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ISLAMIC MICRO-FINANCE

ISLAMIC MICRO-FINANCE. ALHAJI MOHAMMED SAWANEH. INTRODUCTION. Islamic Micro-finance has grown significantly over the past 30 years Estimated deposits surpassing $10 trillion in more than 50 countries

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ISLAMIC MICRO-FINANCE

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  1. ISLAMIC MICRO-FINANCE ALHAJI MOHAMMED SAWANEH

  2. INTRODUCTION • Islamic Micro-finance has grown significantly over the past 30 years • Estimated deposits surpassing $10 trillion in more than 50 countries • More than 150 Islamic Banking Institutions are in operation, ranging from pure Islamic Banks to smaller Shariah banking units in conventional banks and investment houses. • Islamic Micro-Finance is slowly but surely been embraced as an alternative to conventional micro-finance. • It is estimated that over 400 million potential micro-finance clients are excluded because of the issue of interest.

  3. DEFINITION • Islamic Micro-Finance is defined as the provision of Shariah Compliant financial and non-financial services to the entrepreneurial poor. • The principles of Islamic Micro-Finance is rooted in Islamic Economics. • In Islam all wealth belongs to Allah and man is only entrusted with these wealth. • Because all wealth belongs to Allah, it is therefore His prerogative to define the use of this wealth • Islamic Banking advocates for risk sharing, prohibition of interest, sanctity of contracts and the investment of capital in only Shariah Compliant activities

  4. Guiding principles of Islamic MF

  5. ISLAMIC MICRO-FINANCE PRODUCTS • 1. MUDARABAH • 2. MUSHARAKAH • 3. MURABAHAH • 4. IJARAH • 5. QARD-AL-HASAN • 6. ISTISNA • 7. SALAM

  6. MUDARABAH • Mudarabah is a trustee-type finance contract under which one party provides the capital for a project and the other party provides the labour and management. • The capital owner is called Rabb-ul-Mal and the person providing the labour and management is called the Mudarib. • In this arrangement, all the capital needed to finance the operation is provided by the Islamic MF while the client provides the expertise, management and labour required for the operation.

  7. CONTINUE.... • Mudarabah contract does not guarantee any fixed rate of return. • The profit which results from this enterprise are shared between the Islamic MF and the entrepreneur according to a prefixed percentage. • In the case of loss, which does not result from negligence or misconduct on the part of the entrepreneur, the Islamic MF has to bear all the losses and the entrepreneur's loss lies in not getting any reward or compensation for his effort. • The moral hazards associated with this product include the following: • Asymmetrical information • A trustworthy entrepreneur is the cornerstone of these arrangements • Keeping records of business performance is a key challenge.

  8. MUSHARAKAH • Musharakah is an investment partnership where the Islamic MF joins another entity to set up a joint venture ,both parties participating in the various aspects of the project in varying degrees. • All providers of capital are entitled to participate in the management but not necessarily required to do so. • The Islamic MF and the partner share in the profits according to the pre-agreed proportions which may be different from the proportion of the capital contributed. • Any losses of the enterprise will be borne by the partner and the Islamic MF according to the capital contribution. • The moral hazards include the following: • Asymmetrical information • Limited knowledge of the bank in various types of business partners would want to venture in • Human resource constraint to participate in the management of the various businesses

  9. murabahah • Murabahah is a sale contract. • It is the provision of a commodity to a customer by the Islamic MF with a mark up on the cost of the commodity. • The basic ingredient of Murabahah is that the seller discloses the actual costs s/he has incurred in acquiring the commodity, and then adds some profit thereon. • The profit may be lump sum or may be based on percentage. • The payment may be balloon payment, on the spot, or deferred instalment. • The popularity of this product lies in its simplicity.

  10. IJARAH • Ijarah is a term of Islamic Fiqh. • Lexically, it means, 'to give something on rent’’. • In Islamic Jurisprudence, the term ‘Ijarah’ is used for two different situations. • In the first place, it means to employ the services of a person on wages given as a consideration of hired services. • The employer is called Mustajir while the employee is called Ajir. • The second type of Ijarah relates to the usufruct of assets and properties. • Ijarah in this sense means the transfer of a particular property to another person in exchange for a rent claimed from him. • Ijarah in this case, is analogous to the English term Leasing.

  11. CONTINUE.... • Here the Lessor is called Mujir and the Lessee is called Mustajirr and the rent payable to the Lessor is called Ujrah. • The rules of Ijarah, in the sense of Leasing is very analogous to the rule of sale, because in both cases something is transferred to another person for a valuable consideration. • The only difference between Ijarah and sale is that in Ijarah the corpus of the property remains in the ownership of the Lessor but only the its usufruct i.e the right to use it, is transferred to the Lessee. • The Islamic MF can use Ijarah to extend milling machines, farming implements ,etc to groups and individuals.

  12. ISTISNA • Istisna: Istisna is a sale contract where a commodity is transacted before it comes into existence. • It means to order a manufacturer to manufacture a specific commodity for the purchaser. • If the manufacturer undertakes to manufacturer the goods for him with the materials from the manufacturer, the transaction of Istisna comes into existence. • But it is necessary for the validity of Istisna that the price is fixed with the consent of the parties and that necessary specifications of the commodity [intended to manufacture] is fully settled between them. • The contract of Istisna creates a moral obligation on the manufacturer to manufacture the goods, but before he starts the work, anyone of the parties may cancel the contract after giving a notice to the other. • However, after the manufacturer has started the work, the contract cannot be cancelled. • Istisna is ideal for funding micro-finance clients involved in cottage industries.

  13. SALAM • Salam means a contract in which advance payment is made for goods to be delivered later on. • The seller undertakes to supply some specific goods to the buyer at a future date in exchange of an advance price fully paid at the time of the contract. • Salam is an ideal product for agricultural financing. • The Salam contract creates a moral obligation on the Salam seller to deliver the goods. • The Salam contract cannot be cancelled once signed. • The Islamic Micro-Finance Institution can enter parallel Salam –that is with small farmers in one hand and a marketing outlet for the commodity on the other hand. • Salam is an exception to one fundamental rule of trade that state that commodity intended to be sold must be in the physical or constructive possession of the seller. • However, without Salam, investment credit will become difficult for poor farmers to access.

  14. QARD-AL-HASSAN • This is an interest –free loan • It is used in Islamic MF to target the very poor. • Money/capital for this product is mainly derived from zakah and donations.

  15. BASIC RULES OF SALE • Asset to be sold must exist • Sale price should be determined • Sale must be unconditional • Asset to be sold should not be used for un-Islamic purpose • Asset to be sold should be in the ownership of the seller at the time of sale

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