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Islamic Microfinance As a Tool of Financial Inclusion in Bangladesh

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Islamic Microfinance As a Tool of Financial Inclusion in Bangladesh

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Though Bangladesh has achieved worldwide recognition as a star performer in interest based conventional microfinance programs, she is lagging behind exploring full potentials of Islamic microfinance to promote financial inclusion among unbanked people aiming at poverty and inequality reduction. The experience of poverty programs of NGOs during the last three decades reveals that they have, in general, been successful in serving the moderate poor but failed in reaching the extreme poor mainly due to higher rate of interest and operational cost, lack of customized products and reluctance of religious people to participate in interest based programs. Given this, the present paper focuses on concepts and models of Islamic microfinance and its effectiveness as a tool of financial inclusion in Bangladesh. The paper suggests necessary policy options for combating challenges in order to build a vibrant Islamic microfinance market to cater the demands of all categories of poor, extreme poor in particular.
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Islamic Microfinance As a Tool of Financial Inclusion in
Bangladesh
Md Golzare Nabi1, Dr. Md. Aminul Islam2, Dr. Rosni Bakar3 & Rafiun Nabi4
Abstract
Though Bangladesh has achieved worldwide recognition as a star performer in interest based
conventional microfinance programs, she is lagging behind exploring full potentials of Islamic
microfinance to promote financial inclusion among unbanked people aiming at poverty and
inequality reduction. The experience of poverty programs of NGOs during the last three decades
reveals that they have, in general, been successful in serving the moderate poor but failed in
reaching the extreme poor mainly due to higher rate of interest and operational cost, lack of
customized products and reluctance of religious people to participate in interest based programs.
Given this, the present paper focuses on concepts and models of Islamic microfinance and its
effectiveness as a tool of financial inclusion in Bangladesh. The paper suggests necessary policy
options for combating challenges in order to build a vibrant Islamic microfinance market to cater
the demands of all categories of poor, extreme poor in particular.
Key Words: Islamic micro finance, financial inclusion, Poverty alleviation, Bangladesh
JEL Classification number: G21, I32, L3, O16, Z12
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1Corresponding author. Corresponding Address: Research Department, Bangladesh Bank, Central
Bank of Bangladesh, Dhaka, Bangladesh. E-mail: golzare@gmail.com or golzare.nabi@bb.org.bd
Cell: 88-02-01716480. Views expressed in the article are authors’ own and do not reflect the
views of the institutes in which they work.
2Associate Professor, School of Business Innovation and Technopreneurship, University Malaysia
Perlis, Malaysia, E-mail: amin@unimap.edu.my
3Professor, School of Business Innovation and Technopreneurship, Universiti Malaysia Perlis,
Malaysia, e-mail: rosni@unimap.edu.my
4BBA Student (Final Year), School of Business and Economics, North South University,
Bangladesh, E-mail: rafiun.nabi@northsouth.edu
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1. Introduction
Bangladesh has achieved worldwide recognition as a star performer in interest based
conventional microfinance programs initiated by Grameen Bank, a successful noble
peace prize winning specialized financial institution. A large number of Microfinance
Institutions (MFIs) have emerged in Bangladesh to provide collateral free credit to the
poor inspired by the apparent success of Grameen Bank and following failures of formal
financial institution in reaching the poor. Currently, Bangladesh microfinance industry
offers financial services among nearly 37.04 million poor people; more than 90 percent of
them are women. A number of empirical studies reveal that micro finance has positive
impacts on the living standard of the poor (Zaman, H, 2004; Khandker, S. R., 2005,
Osmani, S.R., 2012 and Khandker, Shahidur R., et. al.,. 2015). But a large portion of poor
people, hardcore poor in particular are yet out of micro finance’s network. The
experience of the last few decades suggests that while the poverty programs of NGOs
including microcredit programs have, in general, been successful in reaching the
moderate poor, the poorest of the poor are more often inadequately served or completely
bypassed by such programs (Emran, M. S., Robano, V., & Smith, S. C., 2014). The
failures of the conventional microfinance industry may be attributed mainly to higher rate
of interest and operational cost and reluctance of religious people to participate in interest
based programs. Against this backdrop, Islamic microfinance based on Zakat and other
unique funding models can emerge as an effective financial inclusion tool in fighting all
types of poverty in Bangladesh. Despite being a Muslim majority country and
experiencing robust growth of Islamic banking, Bangladesh is lagging behind in
promoting Islamic microfinance. The interest based conventional microfinance industry
belongs to 95 percent market share of the microfinance industry while Islamic
microfinance industry accounts for only 5 percent share of the market in Bangladesh.
Given this, the present paper would examine the current status, potentials and
effectiveness of Islamic microfinance as a tool of financial inclusion to combat poverty
and inequality in Bangladesh.
A good number of empirical literatures exhibit that financial development and improved
access to finance in a country, referred to as financial inclusion contributes to growth by
allowing the efficient intermediation of resources among savers and investors (Honohan,
2004; Levine, 2005; Beck and de la Torre, 2006; Beck, Demirgüç-Kunt, and Levine,
2004 & 2007; World Bank, 2007). Researchers have also focused on the link between
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financial development, reduced income inequality and poverty alleviation (Hannig A. and
Jansen S., 2010). Although financial inclusion has improved in Bangladesh, a large
number of populations, hardcore poor in particular have yet remained financially
excluded and as a result, they have fallen into persistent poverty trap. Despite rapid fall in
poverty level following sustained growth in GDP, and robust inflows of foreign
remittances, currently 24.8 percent out of total 160 million people live below poverty line
in 2015 with 12.9 percent hardcore poor (World Bank, 2015). If we consider marginally
non-poor people, the number of poor and vulnerable people will be more than one-third
of the population. Income inequality is also acute in Bangladesh with a Gini coefficient
of 0.46 at the national level in 2010 (Osmani, S. R., 2011). The trickle down effects of
GDP growth and massive expansion of conventional microfinance and other poverty
reduction tools as social safety nets have not been able to lift out all poor people out of
the poverty cycle. Given this, unique models of Islamic micro finance (IMF) can promote
the financial inclusion among poor people for reducing poverty and inequality in
Bangladesh by using distributive and risk sharing mechanisms which are absent in
traditional microfinance models.
The paper has been organized into seventh chapters. Following introduction, the second
chapter contains objectives and research methodology of the paper; the third chapter
deals with review of literature; the fourth chapter explains concepts, models and country
experiences of Islamic microfinance; the fifth chapter examines effectiveness of Islamic
microfinance as a tool of financial inclusion; the sixth chapter assesses current status and
potentials of Islamic microfinance in Bangladesh and finally, the seventh chapter points
out challenges facing by Islamic microfinance, contains policy options and conclusions.
2. Objectives and Methodology
2.1Objectives
The objectives of the paper are twofold: first, to review current status, necessity,
potentials and effectiveness of Islamic micro finance as a tool of financial inclusion for
alleviation of poverty in Bangladesh, and second, to put forward policy options to build a
strong Islamic micro finance market in Bangladesh. The broad objectives include:
To shed light on concepts and models of Islamic microfinance
To examine effectiveness of Islamic microfinance as a tool of financial Inclusion
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To assess current status and potentials of Islamic Microfinance in Bangladesh
To examine challenges faced by Islamic microfinance in Bangladesh
To provide policy options for smooth growth of Islamic micro finance for
reducing poverty and inequality aiming at building a caring and egalitarian
society.
2.2 Methodology
The required information/data has been collected from secondary sources to derive the
objectives of the study. The secondary source contains scholarly articles, reports of
regulatory authority, research organizations, donor and Government agencies on Islamic
microfinance. Descriptive analytical method has been used in the paper.
3. Literature Review
Islamic banking has grown significantly both in Muslim majority and minority countries
across the globe during the last four decade. However, Islamic microfinance did not
expand to the expected level. Similarly, research works on Islamic microfinance,
financial inclusion and poverty issues are not available in greater number. As Islamic
microfinance is evolving gradually, most researches on Islamic microfinance are
theoretical and academic in nature.
Ahmed, H., (2002) provides the theoretical basis, operational framework, and empirical
support for the establishment of Islamic MFIs. The author presents an Islamic alternative
after critically evaluating the conventional MFIs. The theoretical part of the paper shows
that there is a great potentiality of Islamic MFIs that can cater for the needs of the poor.
Islamic MFIs have some inherent characteristics that can mitigate some of the problems
faced by conventional MFIs. Empirical evidence from three Islamic MFIs operating in
Bangladesh, in general, supports some of the theoretical assertions. Ahmed, H., (2007)
studies the economics of microfinancing and discusses the sustainability and operational
issues of a waqf-based MFI in details.
Wilson, R., (2007) explores models, instruments and structures of Shariah compliant
microfinance. Although the paper is largely conceptual and theoretical, it mentions a
number of existing Shariah compliant microfinance schemes Indonesia, Malaysia, Yemen
and Syria. The paper suggests that Shariah compliant microfinance is best provided by
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non-banking institutions, which in the case of the wakalah model, may have links to the
waqf and zakat authorities. With murabaha profit sharing microfinance, there is scope for
commercial undertakings, but arguably specialized finance companies rather than banks,
even Islamic banks, may be more appropriate institutions to get involved.
Ahmad, A. U. F., & Ahmad, A. R. (2008) explains the key role of Islamic Microfinance
Services Providers (IMSPs) in Australia in fulfilling the microfinance needs of Muslim
community. The study concludes that IMSPs in Australia can proliferate in microfinance
if they gradually advance towards undertaking more creative microfinance techniques to
suit the financial needs of their clientele to facilitate their desired contribution in
microfinance.
Obaidullah, M. (2008a) develops models of inclusive microfinance for Muslim societies
and proposes a model for linking social safety nets to microfinance in view of the
limitation of the latter to reach out to the poorest of the poor and the destitute through the
Islamic institutions of zakah and awqaf. Obaidullah, M. (2008b) is a monogram
explaining the building blocks of a microfinance program targeted at Islamic societies.
For poverty alleviation efforts to succeed in these societies, there is need for an
appropriate model that is rooted in Islam and conforms to beliefs, cultures of the Muslim
clients. The monogram focuses on the mechanisms, models, tools and instruments of the
Islamic approach as prescribed by the glorious Shariah.
Asyraf Wajdi Dusuki (2008) provides an extensive review of microfinance with the
objective of building a case for Islamic banking to participate in a microfinance initiative.
The paper argues that microfinance requires innovative approaches beyond the traditional
financial intermediary role. Among others, building human capacity through social
intermediation and designing group-based lending programmes are proven to be among
the effective tools to reduce transaction costs and lower exposure to numerous financial
risks in relation to providing credit to the rural poor. This paper suggests that Islamic
banks can actually practice microfinance without undermining their institutional viability,
competitiveness and sustainability.
Obaidullah, M., & Khan, T. (2008) presents the “best practices” models of microfinance
and the consensus principles of the microfinance industry. It highlights the Islamic
approach to poverty alleviation through microfinance and underscores the need for a dual
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approach: a zakah and awqaf-based charity program for the destitute, disabled and
“unbankable” and a micro-finance program of wealth creation. The authors opined that
the Islamic approach to poverty alleviation is more inclusive than the conventional one.
Rahman, M M., (2010) assesses the impacts of Islamic microfinance offered under Rural
Development Scheme (RDS) of Islami Bank Bangladesh Limited (IBBL), the first Islami
Bank in Bangladesh and South Asia. Findings show that household income, productivity
of crops and livestock, expenditure, and employment had increased signicantly due to
the impact of invested money. Results also reveal that clientsocio-economic factors like
age, number of family members in farming, total land size and clients’ethics and morals
had a positive and signicant inuences on household income.
Ashraf, M. A. (2010) examines impact of microfinance on browsers of 3 MFIs based on
exploratory survey in Bangladesh. The author also explores the possibility of establishing
Islamic microfinance Institutions (IMFI) as an alternative to conventional microfinance
Institutions (MFI). The findings of the paper show that overall impact of microfinance on
borrowers is not satisfactory. It also opined that Islamic financing instruments can be
effectively integrated into microfinance programs for alleviating poverty.
UNDP (2012) examines efficacy of Islamic microfinance program under Rural
Development Scheme (RDS) introduced by Islami Bank Bangladesh Limited. Results
reveal that Islamic microfinance has a positive role in poverty alleviation with huge
untapped potential as an effective socio-economic development tool. The report mentions
that millions of poor people can be lifted out of poverty by scaling up Islamic micro
financing in Muslim majority countries. The report opines that countries wishing to
emulate the RDS programme with the assistance of the private sector must place strong
emphasis on capacity building at all levels in order to realize the potential of Islamic
microfinance.
Ashraf, A and Hassan, M. K (2013) analyses reasons for failures of conventional
microfinance in poverty alleviation. The authors provide an Islamic microfinance model
combining Islamic microfinance with two traditional Islamic tools of poverty alleviation
such as Zakat and Awqaf in an institutional setup. The proposed model would be
financially viable and sustainable in the long run. If implemented, this model will
contribute to poverty alleviation by combining all three approaches: positive measures
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(like increasing income growth through development of micro business for the poor),
preventive measures (through ensuring functional redistribution among factors of
productions), and corrective measures (engaging Zakat and Awqaf).
Mollah, S., & Uddin, M. H. (2013) argues that Islamic Microfinance can adopt
microfinance best practices without compromising Shariah compliance. The authors
mention that group financing as practiced in conventional microcredit of Grameen bank
should be the key criterion for Islamic microfinance. The authors propose a three staged
integrated model to alleviate poverty in an effective manner. The first stage is designed
for the poorest (Zakat based), the second stage for the poor graduated from first stage
(qard hasana based) and the third stage for the poor graduated from second stage
(mudaraba PLS based).
Hassanain, K.M., (2015) examines three models namely Waqf-Based Islamic
Microfinance Institutions, a Model of Zakah and Awqaf-based MF Organizations and an
Integrated Awqaf and Zakah Model of Microfinance. Both Zakah and Waqf mechanisms
are considered for Islamic microfinance not only because of their frameworks that are in
accordance to the Shariah but they are the original concepts provided in Islam that serve
the poor. In tandem with the doctrine of microfinance, Zakah and Waqf are seen as tools
best suited to assist the poor who require financing and ultimately could be effective for
poverty reduction. The paper derives recommendation for integrating microfinance
models into the overall economic policy.
Haneef, M. A., et al., (2015) attempts to develop an integrated waqf-based Islamic
microfinance (IsMF) model (IWIMM) for poverty reduction in Bangladesh. The authors
show that there are significant relationships between IsMF and takaful, waqf resources
and human resource development, takaful and human resource development, IsMF and
human resource development and, waqf resources and project financing. The results
reveal that poverty alleviation is possible through the integration of these constructs in
Bangladesh. The authors suggest that further studies need to be conducted in other OIC
member countries to adopt the model in line with practical and regulatory environment of
those countries.
Zulkhibri, M., (2015) examines the inter-linkage between financial inclusion and the
Islamic financial services industry in Muslim countries using qualitative analysis and
case study. The finding shows that despite financial sector growth most Muslim countries
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lag behind other emerging economies in financial inclusion, with only 27 percent adults
having bank accounts. The author identifies cost, distance, documentation, trust and
religious beliefs as important obstacles for financial inclusion. The study also mentions
that the outreach of Islamic microfinance is very limited, small by international standards,
and of a limited coverage, which accounts for a small fraction of microfinance supply,
about 0.5 percent of global microfinance and lack of cost-efficient service model.
However, the study suggests that Islamic distributive instruments such as zakah, sadaqa,
awqaf, and qard-alhassan can play a role in bringing more than 40 million financially
excluded religious populations into the formal financial system. The paper proposes
policy recommendations to address the demand and the supply side dimensions for
improving financial inclusion via strengthening and widening Islamic financial services
and products.
Md Salleh, A. M. H. A. (2015) aims to identify how zakat institutions in Brunei can
facilitate financial inclusion into their practices, assist to fulfill the saving motives of
zakat recipients and create financial products/solutions for the poor and destitute. The
paper highlights the need for bank accounts and credit facilities that meet the needs of
welfare recipients to fulfill their daily needs, as well as saving for
children/grandchildren’s education, and for welfare recipients who save. The findings
show that zakat and other social institutions in Islam can adapt to contemporary
challenges in personal finance, notably in facilitating financial inclusion and
understanding saving motives of recipients.
Mahmood, H. Z., Fatima, M., Khan, M., and Qamar, M. A. (2015) seek to to observe the
impacts of Islamic Microfinance (IMF) on the assets and poverty status of the households
who borrowed from three pioneering organizations i.e. Akhuwat Foundation, Farz
Foundation and NAYMAT based in Lahore, Punjab, Pakistan. The findings reveal
positive impacts of Islamic microfinance on the lives of the poor. A significant increase
in incomes and expenditures was observed in case of clients of all of the institutions.
Moreover, similar increase was experienced in case of assets holdings in post funding
scenario of the organizations to their clients.
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4. Concepts, Models and Country Experiences of Islamic Microfinance
4.1 Concept and Principles of Islamic Microfinance
In common parlance, microfinance means small financial services offered mainly by
NGOs/MFIs/cooperatives among poor people for accelerating income generating
activities toward poverty alleviation and social development. The key financial services
delivered by microfinance institutions include microcredit, micro savings, micro
insurance, remittances and other financial products in which credit plays dominating role.
Islamic micro finance refers to financial services delivered among low income/destitute
people based on Islamic Shariah. The conventional microfinance is operated based on
interest which is prohibited in Islam. Islamic microfinance is offered as an alternative
among religious poor people for poverty alleviation by employing both charity and profit
based unique models. Like Islamic banking, Islamic microfinance operates its programs
following the principles of Islamic Shariah which includes prohibition of interest, risk
sharing, and avoidance of gharar or ambiguity and ensuring falah (welfare) for all
member of the society.
According to GIFR (2012) as reported by Usman, A. S., & Tasmin, R. (2016) the Islamic
micro-finance products can be divided into three classes such as micro-credit, micro-
equity and charity. The micro-credit entails the usage of business asset based on loan or
lease that eases the lack of capital in the face of a business opportunity. Micro-equity
establishes a business relationship between provider of capital and the entrepreneur who
manages the business. Under micro-equity, factors of production are brought together
while profit/loss is shared in line with agreed upon formulae. The charity type of Islamic
micro-finance serves as a source of additional empowerment in the form of safety nets
and for sustainability motives.
Source: Usman, A. S., & Tasmin, R. (2016)
Figure 1: Islamic Microfinance Structures
Microcredit
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Intrest free loan
Murabaha, Lease, Salam
Micro equity
Murabaha
Musharaka
Charity
Zakat!
Sadaka,!Waqaf!
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4.2 Differences between Conventional and Islamic Microfinance:
Both conventional and Islamic microfinance have common features such as serving the
poor, social mission of poverty alleviation and employment generation by offering credit,
savings, training and other social services, and non-profit motives. However, both
systems have differences in target, pricing of products and operational models (Table
4.1).
4.3 Islamic Microfinance: Models, Funding and Financing Modes
Islamic Microfinance has unique, innovative and inclusive features in serving all
categories of poor ranging from hardcore to moderate poor.
Models: Islamic microfinance has inclusive models to incorporate moderate poor and
extreme poor. Islamic microfinance models can be divided into charity and profit based
model as shown in Figure 4.2. Charity based model based on zakat, sadaqa, waqaf and
qard hasana serves for extreme poor and marginal poor just above poverty line. Profit
based model based on qard hasana and commercial funds serves for low-income poor.
Table 4. 1: Differences between Conventional and Islamic Microfinance
Particulars
Conventional MF
Islamic MF
Target Group
Women
Family
Objective of Targeting
Empowerment of Women
Ease of Availability
Pricing of financial products
Interest based
Profit-loss, mark-up and
rental based
Sources of Fund
Foreign donors, multilateral and
national agencies, government,
central banks, savings of clients
Religious institutions,
Islamic charitable sources,
savings of clients, foreign
donors, national agencies,
private sector
Serving hardcore poor
Bypassing
Successful in serving
Funds transfer
Cash
Goods
Liability of the Loan
(Which given to Women)
Recipient
Recipient and Spouse
Work Incentive of Employees
Monetary
Monetary and Religious
Dealing with Default
Group/Center pressure and
threat
G r o u p / C e n t e r / S p o
u s e
Guarantee, and Islamic Ethic
Source: Adopted from Ahmed H (2002)
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Source: Obaidullah, M. (2008) and Iqbal Z. (2015) with some modifications
Funding Modes: Islamic microfinance has charity and profit based funding modes as
shown in Figure 4.3. The funding modes of Islamic microfinance ensures that all
categories of poor can be served- charity based funding for extreme poor and marginal
poor just above poverty line and profit based mode for low income poor.
Source: Compiled by the author
Zakat- It is the third of the five basic pillars of Islamic faith. Zakat is a compulsory levy
imposed on the Muslims so as to transfer a portion of wealth from the rich members of
the Muslim society to distribute the same among the poor. It is a part and parcel of
Islamic society as the right of poor has been declared in the wealth of the rich. Thus,
zakat works as a tool for the distribution of wealth and a sustainable source of funding of
charity based microfinance which helps the poor to meet their basic needs.
Sadaqa-It means voluntarily donations made by Muslims to remove hardship of the poor
people. Islam considers it the collective duty of Muslim society to take care of the poor.
Numerous verses of the holy Quran and many sayings of the great Prophet Muhammad
Figure 4.2: Models of Islamic Microfinance
Charity based Model
Microfinance based
on zakat, sadaqa
and waqaf for
extreme poor
Microfinance based
on Zakat, waqf and
qard hasana for
poor above poverty
line
Profit based Model
Microfinance based
on qard hasana for
low income poor
Microfinance based
on commercial!
fund! for low
income poor
Figure 4.3: Funding Modes of Islamic Micro Finance
Charity based mode
Zakat, sadaqa, waqaf, qard hasana
Profit based mode
Wadia, Mudaraba
(Savings products) Funds from commercial banks
and other commercial sources
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(SM) urge Muslims to give charity. Islamic teachings encourage the rich to contribute
toward the welfare of the poor segments of society to seek the blessings of Allah. Funds
collected as sadaqa may be a viable source of funding of charity based microfinance.
Waqf- The word waqf in Islamic legal terminology is defined as protecting an asset in
order to refrain the usage, and will be utilized and benefited for the purpose of charity.
Kahf (2003) defines five different types of Waqf: (a) Religious Waqf-spread of religion,
(b) Philanthropic Waqf-welfare of the general public, (c) Family Waqf-welfare of the
family members, (d) Waqf of Usufruct-only usufruct of the property is used as Waqf, and
(e) Financial Waqf-only the income generated can be used for Waqf purposes. Income
from waqf may be a viable source of funding of charity based microfinance.
Wadia- These deposits/savings accounts may be used to encourage the microfinance
client to save even smaller amounts as they are allowed to withdraw whenever they want,
and there is no risk of loss.
Mudaraba- The microfinance clients can open mudaraba savings account with MFI to
save surplus funds. Under this mode, the client is exposed to investment risks and shares
the profit with the institution on a pre-determined ratio.
Financing Modes: Islamic microfinance uses different financing modes to tackle
different levels of poverty as shown in Figure 4.4.
Source: Adopted from Iqbal, Z., & Mirakhor, A. (2011) and other sources
Mudaraba: Mudaraba is a shared venture between labour and capital. Here MFI
provides with entire capital and the investment client conducts the business. The MFI,
provider of capital, is called Sahib-Al-Maal and the client is called Mudarib. The profit is
Figure 4.4: Financing Modes of Islamic Micro Finance
Partnership based
Mudaraba
Musharaka
Sale based
Murabaha, Muajjel,
Salam, Istisna
Lease based
General
Izara
Miscellaneous
Qard hasana
Takaful
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to be distributed between the MFI and the investment client at a predetermined ratio
while the bank has to bear the entire loss, if any.
Musharaka: Under Musharaka, every partner has to provide more or less equity funds in
this partnership business. Both the MFI and the investment client reserve the right to
share in the management of the business. But the MFI may opt to permit the investment
client to operate the whole business. In practice, the investment client normally conducts
the business. The profit is divided between the MFI and the investment client at a
predetermined ratio. Loss, if any, is to be borne by the MFI and the investment client
according to capital ratio.
Murabaha: Contractual buying and selling at a mark-up profit is called Murabaha. In
this case, the client requests the MFI to purchase certain goods for him. The MFI
purchases the goods as per specification and requirement of the client. The client receives
the goods on payment of the price which includes mark-up profit as per contract. Under
this mode of investment, the purchase/ cost price and profit are to be disclosed separately.
Muajjal : "Bai-Muajjal" means sale for which payment is made at a future fixed date or
within a fixed period. In short, it is a sale on credit. It is a contract between a buyer and a
seller under which the seller sells certain specific goods (permissible under Shariah and
Law of the Country) to the buyer at an agreed fixed price payable at a certain fixed future
date in lump sum or within a fixed period by fixed installments.
Salam: Salam means advance purchase. It is a mode of business mainly used in
agriculture under which the buyer pays the price of the goods in advance on the condition
that the goods would be supplied / delivered at a particular future time. The seller
supplies the goods within the fixed time.
Istisna:Istisna is a contract executed between a buyer and a seller under which the seller
pledges to manufacture and supply certain goods according to specification of the buyer.
An Istisna agreement is executed when a manufacturer or a factory owner accepts a
proposal placed to him by a person or an Institution to produce/manufacture certain
goods for the latter at a certain negotiated price. An order placed for manufacturing or
producing those goods which under prevailing customs and practice are produced or
manufactured will be treated as Istisna contract.
Ijara (Lease): The mode under which any asset owned by the bank, by creation,
acquirement / or building-up is rented out is called Ijara or leasing. In this mode, the
leasee pays the Bank rents at a determined rate for using the assets/properties and returns
the same to the Bank at the expiry of the agreement. The Bank retains absolute ownership
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of the assets/properties in such a case. However, at the end of the leased period, the asset
may be sold to the client at an agreed price.
Quard Hassan (Benevolent loan): This is a benevolent loan that obliges a borrower to
repay the lender the principal amount borrowed on maturity. The borrower, however, has
the discretion to reward the lender for his loan by paying any amount over and above the
amount of the principal provided there will be no reference (explicit or implicit) in this
regard.
Takaful: Takaful, a risk management tool is one of the most important products for
clients of MFI institutions who are generally unable to plan or save for unexpected or
uncertain events in the future. Takaful, ideally, is a non-profit mode where all the
participants provide joint guarantees. Under takaful, a joint fund is formed by
contributions of each participant and the fund money is then used to support/ help any
member of the contributing fund in difficult times like death, sickness, crop or business
loss, etc.
4.4 Country Experience of Islamic microfinance
Islamic microfinance based on risk sharing and charity model has emerged as an effective
tool in enhancing financial inclusion among about 700 million poor people living in
Muslim countries (World Bank, 2014) due to using interest rate as pricing mechanism by
conventional microfinance programs and its other constraints such as high rate of interest,
lack of sustainable fund and mission drift. The Global Islamic Finance Report, 2014
mentions that Islamic microfinance is growing gradually in the developing economies of
South Asia (Pakistan, Bangladesh), South East Asia (Malaysia, Indonesia) and Sub
Shaharan Africa (Sudan). Among the front runners are Islami Bank Bangladesh,
Akhuwat in Pakistan, Amanah Ikhtiar Malaysia and Agricultural Bank of Sudan. Islamic
microfinance institutions can be found in more than 15 countries across Asia
(Afghanistan, Indonesia, Bangladesh, Pakistan, and Malaysia), Middle East and North
Africa (Bahrain, Egypt, Iraq, Jordan, Lebanon, Palestine, Sudan, and Yemen), Central
Asia (Kazakhstan, Kyrgyzstan) and Eastern Europe (Bosnia Herzegovina, Kosovo).
While the Islamic microfinance has great potentials as an effective tool for poverty
reduction, its overall supply is small relatively to the conventional microfinance sector.
Indeed, Islamic microfinance presents less than 1% of global microfinance programs. The
estimated total number of poor clients using Shariah-compliant products is about 1.28
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million, while there are only 255 providers of Shariah-compatible microfinance products
and services worldwide. About 64 % of these providers are concentrated in East Asia and
Pacific and 28 % concentrated in the Middle East and North Africa (GIFR, 2014).
5. Effectiveness of Islamic Microfinance as a Tool of Financial Inclusion
5.1 Concept of financial inclusion
Sarma (2008) defines financial inclusion as a process that ensures the ease of access,
availability, and usage of financial services of all members of society. Financial inclusion
is also viewed as the delivery of financial services to low-income segments of society at
affordable cost (Mohieldin, M., Iqbal, Z., Rostom, A.M. and Fu, X., 2011). Amidžić,
Massara, and Mialou (2014) stated that financial inclusion is an economic state where
individuals and firms are not denied access to basic financial services. The concept of
financial inclusion is based on several dimensions, including accessibility, availability,
and usage. Amidžić, Massara, and Mialou (2014) constructed a financial inclusion
indicator as a composite indicator of variables pertaining to its dimensions, outreach
(geographic and demographic penetration), usage (deposit and lending), and quality
(disclosure requirement, dispute resolution, and cost of usage.
Since the early 2000s many governments and central banks in developing nations have
adopted financial inclusion as a significant common policy agenda. Iqbal, Z. and
Mirakhor, A. (2012) mentions that during the past decade, the concept of financial
inclusion has evolved into four dimensions: easy access to finance for all households and
enterprises, sound institutions guided by prudential regulation and supervision, financial
and institutional sustainability of financial institutions, and competition between service
providers to bring alternatives to customers. Traditionally, the financial inclusion of an
economy is measured by the proportion of population covered by commercial bank
branches and ATMs, sizes of deposits and loans made by low income households and
SMEs. However, availability of financial services may not equal financial inclusion,
because people may voluntarily exclude themselves from the financial services for
religious or cultural reasons, even though they do have access and can afford the services
(Beck and Demirguc-Kunt 2008).
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5.2 Significance of financial inclusion
Financial inclusion has emerged as a powerful tool for promoting inclusive economic
growth, eradicating poverty and reducing inequality in the emerging and developing
country. A growing body of research unveils that financial inclusion has significant
benefits for both firms and individuals (Ayyagari, M., & Beck, T., 2015). Citing different
works of famous researchers, Ayyagari, M., and Beck, T. (2015) reveal that the positive
beneficial impacts of financial inclusion are reflected in promoting savings (Aportela
1999; Ashraf, Karlan, and Yin 2006), productive investment (Dupas and Robinson 2013),
consumption (Dupas and Robinson 2013), and female empowerment (Ashraf, Karlan,
and Yin 2010). Leading researchers such as Banerjee and Newman (1993), Galor and
Zeira (1993), Aghion and Bolton (1997), Beck, Demirguc-Kunt, and Levine (2007) have
shown that lack of access to finance leads people to poverty traps and inequality.
Demirguc-Kunt and Klapper (2013) reveals that poor people are forced to rely on their
own resources to meet their financial needs and face systemic or idiosyncratic shocks.
The proponents of conventional financial inclusion argue that ensuring broad access to
financial services under inclusive financial systems can benefit the poor people.
Financial inclusion is often considered as a critical element that makes growth inclusive
as access to finance can enable economic agents to make longer-term consumption and
investment decisions, participate in productive activities, and cope with unexpected short-
term shocks. Growing theoretical and empirical evidence suggests that financial systems
that serve low-income people promote pro-poor growth Alfred (Hannig and Stefan
Jansen, 2010). Lack of access to finance, therefore, adversely affects growth and poverty
alleviation. It makes it more difficult for the poor to accumulate savings and build assets
to protect against risks, as well as to invest in income-generating projects. As a result, the
interest in financial sector development has increasingly focused on the factors that
determine not only the depth but also breadth of access, in a move toward inclusive
financial systems. Understanding the link between financial inclusion, poverty, and
income inequality at the country becomes vital for designing and implementing programs
that broadens access to financial services, leading to reduction of poverty incidence and
income equality (Cyn-Young Park and Rogelio V. Mercado, Jr., 2015).
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5.3 The Concept of Financial inclusion in Islam and Its Status in Muslim World
The concept of financial inclusion in Islam is well integrated in the core objectives of
Islamic Shariah known as ‘Maqasid al-Shariah’ which focuses on promoting welfare of
each member of the community. In an Islamic society, a level playing field, including
access to the natural resources provided by Allah needs to be ensured for all members of
the community so that every member can enjoy the opportunities and rights to groom
themselves. In a fact, Islam emphasizes financial inclusion with social inclusion by
meeting minimum requirements for a dignified life of each and every member of the
society. The two distinct features of Islamic financethe notions of risk sharing and
redistribution of wealthdifferentiate its path of development significantly from the
conventional financial model (Iqbal, Z. and Mirakhor, A., 2012 and Iqbal, Z., 2015). The
risk sharing and redistribution of wealth aspect builds the foundation of financial
inclusion in Islamic that includes every member of the community including the under-
privileged poor people. The only profit motive works as driving force behind
conventional financial system that cannot include the poor segment of the society while
both profit and welfare motives act as the motivating forces behind Islamic finance in
which inclusion of the poor people has been made mandatory in principle and action.
Although financial exclusion is a serious problem for all developing countries, it is
especially severe in Muslim-majority countries with around 700 million poor people who
live on less than $2 per day (World Bank, 2014). The low level of financial inclusion
among Muslims is explained by either factors of voluntary exclusion (such as religious
considerations) or those of involuntary exclusion (such as discrimination, lack of
financial literacy, lack of collateral, etc.). One major reason relating to voluntarily
exclusion of many Muslim-headed households and firms from formal financial markets
lies in absence of Shariah based financial services as Islamic Shariah prohibit predefined
interest bearing loans. As a result, most conventional financial services are not relevant
for religiously minded Muslim individuals and firms in need of financing. This is why
only about 25 percent of adults in OIC member countries have an account in formal
financial institutions, which is below the global average of about 50 percent (World
Bank, 2014).
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5.4 Tools of Financial inclusion in Islam
Both collateral based conventional banking system and collateral free microfinance have
been failed to provide necessary financial services to unbanked poor people in Muslim
majority countries. The conventional banking system does not offer financial services to
poor people due to lack of collateral and high cost associated with credit assessment,
monitoring and enforcement of law in case of default. Though the conventional
microfinance has some economic and social impacts on the lives of millions of the poor,
it could not prove suitable and effective for all the poor, hardcore poor in particular
because of high rate of interest, lack of product diversity, paucity of adequate funds and
absence of private sector participation (Iqbal, Z, 2015). Based on the notions of
redistribution of wealth and risk sharing embedded in Islamic Shariah, Islamic
microfinance may be an effective tool in promoting financial inclusion towards poverty
alleviation in developing poor OIC countries. Islamic microfinance can employ either
‘redistribution of wealth tool’ or ‘risk sharing tool’or both in combating poverty. The
application of financing tools depends on the level of poverty as shown in table 5.1.
Iqbal Z (2015) opines that the tool of redistribution of wealth is based on redeeming the
rights of the poor in the income and wealth of the rich. Islam’s redistributive instruments
include set of mechanisms comprising either mandatory levies (zakat), or philanthropic
contributions (sadaqat and waqf, or benevolent loans, qard al-hassana). Islam has made
zakat compulsory and encouraged charities for ensuring welfare of the poor who lack
Table 5.1: Tools for Financial Inclusion under Islamic Microfinance
Level of Poverty
Name of Tool
Redistribution Tool
Risk sharing Tool
1. Extreme Poverty
2. (Below poverty line)
Charity based microfinance model
(Zakat, sadaqa and waqf based)
Collective risk sharing
through collective support
during crisis
3. Poverty
4. (Above poverty line)
Charity based microfinance model
(Zakat, waqf and qard hasana based)
Profit based Microfinance
model
(Mudaraba, Musharakah)
with micro-Takaful
5. Low income*
Charity based microfinance model
( waqf and qard hasana based).
Profit based Microfinance
model
( Mudaraba, Musharakah)
with micro-Takaful
Source: Adopted from Iqbal Z (2015). * If needed, other Islamic financing tools such as
murabaha, muajjal, istisna, salam and ijara may be used in promoting income.
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basic needs for survival and financial support for engaging in economic activities. In
contrast, the risk sharing tool consists of the core principle of risk sharing, which is
promoted through permitted contractual agreement for undertaking business transactions
as well as through the concept of risk sharing with less fortunate members of the society
through self help and exhibition of solidarity during difficult and unexpected times of
economic distress. To promote financial inclusion among poor, the two tools can be used
separately or jointly depending on the poverty level of different segments of society who
suffers from financial exclusion.
The tool of redistribution of wealth, built-in in Islamic values can play as a powerful tool
for promoting financial inclusion among the extreme poor to help them getting out rid of
poverty cycle. By using this tool, funds collected under zakat and sadaqa are provided to
the extreme poor for availing basic necessities of life. Besides, caring Muslims can help
extreme poor and destitute people and share risks with more voluntary donations during
an economic shock or a natural disaster going beyond the minimum prescribed
contribution. In order to enable them to be economically active, vocational training and
skill enhancement services may be offered through waqf. Following these actions,
extreme poor would become eligible to break poverty line.
Both redistribution and risk sharing tools need to use for reduction of poverty above
poverty line. Funds collected under zakat and sadaqa may be used for consumption
purpose while qard hasana can be extended for investment purposes. Training for skill
enhancement may be provided using waqf. Deserving poor may avail finance under profit
based microfinance model (using either mudaraba or musharaka instrument with micro-
takaful). Following these actions, poor above poverty line would become low income
poor.
Low income poor may apply either redistribution or risk sharing tool or both according to
their requirements. Funds collected under qard hasana may be used for investment
purpose while training for skill enhancement can be extended through waqf. Either
mudaraba or musharaka instrument with micro-takaful under profit based microfinance
model may be undertaken in generating microenterprises for promoting sustainable
income. If needed, other Islamic financing tools such as murabaha, muajjal, istisna,
salam and ijara may be used in enhancing income generating activities.
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As conventional microfinance has failed to tackle all types of poverty, extreme poverty in
particular, Islamic microfinance programs based on the principles of risk sharing and
redistribution of wealth may be used as an effective tool for eradication of poverty and
inequality in the society. The unique models of Islamic microfinance can help all types of
poor to lift them out of poverty cycle and promote financial and social inclusion for
building an egalitarian and peaceful society.
6. Current Status and Potentials of Islamic microfinance in Bangladesh
6.1 Current Status of Islamic microfinance in Bangladesh
Bangladesh has a small size of Islamic microfinance market comprising 4 Islamic banks,
20 small Islamic microfinance institutions (IMFs) and Islamic microfinance program of a
conventional MFI (Table 6.1). Association of Muslim Welfare Agencies in Bangladesh
(AMWAB) works as a wholesale fund provider to a limited scale. Islamic banks are
mandated from Bangladesh Bank, Central Bank of Bangladesh while Islamic
microfinance institutions (IMFs) have licenses from Micro Credit Regulatory Authority
(MRA), the watchdog of microfinance in Bangladesh. Islami Bank Bangladesh Limited
(IBBL), the first Islamic bank in South Asia is the largest provider of Islamic
microfinance in Bangladesh accounting for 78.84 percent share of Islamic microfinance
market.
IBBL operates Islamic microfinance programs under Rural Development Scheme (RDS)
in Bangladesh since 1995 with great success replicating Grameen Bank model. RDS is
Table 6.1: Status of Islamic Microfinance in Bangladesh (2015)
Provider of Islamic MF
Number of
Clients
(Million)
Yearly Loan
Disbursement
(BDT in
billion)
Outstanding of
Loan
(BDT in billion)
1. Islami Bank Bangladesh Limited
0.947
29.92
20.80
2.Al Arafah Islamic Bank Limited
0.050
3.52
0.66
3.First Security Islam Bank Limited
0.004
0.10
0.08
4. Social Islamic Bank Limited
0.0007
0.01
0.01
5. Islamic NGOs/MFIs (20)*
0.220
4.17
2.77
6. Conventional NGO with Islamic
Microfinance (1)*
0.005
0.23
0.03
Total
1.70
37.95
24.36
Source: (i) Respective Islamic banks, (ii) Association of Muslim Welfare Associations
Bangladesh (AMWAB) and (iii) TMSS- Only conventional NGO with Islamic microfinance
program. * Provisional data
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treated as first Islamic Microfinance Model in the country & abroad. IBBL accounts for
in Bangladesh. Currently, the annual loan disbursement of RDS of IBBL stood at 29.92
billion and the number of clients was 0.947 million in 2015. Among small microfinance
institutions, one foreign NGO namely Muslim Aid provides microfinance among the
poor.
6.2 Islamic Microfinance: A Small Share of Microfinance Market
Though Islami Bank Bangladesh Limited (IBBL) and other institutions are running
successful Islamic Microfinance programs, Islamic microfinance industry as a whole is
lagging far behind compared to conventional microfinance industry in terms of number of
clients, amount of financing, amount of saving mobilization and number of institutions
offering micro financial services. The number of clients of Islamic microfinance stood at
1.70 million in 2015 which is much lower as compared to 37.04 million of conventional
microfinance (Table-6.2). Similarly, the amount of disbursement of Islamic microfinance
stood at BDT 37.95 billion in 2015 as compared to BDT 829.16 billion of conventional
microfinance. The number of institutions that provides Islamic microfinance is also few
as compared to those of conventional microfinance providing institutions. Islamic
microfinance is offered in Bangladesh by 4 Islamic Banks, 20 NGOs and one
conventional MFI. To the contrary, Grameen bank, 693 microfinance instructions (MFIs),
14 commercial and specialised banks and different ministries offer conventional
microfinance.
Table 6.2: Status of Conventional Microfinance in Bangladesh (2015)
Providers of Conventional MF
Number of
Clients
(In million)
Loan
Disbursement
(BDT in
billion)
Outstanding of
Loan
(BDT in
billion)
1. Grameen Bank
8.80
138.90
91.29
2. NGOs/MFI (693)
26.00
634.00
352.41
3. State Commercial and Specialized
Banks (8)
0.85
25.53
10.76
4. Private Commercial Banks (6)
0.25
8.13
2.89
5. Different Government
Ministries/Agencies
1.14
22.60
19.71
Total
37.04
829.16
477.06
Source: Resume of Banks, Insurance and Financial Institutions, 2015-2016, Ministry of Finance,
Government of Bangladesh.
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Clearly, Islamic microfinance accounts for only 3-5 percent of the entire microfinance
market in Bangladesh despite Muslim majority people and success of Islamic banking.
The small share of Islamic microfinance is depicted in Chart 1 and Chart 2.
The key factors that contribute to explosive growth of conventional microfinance in
Bangladesh include visionary leadership in microcredit movement, a group of dedicated
professionals, group lending model, huge population, liberal policy supports from
successive governments, investment in rural infrastructures, and generous assistance from
development partners (Hulme, D. and Moore, K., 2007). Islamic Microfinance in
Bangladesh did not grow like conventional microfinance due to lack of visionary
leadership, negative attitudes of a section of conservative religious leaders, want of
adequate motivation from top management of Islamic banks, lack of directions/guidelines
from regulatory authorities, paucity of suitable instruments, inadequate funds, lack of
proper use of zakat funds and want of dedicated trained professionals.
6.3 Islamic Microfinance in Bangladesh: Potentials and Significance
Despite low share of Islamic Microfinance, it has great growth potentials to flourish in
Bangladesh. The following factors may be explained for bright prospects and significance
of Islamic Microfinance in Bangladesh.
Promoting Financial Inclusion of Religious People- Islamic microfinance has great
potentials to expand in Bangladesh traditional microfinance program has failed to bring
all the poor people under its network. As traditional microfinance is interest based and
interest is prohibited in Islam, many religious people are reluctant to use it for income
generating activities resulting financial exclusion. This implies that Islamic microfinance
may emerge as a potent driver of financial inclusion among poor people, hardcore poor in
97%!
3%!
Chart 1: Share of Clients of
Islamic Microfinance (2015)
ConvenBonal!
microfinance!
Islamic!
microfinance!
95%!
5%!
Chart 2: Share of disbursment
of Islamic Microfinance (2015)
ConvenBonal!
microfinance!
Islamic!
microfinance!
!
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46!
particular in Bangladesh. This is significant in attaining inclusive growth and poverty
allegation in Bangladesh. A report on Bangladesh by UNDP (2012) quotes rightly--
“With a large number of poor women and men, unable to access financial services due to
religious restrictions and beliefs, it becomes important for governments, the private
sector, especially Islamic commercial banks among other stake holders, to support
Islamic MFIs and channel resources to service those who need it most, poor women and
men, girls and boys. Islamic microfinance has a positive role in poverty alleviation with
huge untapped potential as an effective socioeconomic development tool”.
Microfinance programs based on commercial motive with high interest rate have failed
to reach the hardcore poor. As invisible hands of market economy cannot remove their
hardships, they need unique program- cash with zero interest rate with other supports
beyond funds which includes food relief, training and health facilities. Given this, Islamic
microfinance may emerge as a viable panacea to solve the problems of hardcore poor
employing its charity based model.
Success of Islamic banking: Bangladesh is one of the star performers in Islamic banking
among Muslim majority countries of the world. In Bangladesh, currently out of 56
commercial banks, 8 private sector banks (PCBs) having 965 branches have been
functioning as full-fledged Islamic Banks and 20 branches of 9 conventional banks and
25 windows of 7 conventional banks are also offering Islamic banking services. Total
deposits and investment of the Islamic banking account for more than twenty one percent
of the total banking system at the end of December, 2015 (Bangladesh Bank, 2015). The
Islamic banking industry has now more than 10 million account holders in Bangladesh
indicating a wide acceptance for Islamic financing in Bangladesh. Clearly, ground has
been prepared emergence for Islamic microfinance as an important financing tool in
poverty alleviation program.
Excess liquidity of Islamic banks: Bangladeshi Islamic banks have excess liquidity due
to non-availability of suitable investment instrument. At the end of December 2015
quarter, surplus liquidity of Islamic banks stood at BDT 131.16 billion (Bangladesh
Bank, 2015). Islamic microfinance may be a viable instrument for Islamic banks to invest
some part of excess liquidity of Islamic banks. This will also ensure the achievement of
welfare objective of Islamic bank which is a core part of Islamic banking as per Shariah,
the guiding principle of Islamic banking.
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47!
Success of Islamic Micro Finance Programs of IBBL: The RDS program of IBBL is a
great testimony that Islamic microfinance programs can be expanded in Bangladesh
successfully.
Promoting micro and small enterprises: Bangladesh needs to promote micro and small
enterprises massively to absorb million of youth. In this regard, the role of conventional
microfinance is not satisfactory mainly due to high rate of interest. Islamic microfinance
may easily fill the gap with its unique models.
Experience of Conventional Microfinance: The experience of big MFIs like Grameen
bank, BRAC, ASA and other top NGOs may be crucial in expanding Islamic
microfinance.
Potential Zakat fund: Bangladesh has Zakat Board under Islamic Foundation managed
by Government and other few social organizations for collecting zakat and distributing
those among the poor people. But their performance is far below than great potentials.
Developing proper mechanism may enhance collection of Zakat that may play vital roles
in developing charity based Islamic microfinance model toward poverty alleviation.
Presence of many waqf estates: Waqf, as a religious charitable institution has been in
existence in Bangladesh for centuries in order to attain various types of religious,
educational and social welfare purposes (Karim, M.F., 2009). According to the Census
of Waqfs, 1986 out of 150,593 waqf estates in the country, only 97,046 are registered,
45,607 are verbal and the rest 7,940 are waqf by tradition. Besides pursuing religious
and philanthropic objectives, the income of the estates may be used for developing
charity based Islamic microfinance model toward for socio-economic advancement of the
poor.
Attracting foreign funds: Foreign funds particularly from Middle Eastern Muslim
majority countries, Islamic Development Bank (IDB) and other international bodies may
be attracted through proper designing of Islamic microfinance program.
Serving All Faiths, Muslim and non-Muslim: The beauty of Islamic microfinance lies
in its capability to serve all faiths, Muslim and non-Muslim.
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48!
7.1 Challenges facing Islamic Microfinance
Despite huge potentials, the share of Islamic microfinance is only 3-5% of total
microfinance market. The key challenges that Islamic microfinance industry faces
include: (i) absence of Guidelines for Islamic Microfinance from Micro credit Regulatory
authority (MRA); (ii) want of motivation from Islamic Bank management; (iii) absence
of adequate Islamic Microfinance Institutions; (iv) want of suitable instruments and (v)
paucity of trained human resources.
7.2. Policy Options and Conclusion
It is imperative to adopt following policy options to promote Islamic microfinance
industry in Bangladesh.
Issue of guidelines on Islamic Microfinance Institutions by Micro credit
Regulatory authority (MRA) covering all operating aspects including capital
adequacy, risk management, auditing and monitoring, and global financial
reporting standards.
Allowing a good number of Islamic Microfinance Institutions (IMFIs) by MRA,
establishing separate Department at MRA for supervising Islamic Microfinance
Institutions and Shariah Advisory Board for ensuring Shariah compliances.
Adopting financial engineering for product diversification in order to meet
demands of all categories of poor
Undertaking proper steps for credit, liquidity and market risk management for
ensuring sustainability of Islamic Microfinance
Creation of central data base on Islamic Microfinance for avoiding over-
indebtedness
Developing proper steps for ensuring smooth supply of funds from charity based
sectors as well commercial sectors with more involvement of Islamic Banks.
Arranging dialogue with conventional microfinance institutions to introduce
Islamic microfinance for promoting financial inclusion among hardcore poor
people
Application of modern mobile phone and other technology to reduce operational
cost and expand network in remote areas towards promoting financial inclusion
among unbanked people.
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49!
Adoption of programs for developing devoted and skilled human resources. More
efforts should be made to train Islamic MFI managers and staff.
Promoting research on IMF in order to build the capacity of players at the micro,
meso and macro levels, to help develop and implement appropriate business
models. This also needs to better understand the size and segments of demand, on
one hand, and to try to come up with a group of products responding to this
demand, on a large scale (Khaled, M., 2011).
Higher GDP growth, near self-sufficiency in food production, promotion of export-
oriented labour intensive ready-made garments (RMG), manpower export and huge
expansion of conventional microfinance contributed greatly to reduce poverty in
Bangladesh. Despite significant progress in reducing poverty, 24.8 % people still live in
poverty and 12.9 % people live in extreme poverty. Traditional microfinance failed to
reach among all categories of poor, hardcore poor in particular due to higher rate of
interest, lack of adequate fund and want of customized products. Given this, Islamic
microfinance program may act as a viable tool in promoting financial inclusion and
combating poverty through its inclusive and innovative models based on zakat, sadaka,
waqf and commercial funds to cater the demand of all categories of poor. To this end,
policy makers, academicians, practitioners, Islamic bankers and philanthropist should
join hands to build an Islamic microfinance market in order to establish a caring society
based on equity and justice.
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50!
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... Both models are well-known and widely purchased in Bangladesh and other countries outside of Bangladesh [16,17]. The RDS of IBBL, which is the third most well-known model, is founded on Syariah principles and offers certain microfinance services to those who are impoverished [18,19]. ...
... RDS was created in 1995 to ensure non-urban people have access to equality, justice, and work opportunities [19]. The needs of the people living in rural areas, particularly those involved in the agricultural industry, are considered throughout the system's development. ...
... MFIs have a crucial part to play in the process of bringing about change in the agricultural sector, which various causes may bring about, including advances in technology and infrastructure as well as fair market arrangements. The disadvantaged members of society are resourceful and creative; hence, they need accessible opportunities to use their knowledge and experience in the form of new ventures [19,20]. ...
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... Author's Suggestion What role Islamic microfinance institutions can play in achieving the objective of financial inclusion? (Nabi et al., 2017) 20. ...
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Abstract. The objective of this paper is to present theoretical proposals for institutional structure in the context of Islamic Microfinance by first comparing Conventional and Islamic microfinance institutions and then by highlighting some of the pioneering work of conventional microfinance models that paved the way for Islamic Microfinance. In this paper, we review the literature of micro finance models that simultaneously deals with several facets of poverty by combining Waqf and Zakah principles together or individually. There are three models examined in this paper. Waqf-Based Islamic Microfinance Institutions, a Model of Zakah and Awqaf-based MF Organizations and an Integrated Awqaf and Zakah Model of Microfinance. Both Zakah and Waqf mechanisms are considered for Islamic microfinance not only because of their frameworks that are in accordance to the Shariah but they are the original concepts provided in Islam that serve people in need i.e the poor. In tandem with the doctrine of microfinance, Zakah and Waqf are seen as tools best suited to assist the poor who require financing and ultimately could be effective for poverty reduction. The paper derives recommendation for integrating microfinance models into the overall economic policy. Keywords. Awqaf Funds, Monetary waqf, Zakah, Microfinance, Islamic Microfinance and Poverty. JEL. G21, I31.
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Islamic Micro-finance (IMF) is an emerging mode for empowering the poor. The current study has been devised to observe the implications of IMF on the assets and poverty status of the households who borrowed from three pioneering organizations i.e. Akhuwat Foundation, Farz Foundation and NAYMAT based in Lahore, Punjab, Pakistan. Pre and post project approach was rendered to observe the impacts of microfinance on the targeted respondents. In this regard, purposive sampling was employed for data collection to avoid randomized error where self-administered structured questionnaires were used for data collection. Foster, Greer and Thorbecke measures of poverty assessment were used to achieve the objectives of the study. Results exhibited positive impacts of Islamic Micro-finance on the lives of the poor. This study is a contribution in the literature as there is no empirical study about the impact casted by the Islamic Micro-finance in Pakistan.
Chapter
Haqq, in 2011, propounded the view that major microfinance institutions such as the Grameen Bank and others operate within a "complete ignorance zone." He claims that 98 percent of the participants in the microfinance program in Bangladesh are ignorant about the terms of credit and interest rates. Therefore, the participants in the microfinance program are deprived due to not having the same opportunities as others under the same circumstances. Islam, on the other hand, emphasizes social justice, which helps ensure social balance and peace. Microfinance is theoretically beneficial in alleviating poverty, at least in those countries where the poor have access to funds. But they are deprived of accessing any funds in general under ordinary circumstances because they lack collateral. The Grameen Bank members, unfortunately, pay an interest rate of around 40 percent on their loans. Meanwhile, clients of the regular bank pay only around 10 percent (Haqq, 2011). The poorer clients are ironically paying an incredible four times higher interest rate compared to wealthy clients. Islam considers this unfair and unequal because the poor should not be discriminated against. The poor will benefit if and only if the microfinance system (procedure/theory) believes in alleviating poverty and ensuring justice and equality in the society. We believe that the three-stage integrated Islamic Microfinance model can ensure social justice and equality and, at the same time, alleviate poverty more effectively than the conventional microfinance models.
Chapter
If you ask a rich world citizen with an interest in development to name a development policy that works, there is a very strong chance they will say ‘microfinance’, and tell you that they have heard it works wonders in Bangladesh. In the public eye, and according to many analysts, microfinance has been successful. The microfinance industry now has global outreach, with more than 92 million clients reported in developing countries.2 It is very difficult to find a Poverty Reduction Strategy that does not include microfinance as an element.
Purpose – The purpose of this paper is to identify how zakat institutions in Brunei can facilitate financial inclusion into their practices and assist to fulfil the saving motives of zakat recipients, notably upon creating financial products/solutions for the poor and destitute. Design/methodology/approach – Using mixed methods approach, structured interviews were conducted with 431 individuals (215 welfare recipients and 216 non-welfare recipients) and semi-structured interviews were conducted with 39 welfare recipients. Findings – This paper highlights the need for bank accounts and credit facilities that meet the needs of welfare recipients, to fulfil their daily needs, as well as saving for children/grandchildren’s education, and for welfare recipients who save. Research limitations/implications – Limitation includes non-random sampling. Practical implications – The implications of these findings point out how zakat and other social institutions in Islam can adapt to contemporary challenges in personal finance, notably in facilitating financial inclusion and understanding saving motives of recipients. Originality/value – This paper provides a perspective and contention for zakat institutions to adapt to contemporary aspects of personal finance, through facilitating financial inclusion and the saving motives of zakat recipients.
Purpose – This paper aims to develop an integrated waqf-based Islamic microfinance (IsMF) for poverty reduction in Bangladesh. Microfinance institutions (MFIs) have been constrained by the high cost of funds, high interest rate charges and poor human resource quality of the recipients. Islamic MFIs have recently evolved with the hope of overcoming these financial, ethical and human capital deficiencies faced by the conventional financial institutions. Moreover, a good number of integrated models have been proposed to enhance the role played by Islamic MFIs. Most of these models, however, lack empirical justifications. Design/methodology/approach – The research uses survey techniques. A total of 381 respondents were included in the survey. The integrated waqf-based Islamic microfinance model (IWIMM) was earlier on developed using literature and intellectual discussions. There are six constructs presenting the IWIMM, namely, waqf resources, IsMF, takaful, project financing, human resource development and poverty alleviation. In the survey instrument, 45 items represent the six constructs, but only 26 items have been retained after factor analysis. Structural equation modelling has been adopted to examine the relationship among the constructs. Findings – The results show that there are significant relationships between IsMF and takaful, waqf resources and human resource development, takaful and human resource development, IsMF and human resource development and, waqf resources and project financing. The results also indicate that poverty alleviation is possible through the integration of these constructs. Research limitations/implications – Though the paper has studied conventional and Islamic MFIs in Bangladesh, one of the populated Organisation of Islamic Cooperation (OIC) member countries and also where poverty incidence is high, further studies need to be conducted in other OIC member countries to adopt the model in line with practical and regulatory environment of those countries. Similarly, the study is based on the perception of the respondents, which limits the generalization of the result. Practical implications – The paper proposed a model that has the potential of being applied for poverty alleviation programmes in most of the OIC member states. Originality/value – The present paper has developed an IWIMM for poverty reduction.