It was in 1976 when the world’s first microcredit bank was spearheaded. It extended credit and banking services to the very poor in Bangladesh. Today, microfinance also exists within the tenets of Sharia, explains Elsa Febiola Aryanti.
The microfinance industry has grown from its humble beginnings in Bangladesh with the Grameen Bank. Its founder, Professor Muhammad Yunus, piloted a research project that gave the very poor financial assistance. Today, microfinance is the range of financial services for people who are traditionally considered to be non-bankable, mainly because they lack the guarantees that can protect a financial institution against the risk of a loss. The profound effect of microfinance in lifting the pressures of poverty has contributed to the fast growth of the industry. Microfinance serves not only the poorest of the poor in society, but also those who are borderline cases.
Along with the development of microfinance is an increasing need for microfinancing that conforms to and complies with Sharia, mainly in countries that are predominantly Muslim. The main concern in constructing Sharia microfinance is to find mechanisms that are free from riba (see box) and based on principles and contracts that conform to Sharia law (see sidebar). Sharia microfinance also aims for social justice and advocates entrepreneurship and independence.
The Arabic word ‘riba’ refers to an amount of money that is charged on the loan principal used. Riba is made up of three elements: the first is excess, or surplus, over and above the capital of the loan. The second is the determination of this excess rate in relation to time. The third is that a transaction is conditional on the payment of a predetermined surplus. These three elements jointly make up riba. Any deal, bargain or credit transaction in money or in kind which has these elements is considered a transaction of riba. Source: Sound Vision Foundation, Inc (USA)
In Sharia microfinance, the microfinancing systems are dependant on the economic situation of each particular client or microenterpreneur. For the poorest of the poor, the first scheme applied is through waqf or qard-al-hasan. With these, a certain amount of capital is given to them to elevate their standard of living from the barest minimum. Waqf and qard-al-hasan are given without any restriction—they can also be described as free financing or a loan of kindness.
The assistance that the very poor receive develops the skills and abilities required to produce goods and generate income. Their standard of living thus improved, they are then eligible to receive the mudaraba, or murabaha Sharia microfinance scheme. In the mudaraba scheme, the microfinance institution and microenterpreneur are partners. The institution invests the money while the microenterpreneur provides the labour. From this partnership, the microenterpreneur then has the right to charge a fee as well as to share any profits.
In Sharia microfinance, all forms of economic activities should:
- not be morally or socially adverse
- bear universal and egalitarian approaches
- focus on the wellbeing of the community as a whole
- concentrate on the destitute and the deprived
In the murabaha scheme, the microfinance institution buys some goods and resells them to the microenterpreneur at the cost price of the goods plus a mark-up, as agreed by both parties, that goes towards any administrative costs. The goods are then used by the microenterpreneur in the production process and to generate income. The goods are paid in equal instalments and remain within the ownership of the microfinance institution until all payments are made in full.
For impoverished Muslims who are trapped in their financial situations because of their unwillingness to participate in interest-based loans, Sharia microfinance is the answer to financial assistance—at last.The writer is a fund manager at a reputable state-owned pension fund institution in Indonesia as well as a Sharia-based financial planner, writer and trainer. She also volunteers at a zakat organisation in Indonesia.
Illustration Sugiarto Kwan