Islamic Mirofinance Model

10 Core components of Islam Microfinance

8/14/2011 Farhat Shah

Islamic Microfinance Model, 10 core components By: Farhat Abbas Shah The practitioners, professionals and scholars of Islamic Microfinance are facing a challenge to draw a standard Islamic Microfinance Models out line, which could encircle the needs and issues of the social and commercial both modes of poverty alleviation. A sustainable faithbased microfinance model is the real requirement of the industry, which has been expected from conventional models also and obviously not fulfilled according to the necessity. In case of a faith based model the situation is very interesting because it is not totally depended on product development experts, who have demonstrated their expertise by developing poverty alleviation products in the recent past. Although it apparently seems a matter of conflict between conventional microfinance minded professionals and faith-based philosophy of poverty alleviation, but there is a commonality between three major religions of the world Islam, Christianity and Judaism, which can provide a great agreement upon faith-based microfinance. The three above-said religions condemn the interest in any case. If, for a moment, we understand and agree to the case, we easily will move a step forward. We kick a bundle of confusions when we try to get the same gains with the similar approach through a different and totally contrary source. The point vital to comprehend is a difference between the principles of God and the strategies of a man. Even for a non believer, it is important to understand the universal will of prophets and the effort for social justice of a financial expert. Not any religion forbids to earn a reasonable profit but obviously with an objective of benefit for all. Where the buyer and a seller both could get equal benefits. Regarding the benefits, it is so difficult for individuals but institutions provide this kind of justice at some extent conditioned with the availability of a true leadership. The second core component of the faith-based Microfinance is the partnership on profit and loss sharing. Without believing in the principle of profit and loss sharing and without abiding by the law, it is impossible to attain high profits for each partner. Third and the forth are the honesty and transparency principles. Any business cannot be a successful business for a long term without honoring these values.

The fifth principle is to avoid the acts. Shariah forbids from (Haram). Because if someone mixes Halal and Haram, it damages the real spirit of the code and ultimately spoils the whole system. To avoid the uncertainty, doubt and ambiguity and keeping the business clean and clear, is also the part of the model as the sixth component. Because it saves you from a lot of issues and conflicts. Keeping a will sacrifice or volunteerism as the seventh principle also plays a very productive role as a social responsibility. The eighth component is the cushion for the vulnerable in any cast is also important. It means there is not any space for the policy of zero percent tolerance, particularly in case of poor community and when you are claiming to help and support. Ninth, to please the God or the work for goodness and betterment of the mankind, humanity, peace and justice, is the nucleus of any faith-based business, so that it cannot be neglected in this case. The emphasis on women and childrens betterment could be mention as tenth component jointly with the culture of equality from the staff to the clients and from the clients to the community and society is the a basic principle of the Islamic code. Although where as the policies are concerned, there are a lot of aspects common in conventional and faith-based models, but unfortunately, it never found in practice. No doubt there is a long term profitability with a sustained way, though, a strong belief system is inevitable to make this model successful. Otherwise right after 25 years there can be another economic blast to push the global economy in a more complicated crisis. The structural format also needs a different architecture for faith based or a socially responsible microfinance. Without including Zakah, Sadaqat, Khairat (social funding), Qarz e Hasna ( With its true application and not as a few organizations are doing with document charges, time bound and forced donations etc.), it is hard to find the original silhouette and finally the partnership with the poor on profit and loss basis it is difficult to get the real original and long term profitability from the Model. It will certainly bridge the development and microfinance in very productive ties. Just imagine if billions of poor may able to just sustain their livelihoods and become a productive part of the global economic mainstream, how big the impact they could create. Unfortunately, most of the sector players are trying to only provide a resolve, which could be felt as faith-based Microfinance Model. They are also trying use Shariah scholars to get solutions but not the true structure. It is most critical that the practitioners seek more liberty to cross the boundaries or to get a sincere guidance from original people only for taking advantages by setting and inducting their own policies even with the consent of stretchable Shariah scholars. Ultimately, it will hit the system and will create hidden issues, which can make the plane crash. While the faith-based systems have the power of a long-lasting sustainability. Faith never stops getting rewards and profits. It bounds to make justice for investor, worker and consumer all of them. Profit and loss sharing mode has a miraculous potential of high profits. Farz Foundation is passing through a novel experience of counting high profits in the

field of livestock micro financing on a profit and loss sharing basis. However, socially responsible microfinance demands a right direction towards the goal through a pure professional and socially responsible approach. Faith based mean faith based. The amalgamation will destroy the all kinds of investments. What I am seeing in near future, two kinds of faith-based microfinance models as pure Islamic model, like Farz Foundation and a mix model with a blend of conventional and Islamic model. Where the experts will try to present a resolve of Shariah Issues. While the Farz Foundations model will cater not only the pure Islamic market but will achieve the genuine benefits of the model and set a milestone of success to provide the economic benefits for all above creed or color and irrespective of focusing on any religion. Earning with poor, not earning from poor (10 Core Components of Islamic Microfinance part 2)

10 core components of Islamic Microfinance Model requires a bit elaboration of the prohibitions also. When we enter in Poverty alleviation scene through any Islamic model, we cant exclude Zakah, Qarz e Hasna, and Sadqah Khairat. The microfinance professional who believe in microfinance as a social business will agree that the earning high profits by the partnership with the poor is better than earning from the poor. If we claim that we wish to make the poor productive but we did do not develop the mechanism and can not assure the productivity of the poor, how we can expect the required results even from the mechanism we implement. According to CGAP Microfinance Gateway, the study Non-Productivity of Microfinance Loans in Pakistan by Mazhar M.(4 Sep 2010 microfinance gateway) examines the productivity of microfinance loans in Pakistan. It compares the success of Islamic microfinance lending methodology in Pakistan to that of conventional lending. The study is based on field work with foundations and bank clients, and data obtained from MFI and microfinance bank employees. It discusses:

Principles and objectives of microfinance; Challenges faced by Pakistans microfinance sector; Principles and methodologies of microcredit; Microfinance programs in Pakistan; Comparison of microfinance methodologies in Pakistan; Principles of Islamic microfinance; Difference between productive and non-productive loans; United Nations Millennium Development Goals.

The study illustrates the asset delivery methodology (Farz methodology) developed by the Farz Foundation. It compares data from conventional and Islamic MFIs in Pakistan on aspects such as staff behavior, facilities offered by MFIs, loan type preferred by clients, impact of loans on microenterprises and poverty, and productivity of loans. It identifies characteristics of a successful MFI and emphasizes the importance of trust-building with clients. The study states that MFIs in Pakistan should focus on attaining the Millennium Development Goals. Why the organizations lost their trust among the borrowers? Because they remain unsuccessful to make them productive, while the didnt stop taking profits from them. The most important impact of Islamic Mechanism of poverty alleviation is that it justifies the loses and profits in a very humanistic way to make an economic justice for every one either he or she is an investor or service provider or partner. The prohibition of usury, actually based on this above mentioned philosophy. Interest based financial tools can not focus on any ones productivity. They keep watching only one-sided profitability. There is an issue of taking some profit on Qarz e Hasna prevails as a hidden syndrome can be observed in a few of Islamic Microfinance organizations. But a number of Muftees are not ready to digest it as a Halal transaction according to the Qarz e Hasna Principals. The turning of Zakah into Qarz Hasna is already an interrogative sign for Ulema ( Muslim scholars). Here we can see, what Islam says about Zakah and Qarz e Hasna as followed.

Literally Zakah means Blessing, purification, increase and goodness. It is so called as it blesses the wealth from which it is taken and protects it from misfortunes. Ibn Taimiah said, "The soul of one who gives Zakah is blessed and so is his wealth." Technically Zakah is defined as "A determined portion taken from wealth and allocated to those deserving it, by a Qur'anic injunction." Sometimes Zakah is referred to in the Holy Qur'an as Sadaqah (alms). The Qur'an says, "Of their goods take alms, that so thou mightest purify and sanctify them; and pray on their behalf, verily thy prayers are a source of security for them." (Surah Al-Taubah, No.9, Verse: 103). In an authentic hadith, the Prophet (peace be upon him) said to his Companion Mu`adh, when he was sent to Yemen as governor, "Tell them that Allah has made Zakah obligatory for them, that it should be collected from the rich and distributed among the poor." It is clear that there is not any modification is allowed in the case of Islamic Principles. Only unclear matters can be brought under Ijtehad.

Ijtihad (Arabic: , itihd) is the making of a decision in Islamic law (sharia) by personal effort (jihad), independently of any school (madhhab) of jurisprudence (fiqh).[1] as opposed to taqlid, copying or obeying without question. It is mainly associated with the Shi'a Muslim Jafari school of jurisprudence. To be valid and accepted it has to be rooted in the Qur'an and the hadith and it is required that no established doctrine rules the case. A mujtahid is an Islamic scholar who is competent to interpret sharia by ijtehad( Wikipedia ) In Islamic law, the analysis of problems not covered precisely in the Qur'an, the Hadith, or the scholarly consensus called the ijma'. In the early Muslim scholarly community, every jurist had the right to exercise such original thinking, but the growth of legal schools prompted Sunnite Muslim authorities to declare that the principal legal issues had been settled by the 10th century. Shi'ite Muslims have always recognized ijtihad, and jurists considered learned enough for this kind of analysis have great authority. In the 20th century an attempt was made to restore ijtihad among Sunnites to help Islam adapt to the modern world. The directions about Zakah and Qarz e Hasna are very clear and they dont need any more elaboration or explanation. So that to translate them according to any ones strategy is not only a sin but a social crime also, because instead of providing kind hearted donors an awareness, taking benefit of their unawareness can not be call a social work. In the long run it can be a media blast like the Norwegian Govet and professor Yunus story of misusing the aids funding. Qarz e Hasna also can not be used as a loan. Any kind of benefit against Qarz e Hasna is strictly prohibited. The lender of Qarz e Hasna can not bound the beneficiary to pay within a particular time period. It is upon the borrowers discretion that when he pay back the loan. May be till his or her economic sustainability. There is still a dilemma of Islamic Banks that they are not willing to become a partner on profit and los basis instead of a lender. In Pakistan Punjab province assembly has passed a bill against lending money on interest basis and a committee has been formed ( Shariah compliant loaning to the farmers ) to bridge the Islamic Banks and the formers. Ms. Humaira Awais the member board of advisers of Farz Foundation is the key person to make this milestone effort successful. So the basic philosophy is an Islamic microfinance Model is to earn money or to get big profits by making the poor partners not by pulling them under debt. So it must be keep in mind that EARNIN WITH POOR, NOT EARNING FROM POOR.

Part 2. Earning not from poor, with poor

10 core components of Islamic Microfinance Model requires a bit elaboration of the prohibitions also. When we enter in Poverty alleviation scene through any Islamic model, we cant exclude Zakah, Qarz e Hasna, and Sadqah Khairat. The microfinance professional who believe in microfinance as a social business will agree that the earning high profits by the partnership with the poor is better than earning from the poor. If we claim that we wish to make the poor productive but we did do not develop the mechanism and can not assure the productivity of the poor, how we can expect the required results even from the mechanism we implement. According to CGAP Microfinance Gateway, the study Non-Productivity of Microfinance Loans in Pakistan by Mazhar M.(4 Sep 2010 microfinance gateway) examines the productivity of microfinance loans in Pakistan. It compares the success of Islamic microfinance lending methodology in Pakistan to that of conventional lending. The study is based on field work with foundations and bank clients, and data obtained from MFI and microfinance bank employees. It discusses:

Principles and objectives of microfinance; Challenges faced by Pakistans microfinance sector; Principles and methodologies of microcredit; Microfinance programs in Pakistan; Comparison of microfinance methodologies in Pakistan; Principles of Islamic microfinance; Difference between productive and non-productive loans; United Nations Millennium Development Goals.

The study illustrates the asset delivery methodology (Farz methodology) developed by the Farz Foundation. It compares data from conventional and Islamic MFIs in Pakistan on aspects such as staff behavior, facilities offered by MFIs, loan type preferred by clients, impact of loans on microenterprises and poverty, and productivity of loans. It identifies characteristics of a successful MFI and emphasizes the importance of trust-building with clients. The study states that MFIs in Pakistan should focus on attaining the Millennium Development Goals. Why the organizations lost their trust among the borrowers? Because they remain unsuccessful to make them productive, while the didnt stop taking profits from them. The most important impact of Islamic Mechanism of poverty alleviation is that it justifies the loses and profits in a very humanistic way to make an economic justice for every one either he or she is an investor or service provider or partner. The prohibition of usury, actually based on this above mentioned philosophy. Interest based financial tools can not focus on any ones productivity. They keep watching only one-sided profitability. There is an issue of taking some profit on Qarz e Hasna prevails as a hidden syndrome can be observed in a few of Islamic Microfinance organizations.

But a number of Muftees are not ready to digest it as a Halal transaction according to the Qarz e Hasna Principals. The turning of Zakah into Qarz Hasna is already an interrogative sign for Ulema ( Muslim scholars). Here we can see, what Islam says about Zakah and Qarz e Hasna as followed.

Literally Zakah means Blessing, purification, increase and goodness. It is so called as it blesses the wealth from which it is taken and protects it from misfortunes. Ibn Taimiah said, "The soul of one who gives Zakah is blessed and so is his wealth." Technically Zakah is defined as "A determined portion taken from wealth and allocated to those deserving it, by a Qur'anic injunction." Sometimes Zakah is referred to in the Holy Qur'an as Sadaqah (alms). The Qur'an says, "Of their goods take alms, that so thou mightest purify and sanctify them; and pray on their behalf, verily thy prayers are a source of security for them." (Surah Al-Taubah, No.9, Verse: 103). In an authentic hadith, the Prophet (peace be upon him) said to his Companion Mu`adh, when he was sent to Yemen as governor, "Tell them that Allah has made Zakah obligatory for them, that it should be collected from the rich and distributed among the poor." It is clear that there is not any modification is allowed in the case of Islamic Principles. Only unclear matters can be brought under Ijtehad. Ijtihad (Arabic: , itihd) is the making of a decision in Islamic law (sharia) by personal effort (jihad), independently of any school (madhhab) of jurisprudence (fiqh).[1] as opposed to taqlid, copying or obeying without question. It is mainly associated with the Shi'a Muslim Jafari school of jurisprudence. To be valid and accepted it has to be rooted in the Qur'an and the hadith and it is required that no established doctrine rules the case. A mujtahid is an Islamic scholar who is competent to interpret sharia by ijtehad( Wikipedia ) In Islamic law, the analysis of problems not covered precisely in the Qur'an, the Hadith, or the scholarly consensus called the ijma'. In the early Muslim scholarly community, every jurist had the right to exercise such original thinking, but the growth of legal schools prompted Sunnite Muslim authorities to declare that the principal legal issues had been settled by the 10th century. Shi'ite Muslims have always recognized ijtihad, and jurists considered learned enough for this kind of analysis have great authority. In the 20th century an attempt was made to restore ijtihad among Sunnites to help Islam adapt to the modern world. The directions about Zakah and Qarz e Hasna are very clear and they dont need any more elaboration or explanation. So that to translate them according to any ones strategy is not only a sin but a social crime also, because instead of providing kind hearted donors an awareness, taking benefit of their unawareness can not be call a social work. In the long run it can be a

media blast like the Norwegian Govet and professor Yunus story of misusing the aids funding. Qarz e Hasna also can not be used as a loan. Any kind of benefit against Qarz e Hasna is strictly prohibited. The lender of Qarz e Hasna can not bound the beneficiary to pay within a particular time period. It is upon the borrowers discretion that when he pay back the loan. May be till his or her economic sustainability. There is still a dilemma of Islamic Banks that they are not willing to become a partner on profit and los basis instead of a lender. In Pakistan Punjab province assembly has passed a bill against lending money on interest basis and a committee has been formed ( Shariah compliant loaning to the farmers ) to bridge the Islamic Banks and the formers. Ms. Humaira Awais the member board of advisers of Farz Foundation is the key person to make this milestone effort successful. So the basic philosophy is an Islamic microfinance Model is to earn money or to get big profits by making the poor partners not by pulling them under debt. So it must be keep in mind that EARNIN WITH POOR, NOT EARNING FROM POOR. -----------------------------------------------------------------------------------------------