Dr. Kazi Abdur Rouf Associate Professor Noble International University

1. Islamic Sharia-based Group Micro lending Initiative and Implementation Trajectory Experience in Afghanistan Dr. KaziAbdurRouf Associate Professor Noble International University Noble Institution for Environmental Peace (NIEP) Canada. And Visiting Scholar Comparative, International and Development Education Center (CIDEC) University of Toronto Presented at University of Toronto Date July 04, 2013

2. Topics Discuss about UNHCR funded Grameen Islamic Sharia-based group microcredit implementation experience in Kandahar in 1996-1997. Describes Islamic Sharia-based Financing and Banking Scholarships Their connection to the adaption of the Islamic micro financing services in Kandahar

3. Background of the Project UNHCR Afghanistan intended to replicate Grameen type group microcredit program in Afghanistan To rehabilitate returning refugees and to address the issue of Afghan acute poverty. UNHCR hoped that the implementation success of the project would be replicated in other places of the world, which were dealing with refugees. Political leadership (1996-1997) expressed their willingness to invite and support the Grameen microcredit replication programme in Kandahar. GB prepared a project proposal for Afghanistan in June 1996. GB Bangladesh two staffs was seconded (including the author as Project Director) from GB to work in the project for three years.

4. Background of the Project continue-2 The project hired seven local people to work on the grassroots in Kandahar with the aim that the project would ultimately be run in phases according to Islamic Sharia by local personnel. Before designing and implementing the project team (1) reviewed the existing Group Guaranteed Lending and Saving (GGLS) projects undertaken by SCF (USA) in Mazar-I-Sharif and sharia based lending system in Afghanistan. The political leadership suggested the program to follow Sharia Law which was the common practices of the people in the area. The Governor of Kandahar confirming authorities official agreement (June ‘96) for Grameen to establish its microcredit program in Kandahar following Sharia law micro financing.

5. Issues and Challenges Developing and implementing new Islamic financial products in compliance with the Sharia in an unstable political and economic situation is challenging. Lack of uniform understanding among political authorities in regards to microenterprise development through micro financing Pace of innovation within Islamic Shariah micro financing modality has been slow. Hyperinflation of the local currency.

6. Methodology Extensive literature review and rigorous consultations with Islamic banks, financial agencies and Afghan authorities (Shuras) in the areas of Islamic Financing and Banking Authors working experience on Islamic micro financing project implementation in Kandahar.

7. Objectives To understand and adoption of Islamic Sharia-based micro financing compared to Islamic general financing in Kandahar. To determine the factors that affect Islamic banking adoption in Afghanistan To explain different types of Islamic financial transactions systems To revisit actions and experience received in Islamic micro financing services.

8. Project Components Project has two broad components: (1) the lending components, (2) the non-lending components. Lending components include provision of credits to targeted clients for generating income generating activities among loan receivers. Non-lending component comprises: (1) institutional and office development: procurement of equipment, vehicles and furniture, (2) project training, (3) project monitoring and evaluation, (4) clients’ basic literacy and numeracy skills development.

9. Basic Framework and Basic Instruments in Islamic Financing Islamic financial system is called Shariah. Risk sharing is the basic principle of Islamic investments. Because interest is prohibited, suppliers of funds become investors instead of creditors. Islamic rules on transactions (known as Fiqh al-Muamalat) Islamic financing basic instruments include Cost-plus financing (murabaha), Profit-sharing (mudaraba), leasing (ijara), Partnership (musharaka), and Forward sale (bai’ salam). These instruments serve as basic building blocks for developing a wide array of financial instruments. Project used these basic concepts and adopted tailoring to local context

10. Sharia Scholarships with Regards to Islamic Financing/ Banking Basic principle of Islamic banking is based on risk-sharing Keep away from all financial businesses that are sinful and socially irresponsible Sharing either a loss or gain in a financial transaction is a fundamental principle of Sharia compliance. Forbids lending out money at interest (riba), Islamic rules on transactions: Fiqh al-Muamalat) created to prevent evil. Cost plus (Mudharabah), safekeeping (Wadiah), joint venture (Musharakah), profit sharing Murabahah, and leasing (Ijara). Zakat (tax) Fitra (donation). Sadaquo: Islam allows emergency relief to face crisis period, but not for permanent Soliciting donations for rehabilitating the poor and their livelihoods Halal business (no Alcohol, Drugs, Gambling, Pork food)

11. Islamic Financial Transaction Terminology Bai' al 'inah (sale and buy-back agreement) Bai' bithamanajil (deferred payment sale) Bai' muajjal (credit sale) it is a form of murabahahmuajjal "Mudarabah" cost plus sharing in a commercial enterprise. First partner-"rabb-ul-mal", and other party-"mudarib". Murabahah: profit margin agreed by both parties. Hibah (gift): Voluntarily pay customers a 'gift' on savings account balances-a portion of profit using savings account balances. Istisna (manufacturing finance): finances in installments for each slab of construction. Ijarah means lease, rent or wage.

12. Islamic Financial Transaction Terminology continue-2 Ijarahthumma al bai' (hire purchase): First contract is an Ijarah that outlines the terms for leasing or renting over a fixed period, and Second contract is a Bai that triggers a sale or purchase after Ijarah is complete. Ijarah-wal-iqtina: Ijarah means lease, rent or wage. Parties share loss or gain in a transaction, based on their percentage of ownership. Products would equipment, buildings, or other assets to the client against an agreed rental together Musharakah (joint venture) Used in investment projects, letters of credit, and the purchase or real estate or property. The profit is distributed among the partners in pre-agreed ratios. An innovative approach home loans-Musharaka al-Mutanaqisa, allows for a floating rate in the form of rental. Bank and borrower form a partnership-agreed percentage to purchase the property. Borrower buys the bank's share of the property at agreed Qardhassan/ Qardulhassan (good loan/benevolent loan): goodwill basis, and the debtor is only required to repay the amount borrowed.

13. Islamic Financial Transaction Terminology continue-3 Sukuk (Islamic bonds): financial certificates Bai-Salam: Forward sales. Buy in full cash payment in advance. Takaful (Islamic insurance)-Risk of loss due to misfortunes. Pprohibition against transactions that involve gambling products. Wadiah (safekeeping):Person deposits funds in the bank and the bank guarantees refund of the entire amount of the deposit Wakalah (power of attorney): Person appoints a representative to undertake transactions on his/her behalf Requiring Zakat: Islam imposes a property tax called Zakat.

14. Ethics of Islamic Financing Islamic Sharia system promotes entrepreneurship, discourages speculative behavior, and emphasizes the sanctity of contracts. Promote social justice and equality. Emphasis on the ethical, moral, social and economic justice, and to enhance equality and fairness for the public goods as a whole. Advocating for individuals’ rights and duties, property rights and the sanctity of contracts Reasons prohibiting interest of loans: (1) To promote social justice, (2) To encourage shared risk in financial transactions between investors and investees, and (3) To avoid Maysir- gambling: acquisition of wealth by chance and not by effort

15. Micro lending in Islamic Shariah Micro credit is ideologically compatible with Islamic Shariah finance compliancy Huge market exists because many poor people want to do business to earn income. Micro-financing projects can initiate different financial transactions based on general Islamic Shariah system tailoring with context and situation. Shariah based micro lending initiatives are few for disadvantaged entrepreneurs

16. Malaysia, Bangladesh and Bahrain Islamic Banking Some interest-free financial institutions established in Bangladesh, Malaysia and Bahrain Bank Islam Malaysia Berhad’ established in 1983 Islamic banking moving fast, growth rate of 15-20 per cent per annum Malaysian government has a strong Islamic banking industry capturing 20 percent of the market Islamic banking in Bangladesh started in 1983 captured market share of 29 percent, 30 percent and 28.5 percent in terms of Islamic assets, financing and deposits respectively 41.77% local and 58.23% foreign shareholders

17. Malaysia, Bangladesh and Bahrain Islamic Banking continue-2 Many social welfare projects runs by IBB in Bangladesh include: Islami Bank Hospitals, Islami Bank Crafts & Fashion Houses, Islami International School and College and Physiotherapy and Disabled Rehabilitation Centre. Bahrain which entered into Islamic banking in 1978 (Bahrain Islamic Bank), has emerged into a leading Global Islamic financial centre in the Middle East 24 Islamic banks and it has successfully captured, market share of 32 percent in terms of assets, 29 percent in terms of financing and 37 percent of deposits, respectively (Bahrain Annual Report (2007). Singapore, UK, USA, Australia and Canada introduced Sharia based Islamic banking, financial services

18. GGroup Micro lending Experience in Afghanistan Micro financing project Afghanistan was designed with the experience of Bangladesh Islamic Bank, Faisal Bank and Muslim Commercial Bank of Pakistan, Tejarati Bank of Iran and Those are working in Afghanistan Project prepared outlines of a credit program incorporating therein the essential elements of Islamic Sharia. PD conducted a series of meetings with political authorities (Shuras) and UNHCR officials both in Islamabad and Kandahar on the modalities of the program.

19. Project Operation designed according to Islamic Sharia Principles Mudarebah i.e. profit sharing: Basi-Muajjal (sales under deferred payment Combination of Modarebah and bai-Muajjal Murabaha (contract sale): Total cost of the goods included the duties, taxes, transportations over and above the purchase prices. Price fixed mutually agreed rate with a profit. Use of terms ‘service charge’ Ijara (leasing/hire purchase): Planned Takaful (Islamic insurance), but not implemented because no chance Clients paid loan instalments and savings in the weekly centre meetings. Realization of inflation subsidy @2% was built-in. Recites Holy Quran at the beginning and end of the meeting Exchange visits for improvement of clients’ skills and knowledge

20. Microloans Disbursed in Kandahar Operated in 11 villages within 15-20 m=Km radius of Kandahar City. Conducted mini-meetings and trainings in villages like Yakariz, Gaskhana, Mirbazar, Abassabad, Goskhana, Laowala, Dabaropool, Tarukuzamea, Rajiklacha, Charbahar, Malajat, Khandak, Masburabad etc. villages 100 beneficiaries received loans amounted $20, 000. Average loan size was $200.00 Repayment rate was 100%.

21. Political Authorities directed to Stop Microcredit Activities in Kandahar Authorities notified project to stop the program and started a malicious propaganda offensive against project staff. Attack included (1) preaching Christianity in Kandahar area as it is being done by Grameen Bank in Bangladesh; 2) Even though earning profit was permissible (Jayez) according to Murabah system, some political authorities considered it as interest and therefore, forbidden (haram). Made propaganda paid cash money; (3) Failure to employ Taliban staff from the beginning. (4) Future women would be included Actually these were not the case.

22. Political authorities’ delegation to Bangladesh and final closure of the project Political authorities visited Bangladesh funded by UNHCR After visiting Bangladesh, political authorities sent letter for closing the project Chief of Mission of UNHCR Afghanistan and the Project Director (author himself) tried to convinced the authorities but unsuccessful

23. Behind the Scene Activities and Propaganda GB Bangladesh preached 42 Muslim to Christianity Handed over project fund to authority to use for electricity supply Authorities busy to capture the whole of Afghanistan, busy with warfare for defeating their enemies If Grameen Bank credit program was successful in Afghanistan; the aid program of UN agencies would shrink rapidly

24. Project Banking Challenges Kandahar is the base of hard core political authorities (Shuras) during the project period 1996-1997. Hyperinflation was threatening the project. Loan goods items purchased from Pakistan No banking facilities Need to keep large amount of cash in hand

25. Conclusion Villagers spontaneously accepted the program and requested for receiving credit for starting businesses. Sharia based micro financing successful implementation depends on legal support of Islamic Sharia lending services and Political authorities’ good will commitment.

26. Thank You Questions/Comments