds for consumption
 Demand of Islamic Micro Finance

Respondents
Survey Surveyed Countries
preference (%)
CGAP 08 Jordan, Algeria, and Syria 20 - 40%
PlaNet Finance 07 West Bank and Gaza 35% - 60 %
USAID 02 Jordan 24.9%
IFC/FINCA 06 Jordan 32%
Frankfurt School Algeria 20.7%
of Fin & Mgmt 06
IFC sponsored Yemen 40%
Study
IFC 2007 Syria 43-46%
Bank Indonesia Indonesia (East Java) 49%
2000
A recently survey Conducted by AlHuda CIBE in Azad Kashmir exhibits
99% demand (4 Districts)
 International Experience of Islamic
Microfinance
Institution Mode of Finance
7 Sudanese Islamic Banks Murabaha, mudaraba, musharaka, and
saving deposit [SIB – Productive Families]
Islamic Cooperatives and Cooperatives – Members’ Musharaka
Rural Banks of Indonesia (integrated with Zakat Fund)
Rural Banks – Various modes
Islami Bank Bangladesh, IBB – Mostly bai muajjal
Social Investment Bank and SIBL - Recourse generation - Cash Waqf
AlFalah & Rescue and Financing through various modes
Jordan Islamic Bank Musharaka and Mudaraba
UNCDF Yemen (HMFP) Murabahah and redeemable Mudarabah
Sanabel (12 Arab countries, 64 Murabaha, mudaraba, musharaka
MFIs – meeting 80% of MF
needs)
Amana Ikhtiar Malaysia and AIM – interest free loan
Islamic Pawn Broking Al Rahnu – short term interest free loan
against collateral at market value
 Pakistan’s Experiences

Institution Mode of Finance

Akhuwat AIM – interest free loan
Qaraz-e-Hasna
CWCD Murabahah, Ijarah, Salam & Istisna
MicroTakaful
NRSP – NWFP Murabahah
Mudarabah with BOK for funding Source
Khawendo Kor Murabahah but in limited scale
Islamic Relief Murabahah and Qarz-e-Hassan
KKCB Murabaha and MicroTakaful
Helping Hand Murabahah
Muslim Aid Murabahah
Takaful Pakistan Limited MicroTakaful
Products for IMFI’s
 Islamic Microfinance Institution
Worldwide

. •Germany:2
•- Muslim
•UAE: 8
•- Dubai Islamic Bank
Society •Bahrain: 2 •- Abu Dhabi Islamic Bank2
•Kuwait:
•United States: 4 •Switzerland: •- HSBC Amanah •- Kuwait Finance
•Kiva 6 House
•UK: • Afghanistan: 4
•Helping Hands
•- HSBC Amanah •- FINCA , WOCCU
•Muslim Aid
•- Muslim Aid •- CHF
•Lariba
•- Islamic Relief • Ariana
•- The Halal Mutual •Iran: 8 •Pakistan: 11
Investment Company •India: 3
•Turkey: 7 •Bangladesh:
•Egypt: 9 •- Faisal Finance 9
•- Alwatany Bank of Egypt Institution •Malaysia: 11
•- Egyptian Saudi Finance •- Ihlas Finance•2 - Pure Islamic Banks
•Sudan: 3 House (Bank Islam, Bank
Muamalat)
•Rest - conventional
•Indonesia: 4
banks

•Yemen: 1
 Islamic Microfinance Updates

IMFI’s in Afghanistan
WOCCU CHF FINC
A IMFI’s in Pak
Ariana Fin
. Services KKCB
d
un
Donors ic
F
Is lam CWCD

TPL
UNDP Kuwait

NRSP
PPAF Akhuwat
WorldBank fund k or
IDB Ba
n IR do
K
MISFA n n
Islamic Funds eza we
Me Helping K h
USAID Hands
Int’l IMFI,s Muslim
Aid
Is ank
la
B
m bd
ic

A AIM
FINC
AlBaraka
d one si a
UNCDF i n
BMT
 FINCA - Experience in Afghanistan

• FINCA loans are based on Murabaha

principles, they don’t charge interest,
but a Profit rate.

• Providing Shariah-compliant loans has

made it possible for FINCA to expand in
areas of Afghanistan where other MFIs
have been turned away for charging
interest. According to 2007 figures

• Clients: 41,213
• Village Banks: 5,529
• Portfolio: $8,324,142
• Average loan size: $329
• Staff members: 387
• Clients per CO: 187
 WOCCU Experience in Afghanistan

•2004 – 2005 WOCCU helped to establish two area-based open bond credit unions in the north
of Afghanistan: Balkh and Jawzjan.
• In 2007 , WOCCU has established another five Investment Finance Cooperatives (IFCs)
in the East and South of the Country for Murabaha

Indicators Members of Investment and Finance Cooperatives

Unit of Measure Number
Regions North East
Grand
Samang Baghla Nangarh Total
Provinces Balkh Jawzjan Aqcha
Data Disaggregation

an n ar
Total by
2,634 2,612 313 1,027 830 814
Province 8,230
Male 2,267 2,070 305 961 756 737 7,096
Gender

Female 367 542 8 66 74 77

1,134
 JABAL AL HOSS, SYRIA: MURABAHA

• A UNDP run programme in one of the poorest

areas in Syria.

• 22 self local financial institutions have been

established consisting of 4,691 members

• Each start up is self financed

• When ever repayment is satisfactory, UNDP

provides an additional capital injection

• Profit margin on Murabaha is 2.5%

• A source of income

• Repayment reached 100% by the end of the first

year of operation (Brandsma, 2004)
 Islamic Microfinance Deal in

Free from Interest

Asset Based
Financing Micro Takaful
Financing

Islamic
Insure Shariah
Risk Sharing MF
Compliances

Poverty Alleviation Purity of Contracts Joint Responsibilities

Conventional Micro Islamic Micro Finance
Finance
Functions and operations are based Functions and operations are based
on fully man made principles on Sharia’h principles
assured of pre-determined rate of Promote risk-sharing between
interest provider of capital (investor) and
user of funds (entrepreneurs)
Aim at maximising profit without any Aim at maximising profit but subject
restrictions to Sharia'h restrictions
Creditor-Debtor relationship Partners, investor and traders,
buyer or seller relationship
Based on money trading. Money is Encourage asset-based financing
a medium of exchange and not a and based on commodity trading &
commodity Services
Conventional Micro
Finance
It is almost risk free banking and
depositor has no risk of losing its
money because interest is
guaranteed.
It can charge additional money in
case of defaulters
Islamic Micro Finance
No right of profit if there is no risk
involved. The profit and loss sharing
depositor may lose money in case
of loss.
Islamic banks have no provision to
charge any extra money from the
defaulters