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Micro-finance

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					Class : Islamic Banking Networking & Micro Enterprise
                              Prof. Nurul Alam, Ph.D
Islamic Bank
An Islamic bank may be defined as a financial
intermediary whose objectives and operations as
well as principles and practices must conform      In other way we can call Islamic
to the principles of Islamic Law (Shariah); and,
consequently, is conditioned to operate all its
                                                   banking as participatory banking.
activities without interest.




Islamic bank is not only a financier but also
a partner in business. The system essentially      An interest-based system in which
involves sharing of risk between the owner              the risk is mainly borne
of capital and the entrepreneurs, as well as              by the entrepreneur
sharing the result of the collective efforts.
Islamic Banks Around the-World
 The Islamic Society of North America
 Canada (ISNA, 2000), has initiated Islamic
 banking activities in recent years and started
 lending interest-free funds.




 Western banks such as, the Kleinworte
 Benson, Citibank and ANZ Grindlays also
 started to adopt the pattern of Islamic
 banking in cost-plus financing.
Modes of Investment of Islamic Bank
   The modes or techniques of accepting deposits and lending funds to
              customers differ from conventional banks.
Microfinance & Contextual Review
 Microfinance has become one of the most sustainable and effective tools in the
                        fight against global poverty.
 The most common microfinance product is a microcredit loan - usually less than US $1000




      Microfinance emerged
                                  These tiny loans are        Income from these
      in the 1970s as social
                                  enough for hardworking      businesses provides
      innovators began to
                                  micro-entrepreneurs to      better food, housing,
      offer financial services
                                  start or expand small       health care and
      to the working poor -
                                  businesses such as          education for entire
      those who were
                                  weaving baskets, raising    families, and most
      previously considered
                                  chickens, or buying         important, additional
      "un-bankable" because
                                  wholesale products to       income provides hope
      of their lack of
                                  sell in a market.           for a better future.
      collateral.
Microfinance...(continue)
Microfinance Institutions (MFIs) are now innovating to help meet these needs,
          empowering the world's poor to improve their own lives.


 The global repayment rate for microcredit loans is higher than 95 percent,
 which allows MFIs to re-lend these funds to even more clients.
 By giving the world's poor a hand up, a not a hand out,
 microfinance can help break the cycle of poverty
 in as little as a single generation.
 Microfinance...(continue)
     The World Bank, among others, indicates that gender inequalities inhibit
 overall economic growth and development. A recent World Bank report confirms
   that Societies that discriminate on the basis of gender pay the cost of greater
poverty, slower economic growth, weaker governance, and a lower living standard
                                   for all people.

                          Women have become the
                                primary target of
                             microfinance services.
                                 At a macro level,
                          it is because 70 percent of
                               the world's poor are
                                      women.

   Women have a higher unemployment rate than men in virtually every country
and make up the majority of the informal sector of most economies. They constitute
               the bulk of those who need microfinance services.
               Islamic Microfinance
Islamic microfinance has hardly been mentioned in this context, i.e., the collection
        of small savings and the provision of small loans based on Shariah.
                      In Iran Islamic finance is mandatory




 Islamic microfinance: some have been mandated by the state, but lack
 popular demand; others have emerged in response to popular demand, but
 lack regulatory support by the state. Paradox

   Indonesia is probably the country with the greatest diversity of both
                 conventional and Islamic microfinance.
  Islamic Microfinance (...continue)
  Islamic microfinance represents the confluence of two rapidly growing industries:
                         microfinance and Islamic finance.


                             Today, the total assets of Islamic financial
                             products is estimated at US$500.5 billion
                             (The Banker 2007) and the Islamic finance
                             industry’s 100 largest banks have posted
                             an annual asset growth rate of 26.7
                             percent, outpacing the 19.3 percent
                             growth rate of their conventional
                             counterparts (Kapur 2008).



IMF has the potential to not only respond to unmet       Unlocking this potential could be the key to
  demand but also to combine the Islamic social      providing financial access to millions of Muslim poor
   principle of caring for the less fortunate with     who currently reject microfinance products that
 microfinance’s power to provide financial access      do not comply with Islamic law. IMF is still in its
                     to the poor.                      infancy, and business models are just emerging.
Islamic Microfinance (...continue)
 Islamic microfinance has the potential to expand access to finance to
         unprecedented levels throughout the Muslim world.

              The supply of Islamic microfinance is very
              concentrated in a few countries, with the top three
              countries (Indonesia, Bangladesh, and Afghanistan)
              accounting for 80 percent of global outreach.
              Nevertheless, demand for Islamic microfinance
              products is strong. Surveys in Jordan, Algeria, and
              Syria, for example, revealed that 20–40 percent of
              respondents cite religious reasons for not accessing
              conventional micro loans.

In recent years, some microfinance institutions (MFIs) have stepped in to service low-
income Muslim clients who demand products consistent with Islamic financial
principles  leading to the emergence of Islamic microfinance as a new market niche.

            An estimated 72 percent of people living in Muslim-
           majority countries do not use formal financial services
                              (Honohon 2007).
Islamic Microfinance (...continue)
       The most widely available types of Islamic microfinance contracts :

Murabaha Sale (cost plus markup sale contract). The most widely offered Sharia-compliant
contract is murabaha, an asset-based sale transaction used to finance goods needed
as working capital. Typically, the client requests a specific commodity for purchase, which
the financier procures directly from the market and subsequently resells to the client, after
adding a fixed “mark-up” for the service provided.

Ijarah (leasing contract). Ijarah is a leasing contract typically used for financing equipment,
such as small machinery. Duration of the lease and related payments must be determined
in advance to avoid any speculation. For the transaction to be considered Islamic (and not
a sale with camouflaged interest), the ijarah contract must specify that the ownership of
the asset, and responsibility for its maintenance, remains with the financier.

Musharaka and Mudaraba (profit and loss sharing). The profit and loss sharing (PLS) schemes
are the Islamic financial contracts most encouraged by Sharia scholars. Musharaka is equity
participation in a business venture, in which the parties share the profits or losses according to
a predetermined ratio. Mudaraba denotes trustee financing, in which one party acts
as financier by providing the funds, while the other party provides the managerial expertise
in executing the project.
Islamic Microfinance (...continue)
                    Indonesia

    In Indonesia, the government has actively promoted
    Islamic microfinance. In 2002, Bank Indonesia prepared
    A “Blueprint of Islamic Banking Development
    in Indonesia” in which it developed a nine-year plan
    for development of the Islamic finance sector, including
    support for the 105 Sharia rural banks. Indonesia now
    provides a supportive regulatory framework and has
    licensed 35 new Islamic rural banks in the past five
    years. Bank Indonesia also is spearheading efforts
    in capacity building by establishing a center in Medan
    to offer training and certification on Islamic financial
    operations to Sharia rural bank staff, managers, and
    directors.
        Major Financial Institutions
                        Islamic Financing Systems



                                  IFS



   Market Based                Economic                      Cooperative
Financing Systems
                    MBFS        Actors              CFS   Financing Systems




                                 TMLS

                      Traditional Money Lending System
                        Society
How each of those factors inf luence the lending & borrowing system
What is Network
   Connection            Creates The Universe

    Buyer & Seller



  Network of human
  being in the world
                                                NETWORK



Network man to the God



  Position of human

                         How small we are
                  Different Types of Networks
Personal
Network

                                 NETWORK
Industrial
 Network
                                       1   Instrumental Network
                                       2   Personal or (affective) network
 Actors
                                       3   Symbolic or (moral) network


 Activity    Instrumental network: e.g. in supply and sales contacts, PR relations’
             Personal (affective) network : rooted in sympathy or mutual support.
             Symbolic (moral) network : a rooted in common attitude/goal (political,
             ethnic, religious, moral)
Resources
Micro Finance & Micro Enterprise Networking
             Economic Actors                      Economic Actors


Islamic
 Bank               MFS           Institution            MES

          Micro Finance System                  Micro Enterprise System

       Intra
                                                       Intra
   Organizational
                                                   Organizational
        NW
                                                        NW

                                 TEAM
                                                        GROUP
                                                 MICRO ENTREPRENEURS

                                                            PL
                                                    SM                 DF
                                                           5- 5
                                                      HC          FS
        The Network Triangle

                 Islamic
                Financing
               System (IFS)




GL System                     Religious Group
SB System                      Social Leaders
SM System                      Local Leaders
Micro Enterprice System
         SCI System Institutions



 GL              SB                SM

 Grass         Season            Semi
 Root           Based         Mechanized
System         System           System

             Entrepreneur