Islamic microfinance is one of new trend which appeared newly in finance. So it was funded by charitable program for destitute, disabled and needy people, before the concept of Islamic microfinance So this case study includes some policy recommendations to create small enterprises and alleviate poverty.
It was established to be common with Islam principles and to be sharia complaint through halal activities like(murabaha, mudarbah, musharkah, takaful, sukuk, Istanu, Bai Salam etc.….) and it will discussed in more details later on, as it should not invest in haram activities which include (gharar)(riba)(gambling).
The Islamic microfinance has increased and devolved in Muslim and western countries all over the world.
So now we have a case study in Palestine to represent a real case study at Islamic microfinance,Micro-credit was first introduced in 1980s in the Palestinian territory for the huge growing demand for financing from small and microenterprises, thereafter; the backbone of production and employment in Palestine from that time. It was established in Palestine to overcome the poverty and to achieve social and economic equally distribution. And the main reasons for the poor performance and the fluctuation of Palestinian economy have been attributed to the Israeli policy of limiting the free movement of goods and people from and to Palestine. According to World Food Program WFP (2014) Palestine economy went through a recession specially the Gaza faced a negative growth and had a sever effect on unemployment which went up to 43 percent. The youth unemployment in Gaza soared to 60 percent and overall unemployment in West Bank and Gaza increased to 27 percent in 2014. So the main purpose of this case study is to face the challenges to find solutions for them and to know the main opportunities in Islamic microfinance industry in Palestine through reviewing the current status of Islamic microfinance and financial position in Palestine But after appearance of Islamic finance the SMEs and entrepreneurs became existed and these lead to create job opportunities. The Islamic finance aim to get rid of any inequality between all Muslim nations, and they did. So all of these points will be discussed in more details at the case study.
While conventional microfinance is huge and well developed, with wide all over the world, Islamic Microfinance has yet to enter its potential market. According to a survey by the Consultative Group to Assist and help the poor, the total number of Islamic microfinance accounts and the Clients at year 2007 were 380,000, which lead to up 0.5% of the microfinance industry’s total outreach products.
Islamic Microfinance is a new sector with a great potential to expand. The indications estimated that 72% of the population living in predominantly Muslim nations does not use financial services, because they do not follow the precepts of Islam. Although Muslims countries use conventional financial products, but a lot of surveys show that if they had the choice they would use sharia-compliance financial products.
One of Islam objectives is to be complaint with sharia, and that what we aim at Islamic finance. Today, the Islamic microfinance is concentrated in three countries: (Indonesia, Bangladesh and Sudan). According to CGAP study, 300,000 customers were concerned by the Islamic microfinance through 126 institutions operating in 14 countries. However, in Islamic countries, Islamic microfinance is still a tiny smallshare of Islamic microfinance. It often develops due to government support and changes in policy as in Pakistan, in 2007, where guidelines were developed to encourage and promote growth.
Unlike conventional finance, Islamic Microfinance is a new trend market in Islamic finance: Islamic banks provide financial assistance to people excluded from the banking system. Islamic microfinance has to be complied with principles of Islam and to involve in projects halal (allowed by sharia) away of investing in prohibited activities like: pork, gambling and miser. So by achieving all of these it will lead to social and economic equality and fairly distributions among nations.
Islamic Microfinance would help the 650 million Muslims who living with less than $ 2 a day and give them access easily to financial services. However, there are increases of numbers of people who use Islamic finance now days and a doubling of the number of suppliers, in recent years, the nascent industry continues to increase and struggle to develop. In a study on Microfinance, CGAP has studied the situation of the sector and. In collaboration with the French Development Agency, the CGAP has also conducted a survey in 2011 to better understand the current situation of supplyof Islamic microfinance. Although that there are huge increase in the number of suppliers and customers of Islamic microfinance sector but it is still dominated by a few suppliers in some countries that rely primarily on just two products (Murabaha and Qard Hassan). That’s why; the Islamic microfinance sector needs a concerted action.
Islamic microfinance products
-Murabaha : financing is a popular method used by an Islamic bank to meet the short-term trade financing needs of its customers. It is often referred to as “cost-plus financing” or “markup financing.” It’s also Sharia-compliant activity contract the most commonly which used to finance goods. It depend on sales of products according to client requests with a specific product, then the lender (bank) acquires it directly in the market and resells it to customer after applying a fixed margin payment for the service or product provided. , it falls under the contracts of sales and purchases where the assets can be sold in cash, installments or in advance payment at the end of the period the bank agrees to fund the purchase of a specific asset or goods from a supplier at the request of the customer.
-Qard al Hassan : is a free interest loan extended on a goodwill basis and the borrower is required to repay the amount borrowed.At his or her discretion, pay an extra amount beyond the principal amount of the loan (without promising it) as a token of appreciation to the creditor (gift) .Ifthe debtor does not pay an extra amount to the creditor, this transaction is considered a true interest-free loan. Some Muslims consider this to be the only type of loan that does not violate the prohibition on usury riba because it involve halal activities , and they are not obligated to pay an extra amount time value of money.
-Musharaka: depend on profit and loss sharing and it is a relationship between two parties or more that contribute capital to a business and divide the net profit and loss ratio. and this agreement depend on a predetermined percentage among partners either (management or capital provider). This type of financing can be used for the assets or funds bearing.
-Mudaraba: mainly it depends on profit and risk sharing. It is a trustee financing instrument in which one is a capital provider andanother is management provider in the project.
-Bai Salam : is an advance payment in exchange of a future delivery. It is used in agricultural activities following farmers to finance production in exchange
– Rahn (collateral) and Qard Hassan In this case, deposits are treated as (interest free loan) by the depositor to the bank, so the bank is free to use the funds in a qard hassan current account without permission of the depositor. The depositor (in the role of lender) is not entitled to any return on the use of the funds, the bank guarantees that the amount deposited will be returned, no interest is applied on the loan in case of quard hassan because it’s prohibited under Islamic law and in case of default in payment there is no penalty is implemented on the borrower as it is a loan provided in good faith to support those in need.in this case, the assets kept with lender as collateral).
For future delivery cultures. To respect the sharia, the quantity of finance themselves in their farms within halal activities
-istisna : is an exchange contract between buyer and seller . The Sellers can either buy or sell products by themselves or through a third party, at The end customer can pay the sale price (original amount) it pay once the contract is signed or subsequently at other stages of the manufacturing process.
-Takaful : is an Islamic insurance by which Each person participates in a fund that is used to help the group in case of need, for example, death, agricultural losses, accidents etc… Then the heirs will inherit these amounts in case of death according to (qur’anic heirs)by Premiums paid and reinvested in sharia compliance.
literature review of micro finance
Micro finance as a concept. Microfinance was found in Bangladesh by Grameeen bank and in Bolivia by bancoosool and in Indonesia by bank rakyat . microfinance gives small loans to poor people who are poorly employed and people who are rejected by other banks and they are give them small loans to start their microbusiness .
the role of MFIS
Microfinance institutions focus mainly on group of borrowers instead of lending money to one by one ( the people who are neglected by other banks ) they are neglected because they haven’t any assets to make them as a collateral . the micro finance institutions prefer to operate by group lending system because each member in the group is responsible for the other members they take the loan with them in a group if anyone in group failed to pay its debts . the other members doesn’t required to pay his debts but instead the other members lose the ability to take loans from institutions and that’s a good indicator because that’s make them to monitor each other in group to make them repayment the loan .
The conventional (interest based micro finance) and the Islamic microfinance
Conventional microfinance grown rapidly from 35 years ago when prof. Mohamed gives the poor small loans in Bangladesh , the Islamic microfinance hasn’t grown as conventional microfinance . it is estimated that in 2007 as estimated there were 380000 clients from Islamic microfinance institutions compared with 77 million clients from conventional microfinance institutions .
the difference between microfinance product offerings and Islamic microfinance product offerings
microfinance institutions was started offering only one product ( small business loan ) then expanded into other areas such as : savings , insurance and leasing
1-micro credit :
microcredit are small loans is providing to poor people to start their business or to finance consumer purchase . and the interest rates on these loans typically higher than the interest rates commercial bank loans the formula that’s used to compute interest rate used by banks and microfinance institutions :
= AE + LL + CF + K – II
1 ? LL
AE( administrative expense ) whice is the largest contributor to high interest rate – LL ( loanlosses ) – CF ( cost of funds ) – K ( MIFS required capital ) – II ( non loan assets ) whice decreased interest rate .
micro finance institutions not only provide loans but aslo offer deposit products to help the poor people to build up their assets . and the absence of MFIs offering savings the poor people will suffer because the will found it difficult to save
For example,” in the United States, an estimated 56 million people20 percent of the population do not have a bank account and are forced to use more costly companies like payday lenders, check-cashing services, or money transfer companies to perform services that they would receive for free from a bank.” (from Egyptian knowledge bank )
there are different types of microinsurance such as health insurance and life imsurance , minor property damage , and weather insurance .
Islamic microfinance product offerings
Islamic microfinance is based on sharia’ah compliant credit
the microcredit represents larger part in Islamic microfinance institutions . the types of contracts used in Islamic micro finance are murabaha , ijarah , musharkah and qard Hassan .
in murbaha : the clients want to purchases some goods so they request the bank to purchase the goods but instead of interest the Islamic bank use marke up . also Islamic microfinance instituations offer both leases and financial leases : and the difference between conventional and Islamic in the transfer of ownership Islamic instituations buying the products then leases it for fixed period and after the lease ends the ownership of products transferred to the client . mudrbah and musharkah : they are similar to joint venture capital in mudraba the two partners agree sharing profit ratio but if there is any losses the capital provider bear all the losses . musharakah : is the same as mudarbah but the difference in musharakah the 2 partners contribute capital and both are bear the losses .
2-Micro saving and takaful
the saving products in Islamic comes with two types which are mudaraba and wadia’a . A mudarabah : gives the depositor returns on the deposit from the profit generated with the funds and the depositor will not bear a loss unless the total loss exceeds the total capital of IMFIs . wadia’a: gives the depositor assurance that the deposit will be ammanah and the deposit can be withdrawal anytime but there is no profit in wadia’a account