The World Bank has also declared 2005 as the year of micromanage with the alma to expand their poverty eradication campaign. The main alma of the paper is to assess the potentials of Islamic financing schemes for micro financing purposes. The paper argues that Islamic finance has an important role for furthering socio-economic development of the poor and small (micro) entrepreneurs without charging interest (read: rib’). Furthermore, Islamic financing schemes have moral and ethical attributes that can effectively motivate micro entrepreneurs to thrive.
The paper also argues that there is a nexus between Islamic banking and micromanage as many elements of micromanage could be considered consistent with the broader goals of Islamic banking. The paper, first, introduces the concepts of micromanage, and presents a case for Islamic micromanage to become one of the components of Islamic banking. The paper then discusses, the potentials of various Islamic financing schemes that can be advanced and adapted from micromanage purposes including techniques to mitigate the inherent risks.
Finally, the paper concludes with the proposals to accommodate the Islamic micromanage within the present Islamic banking structure. 2. Principles of Micromanage Micromanage grew out of experiments in Latin America and South Asia, but the best known start was in Bangladesh in 1976, following the wide-spread famine in 1974. Advocates argue that the micromanage movement has helped to reduce poverty, improved schooling levels, and generated or expanded millions of small businesses.
The Idea of micromanage has now spread globally, with replications In Africa, Latin America, Asia, and Eastern Europe, as well as richer economies Like Norway, the united States, and England. Among the features of micromanage is disbursement of small size loan to the spiniest that are normally micro entrepreneurs and the poor. The loan is given for the purpose of new income generating project or business expansion. The terms and conditions of the loan are normally easy to understand and flexible. It Is provided for procedures and processes of loan disbursements are normally fast and easy.
Additional capital can also be given after the full settlement of the previous loan. * Associate Professor at the Killingly of Economics and Management Sciences, International Islamic University Malaysia (Ill-JAM), and currently Director of the Ill-JAM Institute of Islamic Banking and Finance. Islamic Micromanage Micromanage is an alternative for micro entrepreneurs, which are normally not eligible or bankable to receive loans from commercial banks. The basic principle of micromanage as succinctly expounded by Dry.
Muhammad Yuan’s, the founder of Grahame Bank Bangladesh, and the recipient of the Nobel Peace Prize in 2006, that credit is a fundamental human right. The primary mission of micromanage is, therefore to help poor people in assisting themselves to become economically independent. Credit or loan is given for self employment and for financing additional income generating activities. The assumption of the Grahame model is that the expertise of the poor are under utilized. In addition, it is also believed that charity will not be effective in eradicating poverty as it will lead to dependency and lack of initiative among the poor.
In the case of Grahame Bank of Bangladesh, women comprised of 95% of the borrowers, and they are more reliable than men in terms of repayments [Gibbons and Kansas 1990]. In order to facilitate loan process for the poor, loan is given without collateral or guarantor, and normally is based on trust. Micromanage is an alternative for loan because the conventional Nanking system recognized the poor as not-credit worthy. Loan facility is provided based on the belief that “people should not go to the bank but bank should go to the people”. In order to obtain the loan, the prospect borrower needs to Join the recipient group of micromanage.
The group members are given small loans, and the new loans will be given after the previous loans are repaid. The repayment scheme is on short term basis on a scale of a week or every two weeks. The loans are also given together compulsory saving package (e. G. Compulsory saving in the group fund) or voluntary saving. The loan priority is for establishing social capital through group Joint projects established among the loan recipients. The loan contract of a Grahame model has a twist, and this is what has most interested academic economists [De Action and Morocco 2005].
The twist is that should a borrower be unable to repay her loan (about 95% of borrowers are women), she will have to quit her membership of the bank – as will her fellow group members. While the others are not forced explicitly to repay for the potential defaulter, they have clear incentives to do so if they wish to continue obtaining future loans. This helps micro-lenders overcome “adverse selection” problem. The problem is that a traditional bank has a difficult time distinguishing between inherently “risky’ and same (high) rates to all potential borrowers.
The outcome of traditional lending activities is inefficient since, in an ideal world, projects undertaken by both risky and safe borrowers should be financed. Therefore, the advantage of the group lending methodology is that it can put local information to work for the outside lender. Adverse selection is mitigated as villagers (safe and risky) know each others’ types. From the standpoint of the micro-lender, bringing the safe borrowers back into the market lowers the average incidence of default and thus lowers costs. With lower costs, the micro-lenders can in turn reduce interest rates even further.
Another strand of argument in support for group lending methodology is that it can potentially mitigate ex ante moral hazard problems. Moral hazard problems arise from the fact that financial institution cannot effectively monitor borrowers and therefore cannot write a credible contract that 39 (2007) 2 g enforces prudent behavior. Stilling [1990] explains that under group lending theology, group members agree to shoulder a monetary penalty in the case of default by a peer, the group members have incentives to monitor each other, and can potentially threaten to impose “social sanctions” when risky projects are chosen.
Because neighbors can monitor each other more effectively than a bank and thus the effective delegation takes place for ex ante monitoring from micro-lender to borrowers. Another potential benefit of group lending is it reduced ex post moral hazard problem. Moral hazard problems arise as it is assumed that the financial institution cannot observe such returns and thus borrowers have incentives to retied that their returns are low or default on their debt obligations.
Group lending with Joint responsibility as prescribed by the Grahame model can however lower the incidence of strategic default when project returns can be observed by the borrowers’ neighbors, under the fear of suffering from social sanctions, borrowers will declare their true return and repay their debt obligation [De Managing and Morocco 2005]. By lowering the incidence of strategic default, group lending can potentially bring interest rates down as well. 3. Islamic Banking and Micromanage: A Nexus Islamic finance is founded on the prohibition of rib’. Rib’ was prohibited in all forms and intentional).
Thus, the main aim of Islamic finance and banking is to provide the Muslim society with an Islamic alternative to the conventional banking system that was based on rib’ [Guiding 1991]. Rib’ can be classified into at least two main types, namely credit rib’ (rib’ al-angina’s) and surplus rib’ (rib’ al-fad) [Az-Usually 2006]. Credit rib’ is any delay in settlement of a due debt, regardless whether the debt of goods sold or loan. Muslim Jurists define rib’ al-angina’s in loans as bringing to the lender a fixed increment after an interval of time, or extension of mime over the fixed period and increase of credit over the principal.
On the other hand, surplus rib’ (rib’ al-fad) is the sale of similar items with a disparity in amount and dry dates. This rib’ is by way of excess over and above the quantity of the commodity advanced by the lender to the borrower. Rib’ also exists if there is either inequality or delay in delivery of the goods offered. As explained by Queries [1991], Imam Backhanding Razz in his book al-Taffies al-Kabuki emphasizes that there are basically 3 reasons for the unlawfulness of rib’.
The first reason is where the redirector’s can ensure its income from the interest paid by the debtor that will lead to the exploitation and living in reduced circumstances which is a massive inequity. Charging excess or surplus in exchanging one commodity against the other will lead to the exploitation of the borrowers. The borrowers would have to pay back the interest on top of the principal. This will make the lenders better off at the expense of the borrowers. In addition, the strong condemnation of interest based transactions is intended to uphold equity and the protection of the poor (I. E. The borrower).
In other rods, interest or rib’ supports the possibility for wealth to accumulate in the 1) The revelation on the prohibition of rib’ in the Curran can be classified into 4 stages; the first stage was on the moral denunciation of rib’ in al-Rum verse 39, the second stage was on comparing rib’ with the Jews in al-NASA’ verse 61, the third stage was on the legal prohibition in al-Lamar verse 130-132 and finally, the fourth stage was on al- bay (trading) as the alternative to rib’ in al-Basilar verse 275-281. Hands of a few, and thereby it shows that man’s concern for his fellow men is decreased.
Secondly, since interest or rib’ is predetermined and the creditor is certain to receive the interest imposed, it may prevent the creditor from being involved in any occupation because it is certainly easy to receive income from the interest on a loan [Queries 1991]. In this situation, the creditor has not made any effort or undergone any hardship in acquiring income and this will hinder the progression of worldly affairs. Finally the unlawfulness of rib’ is due to an end of mutual sympathy, human godliness and obligations because the practice of rib’ may lead to borrowing and squandering [Queries 1991].
As an alternative to rib’, the profit and loss sharing arrangements are held as an ideal mode of financing in Islamic finance. It is expected that this profit and loss sharing will be able to significantly remove the inequitable distribution of income and wealth and is likely to control inflation to some extent [Squid 2001]. Furthermore, the profit and loss sharing may lead to a more efficient and optimal allocation of resources as compared to the interest-based system. Since the depositors are likely to get higher returns leading to richness, it is hoped that regress towards self-reliance will be made through an improved rate of savings.
Thus will ensure Justice between the parties involved as the return to the bank on finance is dependent on the operational results of the entrepreneur [Squid 2001]. Banking where the functions of a bank do not vary between conventional and Islamic banks. However, the operations, philosophy, and objectives differ significantly between the conventional and Islamic Banks [Guiding 1991]. Conventional bank operates its business in the capitalist system where the root of the system is based on interest and rib’.
On the other hand, the Islamic bank provides the solution to the Muslims in terms of principles, instruments and issues in dealing with banking business activities where the operations of the activities are based on the principles of the Shari’s. From early sass, the existence of Islamic banks has been in a consistent phase. In 1963, the Mit Gamma Saving Bank was founded. It is a small rural institution in Egypt. Later in 1971, the Mit Gamma Saving Bank was incorporated into a new government controlled institution, the Nesses Social Bank.
A major expansion in Islamic banking activities started to take place in the sass. The expansion of Islamic banks is partly due to the oil revenue boom in the Gulf and the growing economic muscle of the more conservative Muslim states of the Gulf [Wilson 2000]. In sass, a number of Islamic banks were established including the initiative of the Organization of Islamic Countries (OIC) that established the Islamic Development Bank (DB). During the same period, Dublin Islamic Bank, Facials Islamic Bank in Egypt, Kuwait Finance House, and Jordan Islamic Bank were established.
In 1978, the Islamic Banking System International Holding was established in Luxembourg. This was the iris Islamic financial institution on the Western soil. The rapid development of Islamic banking worldwide portrays that the expansion of Islamic banking was not only confined to the Middle East but it has also grabbed the attention of its international counterparts. The expansion of Islamic banks continued in the sass, where Dear al-Mall al-alias was established in Switzerland, and the Islamic Bank International was established in Denmark.
In 41 1983, Bank Islam Malaysia Bertha was established in Malaysia and followed by Qatar Islamic Bank. In sass, the Indonesian government took the initiative to establish Bank Mulatto Indonesia, an Islamic bank that started operations in 1992. Due to the massive expansion in Islamic banking activities, some commercial banks started offering Islamic banking facilities (e. G. State-owned banks in Egypt, National Commercial Bank in Saudi Arabia). Furthermore, the Islamic financial product is also now offered by the European banks (I. E. Skeletons Benson of London and the Swiss Banking Corporation).
Such developments show that the Islamic financial instruments are increasingly being accepted internationally, even in the non-lilacs countries, and the basic principles are understood [Wilson 2000]. At the moment, there are about 270 Islamic banks worldwide with a market capitalization in excess of IIS$13 billion. The assets of Islamic banks worldwide are estimated at more than IIS$265 billion and financial investments are above IIS$400 billion. Islamic bank deposits are estimated at over IIS$202 billion worldwide with an average growth of between 10 and are the ‘hot issue’ in Islamic finance.
In addition, Islamic equity funds are estimated at more than IIS$3. 3 billion worldwide with a growth of more than 25% over seven years and the global Tactful premium is estimated at around IIS$2 billion. In looking at the principles of Islamic finance, one can easily observe that the early “idealistic” vision has significantly changed in practice. Idealist, liberal and pragmatic approaches to Islamic banking and finance can be identified in a continuum [Eased 2004]. The idealist approach seeks to maintain the relevant contracts that were developed in the Shari’s in the classical period.
At the opposite end of the continuum are those scholars who argue that the term rib’ does not include modern bank interest. Between these two extremes lies the pragmatic approach, which is legalistic enough to see that the idealist model of Islamic banking has significant problems in terms of feasibility and practicality, but which at the same time maintains the interpretation of rib’ as interest. It can be added to this continuum, an alternative idealist approach that blends the pragmatic approach and socially responsible financing where Islamic banks offer Islamic financial instruments for micromanage purposes.
Despite the wide acceptance of Islamic banking worldwide, the concept of financing for the poor or micromanage by Islamic banks was not well developed. Most Islamic anus, as in the case of conventional commercial banks, did not provide easy access to financing to the poor. A further pragmatic shift in Islamic banking and finance is the almost complete move from supposedly Profit and Loss Sharing (PLUS) banking to sales-based system [Eased 2004].
The literature of the sass and sass was clear that Islamic banking and finance should based on PLUS. Apart from the relationship between the bank and the depositor, in which a form of PLUS that is based on maturated is institutionalized, Islamic banks in the vast majority now avoid PLUS as the most important basis for their investment activities. Instead, such activities operate largely on the basis of contracts that are considered “mark-up” based such as maharajah, salaam, Sarah or assistant’.
For the bulk of their investment operations, Islamic banks have opted for these mark-up based, relatively safe contracts, which are similar, in some respects to lending on the basis of fixed interest. Simultaneously, the use 42 of less secure and more risky contracts such as maturated and muskrat has been dramatically reduced to only a small share of assets on the investment side. Historically, Prophet Muhammad was among the poor and later became a successful reader for many years before he became a prophet.
This was mainly due to the micromanage capital for his ventures that was provided on a PLUS based on maturated by a wealthy widow, Jihad, who later became his wife. Trade, with its associated risks, was fundamental to the economy of Arabia, since communities tended not to be self-sufficient and they depended on the movement of goods over capital. The Curran indeed commends trade (AY-Basilar, verse 198), and defines the poor (AY-Basilar, verse 273) as those that need alms. Many elements of micromanage could be considered consistent with the broader goals of Islamic banking.
Both systems advocate entrepreneurship and risk sharing and believe the poor should take part in such activities [Damage and Spacing 1999]. At a very basic level, the disbursement of collateral-free loans in certain instances is an example of how Islamic banking and micromanage share common aims. This close relationship would not only provide obvious benefits for poor entrepreneurs who would otherwise be left out of credit markets, but investing in misinterpreted would also give investors in Islamic banks an opportunity to diversify their investments.
In support of providing access to Islamic financing to the or and small entrepreneurs, Chap [1992: 260-261] has succinctly argued that: “Lack of access of the poor to finance is undoubtedly the most crucial factor in failing to bring about a broad-based ownership of businesses and industries, and thereby realizing the egalitarian objectives of Islam. Unless effective measures are taken to remove this drawback, a better and widespread educational system will only help raise efficiency and incomes but ineffective in reducing substantially the inequalities of wealth.
This would render meaningless the talk of creating and egalitarian Islamic society. Fortunately, Islam has a clear advantage over both capitalism and socialism which is built into its value system and which provides biting power to its objective of socio-economic Justice. ” Chap [1992: 269] further emphasized that: “While there may be nothing basically wrong in large enterprises if they are more efficient and do not lead to concentration of wealth and power.
It seems that the adoption of a policy of discouraging large enterprises except when they are inevitable, and of encouraging Seems, as much as possible, would be more conducive to the realization f the Massif AY-Shari’s (Goals of Islamic Law). This would have a number of advantages besides that of reducing concentration of wealth and power. It would be more conducive to social health because ownership of business tends to increase the owners’ sense of independence, dignity and self-respect. ” 4.
Principles of Islamic Micromanage The Grahame Bank is an outstanding example of a successful micromanage institution. The award of the Nobel Prize in 2006 to the founder of the Grahame Bank, Muhammad Yuan’s, brought micromanage to international attention. Although Bangladesh is a predominantly Muslim country, the Grahame Bank is not a Shari’s compliant financial institution as it charges interest on loans, and pays interest to depositors. Even though Grahame Bank calculates its rates of interest in simple rather than in compounded terms, it does not mitigate the rib’ transactions [Wilson 2007].
There are also wider concerns with conventional micromanage from a Muslim perspective. Although the provision of alternatives to they conflict with the values and beliefs of local Muslim communities. As interestingly pointed by Wilson [2007], simply extending materialism and consumerism into rural or communities and urban shanty town settlements could actually undermine social cohesion, by raising false expectations which could not be fulfilled, resulting in long term frustration and possible discontent or even economic crime.
Supporters of Islamic alternatives to conventional micromanage have as their aim the enhancement of Islamic society, rather than with the promotion of values that might be contrary to Shari’s. Comprehensive Islamic micromanage should involve not only credit through debt finance, but the provision of equity financing via maturated and muskrat, paving schemes via howdah and maturated deposits, money transfers such as through Katz and shade, and insurance via tactful concept.
Table 1 summarizes the possible differences in characteristics and objectives between the conventional micromanage and Islamic micromanage. Items Conventional MFC Islamic MFC Liabilities (Source of Fund) External Funds, Saving of External Funds, Saving of Client Clients, Islamic Charitable Sources Asset (Mode of Financing) Interest-Based Islamic Financial Instrument Financing the Poorest Poorest are left out Poorest can be included by integrating with micromanage Funds Transfer
Both conventional micromanage and Islamic Micromanage can immobile external funds and saving of clients as their source of fund. However, Islamic micromanage can also exploit Islamic charity such as Katz 2), and was 3) as their source of fund for funding. For modes of financing, conventional micromanage can easily adapt interest-based financing while Islamic micromanage should eliminate interest in their operation. Therefore, Islamic micromanage should explore possible odes of Islamic financing as instruments in their operation. Islamic micromanage can also maximize social services by using Katz to fulfill the basic needs and increase the participation of the poor.
In conventional micromanage, the institution can directly give cash to their client as the financing. In contrast, Islamic micromanage does not give cash to their client as loan is not allowed in Islam unless there is no interest or any incremental amount charge on that loan. Conventional micromanage had also been questioned on its overall desired impact since the poor are subjected very high interest rate some up to 30%. Some even argued that disbursing credit to the poor to make financial gains out of the same cannot be the aim of micromanage institutions. Interest charged is rather oppressive for their poor receivers, and thus fails to achieve the noble objective of micromanage.
According to various studies, a notable number of the recipients were also found to be well above the poor category. Islamic micromanage, on the other hand, utilizes Islamic financial instruments which are based on PLUS schemes rather than loan. Conventional micromanage institutions focused mainly on women as their client. On the other hand, Islamic micromanage institution should not only focus on women but must also be extended to the family as a whole. Moreover, conventional micromanage used group lending as a way to mitigate risk in their operation. Islamic micromanage may also use similar technique, but they can also developed Islamic ethical principles to ensure their client pays the payment regularly.
There are a number of Shari’s compliant micromanage schemes, notably those operated by Hoodooed micromanage program in Yemen, the UNDO Maharajah based micromanage initiatives at Cabal al-Hoes in Syria, Quarrel Has based micromanage chem. offered by Ways Taken in Malaysia, various schemes offered by Bank Rackety Indonesia, and Bank Islam Bangladesh. Many argued that Islamic micromanage is best provided by non-banking institutions. Some others argued that with maturated and muskrat profit sharing micromanage there is scope for commercial undertakings, but arguably specialized finance companies rather than banks, even Islamic banks, may be appropriate institutions to get involved [Wilson 2007]. However, this paper explores further and extends the argument for Islamic micromanage schemes to be offered by Islamic commercial 2) Katz is the third of
