An Islamic Micro Finance Bank To Help Enterprises

The Conventional Micro-Finance programs have shown little interest in religious and cultural sensitivities ,also excludes the poorest of the poor and are inadequate to full-fill the needs of 37.4 % poor Muslims of the world. A recent report by CGAP suggests that a large proportion of poor muslims rejects all forms of loans, including Grameen style Microloans on religious grounds, even many Government initiatives have failed because of this reason. Islamic Finance industry is an industry with rapid growth but has shown little interest in Micro-Finance and poverty alleviation aiming for shariah compliance inform and not in spirit. There are many Islamic MF programs currently operational in different parts of the world, but they are regional and country based programs, this research paper will focus on the development of an International Micro-Finance Bank (not Program) with deepest local penetration. Interest based loans may lead prospective entrepreneurs to refrain from pursuing activities as cost of failure is too high. Islamic Economics goals of equality, fairness, social solidarity through risk sharing, property rights, and sanctity of contracts; entrepreneurship, partnership, income generation through productive activity for poverty alleviation are completely in sync with basic principles of any Micro-Finance program.

Aim and objectives: The purpose of my research is developing a sustainable and universal business model of an ideal full-fledged “Islamic Micro-Finance Bank� by examining working technique and mode of operation of Islamic Banks(and of Banks working on No Interest principle) and of Micro-Finance programs ( both Islamic and Non-Islamic) and merging the working principles of both to come with a business model of a Universal World-Wide Micro-Finance Bank strictly following and working on principles of Islamic Finance. An Islamic Micro-Finance Bank will provide thousands of entrepreneurial poor’s access to Micro-Finance- especially those who fear breaching their religious beliefs. Islamic Micro-Finance Bank will seek to finance business activities which will lead to the economic empowerment of the poor, rather than merely lending to the poor for consumption.

Literature review:

Islamic Finance :

Islamic Finance refers to a system of Banking that is Consistent with Islamic law(sharia) principles. This system reflects Islam’s teachings on wealth distribution, social and economic justice.

The basic principles and practices of Islamic Finance date back to the early part of the seventh century. (Islamic Finance : A Euromoney Publication, 1997).

Prohibition of Riba(interest).

Risk Sharing.

Social Mission.

Prohibition of Speculative Behaviour.

Sanctity of Contracts.

Shariah- approved activities.

Islamic Financing Techniques:

Islamic financial institutions have developed several financing techniques that are applicable according to the nature of the commodity or business and finance period of the project. The principal financing techniques, murabaha, mudaraba, musharaka, and ijarah, are described briefly below:

The first technique, murabaha, is the most popular and widely used Islamic financing instrument. Murabaha involves the resale of a commodity after the lender adds a specific profit margin (often referred to as the ‘mark-up’), which is paid by the borrower who agrees to buy that commodity. Usually, repayment is made in instalments to the financier, who pays the price to the original supplier of the commodity. This type of finance is commonly used for financing assets or working capital inputs, such as raw materials, machinery or equipment. For murabaha to be Shari’ah-compliant the financier must own (or procure) the commodity first and then resell it, the commodity should be a tangible one, and the buyer must know and then agree to the purchase and resale prices. Under mudaraba, a second type of contract, two parties are involved – the financier, who provides all the money, and the entrepreneur who uses his or her skill to invest the money in an attractive business venture. The profit from the mudaraba contract is shared by the financier and the entrepreneur according to a pre-determined ratio. Importantly, profit-sharing rates are a percentage of the profit and not a lump sum payment. In the case of a loss, providing it has incurred in the normal process of business and not due to neglect or misconduct by the entrepreneur, the financier loses all his or her money, while the entrepreneur merely loses his or her time and effort.

Musharaka, a third financing instrument, means partnership in Arabic and can be understood as an equity participation contract. Both parties provide capital and are involved in the management of the funded venture. Profits are shared between each partner according to the ratio of his or her investment. If the venture suffers a loss, each partner loses according to this same ratio. Neither mudaraba nor musharaka are popular mechanisms in the context of microfinance as the thorough reporting and transparency requirements surrounding the just distribution of any profit or loss can result in substantial operating burdens and costs on small businesses which are generally unaccustomed to formal accounting and reporting.

Ijarah, a fourth primary finance instrument, is similar to leasing. Under this arrangement, an entrepreneur short of funds approaches a financier to fund the purchase of a productive asset. The financier may buy the productive asset and rent it out to the entrepreneur. The financier retains ownership of the asset and is responsible for its maintenance. Importantly, and like any other contract, an ijarah contract must fulfil all of the conditions of a valid contract stipulated by the Shari’ah. Thus, the contract should be clear, should be by mutual agreement, the responsibilities and benefits of both parties should be clearly detailed and the agreement should be for a known period and price.

Islamic Micro-Finance Bank is something very very new and in fact there is only one Islamic Micro-Finance bank currently in the world(Nigeria) and that too was launched recently on 15th of April 2010,recently State Bank of Pakistan has laid down guidelines for the establishment of any Islamic Micro-Finance Bank. My research problem is somewhat related with poverty as a whole and poor muslims around the world will be the main focus of the solution, because solution that is applicable for muslims is certainly available to every individual in the world. First, I will talk about why there is a need of Islamic Micro-Finance and then about the need of a Full-Fledged Islamic Micro-Finance Bank. About 65% of the SMEs (muslim owned) who had never applied for bank loans were uncomfortable with the interest based loan products being extended by banks. While this may not be a conclusive evidence for the extensive demand for Islamic finance products as it is not clear that whether these respondents need the loans etc, however generally the respondents do highlight the interest (Riba) based banking products as one of the reasons for their reluctance to access bank loans. About 75% of the farmers in Muslim dominated countries who did not take bank loans and 55% of all the farmers expressed their dislike of interest based products and said that they don‟t want to take the interest bearing bank loans. Although this finding signifies the need for introduction of Islamic Agrifinance Products, however the finding may be somewhat biased as a large number of these farmers also considered lack of collaterals/defects in title deeds and non-cooperation by revenue department as the key hurdles in obtaining banks loans. Nevertheless there is substantial demand for Sharia compliant agri-finance products and if offered most of the farmers would be willing to avail the facility. Conventional microfinance had also been questioned on its overall desired impact since the poor’s are subjected to very high interest rate of up to 30%. Some even argued that disbursing credit to the poor to make financial gains out of the same cannot be the aim of the microfinance institutions. Interest charged is rather oppressive for their poor receivers, thus fails to achieve the noble objective of microfinance. According to various studies, a notable number of the recipients were also found to be well above the poor category.

Islamic Micro-Finance , on the hand, utilizes Islamic financial Instruments which are based on PLS schemes rather than loan. Conventional microfinance institution focused mainly on women as their client. On the hand, Islamic Micro Finance Institution should not only be focusing on women but must also be extended to the family as a whole. Moreover, Conventional Micro-Finance used group lending as a way to mitigate risk in their operation. Islamic Micro-Finance may also use similar technique, but they can also develop Islamic ethical principles to ensure their clients pay the payment regularly.

Now, talking about why there is a need of an Islamic Micro-Finance Bank, well there are many Islamic Micro-Finance operational in different parts of the world run and managed by different organisations like Sanadiq at Jabal-al-Hoss; Mu’assasat Bayt Al-Mal in Lebanon; Hodeidah program in Yemen. IBBL, SIBL in Bangladesh; Akhuwat in Pakistan; Sahulat , Manara in India. Amana Ikhtiar in Malaysia; BPRS , BMTs in Indonesia. FINCA in Afghanistan. Azaovad Finance in Northern Mali. But my question is that why we cannot have a Global Islamic Micro-Finance Program when is there is such a huge of this, microfinance programs are designed keeping in mind the needs of local people and how to serve them better, but if this is done with an International approach then experiences gained in one region will be very beneficial in addressing the problem of other regions, it will be very helpful in the diversification of risk and also SMEs will be share to share expertise and experiences of one another and can work to build and ecosystem of mutual co-operation and empowerment. Also the increasing demand for alternative micro credit products by the less privileged members of the society against the conventional banking practices, now requires a whole financial system rather than a program or a bank as individual entities, marriage of two is much required need of the time and a new approach designed on the strict guidelines laid down by Quran for Islamic Finance is recommended, adapting Classical Islamic Contracts to modern Islamic Micro-Finance is easier than for mainstream Islamic Finance.

I want to develop a Islamic Micro-finance Bank with muslims as prime focus but only for muslims because What we are commissioning today represents our contribution towards providing an alternative banking for Muslims and non-muslims alike. Poor person is a poor person and this has nothing to do with her/her religion, and poverty can only be alleviated if we consider all poors of the world as one and work global make “No poverty� a reality.

The number of Islamic Micro-Finance initiatives remains limited, less than 1% of the total global microfinance outreach, there is for a number of reasons increasing in interest in developing microfinance programmes based on Islamic Financing principles. Since, Islamic Microfinance is a new area, because little research has been conducted on its impact, outreach of such programmes has so far been limited. So, research with the aim of developing a new approach to Islamic microfinance is completely justified.

Research Methodology and Method(s):

My research methodology will be based on a lot research and study of Islamic Finance laws approved by Quran, their practical application in the real world scenario, how they are applied by different Islamic Banks and Micro-finance programs in their working, how differently they are applied in practice, analysis of shortcoming of different Islamic Banks and Micro-Finance programs. Study of how Islamic banks weathered current GFC, what were their advantages and disadvantages.

How an Islamic Bank is started( rules and regulations in different countries) and how an Islamic Micro-Finance program works( relative to different regions), establishing a common ground for Islamic Micro-Finance bank, framing rules and policies for an ideal Islamic Micro-Finance Bank.

Research and study of banking system in Japan( interest rates are negligible) and of JAK Bank Sweden(work on NO interest principal), how they operate , from where and how they fund themselves, how their modus operandi will sustain in an Islamic Finance environment.

Data will be collected basically from internet because much of the work has not been done in the area of Islamic Micro-Finance Bank, interviews and discussion with the experts in field of Islamic Law and Islamic Finance, thorough study of Quran( Islamic laws and Financial laws).Study of books on this topic, discussion and advice from experts on Risk Management and Diversification and how i can apply them in Islamic Finance. Extensive of all available sources of information Islamic Finance and Micro-Finance.

Structure and plan:

Chapters in the Dissertation will be as Follows(Final Structure Can Change):

CONTEXTUALISING ISLAMIC FINANCE Error: Reference source not found (Number of days taken to complete the chapter)

Modern revival of Islamic financeError: Reference source not found

Islamic economic foundationsError: Reference source not found

Ethical dimensions of Islamic economic systemsError: Reference source not found

Benefits of Islamic bankingError: Reference source not found

Islamic economic principles - do they promote or stifle growth? 9


Principles of Islamic financial systemsError: Reference source not found

Prohibition on speculation or risk (gharar)Error: Reference source not found

Prohibition on usury (riba) and hoardingError: Reference source not found

Prohibition on usury (riba) and interestError: Reference source not found

Profits as distinct from usury (riba)Error: Reference source not found


Interface of Islamic Banking Principles and MicrofinanceError: Reference source not found

Islam and microfinanceError: Reference source not found

Social and development roles of Islamic banksError: Reference source not found

Informal Banking and Debt transfer (hawala)Error: Reference source not found

Is Islamic microfinance truly Islamic?Error: Reference source not found


Financial productsError: Reference source not found

Islamic MortgagesError: Reference source not found

Conventional Banking through the ‘back door’?Error: Reference source not found

Need for regulationError: Reference source not found

ISLAMIC MICROFINANCE IN PRACTICEError: Reference source not found

Expansion of microfinance in the Arab worldError: Reference source not found

Islamic microfinance in the Arab worldError: Reference source not found

Experiences in YemenError: Reference source not found

Experiences in BangladeshError: Reference source not found

Resistance to the Grameen BankError: Reference source not found

MicroFinance and Islamic Values 13

Japanese Banking System and JAK Bank Sweden13

Framing Regulations and Strategies For an Ideal Islamic Micro-Finance Bank 14