Wednesday, August 08, 2012

Goals for Islamic microfinance institutions

The Farz Foundation is working on Islamic microfinance in Pakistan, although I do not know much of how it works.  However, a paper they released in July led me to a few points that are applicable more broadly in Islamic microfinance.

A few quotes from the report with comments
"The foundation operates in Pakistan, currently has approximately 100 active clients, and is seeking to expand microfinance operations using the Farz methodology into other Muslim countries. "
 I think it is great to develop Islamic microfinance to provide alternative financial service models for people dealing with poverty, but with such a small group so far, I think it might be more advantageous for Farz to focus its efforts domestically where there is still significant demand, which also can avoid the problems of becoming unfocused, which is likely to act to the detriment to expanding Islamic finance.  That should not mean not sharing things that worked and things that didn't with other emergent Islamic microfinance institutions elsewhere in the world, particularly in other majority Muslim countries. 
"The basic premise of this is that interest is one of the major reasons for keeping the world’s poor trapped in a vicious cycle of debt and poverty. "
 I think this is a distraction from the point of Islamic microfinance.  Islamic finance is based on the idea that interest-based finance is damaging to economies, but it is not the cause of most poverty.  Most people struggling with poverty are completely excluded from the finance sector.  There are likely informal financial services available with high interest, where the debt is doubled and re-doubled, and this probably does do harm, even as it is in demand because there are no alternatives.  However, in Islamic microfinance, it is less important whether interest is a cause of poverty than if Islamic microfinance can help.  Re-engaging in this debate will create more questions about how Islamic microfinance is different (particularly when murabaha or muajjal are the financing methodologies) rather than letting it stand on its own. 
"A key component of the microfinance products provided by Farz Foundation is the Islamic concept of Bai muajjal-murabaha [...] Farz Foundation has applied Mudarba (a partnership based product in which Farz provides livestock and the poor farmer provides her or his services to nourish the livestock ) to cattle and livestock rearing with significant success in both Pakistan and south Cameroon. "
 I think this balance between murabaha and mudaraba is healthy for the Islamic MFI sector since murabaha is likely to be a common structure used, whatever the controversy may arise around the preference towards it versus mudaraba.  It can also provide a financial service that may be useful for some clients, and they should get access to Shari'ah-compliant products even if mudaraba may be preferred.  Murabaha can be an easy way to get people involved with Islamic microfinance by showing the similarities with conventional microfinance, while still offering an alterantive if mudaraba is available.
"In all potential countries where Farz seeks to operate, it must develop profit-generating self-sustaining business models. The ultimate aim of Farz over a 10 year period should be to eliminate or drastically reduce dependency on external funding sources."
 This is a key goal for Islamic microfinance (not to mention conventional microfinance) and should be a focus at all stages of development.  Islamic MFIs may not be profitable right away, and there are good reasons to operate in a not profitable state for a while, but the long-term (not immediate) goal should be self-sustainability so that Islamic MFIs will be around in perpetuity, focused on their clients, not finding external funding just to keep operating. 

The conclusions I reach from the report are:
1) Stay focused on the core market to expand access, but work with Islamic MFIs around the world to spread good ideas and failures.
2) Avoid litigating the causes of poverty; focus on solutions
3) Be open to replicating conventional microfinance using murabaha, muajjal and salam while developing additional products like mudaraba.  The former are needed to be able to provide service while the latter will be what differentiates Islamic microfinance
4) Don't try to make a profit the first year, but stay focused on making the Islamic MFI financially self-sustaining

1 comment:

PropTiger.Com said...
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