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ROLE OF ISLAMIC FINANCE AUSAF AHMAD Hyderabad More than three billion people live below poverty line More than two billion do not have safe water to drink It has been estimated that it would require only $21 bn. to provide micro finance to world’s 100 million most poor families. Poverty could be eradicated from the face of earth if seven richest families could get together. The world does go by charity alone. Why Micro Financing? What is Micro financing? Why interest free micro finance? Some Major Experiments: Emergence of Islamic Banking, MitGhamr Project Grameen Bank Project Micro Financing in India Cooperatives and Micro financing Financial Intermediation between savers and investors Mismatch between the preferences of savers and investors Problems of Moral hazards Problems of Adverse Selection Specialized agencies Failures of organized finance Emergence of Micro financing Micro financing is a term used for providing financial services such as micro credit, micro savings and micro insurance to poor people. Standard finance, credit worthiness, profitability and bankable projects ( Poor people do not have collaterals) Poor people can be relied to pay loans Group liability as a collateral Market mechanism can be productively used to improve the economic conditions of the poor. 1864 Wihelm Raiffesen’s German village Experiment of rural financing 1900 Alphonsoe Desjardin: Quebec Experiment 1963 Mitghamr (Egypt) Project 1970 Grameen Bank (Bangladesh) 1980 onwards: International institutions, NGOs, Multinational banks, financial companies: Widespread acceptability of the idea Established in 1976 in Jobra, Bangladesh by Dr. Mohammed Younus Incorporated in 1983 by Special law Owned by poor borrowers No Collaterals, No legal instruments, No group or joint liability Responsibility of repayment with the individual borrowers, 97% borrowers are women. Number of branches 2000, works in 75,000 villages, Total staff : More than 21,000 Total loans disbursement TK310 bn. Repaid: 277 bn. Outstanding: TK 33 bn. Recovery rate: 98.5 Percent Loans financed 100 percent from own deposits Group of Five, All denied credits if some one defaults Fixed for Micro Credit programs 11 % Housing loans 8% Students loans 5% Struggling members Zero Deposit rates 8.5 – 12% Housing loans, Micro enterprise loans, Scholarships, Higher education loans, 17 Companies in Grameen Network: Grameen phone, Telecom, Communications, Cybernetics, Software, IT Parks, Information highways, Udyog, Knitwear, Textiles, Shiksha, Bayopar Vikas, Grameen Trusts etc. Usurious: High interest rates Exploitative Benefits large corporations Harms family relationships as Grameen model focuses the female members of the house holds only. With 63000 branches of commercial banks, 14000 branches of regional rural banks, 100,000 branches of cooperative banks, banking and finance is still out of reach for millions. More than 75 million households are still dependent on money lenders More than 90 percent rural population has no access to institutional credit Micro Finance can change lives of millions. ! NABARD (National Bank for Agriculture and Rural Development) India Together ARCOD (Association for Rural Community and Development) VMCS (Village Micro Credit Services) The emergence of Islamic banking removes biggest objection (interest) against modern banking The objective of Islamic banking and micro financing coincide. From the objective point of view, Islamic financing techniques are well suited to micro financing. Relevance of Mitghamr project Modern Islamic banks are in the corporate sector, touching only upper crest of the society. Islamic banking movement has yet to benefit from cooperative principles. Tip of the Iceberg. Only a few institutions. Examples: Al Khair Cooperative Society All India Council of Muslim Economic Upliftment Bair al Nasr Housing Society (Now defunct) Beit al Mal Mostly in the organized sector Mostly unregistered. Mobilizes small savings from small wage earners Develop saving habits and frugality Small investment Interest free loans in times of distress Advance of loans against collaterals (Mosly rahn of Jewelry, house, or land) Reorganization of Islamic finance institutions along the cooperative lines. Democratic Participation and Control Open Membership Cooperative Education Cooperative Cooperation Insulation from Competition from the corporate sector Less regulated, More Incentives More elastic with respect to size More amenable to different purposes More decentralized Less paper work Channelization of individual initiatives and voluntary efforts: Working through self help groups NABARD STUDY FINDINGS Value of assets increased by 72 % Average borrowing increased from Rs 4,000 to Rs. 8,000 per borrower with 70% loans for income generating activities. Household income increased by 33% Professionalism Rate: Responsibility Accountability Transparency Efficiency MAY ALLAH BLESS YOU ALL!