Islamic Microfinance and Financial Inclusion

Significant populations are disadvantaged in Muslim countries particularly in central Asia, sub-sahara Africa, and MENA region. They have no proper access to the formal banking, conventional or Islamic financing. Moreover, the banking institutions are not focused in reaching out to the needy. Private and foreign financial institutions/banks seek the maximization of profits generally for shareholders/stakeholders in primarily urban centers. Rural infrastructure projects, micro-finance and rural development are generally left only to public government finance houses because of the assumed high risk that is associated with lending/financing the poor or micro producers. Given the rate of high poverty among these low income groups and the unavailability of adequate collateralization mechanism, financing this group is normally associated with greater risk as reflected in the banks’ high non-performing loans in some countries like Egypt and Morocco. Islamic Micro-Finance is an important solution for financial inclusion and poverty alleviation in both Muslim and non-Muslim countries. Such a solution can be a form of Da’wah/Invitation to Islam to the non-Muslim fraternity in portraying the economic and financial values of Islam. Islamic microfinance can provide finance for the poor people or people with good expertise without any start-up capital. Unlike conventional microfinance, Islamic microfinance is based on sound Islamic financial and economic principles. Islam always encourages self-employment and empowerment rather than just donating money and food to the needy for consumptions. However, providing tools for production to poor people is better than the donation of consumable charity (hadith). The poor people who are self-employed will be empowered to care for themselves and their families for generations. Furthermore, the World Bank declared microfinance as a means of eradicating inequality and poverty eradication. Islam has more means of eradicating income inequality such as Zakat and Sadaqah which is given directly to the poor to solve their urgent needs. Hence, Islamic microfinance targets the very poor people who are capable of working in the production and manufacturing of goods or services. Consequently, while Zakat and Sadaqah should be paid only to specific people, Islamic microfinance is not. Islamic microfinance can be used to mitigate the negative impact of the high unemployment rate among the youth in poor geographies. Evidence has shown that the rate of unemployment is skyrocketing in the world among the adult and youth at same time in most Muslim countries and poor non-Muslim countries. Islamic microfinance can be used as a quick response, targeted to finance small entrepreneurship such as Small and Medium-sized Enterprises (SMEs). Hence, Islamic microfinance can be used effectively to overcome the problem of hyper unemployment and the challenges facing SMEs in accessing suitable finance in Muslim and poor non-Muslim countries. As the case of other Muslims countries, the Sudanese and Pakistani experience showed that Islamic microfinance has a positive impact on income generating activities. In addition, Islamic microfinance used to finance graduate students as a part of the unemployed youth sector in Sudan. Despite the positive impact of Islamic microfinance in many Muslim countries, the borrowers are still dominated by the traditional sectors. Unfortunately, most of these sectors faced more challenges in most Muslims countries. These challenges include but are not limited to the basic infrastructures, financial infrastructures, and far and unreachable markets. These challenges have negatively impacted the accessibility of Islamic microfinance by raising the cost of finance in many Muslim countries. Other challenges facing Islamic micro-finance in Muslim countries is high cost and the riskiness of financing poor borrowers. This stems from the small size of their finances, the remote residential areas of the poor from the urban cities, and their uncollateralized risk. Thus, the projects executed by the poor are always of small scale in nature and they always lived in very remote and even some times, primitive areas in Muslims countries. In addition, Muslims countries only recently recognized the essentiality of microfinance as a tool of empowering low income group, reducing the problem of unemployment, and elevating poverty. Also, the weakness of the Islamic microfinance infrastructures includes the limited spread of Islamic financial institutions and the relevant financial regulations, and the unavailability of popular Islamic micro finance agencies or effective program in these countries. While extreme poverty is a global phenomenon which is not limited to the Muslim countries, the structured finance, right choices of financing programs, and the policies to alleviate it, is very essential and urgent. This is because although the World Bank planned to end extreme poverty by the end of 2030, some evidence showed that people in the poorest regions of rural Africa can even lift themselves out of extreme poverty in just five years. Thus, this can become a reality if proper means and tools of microfinance exist.  Thus, this will facilitate the particular needs of the poorest people based on their diversity. Also, Structured Islamic microfinance by diversity might represent the right intervention for achieving better financial inclusion among the poorest in Muslim communities. The Readiness of Islamic Microfinance Islamic Microfinance is very effective and essential for creating hope not only for the poor and those above the poverty line as shown by the traditional microfinance, but also for the extremely poor in the community. However, Muslims who are extremely poor remained excluded through traditional microfinance for several reasons. They were excluded voluntarily due to the practices of the interest rate by conventional lending institutions which considered riba which is forbidden in Islam. Similarly, it can be excluded non-voluntarily due to inability to repay back the loan plus the interest rate accrued to it. Thus, Islamic microfinance can easily overcome these challenges due to its wide scope to cover various diversity of customer whether based on their expertise or sectorial dimension. This is in addition to its supported tools such as zakat, waqf, and sadaqah.

Islam does not differentiate between poor people based on the drown line of poverty. Thus, Islam divides poor people based on two main categories of Fuqara and Masakeen. Fuqara are the people that do not have enough substances to satisfy their basic need for one day, while Masakeen are the people that have enough substances to satisfy their basic needs for the whole year. In this case, Islamic microfinance providers might not prevent a Faqeer who is highly skilled in certain specialization, and trustful from lending him through profit sharing if the outcome of the project is viable. A Faqeer is also illegible in Islam for both Zakah and Sadaqah. However, this is the most effective Islamic tools for social inclusion. So Islamic gives the satisfaction of the basic needs for Fuqara and Masakeen high priority through recommended tools to be implemented by the state, institutions and even wealthy people from their wealth. This occurs whenever they fulfill certain requirement such as al-nisab in term of the Zakah and voluntary charity (Sadaqah). Furthermore, Islamic microfinance is moving beyond conventional counterpart to provide effective social and financial inclusion simultaneously through its twin tools. Hence, credit lending and Zakah should be given directly to the extremely poor in cash or in kind to satisfy their basic needs. Islamic microfinance is expected to be more ethical that focus more in the social responsibility rather than on only profit maximization. Islamic microfinance is very ethical when it grants finance and more ethically at time of repaying the loan. Subsequently, Islam encourages being lenient on the people you lend, and have a natural default for those unable to pay back the loan even if there are not Fuqara. And if someone is in hardship, then [let there be] postponement until [a time of] ease. But if you give [from your right as] charity, then it is better for you, if you only knew (Quran). Evidence has shown the failure of the dominant conventional microfinance to satisfy extreme poor people in Muslim countries. In addition to the religious conservativeness, the urgent need of the extremely poor needs to be satisfied first, before moving along to production borrowing. However, these tools of satisfying the basic needs of the poor free of charge exist only on Islamic socioeconomic, through Zakah, Sadaqah and waqf. Zakah is the right of poor in the wealth of rich Muslims being companies, banks, or individuals. Other factors that may cause the failure of the conventional microcredit is the interest rate-based (Riba) financing which is forbidden in Islam. Despite their extreme poverty, poor Muslims are very reluctant to take usury. In addition to that, interest-based finance requires collateral or the grantor to secure the payment of the loan is difficult for the poor as they can even afford their daily basic need. Islamic microfinance is also more appropriate than the conventional for entrepreneurship, SMEs, and extremely poor even in terms of the modalities. Based on sale or profit and risk sharing contracts, Murabahah, quart al-Hassan, Ijarah, salaam, Istisna’a and muzara’a, etc are Islamic microfinance best modalities to address the diversities needs and business nature of the poor or SMEs being Muslims or even non-Muslims. Islamic Microfinance develops and creates new economies and wealth rather than transferring wealth. Real economic growth and creation is what is required today in repelling the effects of poverty. The poor require a diverse range of microfinance services that covers their wide scope of need as far as possible. Islamic microfinance is a more accurate way of micro financing to the poor since it provides various microfinance products. In addition to that, Islam would not support the idea of granting unproductive microcredit loan for the purpose of gathering more profit from Fuqara and Masakeen. Islam encourages providing tools for production to the poor which might increase their income and help them to make more money. Unlike the previous conventional microfinance provided by the NGOs, the current practices of Islamic microfinance might exceed the microcredit to the micro-saving, micro-insurance, and other non-financial micro-services such as capacity building. Conventional microcredit is one way to be granted based on the interest taking gain and without sharing the pain with the borrower as the matter in the Islamic microfinance. Moreover, Islamic microfinance is more inclusive than the conventional microcredit that addresses the social and financial inclusion simultaneously. Islamic microcredit does not target only the low income group of people, but are more appropriate for the unemployed and skills group such as the graduate students and educated people, farmers, and alike. Hence, Islamic microcredit targets different clients with a wide scope of lending products. Given the high unemployment rate among Muslims youth, Islamic microfinance could be the best modalities to mitigate the risk of disadvantaged graduates and other group of youth than the conventional counterpart. Islamic microcredit can be structured based on the specialization and the professionalism of the poor and the unemployed people by categories. In Sudan, microfinance is used to finance veterinary projects for the graduated universities students such as egg production and chicken rearing through partnership between family bank, Omdurman Islamic University, and the students. Islamic instruments such as Salam, Muzara’ah and even Istisna’a can be used to finance working capital for disadvantaged rural people in Muslims countries regardless of having income or not. Thus, this is possible since they have expertise in certain business. Also, these instruments are the best fit for financing pre-shipping and post-shipping for entrepreneurship and SMEs imports and exports. Other modalities such as profit and loss sharing (Musharakah and Mudarabah) can also fit for many disadvantages of financial needs and small scale industries. Through Zakah, Sadaqah, Waqf and Qard al-Hassan, these unemployed disadvantaged people can be socially included by providing them with the necessary needs before taking them to the next step of the microcredit. However, Islamic social intervention tools will pave the roads to effective microfinance. Thus by empowering extreme poor and disadvantaged people, Islamic microfinance is moving beyond financial inclusion to social inclusion and is preserving human dignity.

Conclusion

The current situation of high unemployment rate and the widen whole of the disadvantaged people in Muslim countries and poor non-Muslim countries have awakened the need for proper access to micro-financing. Currently, poor and low-income people in such countries have little access to either conventional or Islamic microfinance.

Most poor people have been deprived access to microfinance either because of the adopted interest rate by conventional microfinance providers which is strictly forbidden in Islam or those who are extremely poor cannot fulfill the criteria of conventional microfinance. Contrary to conventional microfinance, Islamic microfinance might use Zakah, Sadaqah, Waqf, and Qard al-Hassan to make social inclusion to the disadvantaged people by providing them with the necessary needs before taking them to the next step of the microcredit. Furthermore, Islamic social intervention tools will pave the roads to an effective microfinance. Thus by empowering the extremely poor and disadvantaged people, Islamic microfinance is moving beyond financial inclusion to social inclusion, Da’wah/Invitation of Islam to non-Muslims and is preserving human dignity in general.

Islamic Microfinance and Global Islamic Financial Services Firm

GIFS is currently developing several products for Islamic Microfinance in Africa and East Asia. We are seeking global financial partners in rolling out such products and would be keen to review partnership proposals.

Mufti Ismail Desai

CEO. Global Islamic Financial Services Firm

Mobile: 071 683 8921

Email: ceo@islamicfinancialservices.co.za

Address: 21 Aurora Drive, Umhlanga, Durban, South Africa and Standard Chartered Towers, Dubai, United Arab Emirates

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