Banking for the Poor, the role of Islamic Banking in Microfi
From HodHood
Contents
Top 20 FREQUENT WORDS
islamic 108 microfinance 73 financial 69 banking 57 financing 51 social 39 banks 37 spv 34 funds 30 development 26 credit 24 services 24 vol 23 finance 22 institutions 22 based 21 economic 21 rural 20 costs 19 intermediation 17
DOCUMENT KEY POINTS
- with such an impressive growth of islamic banking over the last years this paper argues that it is time for the industry to be reoriented to emphasize on issues relating to social and economic ends of financial transactions rather than overemphasizing on making profits and meeting the bottom line alone
- as formal lenders risk averse banks would only be willing to lend if these two elements serving as a basis of trust exist in their reciprocal relationship with clients as borrowers
- the uncertainty regarding the ability of borrowers to meet future loan obligations inability to monitor the use of funds and demand for small sum of loans by the rural households further reinforces the higher units of transaction costs which is characterized by fixed costs braverman and guasch zeller and meyer
- these traditional formal lenders faced with borrowers whom they do not personally the poor know who do not keep written accounts or a a business plans and who want to borrow small and uneconomic sums jacklen thus exposing them to very high risks due to the inherent screening problems faced by the lenders at the same time make the project appraisal become too expensive rhyne and otero
- thus social intermediation is defined as a a a process in which investments are made in the development of both human resources and institutional capital with the aim of increasing self reliance of marginalised groups preparing them to engage in formal financial intermediation bennett et al pitt and khandker
- social intermediation is different from other common types of social welfare services because it offers mechanism enabling beneficiaries to become clients who should then ready to enter into a contract involving reciprocal obligations
- by playing the role of social intermediation bank is not only building self reliant groups of poor people in rural areas with related skills that could foster long term business relationship but also exploiting cost advantage of informal monitoring and enforcement systems in the long run which is inevitably important for a more efficient and effective role of financial intermediation
- the self selected group members share a common interest in gaining access to credit and savings services and possess enough low cost information to adequately screen each other and apply sanctions to those who do not comply with the rule
- again trust social capital plays a paramount role in the formation of group lending success particularly in the absence of collateral besley and coate bhatt and tang collier krishna et al narayan and pritchett otero and rhyne stiglitz zeller and sharma
- the values as prevailed within the ambit of shariah are expressed not only in the minutiae of their transactions but in the breadth of their role in society as a manifestation of religious belief and a commitment to addressing the issue of income inequality poverty eradication and social justice
- islamic banking approach to microfinance concern over credit provision and finance accessibility for the poor via microfinance is also relevant to islamic banks that should place greater social welfare responsibilities and religious commitments to achieve the islamic economic objectives including social justice equitable distribution of income and wealth and promoting economic development
- in addition to the innovative approaches used by many microfinance institutions islamic banking can apply diverse financial instruments together with other available mechanisms such as zakah charity and waqf which can be integrated into microfinance programmes to promote entrepreneurship amongst the poor and subsequently alleviate poverty akhtar al harran alharran al zamzami and grace dhumale and sapcanin hassan and alamgir
- it can be used to resolve the issue of financing the poorest of the poor or hardcore poor who normally require certain amount of funds for their basic consumption purposes
- the need to focus on demand oriented financial services induces them to greater institutional and programmes innovation especially in products differentiation operation efficiency and more outreach improvement
- there must also be no provision in the constitutional documents of the spv giving the sponsoring bank a right to control the affairs of the spv
- these instruments can be broadly divided into participatory profit loss sharing modes like mudarabah and musharakah exchange muawadat modes like murabahah cost plus sale bay bithaman a ajil deferred payment sale bay al salam forward sale and bay al istisna commission to manufacture sale ijarah leasing voluntary charitable contract tabarru such as pawning contract arrahn and benevolence loan qard al hassan and hybrid modes like diminishing partnership musharakah mutanaqisah hire purchase ijarah thumma al bay etc
- this financing mode is suitable for bithaman equipment or goods requested by the clients are bought by the bank working capital financing fixed asset a ajil which subsequently sells the goods to the client at an agreed price which purchased project financing etc
- mudarabah an agreement made between two parties one which provides per cent this financing mode is suitable for of the capital for the project and another party known as a mudarrib who working capital financing fixed asset manages the project using his entrepreneurial skills
- voluntary ar rahn a pawning contract which involves holding a valuable non fungible good this financing mode is suitable for all charitable as insurance against a debt where the non fungible may be used to purposes including working capital contract extract the value of the debt or part thereof
- ijarah this instrument involves two separate contracts namely leasing and sales this financing instrument is suitable for thumma contracts executed separately and in sequence
- the benefits to the bank will be lost if the accounts of the spv are consolidated with those of the selling bank
- perhaps after more than years of impressive growth it is time for the industry to be reoriented to emphasize on issues relating to social and economic ends of financial transactions rather than overemphasizing on making profits and meeting the bottom line alone
- the values as prevailed within the ambit of shariah are expressed not only in the minutiae of its transactions but also in the breadth of its role in society
- among others building human capacity through social intermediation and designing group based lending programmes are proven to be among the effective tools to reduce transaction costs and lower exposure to numerous financial risks in relation to providing credit to the rural poor
- in such arrangement stiglitz argued that the grameen bank devised an incentive structure called a a peer monitoring whereby the others within the village do the monitoring on their behalf by exploiting the local knowledge of the members of the group
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DOCUMENT WORD ANALYSIS
Main Category
- AlHuda Material\islamic micro
KeyWords
islam finance fund mfis institute developed agricultural financial bankable oper credit rate client econometric mfi loan program beneficiarie imfi sustain
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DOCUMENT REFERENCES
Number of Pages
18
Published Date
2008-02-15 16:55:33
