Religiosity and threshold effect in social and financial

performance of microfinance institutions

Mohammad Ashraful Mobin

SHARIA PRINCIPLES,

OPERATIONAL MECHANISM AND MARKETING

STRATEGY FOR ISLAMIC MICROFINANCE.

Presented by: Jaafar

Mohammad

Islamic Microfinance
Micro finance has been defined As the provision of financial
services to low- income people the definition has two
important aspects
- provision of financial services and;
- low income people.
The target group has always been the low income people,
commonly referred to as the un-bankable who traditionally
have been excluded from the financial services due to their
high risk and lack of collateral.
SHARIA PRINCIPLES,
OPERATIONAL MECHANISM AND MARKETING STRATEGY FOR ISLAMIC MICRO FINANCE.

Religiosity and threshold effect in social and financial

performance of microfinance institutions

Mohammad Ashraful Mobin

Religiosity and threshold effect in social and financial

performance of microfinance institutions

Mohammad Ashraful Mobin

Religiosity and threshold effect in social and financial

performance of microfinance institutions

Mohammad Ashraful Mobin

Islamic Microfinance
According to multiple market surveys, Muslim population

tend to have a high rate of rejection to conventional Microfinance, hence impeding financial inclusion process.

According to CGAP paper back in 2008, suggested that

almost 40% potential micro-finance clients reject non sharia

compliant loans.

The rejection is mainly driven by religious factors mainly

avoidance of Riba (Interest)

SHARIA PRINCIPLES,
OPERATIONAL MECHANISM AND MARKETING STRATEGY FOR ISLAMIC MICRO FINANCE.

Islamic
Islamic MicroFinance
Microfinance
Micro
been defined
As in global
the
Muslim finance
populationhas
proportionately
rank high
poverty, with
half a billion
living to
on under
per
provision
of over
financial
services
low- 2USD
income
day.
people
the definition has two important
aspects
Many struggle to access liquidity, manage savings and
- provision
of financial services and;
expand
their micro business.
- low income people.

Conventional micro finance assist the un-bankable or micro

finance clients -female heads of house holds, pensioners,
The
target
group
has always
the low
displaced
persons,
retrenched
workers, been
small farmers
and
micro entrepreneursaccess funds
and achieve
their
income
people, commonly
referred
to as the
dreams, Islamic micro finance in addition to that, assist
unbankable
who traditionally have been
those who reject conventional micro loans, access funds
excluded
fromcompliant
the financial
through Sharia
means. services due to their

high risk and lack of collateral.

SHARIA PRINCIPLES,
OPERATIONAL MECHANISM AND MARKETING
STRATEGY FOR ISLAMIC MICRO FINANCE.
SHARIA PRINCIPLES,
OPERATIONAL MECHANISM AND MARKETING STRATEGY FOR ISLAMIC MICRO FINANCE.

Islamic Microfinance

Islamic Micro finance can hence be understood as a

provision of financial services to low income people in
accordance with sharia principles.
The micro finance module has, to a great extent, the same
objectives of sharia, which revolves on:
Reduction of poverty
Team work
Equity
Social and economic empowerment
SHARIA PRINCIPLES,
OPERATIONAL MECHANISM AND MARKETING STRATEGY FOR ISLAMIC MICRO FINANCE.

Sharia Principles
Introduction

Sharia is a body of legal framework within which public and

private life of Muslims is regulated
Sharia has two primary sources and two secondary sources,
the primary sources are;
- The holy Quran
- The prophetic tradition (Al Sunnah)
The secondary sources are:
- The Ijma ( Juristic Consensus)
- Qiyas ( Analogy)
SHARIA PRINCIPLES,
OPERATIONAL MECHANISM AND MARKETING STRATEGY FOR ISLAMIC MICRO FINANCE.

The Sharia Principles

Objectives of Sharia.

Scholars have enumerated five main objectives of Sharia

under which all issues rotate around. These are;
-

Protection of Religion
Protection of life
Preservation of Intellect
Preservation of progeny
Protection of Property/ Wealth.

The five objectives are summarized in one main objective of

perpetuating good and warding off evil
SHARIA PRINCIPLES,
OPERATIONAL MECHANISM AND MARKETING STRATEGY FOR ISLAMIC MICRO FINANCE.

Sharia Principles

Sharia has a defined body of rules and regulations relating to

commercial transactions normally referred to as Fiqh al
muamalat.
These rules are mainly derived from the main Sharia
objective of property/ wealth preservation.
Sharia has developed means that assist in poverty reduction
and alleviation:

SHARIA PRINCIPLES,
OPERATIONAL MECHANISM AND MARKETING STRATEGY FOR ISLAMIC MICRO FINANCE.

Sharia Principles

Sharia has also advocated for fair trade and commerce and
redistribution of wealth among people and has taken
different measures which include:
positive measures:
- Income growth- Through work and proper spending
- Distribution of income acknowledging different
groups in zakat
- Equal opportunities by supporting profit sharing

Preventive measures:SHARIA PRINCIPLES,

OPERATIONAL MECHANISM
AND MARKETING STRATEGY
FOR ISLAMIC
MICRO FINANCE.
- Prevention
of malpracticesRiba,
hording,
gambling
e.t.c

Sharia Principles

Corrective measures
- compulsory Zakat
- Charity

There are specific Sharia principles that govern commercial

transactions including micro-finance, which are;

Prohibition of Riba ( Interest): All form of interest is not

allowed. This is because, Riba is mainly money paid for use
of money, and which money is not a commodity from a
Sharia point of view.
SHARIA PRINCIPLES,
OPERATIONAL MECHANISM AND MARKETING STRATEGY FOR ISLAMIC MICRO FINANCE.

Sharia Principles

Business risk must be taken to justify any income. The

principle is also known as al kharaaju bi dhaman.
Transactions must be free of excessive uncertainty or
ambiguity also known as Gharar al faahish.
No Gambling (Maysir) is allowed, as it amounts to having
ones property unjustly.
No exploitation. This can either be through lack of
understanding of the market or misrepresentation of facts by
parties.
SHARIA PRINCIPLES,
OPERATIONAL MECHANISM AND MARKETING STRATEGY FOR ISLAMIC MICRO FINANCE.

Sharia Principles
Prohibition of trading in unlawful goods or services.
Its socially responsible. By working to minimize liabilities
through hawala, al ibraa, extension of time for the distressed
customer.

SHARIA PRINCIPLES,
OPERATIONAL MECHANISM AND MARKETING STRATEGY FOR ISLAMIC MICRO FINANCE.

Operational mechanism

Islamic microfinance operates within clear Shariah contracts.

These include:

Debt based contracts

Equity based contracts

The debt based contracts are:

-

Qard hassan
Murabaha
Salam
Ijara
SHARIA PRINCIPLES,
OPERATIONAL MECHANISM AND MARKETING STRATEGY FOR ISLAMIC MICRO FINANCE.

Operational mechanism
Qard hassan:
This is a kind of borrowing where there is no expectation
from the lender other than receiving of his Principle amount.
It is a benevolent loan. Qard Hassan is the second most used
contract in financing Microfinance.

Murabaha:
This is cost-plus mark up financing. Where a financial
institution purchases an asset and sells it to the customer
with a mark up.

According to CGAP survey,

this is the most highly used
SHARIA PRINCIPLES,
contract. OPERATIONAL MECHANISM AND MARKETING STRATEGY FOR ISLAMIC MICRO FINANCE.

Operational mechanism

Salam:
This is a forward contract. An advance payment is made
against future delivery of commodity. Its mainly used in
Agricultural context but its being extrapolated to other
areas.
Ijara:
This is a leasing contract where a financial institution leases
an asset to a client for a period of time and mostly, sells the
asset thereafter to the customer at the end of the lease
period.
SHARIA PRINCIPLES,
OPERATIONAL MECHANISM AND MARKETING STRATEGY FOR ISLAMIC MICRO FINANCE.

Operational mechanism

Equity based contracts include:

Mudharaba:
This where a financial institution offers working capital and
the other party offers the work and management of the
business. Profits are shared according to predetermined
ratios. Any losses are bared entirely by the financial
institution.
Musharaka:
This is equity participation in a business venture in which
parties share profits and losses according to predetermined
rations.
SHARIA PRINCIPLES,
OPERATIONAL MECHANISM AND MARKETING STRATEGY FOR ISLAMIC MICRO FINANCE.

Operational mechanism

The above named contracts have their challenges in This is

due to their inherent features.
The equity based contract always brings forward challenges
related to Capital erosion, impairment and credit risk which
can also be high if the customer is not managed properly.
The debt based contracts brings forward
credit
displacement risk and high operational costs due to their
interactive operational nature mainly: Salam, Murabaha and
Ijara, and erosion of capital incases of Qard hassan.
SHARIA PRINCIPLES,
OPERATIONAL MECHANISM AND MARKETING STRATEGY FOR ISLAMIC MICRO FINANCE.

Operational mechanism

Multiple risk mitigation mechanism have been developed to

ensure smooth running of business. These include:

Credit Guarantee by a third party other than the

partners in equity based contracts.
Performance guarantee in Murabaha contracts.
Training and educating the customers in basic book
keeping and accounting.
SHARIA PRINCIPLES,
OPERATIONAL MECHANISM AND MARKETING STRATEGY FOR ISLAMIC MICRO FINANCE.

Marketing strategy
What is marketing all about?
Marketing is all about acquiring new customers and retaining
the existing ones. This is achieved through:

Knowing your customer needs.

Knowing your competitor.
Knowing your business environment.
This three areas will help an institution identify, anticipate
and satisfy customers needs profitably.

What to consider in a strategy:

1. The kind of target market:
New market
Developing market
Developed market
SHARIA PRINCIPLES,
OPERATIONAL MECHANISM AND MARKETING STRATEGY FOR ISLAMIC MICRO FINANCE.

Marketing strategy

By understanding the market type, the institution will

appreciate the level of potential demand.

2. The nature of the Institution:

Microfinance institutions are not homogenous in nature and
have various goals and target group.

Islamic Microfinance need to develop creative marketing

plans to enable them penetrate the markets and attract
customers.

SHARIA PRINCIPLES,
OPERATIONAL MECHANISM AND MARKETING STRATEGY FOR ISLAMIC MICRO FINANCE.

Marketing strategy
The marketing plan should work to ensure;

Proper pricing
Sustainability
Innovation
Prioritizing clients

There are two main challenges:

Poor awarenessThey customers are not aware of the institution.
Poor understanding: they dont know how it works and the
various products.
SHARIA PRINCIPLES,
OPERATIONAL MECHANISM AND MARKETING STRATEGY FOR ISLAMIC MICRO FINANCE.

Marketing strategy
The way forward.
The Islamic microfinance should adopt an innovative way to
address the marketing gap through:

Personalized interaction
Sales promotions
Direct marketing
Advertisement

SHARIA PRINCIPLES,
OPERATIONAL MECHANISM AND MARKETING STRATEGY FOR ISLAMIC MICRO FINANCE.

THE END
THANK YOU

Presented by: Jaafar

Mohammad

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