Mohammad Abdul Mannan in the first of a three-part article on Islamic microfinance
Islamic microfinance (IM) is becoming an increasingly popular mechanism for alleviating poverty, especially in developing countries around the world. The Islamic microfinance industry as a whole is expected to reach over $2.0 billion in 2012 and is a continually growing sector due to its ethical principles and prohibition of riba (interest). This amount of assets is, however, only 1.0 per cent of the total microfinance of the world.
The concept of IM adheres to the principles of Islam and is a form of socially responsible investment. Investors who use their wealth for IM projects only involve themselves in halal projects which benefit the community at large. Such projects include zakat, which is charity based, or trade and industry projects to develop a country’s economy.
The mechanism of lending in IM differs from conventional microfinance due to the prohibition of interest. Unlike conventional microfinance, IM offers an interest-free way to give small loans to people who are poor and in need.
IM gives the investor a chance to get involved in worthwhile projects which could essentially play a significant role in targeting poverty and alleviating it in many countries around the world. IM primarily relies upon the provision of financial services to the poor or developing regions which are subject to certain conditions laid down by Islamic jurisprudence. It represents the merging of two growing sectors: microfinance and the Islamic finance industry. It has the potential to not only be the solution for an increased demand to help the poor but also to combine the Islamic socially responsible principles of caring for the less fortunate.
Utilising Islamic financial instruments such as Murabahah and Musharaka to help in facilitating IM cannot only spur the IM sector but can also increase the options of Islamic finance and make it more accessible to poverty stricken countries.
Hundreds of IM institutes have been developed across the world. Like many countries of the world a number of banks in Bangladesh have incepted IM scheme to cater for dealing with poverty. In this paper we will see how it works and if this can contribute to alleviate poverty.
Concepts and views of poverty: In conventional approach poverty is defined as any individual having per day income less than US$ 1.0 while in nutritional aspect the definition of poverty is not being able to avail 2112 kilo calorie of nutrition per day per person.
On the contrary, Islamic approach to poverty line is Nisab i.e. people having less than Nisab (no zakat is due on wealth) amount of income is poor. This is a universal definition which is applicable in any time and any place of the world. The definition of poverty in conventional approach is not universal i.e. it needs to be revised in course of time and it is not applicable in developed countries.
Approaches to poverty alleviation: Anti-poverty programme can be broadly classified into two strategies: (a) Indirect strategies that formulate a macro-economic policy framework to ensure sustainable growth, higher employment, higher per capita income, and eventually reduce poverty; and (b) Direct strategies that target the underprivileged population and provide them necessary assistance to ensure credit access, improve health conditions, increase literacy rate and ultimately eradicate poverty.
Indonesia, Malaysia, and Thailand are good examples of countries that have alleviated poverty through indirect strategies. These countries pursued consistent macro-economic policies that ensured growth of six per cent or greater and increased public spending on education, health, family planning, etc. for decades. In contrast, Bangladesh is an example of direct policy application where government and non-governmental organisations (NGOs) provide a set of services for the targeted poor population like ensuring access to credit, health care and educational services to targeted underprivileged individuals.
Evolution of poverty alleviation initiatives: Poverty alleviation has many phases in modern time. One approach is trickle-down strategy through market mechanism or through growth promotion, benefits of which could hardly reach the poor. Cooperative movement also failed to benefit the small farmers and the landless as it is occupied by the well-to-do farmers. Target group approach through microfinance and credit entitlement is another method; but it could not bring the desired result because of its high interest rate and failure to reach the ultra poor. The introduction of IM changed the scenario with borrowed scheme replaced in it.
Key considerations of poverty alleviation scheme should be able to address the ultra poor. There should be social charter accepting that the poor are entitled to get initial capital along with their micro-finance entitlement to make them fit as market player. This should ultimately turn into a credit-plus integrated poverty alleviation scheme.
Modes for Islamic financing: Conventional micro-finance institutes (MFI) asset portfolio is of fixed interest nature while Islamic micro-finance institutes’ (IMFI) asset portfolios should feature diversity in terms of mode of financing and areas of financing. Figure 2 describes the basic categories of diversified financial products the Islamic financing system offers.
Differences between conventional and Islamic MFIs: IM has some fundamental differences from conventional micro-finance which are presented in the table 1.
IM around the world: Many IMs are working around the world. There are more than 300 Islamic financial institutions in over 65 countries which are managing assets of approximately US$ 1.0 trillion in Shariah compatible manner and the annual growth is more than 15 per cent. Some of the important microfinance programmes are presented in Table 2.
The writer is Managing Director, Islami Bank Bangladesh Limited
sultan@islamibankbd.com
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