Religiosity and threshold effect in social and financial performance of

microfinance institutions

Mohammad Ashraful Mobin

Islamic Microfinance Scheme in Maldives:

Faseyha Madadhu
Dr Aishath Muneeza
Associate Professor
INCEIF, The Global University of Islamic Finance

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AlHuda CIBE FZ LLE - U.A.E

P: + 971 56 9286664, + 971 55 938 99 00
AlHuda Center of Islamic Banking & Economics Pakistan
Ph: (92-42) 35913096 - 98, Fax: (92-42) 35913056
Email: info@alhudacibe.com
Website:
www.alhudacibe.com

Contents
Introduction
Microfinance in the country
Governance System of Islamic Microfinance
Scheme in Maldives
Faseyha MadadhuScheme
Targeted Sectors, Shariah Contracts & Financial
Requirements
Operational Challenges Facing the Scheme
Challenges

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Introduction
Islamic microfinance is a new concept in Maldives.
Maldives is a hundred percent Muslim country with a population of less than four hundred thousand
people.
Maldives can be best described as a geographically scattered island chain with a small population.
Maldives is a small island nation that is located in south-west of Sri Lanka and India in the Indian
Ocean.
The existence of Maldives was not found in the world map until recently as it was too tiny to be
shown visibility in the map.
The population of the country is just 344,023 (National Bureau of Statistics, 2015) and all Maldivians
are Muslims.
Due to limited natural resources available in the 1,190 islands of Maldives, heavy reliance is on
imported goods while the major income to the country in foreign currency is generated from tourism.
The population that has no means to access commercial banking to upgrade living standards sought
an alternative financing scheme that will not be stringent.
The first ever Islamic microfinance scheme introduced to the country is FaseyhaMadadhuscheme
that was introduced in 2015 and for the countries that aspire to introduce Islamic microfinance
schemes, it is a a good case study to understand.
The challenges in introducing and implementing such a scheme will definitely assist in learning from
the experience of a small island nation.
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Microfinance in the Country

Microfinance is a nascent concept in the country.

Though there are seven commercial banks operating in the country, there is no financial institution that is
specialised in Islamic microfinance.

However funds received as foreign aid have been disbursed through the Bank of Maldives, the national bank as
it is required by law to disburse such funds through a bank.

The beginning point that led to the formal existence of microfinance in the country is the enactment of Small
and Medium Enterprises (SME) Act (Law No. 6/2013) in 2013.

The objective of this law was to help reduce poverty and related vulnerabilities as well as making the sector
broad based, innovative, resilient and internationally competitive.

The enactment of this legislation proved the importance given to small and medium enterprises by the
government at policy level. The responsible government agency in dealing with SME sector development is
Ministry of Economic development (MED).

Under the significant SME Act, an SME Council was formed and it became a statutory responsibility for the
government to allocate Maldivian Rufiyaa Fifty Million each year for disbursements of financing facilities to the
sector.

This is indeed a landmark development in the country towards the development of SME sector with full support
and backing from the government.

In 2015, the first Islamic microfinance scheme was introduced under the name of FaseyhaMadadhu with the
assistance from Islamic Development Bank.

The local bank involved in the scheme is Bank of Maldives.

The products developed under this scheme was unique as it was shaped to cater for the local needs.
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Governance System of Islamic Microfinance Scheme in Maldives

MSME is defined under the SME Act, as an individual or other legal entity carrying on a business
enterprise in one of the following categories:

(i) Micro: businesses with up to 5 employees and an annual income of 500,000 Maldivian Rufiyaa
(MVR);
(ii) Small: business employing between 6 and 30 persons and an annual income between 500,001
and 5,000,000 MVR; and
(iii) Medium: business that employs between 31 and 100 persons and an annual income
between 5,000,001 and 20,000,000 MVR.

SME Council formed under the SME Act plays a vital role in determining the sectors to which the
Islamic microfinance scheme will be directed to. Not only the sectors, but the target audience is also
determined by the SME Council. Therefore the influence of SME Council on FaseyhaMadadhu
scheme is critical.

Chapter three of SME Act deals with the formation and other matters related to the SME Council.
SME Council is formed by the President of the country.

The main function of the SME Council is to advice the Minister of Economic Development on ways in
which the policies of government regarding the development of SME sector could be implemented
including formulation of activities related to this. The president of the SME Council is Minister of
Economic Development and the vice president as per the statutory requirement must be selected
from the members representing civil societies in the Council. There are fourteen members in the
SME Council and some of them are ministers holding economy and finance related portfolios.

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Cont

The funds used in the project from Islamic Development Bank was approved pursuant to a
request made by the government of Maldives to participate in the Micro, Small and
Medium-size Enterprise Development project in 2011.

The affiliation between Islamic Development Group and Maldives began in 1980, after
Maldives became a member of Islamic Development Bank Group.

The funds received from Islamic Development Bank to provide Islamic financing facilities to
SME is given to the Bank of Maldives to disburse it in accordance to the conditions agreed
by SME Council and the Ministry of Economic Development.

For this purpose an agreement between Ministry of Finance and Treasury, acting for the
government of Maldives was signed with Bank of Maldives. As such, the applicants will apply
to the Islamic microfinance facilities via Bank of Maldives.

It is imperative to note here the Bank of Maldives is the only bank operating in the country
that has the largest coverage, with branches in 27 islands.

Though FaseyhaMadadhuIslamic micro finance scheme is managed jointly by Ministry of

Economic Development and Bank of Maldives, the administrative matters such as
application form acceptance and evaluation of the applicants is carried out by Bank of
Maldives.

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Faseyha MadadhuScheme
FaseyhaMadadhu scheme is the first shariah compliant microfinance scheme
introduced by the government of Maldives.
The scheme was introduced in 2015.
Faseyha is the Dhivehi (language used in Maldives) word for easy and
Madadhu is also a Dhivehi word which means assistance or help.
Hence, faseyhamadadhu means easy assistance. Forty percent of the total
financing facility is allocated for women and youth entrepreneurs.
Under FaseyhaMadadhu scheme, micro (businesses with up to 5 employees and
an annual income of 500,000 Maldivian Rufiyaa (MVR)) businesses can apply up
to Maldivian Rufiyaa hundred thousand; small (business employing between 6
and 30 persons and an annual income between 500,001 and 5,000,000 MVR)
businesses can apply up to Maldivian Rufiyaa five hundred thousand; and
medium (business that employs between 31 and 100 persons and an annual
income between 5,000,001 and 20,000,000 MVR) businesses can apply up to
Maldivian Rufiyaa one million. For newly set up businesses the maximum amount
of financing that could be given is Maldivian Rufiyaa three hundred thousand.
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Targeted Sectors, Shariah Contracts & Financial

Requirements

The targeted sectors in this scheme was tourism, transportation, construction, fisheries and
agriculture.

For tourism sector, shariah compliant financing assistance is only given to purchase or buy materials
to develop guest houses and to purchase equipment to produce handicraft items.

As for the transportation sector, the shariah compliant financing facility is provided only to replace old
taxis with new cars and to purchase vehicles other than cars used for land and sea transportation
purposes.

For construction sector, shariah compliant financing will only be given for the purpose of purchasing
machineries or materials used for construction.

Finally in fisheries and agricultural sector, Islamic finance facility can be given to buy machineries that
will be used to process fisheries or agricultural produces or to purchase machineries that will help to
value add the fisheries and agricultural produces. In agricultural sector Islamic finance facility can also
be obtained if the applicant wishes to produce crops using new innovative technology.

Except for the agriculture category where applicant wishes to produce crops using new innovative
technology, for the rest of categories, murabahah is the underlying contract used.

There is no additional collateral requirement except for the equipment or assets purchased under the
scheme which will be mortgaged as a security. The tenure of the financing facility will be determined
based on the financial documents submitted by the applicant and the tenure will not exceed six years.
The financing rate is 9% per annum, which is relatively high for a microfinance product.

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10

Operational Challenges Facing the Scheme

Even though faseyhamadadhu scheme was
successfully launched, the success of these products
is yet to be tested as the successful applicant is yet
to be chosen by Bank of Maldives.
As of the closing date, 29th October 2015, Bank of
Maldives received 119 applications and the majority
of these application was to obtain financing facility
for transportation sector.
However, even at this stage, the challenges facing
the scheme can be identified and these challenges
need to be properly addressed especially for the
successful continuance of the scheme.
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11

Challenges
Lack of
information and
awareness of
public about
Islamic Finance
Products
Misconceptions
understanding
population
below poverty
level
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Constraints in
accessibility to
the population
in Islands

Mismatch in
sector chosen
and actual need

Lack of enabling
infrastructure to
monitor the
scheme

Lack of proper
vision, research
and planning to
develop
microfinance
sector

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12

Thank You
Dr Aishath Muneeza
Associate Professor, INCEIF
muneeza@inceif.org

Copyright 2015 INCEIF e Learning. All rights

reserved.

AlHuda CIBE FZ LLE - U.A.E

P: + 971 56 9286664, + 971 55 938 99 00
AlHuda Center of Islamic Banking & Economics Pakistan
Ph: (92-42) 35913096 - 98, Fax: (92-42) 35913056
Email: info@alhudacibe.com
Website:
www.alhudacibe.com