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An Introduction to

Islamic Microfinance

Muhammad Zubair Mughal

Chief Executive Officer,
AlHuda: Centre of Islamic Banking and

• What is Shariah Based Microfinance ?

• Difference between Conventional & Islamic MF
• Demand of Islamic Microfinance Worldwide
• Global Landscape of Islamic Microfinance
• Islamic Microfinance Update
• The Way Forward
Islam and Shariah


Aqidah Shariah Akhlaq

(Faith & Belief) (Practices & Activities) (Morality & Ethics)

IBADAT Muamalat
(Man to God Worship) (Man to Man Activities)

Political Activities Economic Activities Social Activities

Banking & Financial Activities

Sources of Fiq’h in Islam (Islamic
Micro Finance)
• Quran

• Sunnah

• Ijtehad / Qiyas

• Ijama’e Ummah
Human Financial Needs

Fulfillment of Financial Needs

Own Capital Others’ Capital

Equity Financing Debt Financing

• Musharakah • Murabahah
• Modarabahah • Ijarah
• Other Products •Salam & Istisna etc
External (Equity & Debt) Financing
Equity Financing Debt Financing
Uqud al-Ishtirak Uqud al-Muawadhat
(Contracts of Profit (Deferred Contracts of
Sharing ) Exchange)
Al-Mudarabah Al-Bai’ Bithaman (Mu)Ajil
(Trustee Profit Sharing) (Deferred Installment Sale)
Al-Musharakah (Joint Bai’ al-Murabaha
Venture Profit Sharing) (Cost Plus Profit Sale)
Others Al-Ijarah (Leasing)
Bai’ al-Salam (Commodity Sale)

Bai’ al-Istisna’ (Sale on Order)


Islamic Modes of Microfinance

Partnership Based Trade Based Rental Based

Modes Modes Modes

Musharaka (Cost Plus Profit Sale) Ijarah
(Joint Venture Profit Sharing ) Musawama ( Leasing )

Mudaraba (Bargain sale ) Diminishing

( Trustee Profit Sharing) Salam Musharaka
(Commodity Sale)
( Transfer of Ownership)
(Sale on Order)
• Customer
to Halal Restaurant Owner

• Halal Restaurant Owner

to Halal Meat Supplier

• Halal Meat Supplier

to Halal Abattoir / Butcher

• Customer to Islamic Banker

• Islamic Banker
to Shariah Scholars
Industry Progress in Pakistan

Year 2001 2002 2003 2004 - 06 2007 - 09

2 3 4 10 18

•Meezan Bank •Meezan Bank (161)

•Al Baraka •Meezan Bank
•Al Baraka •Meezan Bank •Al Baraka (30)
•Meezan Bank
•MCB •Al Baraka •MCB (8)
•Al Baraka
•MCB •Alfalah(40)
•Alfalah •SCB (11)
•Bank AlHabib(4 )
•Bank AlHabib
•Bank of Khyber(16)
•Habib AG Zur.
•Soneri Bank ( 5)
6 Full fledge Banks having 239 and 12 Conventional Banks have 167 SAIBBS and 10 Sub Branches •HBL(1)
• till 1 January , 09
st •Bank of Khyber
•Bank Islami(102)
Total IB Branches = 519 •Soneri Bank
• •DIB (25)
•EGIBL (40)
• Dawood(21)
•RBS (3)
•UBL (5)
Industry Progress in Pakistan
International Overview
• The size of Islamic Financial Industry has reached US$ 950 Bln.
and its growing annually @ 15% per anum.

• 70 countries have Islamic Banking Institutions

• 37 Muslim countries including Bahrain, UAE, Saudi Arabia,

Malaysia, Brunei and Pakistan

• 34 non-Muslim countries including USA, UK, Canada, Switzerland,

South Africa and Australia
International Overview
• In Feb 1999, Dow Jones introduced the Dow Jones
Islamic Market Index (DJIM) of 600 companies world
wide whose business complies with Islamic Shariah laws

• At present there are more than 170 Islamic Funds

operational through out the world with a total fund base
of over USD 3.50 billion
International Overview
• Governments of Bahrain ,Malaysia and now Pakistan
have issued Islamic Bonds (Sukuk) in order to facilitate
Islamic Banks in managing their liquidity.

• Issuance of these bonds has also paved the way for

Shariah compliant Government borrowings
International Overview
• Institutions like Accounting and Auditing Organization for Islamic
Financial Institutions (AAOIFI) and Islamic Finance Services Board
(IFSB) have been formed.

• These institutions are playing a key role in setting up and

standardizing Shariah , Financial and Accounting standards for
Islamic Financial Institutions.

• Due to these collective efforts Islamic banking is now recognized by

IMF, World Bank and Basel Committee.
Islamic Microfinance
Principle of Shariah Based
 Prohibition of Interest

 Risk sharing

 Social Development Mission

 Prohibition of speculative

 Purity of contracts

 Asset Based Financing

 Shariah-approved activities.
Prohibition of Riba ( Interest)

And ALLAH has permitted trading and forbidden Riba

(Al Baqara 275)

•Riba means any fixed or guaranteed interest payment on cash

advances or on deposits.

•Islam encourages the earning of profits but forbids the charging

of interest
Difference Between Islamic and
Conventional Microfinance

MFI Client

money + money (interest)

Difference Between Islamic and
Conventional Microfinance


IMFI’S Goods & Client


Modes of Islamic Microfinance
Need & Compatibility

 For Muslim majority country great need for Islamic MF exist and large

target segment is averse to the interest based microfinance products.

 Islamic Microfinance emphasize ethical, moral & social factors to

promote equality and fairness for the good of the society.

 Risk Sharing, individual duties, property rights and purity of contracts

are part of Islamic Microfinance

 Approximately 44% conventional microfinance clients worldwide reside

in Muslim countries (Source: MF Info Ex).

 Asset-based – can prevent diversion of funds for consumption
Demand of Islamic Micro Finance

Survey Surveyed Countries Respondents


CGAP 08 Jordan, Algeria, and Syria 20 - 40%

PlaNet Finance 07 West Bank and Gaza 35% - 60 %
USAID 02 Jordan 24.9%
IFC/FINCA 06 Jordan 32%
Frankfurt School of Algeria 20.7%
Fin & Mgmt 06
IFC sponsored Yemen 40%
IFC 2007 Syria 43-46%
Bank Indonesia Indonesia (East Java) 49%
A recently survey Conducted by AlHuda CIBE in Azad Kashmir exhibits
99% demand (4 Districts)
International Experience of Islamic
Institution Mode of Finance
7 Sudanese Islamic Banks Murabaha, mudaraba, musharaka, and
saving deposit [SIB – Productive Families]
Islamic Cooperatives and Rural Cooperatives – Members’ Musharaka
Banks of Indonesia (integrated with Zakat Fund)
Rural Banks – Various modes
Islami Bank Bangladesh, Social IBB – Mostly bai muajjal
Investment Bank and AlFalah & SIBL - Recourse generation - Cash Waqf and
Rescue Financing through various modes
Jordan Islamic Bank Musharaka and Mudaraba
UNCDF Yemen (HMFP) Murabahah and redeemable Mudarabah
Sanabel (12 Arab countries, 64 Murabaha, mudaraba, musharaka
MFIs – meeting 80% of MF
Amana Ikhtiar Malaysia and AIM – interest free loan
Islamic Pawn Broking Al Rahnu – short term interest free loan
against collateral at market value
Pakistan’s Experiences
Institution Mode of Finance
Akhuwat AIM – interest free loan
CWCD Murabahah, Ijarah, Salam & Istisna
NRSP – NWFP Murabahah
Mudarabah with BOK for funding Source
Khawendo Kor Murabahah but in limited scale
Islamic Relief Murabahah and Qarz-e-Hassan
KKCB Murabaha and MicroTakaful

Helping Hand Murabahah

Muslim Aid Murabahah
Takaful Pakistan Limited MicroTakaful
Products for IMFI’s
Islamic Microfinance Institution

. •Germany:2
•- Muslim
•UAE: 8
•- Dubai Islamic Bank
Society •Bahrain: 2 •- Abu Dhabi Islamic Bank2
•United States: 4 •Switzerland: •- HSBC Amanah •- Kuwait Finance
•Kiva 6 House
•UK: • Afghanistan: 4
•Helping Hands
•- HSBC Amanah •- FINCA , WOCCU
•Muslim Aid
•- Muslim Aid •- CHF
•- Islamic Relief • Ariana
•- The Halal Mutual •Iran: 8 •Pakistan: 11
Investment Company •India: 3
•Turkey: 7 •Bangladesh:
•Egypt: 9 •- Faisal Finance 9
•- Alwatany Bank of Egypt Institution •Malaysia: 11
•- Egyptian Saudi Finance •- Ihlas Finance•2 - Pure Islamic Banks
•Sudan: 3 House (Bank Islam, Bank
•Rest - conventional
•Indonesia: 4

•Yemen: 1
Islamic Microfinance Updates

IMFI’s in Afghanistan
A IMFI’s in Pak
Ariana Fin
. Services KKCB
Donors ic
Is lam CWCD

UNDP Kuwait

PPAF Akhuwat
WorldBank fund k or
IDB Ban IR do
Islamic Funds eza we
Me Helping Kh
Int’l IMFI,s Muslim
Is ank
m bd

d one si a
FINCA - Experience in Afghanistan

• FINCA loans are based on Murabaha principles,

they don’t charge interest, but a Profit rate.

• Providing Shariah-compliant loans has made it

possible for FINCA to expand in areas of
Afghanistan where other MFIs have been turned
away for charging interest. According to 2007

• Clients: 41,213
• Village Banks: 5,529
• Portfolio: $8,324,142
• Average loan size: $329
• Staff members: 387
• Clients per CO: 187
WOCCU Experience in Afghanistan

2004 – 2005 WOCCU helped to establish two area-based open bond credit unions in the no
of Afghanistan: Balkh and Jawzjan.
In 2007 , WOCCU has established another five Investment Finance Cooperatives (IFCs)
n the East and South of the Country for Murabaha

Indicators Members of Investment and Finance Cooperatives

Unit of Measure Number
Regions North East Grand
Aqcha Samanga Baghlan Nangarhar Total
Data Disaggregation

Provinces Balkh Jawzjan

Total by Province 2,634 2,612 313 1,027 830 814 8,230

Male 2,267 2,070 305 961 756 737 7,096


Female 367 542 8 66 74 77 1,134


• A UNDP run programme in one of the poorest areas

in Syria.

• 22 self local financial institutions have been

established consisting of 4,691 members

• Each start up is self financed

• When ever repayment is satisfactory, UNDP

provides an additional capital injection

• Profit margin on Murabaha is 2.5%

• A source of income

• Repayment reached 100% by the end of the first

year of operation (Brandsma, 2004)
Islamic Microfinance Deal in

Free from Interest

Asset Based
Financing Micro Takaful

Insure Shariah
Risk Sharing MF

Poverty Alleviation Purity of Contracts Joint Responsibilities

Conventional Micro Finance Islamic Micro Finance

Functions and operations are based Functions and operations are based
on fully man made principles on Sharia’h principles
assured of pre-determined rate of Promote risk-sharing between
interest provider of capital (investor) and user
of funds (entrepreneurs)
Aim at maximising profit without any Aim at maximising profit but subject
restrictions to Sharia'h restrictions
Creditor-Debtor relationship Partners, investor and traders, buyer
or seller relationship
Based on money trading. Money is a Encourage asset-based financing
medium of exchange and not a and based on commodity trading &
commodity Services
Conventional Micro Finance Islamic Micro Finance

It is almost risk free banking and No right of profit if there is no risk

depositor has no risk of losing its involved. The profit and loss sharing
money because interest is depositor may lose money in case of
guaranteed. loss.

It can charge additional money in Islamic banks have no provision to

case of defaulters charge any extra money from the