Can an
Islamic bank run a microfinance project as part of its mandate?
The definite answer to this question is Yes.
One of the roles of Islamic bank as the financial intermediary is to provide
access for financing to the deficit units that it has accumulated from the
surplus units. The same role also played by conventional banks. However, the
operations, philosophy, and objectives differ significantly between the
conventional and Islamic bank. Islamic bank operates within the Islam’s
mu’amalat, promotes maslahah mursalah and emphasis social justice in economy.
Unlike the peers conventional banks who run the business to achieve the
ultimate profit from riba-based lending activities.
As the financial intermediary, Islamic bank
can run the microfinance project by providing financing to the poor
entrepreneurs, socio-economic development projects or small businesses. The
service is termed small because a person or small business does not have a lot
of money will not need financing of several hundred thousand ringgits. They
just need money to run “micro” business or small project out of necessary to
support their daily lives and family.
Islamic banks offer products and services
based on equity-based participation. The products it selves such as mudharabah
or musyarakah types financing will allow an Islamic bank to participate in a
small business or project. The bank and owner of the business will share profit
and loss from the business. Thus, both parties are exposed to business risk and
it is a fair deal.
One of the reasons why the poor people unable
take a loan from the bank is they do not have credit history track record but
the Islamic bank can address this issue. Islamic bank should be able to run a
micro business by being a partner. The criterion used by Islamic bank is to
evaluate the potential of micro-business itself not the credit history before
approving a microfinance facility. Islamic microfinance offers the best
alternative to normal loan.
Zakat payment by Islamic bank could be
utilized to help poor people who have the capability to run a micro-business.
For example, the tax authority of Malaysia (Inland Revenue Board) allows the
reimbursement of certain portion of zakat payment. The zakat reimbursement
payment could be channeled to a special fund meant for micro financing
activities. This is not only considered as the bank’s corporate social
responsibility but also fulfilled the zakat distribution rules that only certain
parties can receive zakat such as the poor for microfinance with no interest
payment.
Managing microfinance could cost a lot of
money for banks and as far as Islamic bank is concerned, they are not allowed
by Shariah principles to charge interest for loans. Nevertheless, Islamic bank
still can mitigate the higher financing cost by setting a more viable profit
sharing ratio to cover the costs. A study on global micro financing shows a
very excellent track record of loan repayment with an average about 97 percent.
Hence, the microfinance financing is a viable option for Islamic bank to
venture into it.
Microfinance’s objectives among others are
used to reduce and solve poverty problems. Islamic bank can be pulled in to
provide assistance for the poor. They will be able to train, advice and
facilitate micro businesses operators to run the business and project
professionally, efficiently and effectively. The Islamic bank can tap onto
their pool of experts for this purpose. As a result of banks indirect
involvement in microfinance, the business will have better chances to generate
good result and profit, which will eventually help to payback the small capital
given to the poor and reaps the investment returns.
The example concept of a bank that runs a
microfinance project is the Grameen Bank project founded by Professor Dr
Muhammad Yunus. The bank provides loans to the poor people who have skills that
can be utilized to earn more money. The concept can be applied to Islamic banks
as well. In order to comply with Islamic laws that prohibit the charging of interest,
the Islamic bank can act as the capital provider for microfinance project under
mudharabah concept or the bank it selves become the co-owner of the project
under the musyarakah arrangement where the Islamic bank will be able to recoup
the money invested through profit sharing derived from the profit of the
microfinance project.
Author: saupee @ All copy rights reserved 2013.
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