Islamic Micro finance should be Introduced Internationally

Dr. Fatima Al-Blooshi discusses the need at the 3rd Global Islamic Micro finance Forum in Dubai

Islamic Microfinance should be Introduced Internationally

Islamic Microfinance should be Introduced Internationally

“Islamic Micro finance is an effective tool for the poverty alleviation and it should be introduced around the globe to state an effective policy for ultimate poverty alleviation from the world,” said Dr. Fatima Mohamed Yousif Al-Balooshi, Minister at the Ministry of Social Development in Bahrain.

Al-Blooshi was the Chief Guest in the 3rd Global Islamic Micro finance Forum (GIMF) held 6-8 October at Dusit Thani Hotel, Dubai. Delegates from more than 30 countries participated actively in the Forum, organized and conducted by AlHuda Centre of Islamic Banking and Economics (CIBE).

Al-Blooshi also added that Islamic Micro finance should be presided over and supported by the government in different countries in order to promote the these institutions. She also admired the endeavors of AlHuda CIBE at the inauguration of 3rd forum, and proposed to conduct the 4th Global Islamic Microfinance Forum in Bahrain.

Muhammad Zubair Mughal, CEO of AlHuda CIBE, also addressed the forum. “Poverty is increasing in Muslim countries rapidly, and consequently half of the world poverty has, approximately, been confined to the Muslim countries in the current age.”

“The involvement of interest in micro financing is one of the major causes behind this phenomenon, and that is why Muslims hesitate to avail micro finance facility. If Islamic Micro finance is not introduced resolving this issue, the world’s poverty will increase extraordinarily,” Mughal continued.

He said that the forum aimed to gather all the Islamic Micro finance Institutions on a single platform, to “streamline the policies for poverty reduction, to promote research and education in Islamic Micro finance industry and to enhance its outreach on global canvas.” Mughal added that current facts about the failure of micro finance system require an alternative and prudent Islamic Micro finance system to “enhance financial inclusion globally and ultimate global economic prosperity.”

Hamdan Mohamed Al Murshidi, President and Chairman of the Board at the UAE Arab Business Club, said “There is no other argument for addressing poverty through Islamic Micro finance, as it is the ultimate solution to the problem,” and also he committed himself to promote Islamic Micro finance globally.

Amjad Saqib, Executive Director of Akhuwat, agreed that Islamic Micro finance is a hope for the poor looking to resolve social and economic problems globally. By presenting Akhuwat as a case study, Saqib claims that there are about 380,000 families benefitting through Qarz e Hasana from Akhuwat. Meanwhile its portfolio has crossed PKR. 5 billion with an increasing trend day by day.

Can you make the below into a small sidebar? As small as you can realistically do it w/ so many names…

The forum was attended by researchers, scholars and Islamic Micro finance practitioners including:

Mufti Aziz Ur Rehman (Manager-Shariah, Mawarid Finance – Dubai),

Justice (R) Khalil Ur Rehman (Shariah Advisor – AlBaraka Islamic Bank & Chairman – Punjab Halal Development Agency Govt. of Pakistan),

Dr. Ajaz Ahmed Khan (Microfinance Advisor, CARE International UK),

Mr. Atef Ebrahim (Chief Executive Officer, Family Bank – Bahrain),

Mr. Zeinoul Abedien Cajee (Founding CEO/ Management Board, National Awqaf Foundation of South Africa),

Mr. Mamode Raffick Nabee Mohomed (Founder/ Secretary, Al Barakah Multi-purpose Co-operative Society Limited – Mauritius),

Ms. Rehab Lootah (Managing Director – Mawarid Consultancy Dubai – U.A.E),

Mr. Mohamed El Mehdi Zidani (Author – An Islamic Analysis of the Grameen Bank and Director Baraka Editions – France),

Mr. Pervez Nasim (Chairmen & CEO, Ansar Financial and Development Corporation – Canada),

Mr. Abdul Samad (Shariah Advisor, The Bank of Khyber – Pakistan),

Mr. Humayun Saeed Jamshed (Senior Director – Islamic Banking & Finance, SAB – France),

Mrs. Helena Lutege (Founder and Managing Director, BELITA Fund – Tanzania),

Mr. Ali Tariq (Executive Director, Iraqi Microfinance Network – Iraq),

Dr. Mohammed Kroessin (Global Microfinance Advisor – UK),

Mr. Zaigham Mehmood Rizvi (Renowned International Expert Islamic Banking & Housing Finance Washington – U.S.A.),

Mufti Barkatulla (Sharia Advisor, Islamic Bank of Britain, London, UK) and some other prestigious international speakers addressed in this forum.

© Business Islamica 2013

A big question mark in the Islamic finance industry

Is Islamic finance reaching the poor?

Apparently, it is a matter of pleasure that the global volume of the Islamic finance industry has crossed the USD1.3 trillion threshold, which is definitely providing the best and compatible sources of finance with interest-free modes.

A big question mark in the Islamic finance industry

A big question mark in the Islamic finance industry

According to a careful estimate, there are more than 2,000 Islamic financial institutions that are offering Islamic banking, Islamic insurance (takaful), Islamic funds, mudaraba, Islamic bonds (sukuk), and Islamic microfinance. Meanwhile, some other institutions actively provide Islamic financial services on different modes in adherence to Shariah principles of Islamic finance.

Yet if we look into the market share of the above-mentioned institutions, we get shocked and depressed for a while with the fact that Islamic banking and finance has been nearly confined to the “rich people” and as per the ideology of capitalism.

The profit urge has captured the Islamic financial industry and discriminated against the underprivileged people, letting them be deprived from Islamic financial services. Keeping in view these facts, it can be simply said that commercialism has captured Islamic finance institutions in such a way that business and finance with and for the poor has gone astray from their agenda.

According to the facts and figures from a March report by Consultative Group to Assist the Poor (CGAP), an associated institution to the World Bank, the global volume of Islamic microfinance has reached USD 800 million with service to about 1.3 million beneficiaries.

While as per the latest research (July 2013) conducted by AlHuda Centre of Excellence in Islamic Microfinance, the global volume of Islamic microfinance has reached at USD1 billion. The total number of Islamic microfinance Institutions stands at more than 300 globally, yet Islamic microfinance constitutes less than 1 percent of the overall USD1.3 trillion assets that comprise the Islamic finance industry. This, in itself, is a big question mark on Islamic finance industry and proving its misfortune.

These stated facts and figures give rise to different question such as: is social segmentation between poor and rich 1 percent to 99 percent? Does Islamic finance have financial resources only for the rich people? Not for the poor? Is Islamic finance an option only for the particular segment of society? Furthermore, is it justice system of Islam?

As per the analysis of Islamic finance in the light of Islamic teachings, we get into the heart of Islamic ideology towards finance, which aims at justice, cooperation, and welfare of the poor and financially deprived people of society with its best principles. Islam is in name a revolution, starting from the poor and ending at with the same.

If we have a look at comparative study of different religions regarding the viewpoint of poverty, then we come to know that poverty alleviation is not only a social responsibility in Islam, but rather a religious obligation as well. Zakat, charity, sadqa, fitr, ushur and qarz-e-hasan are all amongst the key religious responsibilities of Muslims, whereas it is a social responsibility in other religions rather than a religious one, a responsibility recognized and branded in the name of “Corporate Social Responsibility” (CSR). These institutions are doing good work for poverty alleviation and social development in the whole world. Unfortunately, the Islamic financial industry has widely ignored its social or religious responsibilities.

If we look at world poverty, we get surprising facts and figures. Currently, 46 percent of world poverty exists in the Muslim World, while the Muslim population in the world is 26 percent[SO1] . The United Nations have marked 26 out of 57 member countries of the Organization of Islamic Countries (OIC), as the least developed countries. Current statistical information is highlighting that the poverty in the Muslim World is increasing day by day.

In serious observation, it can be said that this is caused by no or little response of poor people to microfinance facilities because of interest; none or limited Islamic Microfinancing facilities provided by Islamic financial institutions; and finally, the least attention and interest of International Donor Agencies (UNDP, World Bank, IFC) towards Islamic microfinance. All of which, in turn, is throwing the Muslim world into an era of poverty.

As per the praiseworthy analysis of economics experts of the modern age (Mr. Tariq Ullah and Mr. Ubaid Ullah 2008), 650 million Muslims in the world are living below poverty line with less than USD2/per day income. On the one hand, only 1.3 million Muslims out of 650 million were aided in alleviating their poverty through Islamic microfinance services, whereas the remaining 649 million Muslim, living in poverty, are still looking for any financial assistance through Islamic way.

The Islamic finance industry is facing lot of criticism in different aspects, namely the acceptability of Islamic finance as a whole, but also through internal objections from Shariah scholars and conflicts in Shariah related issues. These are seen as the main challenges to the Islamic finance industry. But the issue of neglecting the poor is very critical, and if not resolved, can damage and bring a perpetual loss to the Islamic banking and finance industry.

Optimal results for the economic prosperity of Islamic finance can be ensured if Islamic microfinance institutions are established by the Islamic finance industry. Although Islamic microfinance can be energized by utilizing the available charity amount of the Islamic banking and finance industry–which is worth millions of dollars–tools such as alia zakat, sadqaat, waqf, and other Islamic microfinance products such as murabaha, musharaka, salam and istisna’, can be used prolifically for poverty reduction and social development.

Our Shariah scholars are also responsible for pursuing and insisting that the Islamic financial institutions execute and promote Islamic microfinance.

Otherwise, there is a definite chance of rumors that Islamic banking and finance services are only for rich people, creating the discrimination of “Do Have and Have Not” and ensuring that the industry ultimately benefits only rich people.

About: Muhammed Zubair Mughal is Chief Executive Officer of AlHuda Centre of Islamic Banking and Economics (CIBE) and has been working consistently for the last nine years towards poverty alleviation through the Islamic microfinance concept. He can be reached at [email protected]

© Business Islamica 2013

Problems And Prospects Of Islamic Banking In India – Road Map Ahead

By H Abdur Raqeeb

Banking institutions have emerged as very necessary for everyone, poor as well as rich. It is needed to deposit and protect the saving however meagre it may be. Poor labourers, construction workers and others migrating to the urban centres of the country from remote corners must have access to banking to transfer their earning to the families in far off places. Also several social initiatives, welfare programmes and schemes of the government both state and central do require bank accounts of those targeted – below poverty line segments – to receive money safely in their account. Also credit is provided to people through banks. All these requirements have made banking an inevitable part of life of today’s men and women.

Even after forty years, since nationalisation of the banks about 60% population do not have access to formal banking and only 5.2 % of villages have bank branches. Marginal farmers, land less labours, oral lessees, self employed and unorganised sector enterprise, ethnic minority and women, Aam Aadmi of our great country continue to form the financially excluded class. The financial exclusion of a large segment of the population has far-reaching implications for the socio-economic and educational uplift of the masses. These financially excluded classes would not hesitate in sharing a “return” on their investment but they often find it difficult to meet the demand of a pre determined return unrelated to the yield. If finance is available without the burden caused by pre-determined interest rates, it will be a welcome development for the marginalized and also especially for SME’s. Interest-free Islamic Banking can fill up this gap.

For Muslims, as per the Sachar Committee report based on census 2001 data, the percentage of household availing themselves of banking facilities is much lower in towns and villages where the Muslim population is high. This is due to a certain mindset prevailing in the banking sector which has categorized Muslims and Muslims dominated areas as ‘Negative Zones’ as documented in Sachar report. Prohibition of interest and thus for reasons of faith Muslims are away from the conventional banks as referred to in the report of the Committee on Financial Sector Reforms –CFSR of the Planning Commission headed by Dr. Raghuram Rajan

Interest Free Banking

In the absence of an alternative to the convention based on interest, in the state of Kerala where Muslims make up around 25% of the population of Kerala, which was 31.8 million according to the 2001 Census, it is reported that thousands of crores earned in interest is kept in suspended accounts, as believers do not claim it. Muslims both rich as well as those employed in the Gulf invest their money on gold and real estate which are not productive investments. They also indulge in lavish spending in marriages and other rituals and many of them fall into trap of bogus financial institutions lose their hard earned money.

Therefore there is a strong case to have an alternative system based on equity instead of the debt based banking system catering and caring to the unbanked segments more specially of the marginalized and minorities -particularly Muslims in the country

Government Initiative

RBI Working Group

In 2005, Government of India asked Reserve Bank of India to examine Islamic banking instruments and constituted a Working Group headed by Mr. Anand Sinha, Chief Manager, Department of Banking and Operation and Development along with senior Bankers from SBI, ICICI and Oman International Bank that came up with its report in 2006 which said: In the current statutory and regulatory framework it would not be possible for banks in India to undertake Islamic Banking activities and concluded that if the banks are allowed to do Islamic banking appropriate amendments are required in Banking regulations Act 1949.

National Workshop

After the GOI announcement that Islamic banking is not feasible in India, several interactive sessions were held by ICIF, one of them was a National Workshop on “Road Map on Islamic banking” in Sept 2006, which was participated by prominent National and International Islamic experts and bankers. It passed resolution that Islamic Banking is relevant in the 21st century and India may implement the same by obtaining inputs from the global example in UK, Malaysia and Singapore. It also chalked out a plan of action as well.

CFSR-Planning Commission Recommendation

In August 2007, Govt. of India under the Planning Commission constituted a high level committee on Financial Sector reforms (CFSR) under the chairmanship of Dr. Raghuram Rajan, former chief economist, IMF along with other eleven members who are the finest financial and legal minds in the country.

CFSR submitted its final report in Sept. 2008 to Prime Minister with the specific recommendation of interest free banking in the country:

“Another area that falls broadly in the ambit of financial infrastructure for inclusion is the provision of interest-free banking. Certain faiths prohibit the use of financial instruments that pay interest. The non-availability of interest-free banking products (where the return to the investor is tied to the bearing of risk, in accordance with the principles of that faith) results in some Indians, including those in the economically disadvantaged strata of society, not being able to access banking products and services due to reasons of faith. This non-availability also denies India access to substantial sources of savings from other countries in the region.

While interest-free banking is provided in a limited manner through NBFCs and cooperatives, the Committee recommends that measures be taken to permit the delivery of interest-free finance on a larger scale, including through the banking system. This is in consonance with the objectives of inclusion and growth through innovation. The Committee believes that it would be possible, through appropriate measures, to create a framework for such products without any adverse systemic risk impact.” (Chapter 3: Broadening Access to Finance, Page: 72)

Why Islamic Banking?

The collapse of leading Wall Street institutions, notably Lehman Brothers, and the subsequent global financial tsunami and economic recession, Islamic banking is seriously being considered and has emerged as a possible alternative to the conventional banking because of the followings:
• It is based on Ethical and Socially Responsible Investments (SRI)
• It aims at Equity and Justice and leads to poverty alleviation and
• It acts to new dimension to assets and actual projects aiming to support real economic growth instead of financial engineering.
• It provides services to under banked populations ignored by conventional banks

Efforts Undertaken – Meeting RBI & FM

When it was learnt that RBI is considering implementing a few recommendations of Dr. Raghuram Rajan Committee on Financial Sector Reforms (CFSR), ICIF contacted the Governor RBI and sought an appointment to plead for the case of the recommendation of CFSR regarding Interest-free banking. Accordingly a delegation of ICIF met the Deputy Governor Dr. K.C Chakrabarty on September 11, 2009 and presented a memorandum along with the important documents. RBI conveyed that it has no reservation regarding interest free banking but for that an amendment in the Banking regulations has to be passed in the Parliament which can be done by the Central government.

A memorandum was submitted to FM, Mr. Pranab Mukherjee to accept the recommendation of CFSR committee on interest free banking and suitable legislative amendment. Several meetings and interactions have taken place with the officials of the Finance Ministry and RBI in this regard till now.

In order to amend the Ranking Regulations Act 1949 and accommodate a level playing field for Islamic banking, a bill has to be passed in Parliament. For this, Banking Amendment Bill has been prepared and vetted by Dar Al Shariah, Dubai Islamic Bank and submitted to Parliament secretariat by an MP to be undertaken as a Private Member’s Bill in the next session of Parliament.

Kerala & Islamic Banking

Another significant development has taken place in the state of Kerala. Govt. of Kerala under KSIDC (Kerala State Industrial Development Corporation) has taken a courageous and commendable step to form an Islamic Investment company named Al Barakah Financial Services Company, an NBFC after an exhaustive feasible report undertaken by a reputed international consulting firm Ernst & Young. This NBFC will be turned into a global Islamic bank as soon as the RBI accommodates it after an amendment in the Banking regulations. Dr. Subramaniam Swamy has submitted a petition in the High court to stop the participation of the Kerala Government. Admission of his petition has put a hold on the proceedings for the time being.


To bring Interest free Islamic Banking, misunderstanding and misinformation among the Muslim masses as well as non-Muslims have to be removed. The need and necessity of interest free Islamic finance and banking has to be spread among the Muslims, common people, religious scholars, business men, bankers, politicians, and other stakeholders.

• Among Muslims, criticism has been raised against the banking approach itself. Some allege that it is nothing but the changes of nomenclature only. Some other questions its capability to meet all the financial requirements of modern day economy. Some go further to say that the whole exercise is futile, with the macro level money creation process remaining the same, what is attempted through so called innovative products is nothing but a cosmetic touch and even in international arena, Islamic banks have to price their investments on Global standards like London Inter-bank Offered Rate (LIBOR) which are essentially interest based. These issues have to be addressed properly by the Islamic scholars, finance experts and those who campaign for Islamic Finance and Banking.

• Justice Mufti Muhammed Taqi Usmani, Chairman, AAOIFI (Accounting and Auditing Organisationfor Islamic Financial Institutions) mentions in his famous book titled ‘An introduction to Islamic Finance’:
“Islam, being a practical way of life, has two sets of rules: one is based on the ideal objectives of Shariah which is applicable in normal conditions, and the second is based on some relaxations given in abnormal situations. The real Islamic order is based on the former set of principles, while the latter is a concession which can be availed at times of need, but it does not reflect the true picture of the real economic order.

Living under constraints, the Islamic banks are mostly relying on the second set of rules; therefore, their activities could not bring a visible change even in the limited circle of their operations. However, if the whole financing system is based on the ideal Islamic principles, it will certainly bring a discernible impact on the economy”. (Page 24)

• In the plural and secular country like ours, misunderstanding among majority community has to be addressed; Islamic banking is not just for Muslims. It is only a mechanism for financing business without providing debt. It is also to be focused that it is based on ethics and Socially Responsible Investment (SRI). It has to be show cased that 40% customers in Islamic banks in Malaysia are Chinese of other communities and also in UK, 20% customers are Non Muslims.

Ms. Perrine Fiorina of CELENT, Strategy consulting for financial institutions, talks of ‘Promising Future of Islamic Banking’ thus:

“In addition to the large and untapped Muslim population, Islamic Banking is currently beginning to attract Non-Muslim customers, who are interested in alternative way of banking. Indeed, a growing number of Non-Muslims are turning to Islamic Banking as customers spooked by turmoil in the western banking system increasingly see the sector as a safe and more connected to the real economy. In my opinion, Islamic banking will benefit from this new customers interest and grow even more quickly than it recently did”.

Even Vatican has offered Islamic Finance principles to Western banks as a solution for worldwide economic crisis. “The ethical principles on which Islamic Finance is based may bring banks closer to their clients and to the true spirit which should mark every financial service” the Vatican’s official newspaper, L’ Osservatore Romano said.

Recently, France has amended its laws to issue SUKUK –Islamic Bonds based on assets-of one Billion Euro.

• Post 9/11, oil money has stopped being invested in U.S and is looking for a safe investment destination, and India could well be that destination given its safe economic scenario, huge market, skill and educated labour and good growth rate.

• Among the intellectuals, scholars and politicians, a doubt is lurking in the mind whether banking operations are feasible without the base of interest.

• As Dr. Hussein Hamid Hassan, Chairman, Shariah Board, Dubai Islamic Bank has said “Conventional banks have since inception, had only one product, that is loan with interest, Shariah has unlimited products to suit every customer and every project under any circumstances”.

Various products with Arabic words have to be suitably presented in the prevailing banking terms and the reasons why they are preferable to the conventional banking products and practices provided as they are based on real economy rather than financial engineering in conventional banking has to be suitably highlighted.

Modern, secular and industrialized countries like Britain, Singapore, Hong Kong and Japan have become hub of Islamic finance and banking. If London, Tokyo, Singapore and Hong Kong can become hub and house of Interest free Islamic finance and banking Why not Mumbai and Cochin?

10-Point Programme of Action

A 10-point programme of action is suggested to this august house for consideration and serious follow up to make the dream of Islamic Finance and Banking become a reality which will change the face and fortune of the community as well as the country, if Almighty wills.

1. Interest free Islamic banking is emerging as a possible alternative to conventional Finance and Banking – Know why?

2. Start discussion in our circle & make it an integral part of our all programmes.

3. Bring out special issues and supplements in the print media, create space for discussion in electronic media, usage of internet to share the latest development & progress

4. To remove Misconception among Non-Muslims that interest-free banking is not only for Muslims, a group of strong supporters among them- Abu Talibs has to be included in our efforts to spearhead this great cause.

5. Create awareness among Muslim Scholars, Students and the General Public by using Jum’a Sermons, Conferences, seminars, etc.

6. Human Resource Development – Skills & Spirits, Competence & Character specific to Islamic Shariah – Fiqh ul Muamilat and modern finance and banking has to be produced.

7. General awareness in Media – lobbying for Islamic Banking, Takaful – Islamic Insurance, Sukuk – Islamic Bonds.

8. Conduct seminars & symposium – Contact B-Schools, Professional associations, etc.

9. Create political will – contact & convince MPs of all parties to enable amending Banking Regulation act, 1949 in Parliament.

10. Planning for Islamic Micro finance & Mega Private Islamic Banks when permission granted.

(H Abdur Raqeeb is Convener, National Committee on Islamic Banking & General Secretary, Indian Centre for Islamic Finance (ICIF). The paper was presented at Islamic Investment and Finance conference on March 28, 2010 at India Islamic Cultural Centre in New Delhi).