Jeddah, Kingdom of Saudi Arabia, 31 May 2016 – The Organisation of Islamic Cooperation (OIC) and IsDB Group launched the Islamic Microfinance for Poverty Alleviation and Capacity Transfer (IMPACT) Program in Bogor, Indonesia, on 16 May 2016.
The program provides a platform for experts to share and deepen their understanding of the Islamic Microfinance models and to create tools and infrastructure to disseminate best practices.
The program was launched during the “Seminar on Islamic Microfinance for Poverty Alleviation in OIC Member Countries,” hosted by Bogor Agricultural University.
The seminar was organized by the Islamic Research Training Institute (IRTI), IsDB and OIC. It brought together more than 40 experts and practitioners from 12 OIC member countries: Bahrain, Bangladesh, Egypt, Indonesia, Jordan, Kuwait, Malaysia, Morocco, Pakistan, Palestine, Saudi Arabia and Sudan.
Seminar participants discussed the development of the Islamic Microfinance sector and shared innovative best practices. Experts offered ideas and solutions to develop the Islamic Microfinance sector in five key areas: technology; advocacy; operations; monitoring and evaluation; and policy and standards.
Islamic banking: a true partnership
Islamic Microfinance Institutions (IMIs) differ from conventional microfinance institutions. IMIs do not charge interest and work on profit- and risk-sharing basis. Their relationship with the client is not based on creditor-debtor relationship.
The central premise of IMIs is that social networks among partners have value. The social capital resources inherent in social relations help facilitate collective action for a common purpose.
IMIs engage and treat their clients as business partners. As a business partner, they add value in the relationship and provide ‘smart finance’. This allows IMIs to create sustainable jobs even in the most difficult and fragile situations.
“Islamic microfinance is about economic empowerment of the poor,” said Mr. Anas El Hasnaoui, CEO of IBF International Consulting, a Brussels-based organization that works on development aid projects financed by international organizations.
Mr. Hasnaoui explained how the Bank of Khartoum in Sudan invested USD 4 million in venture capital in the Abu Halima Greenhouses Project. The initiative provided low-income graduates and their families, 600 people in all, with smart finance products to enable them to work in the modern agricultural sector.
“Islamic Microfinance Institutions treat their clients as business partners, not as debtors,” said Mr. Nasser Faqih, Team Leader of the Deprived Families Economic Empowerment Program (DEEP) in Palestine.
He compared how two women with similar small sewing businesses were treated. One borrowed under the Islamic microfinance window while the other borrowed from the conventional window of the same MFI. When the woman who borrowed from the Islamic microfinance window was hospitalized, the MFI hired a replacement and ensured her business continued to run while she recuperated. Her payment schedule to the bank was frozen until she returned to work. The woman who borrowed from the conventional window
however, was required to continue making her payments, and interest compounded as the payments were delayed. After some time, when it was clear that she would not be able to make her payments, the MFI took her to court.
The innovations in Islamic microfinance and its ability to generate employment and alleviate poverty through trading and investing with their clients makes it possible for microfinance institution to do business with poor people. However, such good practices are not well known and expertise and experience gained from innovative pilots are scattered in various countries.
Putting poor people first
The IMPACT program was created in response to a call from the President of IsDB for experts in Islamic finance to take advantage of existing technologies and business approaches and develop ‘Smart Islamic Microfinance’. His comments were in line with the recommendations by the leadership of both OIC and IsDB Group.
The IMPACT program will promote Islamic microfinance in a way that puts poor client’s needs at the centre, providing an enabling environment and tools for microfinance institutions to do business with and help them thrive. Financing provided will therefore help poor clients find their way out of poverty, instead of perpetuating the cycle of poverty through debt.
The five pillars of the IMPACT Program
Technology: To develop a one-stop portal on Islamic microfinance that provides all the necessary knowledge and tools needed for a microfinance institution to understand and implement Islamic microfinance. Knowledge generated from various pillars will be disseminated through the portal. The information portal will also include key applications that will be useful for Islamic Microfinance Institutions.
Operations: To develop an operational toolkit that includes standard operating procedures, policies, contractual document templates, feasibility study templates and other operational documents. The toolkit will be developed for MFIs that are already operating but are interested in implementing Islamic Microfinance, highlighting what they need to do to be Shariah compliant as well as layout an incremental approach that will develop their capacity to engage in the value chain through practical
Monitoring and Evaluation: To develop a monitoring and evaluation framework, including a rating system combining areas of financial sustainability, governance, social performance. In addition, the framework will highlight approaches on how to determine the impact of the MFI on its beneficiaries through measuring its value add to its client through its engagement in the value-chain. The framework will be summarized in a logical framework with key indicators for each project stakeholder.
Policies and Standards: To identify and promote key policies and standards (including accounting and governance standards) that facilitate the growth of Islamic Microfinance. This will include a framework for Islamic Microfinance Law highlighting key policy requirements needed to facilitate the industry, simplified accounting standards for MFIs as well as governance structures for various organization structures such as cooperatives, companies, funds and NGOs.
Advocacy: To develop and promote Islamic Microfinance in IsDB member countries and beyond by building awareness, exchanging experiences and reverse linkages through collaboration among different stakeholders, including governments, regulators, private sector, practitioners, networks, developmental organizations and financial institutions.
Implementation Arrangements: The program will be implemented by stakeholder teams identified under each pillar. OIC General Secretariat and IsDB Group will identify key experts to participate in each team. Additional experts may be engaged when required. Experts/stakeholders may be engaged through partnership or consultancy agreements. All five pillar teams will constitute the Program Management Team (PMT) that will be led by Senior Specialists from IsDB Group and OIC General Secretariat who
will report to the Leadership Committee on the progress of the IMPACT program.