Table of Content

Page

1.0 Abstract 2

2.0 Introduction 3

3.0 Argument 1 : Offer Syariah Compliant Finance 5

4.0 Argument 2: Increase the Performance of Islamic Banking and Finance 7

5.0 C. Argument: Risky and Costly to Implement Islamic Microfinance 9

6.0 Argument 3: Provide Financial Assistant for Low and Middle Income Groups. 11

7.0 Conclusion 13

Reference 14
 The Number of Islamic Microfinance Institutions in Malaysia Should be Increased. 2

1.0 Abstract

Recent years, Islamic microfinance has become more popular among Malaysian. It has been

offered by Islamic Financial Institutions and also Non-governmental organizations. However,

the number of Islamic microfinance institutions in Malaysia still in a small number. Due to the

demand of Malaysian for Islamic microfinance that cannot be fulfilled recently, the number of

Islamic microfinance should be increased. The purpose of this academic research was to identify

and discuss the reason for needs of increasing number of Islamic microfinance institution in

Malaysia. Somehow, some institutions refuse the establishment of Islamic microfinance

institutions. This and other results of the research will be discussed.

 The Number of Islamic Microfinance Institutions in Malaysia Should be Increased. 3

2.0 Introduction

As a developing country, most of the businesses in Malaysia are small and medium

enterprises. Based on the data by Census of Establishments and Enterprises 2005 issued by the

Malaysian Department of Statistics, there are over 430000 micro enterprises in Malaysia. From

the increasing number of SMEs, the number of banking and finance institution also keeps

increasing to cater the needs of Malaysian. This is why government put a serious effort in

improving the performance of SMEs by introducing microfinance a long time ago. As at June

2009, there are around RM2 billion financing outstanding for microfinance. Microfinance offer

micro saving, micro credit, micro leasing and many more with a finance range from RM500 to

RM50000. There is simple procedure and less documentation to make it easy to obtain and fast

approval. The duration for the financing mode also flexible which is from a month to 10 years.

Somehow, most of the banking and finance institution offer conventional microfinance. So, it is

a beginning for Islamic microfinance as a substitute for microfinance. Islamic microfinance can

be in many forms such as Ijarah (leasing), murabahah (cost plus mark-up), musyarakah

(partnership), wadiah (saving), takaful (insurance) and so on.

Recently Islamic banking and finance has grown rapidly and become popular in Arab

countries such as Saudi Arabia, Kuwait, Qatar and UAE. Besides, it becomes popular even in

Muslim minorities country such as United Kingdom, United States and Australia. In Malaysia

context, if we compared to previous year, Malaysia has improve a lot in Islamic banking and

finance sector. Malaysia already recognized as regional and global hub for Islamic Banking and

finance and there is already a Malaysian scholar in Syariah Supervisory Board. It also sees the

improvement in Islamic microfinance where the products of Islamic Microfinance also have been

offered by some Islamic financial institution and NGOs. So, we can say that Islamic
 The Number of Islamic Microfinance Institutions in Malaysia Should be Increased. 4

microfinance institutions consist of Islamic financial institution and NGOs. However, the

numbers of them are still small. Until now, from nine banks that offer microfinance four of them

offered conventional based, two offered Islamic based and three banks offered both conventional

and Islamic. For NGOs “Amanah Ikhtiar Malaysia” and TEKUN already offered Islamic

microfinance.

So, for further step I strongly agree that Malaysia should increase the number of

Islamic Microfinance institutions in order to offer Syariah Compliant finance, increase the

performance of Islamic banking and finance and provide financial assistant for low and

middle income groups.

3.0 Argument 1: Offer Syariah Compliant Finance

 The Number of Islamic Microfinance Institutions in Malaysia Should be Increased. 5

It should be best for a Muslim country like Malaysia to offer Syariah compliance finance

based product to cater the needs of Muslim citizen. So, Malaysian can have a substitute and can

choose either conventional or Islamic product. As a Muslim, to find the “halal” (permissible)

product is compulsory. Even though conventional financial institutions that offer microfinance

already well establish in Malaysia for a long period but nowadays, Muslims already realizes the

important of Islamic financial institutions to serve the Muslims community. So, in order to cater

the needs, the number of Islamic Microfinance institutions should be increased.

Nowadays, most of the Muslims already switch from conventional to Islamic financial

institutions. The Islamic financial institutions in Malaysia are supervised by Syariah Supervisory

Board from Central Banks of Malaysia in order to make sure that it follows the Syariah rules and

guidelines by Central Banks of Malaysia. So, every Muslim can have more confident on Islamic

microfinance products that offer by Islamic Financial Institution. Islamic microfinance follows

the Syariah rule since it is free from interest and free from uncertainty. In Al-Quran Allah said:

That they took usury, though they were forbidden; and that they devoured men's substance

wrongfully. We have prepared for those among them who reject faith a grievous punishment.

(4:161).

It is clearly stated that riba is forbidden and for those who take riba will be punished in

the hereafter. Muslim Scholars have accepted the word riba means any fixed or guaranteed

interest payment on cash advances or on deposits. Basically, interest gives burden to the

borrower since the interest will be charged on the remaining amount of debt. It means the interest

charge on interest and of course the total amount of interest that should be paid is high. For

example, in the case of Grameen Bank in Bangladesh the interest is high which around 20% and

it gives burden to the borrower. The borrower ends up with a high debt that he/she take from
 The Number of Islamic Microfinance Institutions in Malaysia Should be Increased. 6

another bank to pay to Grameen Bank. This situation shows that the interest gives burden to the

borrower. It is forbidden in Islam where Allah said: O Muslim, do not devour Riba, doubling and

redoubling it and fear (the punishment) of Allah that you may be successful. (3:130).

Another element that is forbidden in Islam is excessive uncertainty. In Islamic

Microfinance, Muslim will free from this elements where all the transaction between two parties

are clear and accurate. Customer will be explained on the concept of Islamic microfinance and

both parties should understand and agree with the contract. Mohammed Obaidullah said “Some

degree of gharar or uncertainty may be acceptable in certain forms of contracts. The presence of

excessive gharar makes a contract forbidden.”

Other than that, Islamic Microfinance also needs the borrower use the amount borrows

for the permissible activity. Borrower cannot borrow the money for gambling or forbidden

business. It is different from conventional financial institution where people can borrow money

for forbidden activity like business in pornography, wine, gambling and so on. Basically, before

the loan by customer has been approved by Islamic microfinance institution, he/she should

disclose the purpose of his/her loan. So, the Islamic microfinance institution will be aware with

the purpose of the borrowing. So, it shows that Islamic Microfinance really follows the Syariah

rule.

4.0 Argument 2: Increase the Performance of Islamic Banking and Finance

 The Number of Islamic Microfinance Institutions in Malaysia Should be Increased. 7

Besides, by increasing the number of Islamic microfinance institutions it also can lead to

increase the performance of Islamic banking and finance. Islamic Microfinance institutions are

not necessarily to be banking and finance institution but it also can be NGOs institution. But, I

will focus on Islamic banking and finance since NGOs that provide Islamic microfinance are not

profit based organisation and most of Islamic microfinance offer by Islamic financial Institution.

As we know, banking and finance institution contributes a lot in Malaysia Gross Domestic

Product (GDP). In 2000 it contributes 9.2% to GDP and increase to 11% in 2008. So, when the

number of Islamic microfinance institutions increases it will improve the performance of banking

and finance sector in Malaysia. It happens when people choose the Islamic Microfinance, then it

will also give the profit to the institutions. Islamic financial institution should not exclude the

poor people from being their customers but they have to be seen as an opportunity and a

profitable market niche for Islamic Financial Institution. For example, when a person chooses

Islamic microfinance to have a machine for business by entering Ijarah (leasing) contract, bank

will buy the machine and the person can rent the machine on a certain period that both parties

agreed upon. During the rental, the person can use the machine but the bank still own the

ownership of the machine until the last period of rental. Every month, that person should pay the

rental amount to the bank. At the end of lease period the person will be given an option either to

buy the machine at nominal price. So, both parties will get the benefit.

Other than that, when Islamic Banking and finance promote and offer Islamic

microfinance product, it will obtain long-term gains from enhanced the organizational value, a

strong reputation and positive association with socially responsible values that will cause public

trust where the bank also consider the low and middle income group for financial assistant. It is

also an interesting market niches that can create loyalty in their clients. It is happen when
 The Number of Islamic Microfinance Institutions in Malaysia Should be Increased. 8

customers can access diversified of products for low and middle income people in one Islamic

Financial Institutions and they are very convenient and accessible. So, of course customer will

loyal with those institutions since it provides useful products.

Furthermore, when the Islamic microfinance becomes popular in Malaysia of course it

will attract outsider investor to invest in Islamic Banking and finance since many foreign

organizational also concern about the corporate social responsibility activity. Governor Dr Dr.

Zeti Akhtar Aziz's Keynote Address at the 11th Malaysian Banking Summit - "The Malaysian

Banking Industry Reinvention and Transformation"In Malaysia at Nikko Hotel, Kuala Lumpur

on 19 July 2007, “there are at least 435,000 micro enterprises, but only 13% rely on financial

institutions for funding. Of importance is promoting commercially viable microfinance ventures.

In this connection, greater flexibility has been provided for foreign banks to enhance their

presence in non-urban areas. Given the objectives of financial inclusion, it is hoped that foreign

banks support this initiative given the flexibility that is being accorded to widen the outreach to

segments of the economy which are currently underserved.” From the keynote also we can see

that Central Bank of Malaysia also welcome foreign investor to invest in microfinance sector and

the flexibility has been given to enter on this industry.

5.0 Counter Argument : Risky and Costly to Implement Islamic Microfinance

 The Number of Islamic Microfinance Institutions in Malaysia Should be Increased. 9

However, it sees that many institutions refuse to offer not only Islamic Microfinance but also

microfinance due to high risk when give a finance assistant to the poor and it is costly. It is

because, they lack the guarantees that can protect a financial institution against a loss risk.The

risk when we give a loan to the poor is high since the chances for them to not pay back the loan

also high since they are poor. Even the Islamic microfinance institution give the loan for business

purposes it is hard to monitor the use of the fund. Sometimes, they are not using the fund in

appropriate manner so they just end up with cannot pay back to the institution. As we know,

most of the low and middle income people are lack of knowledge and do not have a high

education so they are not capable enough in financial management. Sometimes, when loan is

given to help them in business, the business incur loss because lack of knowledge in managing

business.

For a non profit based organisation like Amanah Ikhtiar Malaysia and TEKUN that offer

Islamic Microfinance, they are funded by federal and state government, banks and other

institution. Only the administrative and operational cost will be charge to the borrower to cover

their cost. So, the NGOs will always get a subsidy from government and can cover the loss if

borrower did not pay back the loan. The data from Amanah Ikhtiar Malaysia shows that every

year around 4-5% of the loan cannot be collected. But the only question is when government

should stop the funding since every year there are people that did not pay the loan. Some people

said, by doing this Malaysian will depend on government too much and cannot be independent.

As a developing country, to reach a develop country all Malaysian should be independent.

For the Islamic banking and finance that is profit based organisation of course the banks

also want to generate a high profit. That is the reason why the number of microfinance and

Islamic microfinance institution is still small. Besides, the institutions just incur a high
 The Number of Islamic Microfinance Institutions in Malaysia Should be Increased. 10

administrative cost since the amount of borrowed just in small amount and all of them needs a

proper document. When there are needs for more and proper documentation, it incurs a lot of

cost while the cost that charge to the borrower is just a small amount. So, it just gives a little

profit to the Islamic finance institutions. Besides, to have Islamic Microfinance efficient and

effective operational staffs are required to deliver a well done job and to make sure that all

employees that work in this sector have a proper knowledge on Islamic microfinance. So, the

training is needed and of course it requires a lot of fund. The Islamic microfinance institution

also needs to hire an expertise in Islamic microfinance and it is costly.

6.0 Argument 3: Provide Financial Assistant for Low and Middle Income Groups.
 The Number of Islamic Microfinance Institutions in Malaysia Should be Increased. 11

But, Islamic microfinance institution should not focus on making profit only. As an

Islamic institution, it should refer back to the objective of Islamic Financial Institution where it

very concern on the maslahah (benefit) of the Muslim community. By giving the low and middle

income people a financial assistant, it will help them to improve their standard of living. For

those who help people who are needy will be reward in the hereafter. Eradication of poverty,

socio-economic justice and fair distribution of income are among the primary goals of Islam and

should be main features of an Islamic economic system. So, the Islamic financial system should

also reflect these objectives of Islam.

Besides, by giving needy people financial assistant, it will improve their businesses status

and it will open a job opportunity to other parties. For a small business, they always hire their

family, relatives and friends and it will help other parties also and it will reduce the

unemployment rate of Malaysian. Most of Malaysian businesses are small and medium

industries and they need more financial assistant to improve their business. So, by increasing the

number of Islamic microfinance institution in Malaysia, it will be easier for them to access this

opportunity in improving their economic status. There are many prove of the successfulness of

microfinance in helping the economy of low or middle income people. In Bangladesh for

example, Islamic Bank Bangladesh Ltd introduce Rural Development Program (RDS) and it has

been operated since 1996 until now to finance small and medium enterprise. As October 2006,

RDS operated from 116 branches covering 7,788 villages giving a total of Tk. 8589.7 mill. To

368,360 clients and the recovery rate is 99%. So, it shows the successful of this bank in introduce

microfinance to help the poor.

Besides, there are many ways to reduce the risk of people not paying back the loan. For

example, Islamic financial institution can implement the method used by Amanah Ikhtiar
 The Number of Islamic Microfinance Institutions in Malaysia Should be Increased. 12

Malaysia. Every customer that requires the loan should have a saving account in the Islamic

financial institution. If customer cannot pay back the loan then it can be cover by the saving

account. So, it can reduce the credit risk. Other than that, Islamic financial institution also can

identify the background of borrower to make sure that they did not have a bad reputation like

bankruptcy or did not pay loan to other institution before this. Another step that Islamic

microfinance institution can take is by giving an asset or goods instead of cash. So, the misuse of

fund will not happen.

7.0 Conclusion
 The Number of Islamic Microfinance Institutions in Malaysia Should be Increased. 13

In order to cater the needs of Muslim citizen in Malaysia, the number of Islamic

microfinance institutions in Malaysia should be increased. As a Muslim, it is must for every

Muslim to only use the permissible products except when it is “darurah”. If there is no single

microfinance institutions that offer Islamic microfinance in that area then it is permissible for

people to use conventional practices. So, to make sure that every Muslim got their rights,

Malaysia should increase the number of Islamic microfinance institutions especially in rural area

so that it will be accessable for needy people.

Besides, by increasing the number of Islamic Microfinance institutions, it can increase the

performance of that institution since Islamic microfinance also give profit and good name to the

institutions. There are many successful story of Islamic microfinance institution in other country

that can be use as benchmark.

Furthermore, Muslims are taught to have sympathy with the poor and recognize that the poor

have rights over them. It is our responsibility to help them by giving a financial assistant. In Al-

quran Allah said: “(Charity is) for the poor who are restrained in the way of Allah, and are

unable to move about in the land. The unaware consider them wealthy because of their restraint

(from begging). You shall recognize them by their countenance – they do not beg people

importunately. And whatever of good things you give, then Allah is All-Knowing of it.” (2:273)

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