Islamic microfinance

In the criteria set by the Islamic Microfinance Institutions, one important criterion is the business age of the Micro, Small and Medium Enterprises, because the business age is used to assess the consistency of the Micro, Small and Medium Business actors regarding the business they run. According to Ganyaupfu (2013) from the results of his research found that the length of running a business empirically has a positive and significant effect on business success. the findings of Alom et al. (2016) also state that the length of business has a positive effect on the success of MSMEs in Malaysia. The results of similar studies are also in line with the findings of Kemayel (2015) that business age has a significant effect on the success of MSMEs in Lebanon. Thus, the longer an organization operates, the more successful the organization is compared to other organizations operating in a shorter period of time (Nandita, 2018). This is the reason the managers of Islamic microfinance institutions provide easy access for MSMEs to conduct financing.

According to Vento (2004), the three main services of microfinance institutions are microcredit or micro financing, micro leasing, and micro insurance. Islamic microfinance institutions (IMFIs) also offer similar type of services based on Islamic mode of financing. Several literatures on Islamic microfinance such as Dhumale and Scapcanin (1999) promote the use of equity based financing such as Mudharabah, Musharakah and debt based financing such as Murabahah, Bai-Bithaman-Ajil and Ijarah as the products of IMFIs. Even though most Islamic modes of financing can be applied in IMFIs activities, the implementations of these models should be different with current practices of Islamic banking since the nature of Islamic banking and Islamic microfinance are different.

BPRS is regulated by National Act amended into National Act No.10/1998. rural banks (BPRS) established in order the need of Muslim for Islamic microfinance these are supervised by the central bank. BMT (Baitul Maal wa Tamwil) BMT is a fast growing microfinance reaching more than 5,000 units that gains politically and is socio-religiously accepted. serves the Muslim-grassroots segment implementing Sharia’h compliant financing. Islamic microfinance cooperatives suffer supervisory neglect by the Ministry Cooperatives and in the practice they are difference than the conventional one. “At fifth of Islamic cooperatives are in reas health. The majority is dormant or non- most of the remaining ones exist for the receiving funds from the government” [16] Based on Seibel’s findings below, the gap 2 highlights the cause of problems. BRI

Assessing the Impact of Islamic Microfinance on Poverty Alleviation in Northern Nigeria... Assessing the Impact of Islamic microfinance on poverty alleviation in northern ...[r]

Islamic microfinance models are skewed towards social outreach and social welfare rather than financial sustainability which has long been a focus of attention of conventional microfinance. These models follow the central theme of resource redistribution consistent with the aims of an Islamic welfare state. Their objectives are aligned with the components listed in Islamic concepts of poverty alleviation. The Waqf (Endowment) is considered an important feature in the history of Islamic finance. The concept has been widely acknowledged by a number of researchers (Khan, 2001; Ahmed, 2007; Kaleem and Ahmed, 2009; Adam and Lahsasna, 2013), but the model comprises some built-in risks that make its practical applicability ambiguous. For example, the Waqf endowments used for microfinance loans have some inherent risks such as high transaction cost of generating funds that do not cover the face value of loans in interest-free lending. The substitution effect occurs if the cost of generating loan is higher than the value of loan. In that case, the Waqf endowment could be invested in higher profit businesses rather than microfinance. Secondly, in countries like Pakistan, the Waqfs are managed by the provincial government authorities. These provincial authorities do not allow the Waqfs to work autonomously, therefore, they are not able to provide financial support to microfinance. In addition, legal complexities delay the lending process and require formal approval from the government departments thus making it inefficient.

Microfinance program is become more significant as the main contributor in creating new job opportunities and generating income for the purpose of increasing social and economic status of the poor and alleviating poverty. The integration of entrepreneurial concept, training and microenterprise into microfinance program also contributes in increasing the effectiveness of the program. Islamic microfinance program (IMP), which is based on Shariah and Islamic finance concept, has a very high potential in helping the poor people to expand and diversify their economic activities, increase their income and improve their social well-being. (Nawai, 2018).

Many approaches and tools have been utilized throughout the globe by public and private sector organizations to curtail the deprivations and enhance welfare of the poor. Islamic Microfinance is one of them and is rapidly getting popular in Muslims as well as non-Muslims majority population countries. This study was conducted to gauge the impact of Islamic microfinance on the household welfare of the target clients by observing its impact on health, education, income, expenditures and assets of the poor who took loan from Islamic Microfinance institutions (IMFIs). Study is based on primary data and assessment was made rendering pre and post project approach by employing paired sample t-test and Regressionanalysis as statistical tools. Respondents were selected from three microfinance institutions, namely Akhuwat Foundation, Farz Foundation and NAYMET. Results delineate statistically significant differences in Pre and Post borrowing scenarios in the welfare indicators of the target households. It has been observed that borrowing from Islamic Microfinance institutions has not only significantly raised monthly income; expenditures on food, education and health; and incremented households ’ assetsbut also surprisingly raised borrowed amount of loan which negatively affected income. This requires some further investigation and it is recommended that practitioners and policy makers must keep IMF on its top agenda to enhanceliving standards of the poor in developing countries.

Abdul-Rahman (2007) examines Islamic microfinance as part of important component of Islamic banking. Interestingly, Abdul-Rahman (2007) explains several principles which have great potentials to be advanced and adapted as Islamic microfinance schemes. The principles, among others, are mudarabah, musharakah, murabahah, ijarah and qardhul hasan. Of these, he argues that qardhul hasan concept is found to be reliable in helping the poor and the needy. Through this principle, Islamic bank can provide fund to entrepreneurs who are in need of small start-up capital and have no business experience (Abdul-Rahman, 2007). On the other hand, Abdul-Rahman (2007) also explains the significance of musharakah mutanaqisah to Islamic microfinance. Here, the bank and the entrepreneur will share the capital in which the former will contribute say 90 percent whilst the latter will contribute say 10 percent. At the end, the business will solely be owned by the entrepreneur once all capital repayments have been reimbursed. Yet, there is no information provided by the author with regard to the proper calculation of profit sharing and loss ratio between the transacted parties.

In Yemen, despite the political crisis in 2011 (figure 3 shows a high instability score in Yemen compared to other countries), microfinance has grown by 0.3% between the year 2011 and 2012 and its potential is promising. IFC commissioned market studies show a high demand for Islamic microfinance products. In Yemen, 40% of the poor prefer Islamic financial services 17 . According to the EIU data, Yemen fell 17 places in the world microfinance ranking, dropping from rank 25 to 45. Currently, the microfinance market operate s under the “Microfinance Law”, which was established in 2009. Under such law, MFI Banks are subject to direct supervision from the Central Bank of Yemen (CBY), and are required to set a minimum capital of YR500m (US$2.5 million). Besides, the law allows NGOs to upgrade to operate as commercial MFI Banks. MFIs NGOs that refuse to upgrade are neither supervised by CBY nor required to comply with the capital requirement. Instead, the Social Fund for Development (SFD) regulates most of the NGOs. Each NGO must present its monthly set of accounts to the SFD. Practically, not all NGOs fulfill this obligation. Besides, some NGOs, which are not allowed to do so, provide voluntary saving products to the public. MFIs that want to join the Yemen Microfinance Network (YMN) are obliged to provide an audited financial report for at least one year. After that, YMN members are asked to submit monthly financial updates. The progress in the regulatory process aims to assure the MFIs financial strength in term of profitability ratios, income statements, and their other financial indicators. Although it has been voluntary practiced by many Yemeni MFIs, price transparency is still not required by law. The National Microfinance Foundation, the largest MFI in the country, usually posts information on pricing in its different branches

The role of Islamic values and principles were well documented theoretically but not empirically. Today many researchers have shifted their focuses on understanding the complex dynamic of poverty alleviation towards Islamic point of view. Since their inception in the mid 1975s, Islamic Financial Institutions (IFIs) have considered poverty alleviation as one of their major areas of interest. However these successes lead to the new and emerging approach which is introducing interest-free microfinance (Islamic Microfinance). Since the fact is Microfinance can only success in every Muslim country if it is -compliant. As in Islam, charging interest (Riba) is prohibited because by Islamic teachings, money is not an asset for earning profit and thus interest cannot be used by and for the Muslims.

The basic structure of Islamic Microfinance banking can be explained mathematically as follows. First, an Islamic Microfinance bank creates an asset pool (AP) which consists of bank‟s equity (E) and deposits (D). Deposits include two further classification s, i.e. remunerative deposits (RD) and non-remunerative deposits (NRD). RDs are mobilized using partnership mode „Mudarabah‟ with bank‟s shareholders and depositors as partners. Profit sharing ratio is agreed at the start of this partnership. NRDs are mobilized using Qarz (non- compensatory loan).

Additionally, Islamic microfinance is able to exploit charity funds, such as zakat, infaq, and shadaqah, as their fund sources for delivering financing, whereas conventional microfinance does not have access to these capital sources. However, conventional microfinance can use interest as a method of increasing income, while Islamic microfinance is instead required to provide other schemes that still remain compliant with Islamic laws (Rahman, 2007). The need to employ Islamic principles in Islamic finance, such as avoiding riba, gharar, jahl, darar, and other unfair business practices, does not mean Islamic MFIs have limited financial products. Islamic microfinance employs several methods of fund mobilization and financing, and uses a monitoring system for managing risk (Obaidullah and Khan, 2008).

Islamic Boarding School in Indonesia currently has many economic sectors including Islamic microfinance services such as Baitul Mal Wat Tamwil (BMT) one of Islamic Boarding School Abdussalam. The purpose of this study is to find out how the design of mall products that can be applied by Islamic microfinance institutions to support economic empowerment Islamic Boarding School. Research method in this research use qualitative approach with descriptive technique. Data collection techniques use observation, interview and focus group discussion to determine the right product design and in accordance with the condition of sharia micro finance institution in Islamic Boarding School. The results of this study indicate that the product design that can be developed by BMT Barokah Abdussalam is the design of cash waqf mall products with two approach models and Zakah infaq sadaqa mall product with two approach models, and from both models can be applied if BMT can optimize the source of social funds so that it can distribute the fund is one of them through the development of product design proposed in this research. The results of this study can be applied by other Islamic Boarding School who have sharia micro finance institutions and has the same criteria with Islamic Boarding School Abdussalam. Keywords: Product Design, Islamic Microfinance, Empowerment Islamic Boarding School

Frasca (2008) undertakes two seminal case studies in the use of Islamic finance instruments in MFIs: a) the Sanduq project in Jabal Al-Hoss, Syria; and b) the Hodeidah Microfinance Programme (HMFP) in Hodeidah, Yemen. He concludes that Islamic MFIs can be both competitive with conventional MFIs in the region and meet the reported demand for religiously tailored financial services for lower income groups. If we are to assume that microfinance, in general, can improve the standard of living and alleviate poverty, Islamic MFIs appear to be doing as well as their conventional microfinance counterparts. Karim et al. (2008) conducted a survey, which includes 125 institutions in 19 Muslim countries. It shows that Islamic microfinance providers still reach only 300,000 clients, one-third of them in Bangladesh alone. They argue that to reach more people and build sustainable institutions, it is essential to focus on designing affordable products, training and retaining skilled loan officers and administrators, improving operational efficiency, and managing overall business risk.

In case of Indonesia, the Islamic Microfinance Institution (IMFI) has contributed to alleviate poverty since 2000 by expanding financial access to the poor. One of the IMFIs in Indonesia is the Baitulmaal Wa Tamwil (BMT), which is well-known for its role in conducting and delivering their businesses with the principles of Islamic muamalat. Operating based on a cooperative model, BMT has two functions, namely social function (Baitulmaal) and business function (Baituttamwil), simultaneously. According to the Indonesian Ministry of Cooperative and Micro, Small and Medium Enterprises (2017), there are currently more than 5.000 BMTs around Indonesia, and this MFI has contributed significantly to the income of the poor, helping them to graduate from poverty and creating wealth (Santoso and Ahmad, 2016), It is estimated that cooperative, in general, has contributed around 4% to the Indonesian gross domestic product (GDP).

Maintaining microfinance institutions’ (MFIs) sustainability is extremely significant owing to the fact that it aims at alleviating poverty and improving the living standard of the poor at the same time. Hence, a sustainable Micro Finance Institution (MFI) is necessary in order to achieve the objective thereby realizing a just economic growth. Nevertheless, there are issues and challenges being faced by the institutions that could give impact towards their sustainability. Among others are moral hazards and adverse selection problems among participants that would ultimately give potential risks to the institutions. Hence, maintaining its sustainability by way of risk management is significant in ensuring financial inclusion of the poor and materializing the objective of poverty alleviation. This quantitative study was conducted to examine the practice of risk management in the specific context of Islamic microfinance (IMF) product offered by several Islamic financial institutions in Malaysia. Primary data were collected through the distribution of questionnaires to the selected officers of the bank. Findings of the study indicated that the institutions had taken the necessary steps in managing the risks.

Islamic microfinance (IsMF) provides qard hasan (interest-free loan) or PLS (profit-loss sharing) system based on mudharabah. Islamic microfinance institutes (IMFIs), thus, not having the requirement of collateral, have the great potential of reaching the poorest of the poor. IBBL has introduced a scheme called rural development scheme (RDS), specifically to address the investment needs of the country’s agricultural rural sectors where the majority of people live under the poverty line. The programme is based on PLS with necessary modification of Grameen Bank’s model (followed by principles of Shariah) and provided financial services to both men and women. Among other existing IMFIs, the microcredit programme under RDS model is the largest and remarkable one. According to World Bank survey, there are about one million businesses in the country where only 7 per cent of those have had access to the financial institutions (Bhuiya and Chowdhury, 2002). As the lending formalities are less and more emphasis is given to the root level, the landless poor borrowers have a greater chance to get microfinance assistance from RDS of IBBL.

Poverty prevalence dates back to the existence of human being and today it has occupied foremost place on human development agendas of virtually all countries of the world. Islamic microfinance (IM) is becoming an increasingly popular mechanism for alleviating poverty, especially in developing countries around the world. The concept of IM adheres to the principles of Islam and is a form of socially responsible investment. In this perspective, many economists think that there is a common goal in Islam and microfinance which can be summarized in making people self reliant, enterprising and self respecting. A solution to achieve the target of poverty eradication is by practicing microfinance in an Islamic way. Islamic microfinance which involves Shari’ah-compliant way of financing and providing credit without collateral or any property for guarantee to the marginally poor for their business, is one of the most popular tools employed as part of a poverty reduction strategy, empowering and increasing the productivity of poor, giving social benefits to them in a sustainable way, and aiding economic development.

Following a massive state collapse, Somalia continues to experience political instability and economic challenges. For the past two decades, the Somali economy has been functioning informally due to the absence of a formal financial system (Nor and Masron, 2019). Although banks are still operating (e.g. Dahabshil Bank and Salaam African Bank) in Somalia, Deacon (2013, p. 43) reported that “traditional money transfer operators provide the only functioning financial services in the country” and that all international organisations and companies operating in Somalia use money transfer operators. Notwithstanding its political unrest and economic challenges, there are microfinance-providers operating in Somalia offering small loans for the Somali people (World Bank, 2019). One of the microfinance providers is Kaah International Microfinance Services (KIMS), which offers Shariah compliant financing and micro-savings to Somali micro and small businesses. However, little is known about the Islamic microfinance sector in Somalia. Therefore, the objectives of this study are to study the recipients’ views regarding Islamic microfinance products and to examine the effectiveness of microfinance in alleviating poverty in Somalia.

Issuance the Act (UU) No.1 Year 2013 on microfinance institutions will certainly have an impact on changes in the shape and condition of Indonesian microfinance institutions including Islamic microfinance institutions in the future, because the Act requires microfinance institutions have legal entities or shareholder firm and also the operations of microfinance institutions will be supervised by the financial services authority. Currently there are still many microfinance institutions, particularly Islamic microfinance institutions that do not have a legal entity, IE Baitul Mal Wa Tamwil (BMT) which amount 60% of the total BMT (Republika Online.com, December 15, 2010). The number of BMT to June 2012 is estimated at 5,500 units (Republika Online.com, June 28, 2012), and if 60% of BMT has not been incorporated in the amounted to 3,300 units and 2,200 units remaining BMT incorporated cooperative.