Archive for: Islamic Microfinance Series

As the blog series on Islamic Microfinance Challenge is wrapping up, below is a summary of the main points that the posts, comments, and challenge winners made.

Business Model for Islamic Microfinance: What does it need?

1. Market segmentation from day one:  In conventional microfinance, an MFI begins usually with one product which does not fit the needs of many clients running diverse enterprises; over time it begins to segment the market and to diversify their products. The same principle has to be applied to Islamic microfinance and MFIs have to begin by segmenting their market into subsectors and by designing special product/s and or using different instrument/contract for each subsector of the market.
2. MFI/Bank should think as an investor and not only as a creditor:  In order to implement the above, for Musharaka and Mudaraba, not only must the institution get involved in buying the cows or the baby cows, but also, it must get involved in a more careful monitoring of the project, provision of some vet services and counseling. It cannot just lend money, retrieve it, and make a profit.  In most cases, we are talking about partnership, not simply a lending operation. Read the rest of this page »

Al Amal provides various financial services and products (Islamic financing, savings, solidarity insurance, etc.) and is among a handful of microfinance institutions in the Arab World providing Islamic financial services. The bank continually works to improve competitiveness in the market by providing new products that meet the needs of the target segment and reach as many people as possible to realize the goals of the bank. Read the rest of this page »

Enterprise Development through Islamic Financial Services

Innovation at CWCD has led to a complete organizational transformation, where CWCD has let go of its conventional microfinance programs and dedicated itself completely towards Islamic Microfinance. This conversion has allowed CWCD to benefit from better recovery rates, increased organizational and borrower sustainability, as well as enabling itself to meet its core objective of poverty alleviation, increased production, and job creation. Read the rest of this page »

Our business idea for the Islamic Microfinance Challenge 2010 was to mobilize savings using a Recycled Waste Savings Product.  The project was designed to address pollution and waste management issues in the capital city of Bandung, in the West Java province of Indonesia.   Approximately 2,000 tons of waste is collected on a daily basis in the city alone.

We at BISMA feel that microfinance institutions (MFIs) can participate in solving this problem by mobilizing savings in the community through waste collection.  Our idea is that MFIs collect waste from community members, and pay for the waste collected.  However, instead of paying for it with cash, MFIs will open a savings account for each student or community member who has collected the waste. The collected waste will then be sold to either a waste power plant or the city’s waste recycling company.

The project will focus on students in particular, since we feel it is easier to motivate youth. We anticipate that this will trigger a widespread movement to engage the larger community. Moreover, this project does not require any large capital to start. Read the rest of this page »

Tanzania eco-Volunteerism’s (TeV) honey project is a community development program providing rural poor communities of Tanzania with an innovative microfinance model that is in complete compliance with Islamic guidelines for business and finance. TeV’s microfinance activities are sustainable, scalable, and market-driven and include interest-free loans (qard hasan), savings (wadiah), and insurance (takaful).

TeV’s mission is to invest in communities by introducing sustainable beekeeping. The investment of beehives benefits a large number of poor at the grassroots level who are involved in apiculture. TeV empowers communities by offering each family two Langstroth Hives (beehives) on an agro-based, qard hasan loan. Each loan is interest or riba-free and does not require any form of physical collateral or al-rahn. Each family will harvest honey and will benefit from a revenue stream based on fair-market-value sales to TeV. Read the rest of this page »

Winning project idea
At Tameer, we consistently hear a need for Islamic Banking products. Pakistan does not have any visible Islamic microfinance banks or institutions, so this is a critical project to move forward, albeit in a staged way to limit risk and cost and making sure that we apply new learning as we go. With the basic infrastructure in place, Tameer envisages a healthy Islamic Banking Portfolio.  Eight products are expected to be launched; four on the asset side (Murabaha, Bai’ al ‘inah, Ijarah, Musharika), three on the liability front (current /checking account, Mudarba, Mudarba certificates), and one Takaful product (health microinsurance). Read the rest of this page »

For more details on Islamic finance products click here.

If there are so many poor Muslims in the world, and if the overwhelming majority of those Muslims do not have access to financial services, and if two thirds of these either insist or prefer having financial products that comply with Sharia, and if there are MFIs that are providing Islamic microfinance services, then what went wrong? How come in a country like Bangladesh, the largest MFI or bank providing products complying with Sharia reach only 100,000 active borrowers compared to the 22 million active borrowers reached by Grameen Bank, BRAC, and ASA, all of which are providing conventional products? The Arab World is no different. While we have conventional MFIs reaching tens and hundreds of thousands of active borrowers, Islamic MFIs have stagnated below 10,000 thousand active borrowers and in most of the cases only have 2-3 thousand active borrowers. Why hasn’t microfinance succeeded in reaching as many clients as conventional microfinance? Read the rest of this page »

Today, microfinance and Islamic finance are professionalized industries with diverse products, growing client bases, and widening geographical coverage. Both have developed innovative solutions to cater to populations that are outside the fold of conventional financial access. They share objectives of providing inclusive banking through financing productive, asset-backed activity, and lay special emphasis on economic empowerment through entrepreneurship. These complimentary objectives create a ready framework for the confluence of both sectors—into a special niche industry referred to as ‘Islamic microfinance,’ which is just taking off.

High unemployment, poverty, and low levels of financial access in Muslim countries continue to create high demand for microfinance. While conventional microfinance has successfully reached large numbers of poor in Muslim countries (most notably, Bangladesh and Indonesia), there is evidence to suggest that there are many potential clients of microfinance that categorically reject products that do not comply with Islamic principles.

IFC commissioned market studies reveal that in Algeria and Jordan, approximately 20% of the poor cite religious reasons for not seeking conventional microfinance, while in Yemen and Syria, this percentage rises to 40%. In a 2008 CGAP survey, local practitioners and key informants suggested similar demand trends in Indonesia, Afghanistan, Pakistan, and the Palestinian territories, and also in Muslim majority areas of India, Sri Lanka, Brunei, Cambodia, and the Philippines.

Broadly speaking, the market for microfinance in the Muslim world can be divided into three segments: 1) individuals who will accept conventional finance products; 2) individuals who state a clear preference for Shariah-compliant finance but—due to unavailability or price differentials—accept conventional finance, and finally, 3) individuals who only use Shariah-compliant products.  The ratios of these groups fluctuate by region. For example, individuals who would insist on Islamic financing (category 3) constitute far more than one third of the market in Yemen, and less than a third of the market in Bangladesh.  Overall, it is estimated that roughly 2/3 of the microfinance market in the Muslim world either insists on, or prefers Islamic financing.

The 2008 CGAP survey revealed that global Islamic microfinance supply is very limited and concentrated in only a few countries (80% of the 380,000 clients of Islamic microfinance worldwide are in Bangladesh, Indonesia, and Afghanistan). Moreover, Islamic microfinance does not exceed more than .05% of total microfinance outreach. In the Arab world, MFIs that have been in the market for 7-10 years typically only reach between 2,000-7,000 active borrowers using Islamic microfinance. In direct contrast, MFIs of similar age operating in the same region reach tens and hundreds of thousands active borrowers using conventional microfinance.

Islamic microfinance offers an alternative paradigm for millions of poor people who are currently not served by conventional microfinance. In order to provide access to sustainable services on scale, it is imperative for the industry to adopt innovative and sound practices and prove that these models work. To this end, the industry requires deeper market research and a comprehensive initiative to build the capacity of players in the micro, meso and macro levels, in order to help in developing and implementing appropriate business models.

Responding to this need, CGAP, Deutsche Bank, Islamic Development Bank, and Grameen-Jameel launched the Islamic Microfinance Challenge 2010. The objective of this challenge was to canvass the industry for ideas for sustainable, scalable, and authentic Islamic microfinance business models to meet the financial needs of the Muslim poor.  The competition was made open to the general public. Institutions as well as independent consultants were invited to apply, with the stipulation that applicants have the capacity to roll out a pilot project using the prize funds.

The competition generated a lot of interest and received over 130 applications from 43 countries, with the highest number from Indonesia, Pakistan, and India, respectively. Applicants included Islamic and conventional microfinance institutions (MFIs), multi-sectoral NGOs, apex institutions, consultants, and academics. A review board with expertise in microfinance practice, microfinance investment and Islamic finance, judged submissions against the criteria of profitability and scalability and Shariah-compliance.

Five applications, namely, Al Amal Microfinance Bank (Yemen), Bina Insan Sejahtera Mandiri (Indonesia), Centre for Women’s Cooperative Development (Pakistan) Tameer Bank (Pakistan), and Tanzania ecoVolunteerism (Tanzania) were shortlisted by the judges. These applicants were asked to apply to the second phase with more detailed plans on implementation.

On February 16, 2011, the sponsors named Al-Amal Microfinance Bank from Yemen as the finalist and recipient of US$ 104,000 in prize funds. Al Amal Microfinance Bank is the first microfinance bank in the Arab world to offer only Shariah-compliant products. Operating for just over two years, the bank has 15,000 active borrowers and 20,000 savers, and has captured over 25% of the Yemeni microfinance market. Al Amal’s proposal for the competition was to pilot an Islamic leasing product. The bank plans to self-fund its leasing product by relying on an Islamic investment funds product. It expects to reach operational and financial sustainability by 2012. The bank’s menu of Islamic microfinance products include group and individual financing, project, corporate, and investment financing, savings, investment funds, and insurance.

Going forward, sponsors of the Islamic Microfinance Challenge 2010 seek to engage with the broader microfinance and Islamic finance communities to find new ways to foster development and support this sector going forward. Given that the group of 2.7 billion unbanked includes a vast number of Muslims, expanding the availability of affordable and sustainable Shariah-compliant services can prove to be transformative for microfinance.

–Nimrah Karim and Mohammed Khaled

For three weeks starting today, this blog will host a special series on Islamic microfinance, featuring finalists of the Challenge and other global experts. Watch this space for a new post every week and we look forward to your comments and discussion.