An Islamic Microfinance Program without an Islamic Label

It is a long-standing debate among contemporary Islamic banking and finance scholars and professionals. Should Islamic banking and finance should carry the Islamic label? A country with an avowedly Islamic identity resisted the Islamic label for the distinct model of banking and finance on the ground that this would amount to an indirect admission that the prevalent system had been unIslamic. Another country with a long secular tradition and identity would embrace the idea but subject to the condition that the Islamic label would be replaced with something else in line with the predominant distinguishing feature, e.g. participatory nature of transactions. Then there are financial institutions with clear Islamic labels that engage in spurious transactions that are Islamic in form but not in spirit. And there are financial institutions with clear Islamic labels that engage in spurious transactions that are neither Islamic in form nor in spirit. Indeed, opinion is deeply divided on whether the label that confers a distinct identity to the model also confers a distinct advantage or not.

In this blog I have no intention to evaluate the arguments for and against the use of the Islamic label. What I purport to present here is an experiment that I have long admired and considered to be a model to be emulated and replicated in Islamic societies. The experiment did not purport to be meant for Muslims, yet it is Islamic perhaps both in form and in spirit. I have believed that the financing offered by Kiva in the form of loans with a small charge (to recover actual costs) did not violate the Shariah rules of permissibility to qard or loans that recover the actual cost incurred in the transaction. At the same time, there was no transparent way to determine whether there was an element of profit in such financing, or not. Kiva in a new avatar Kiva Zip has however; put all misgivings to rest by providing zero-cost microfinance. It therefore did not surprise me to learn that the jury for the Islamic Economy Award 2013 had chosen Kiva as the world’s best provider of Islamic microfinance. I would restrict the discussion to Kiva Zip.

Kiva Zip is a pilot program launched by Kiva, the world’s first and largest micro-lending website. It is credited with mainstreaming the idea of crowd funding. It enabled anyone with an internet connection to lend as little as $5 to alleviate poverty. Kiva Zip takes this model even further by making it possible for lenders to send funds directly to the entrepreneurs they support. It essentially takes care of three important considerations in provision of finance to the poor – affordability, convenience and low credit-worthiness as reflected in credit scores.

Kiva Zip operates online and uses mobile payment technologies to move money. It is thus, able to expand its outreach to remote areas and to the marginalized poor. It is also able to slash the cost of making microfinance loans to the level of zero. Where it is unable to reduce the cost of loans to zero, its seeks to recover the actual cost of making the loan that is now reduced to very low levels. Any savings in costs is transferred to the borrowers.

Kiva ties loans to borrowers characters. Here trustees play an important role. Every borrower must be endorsed by a trustee. Trustees can be individuals or organizations, and are responsible for identifying borrowers that would be a good match for Kiva Zip loans. They do this by assessing the character and creditworthiness of borrowers. If these check out, trustees can publicly endorse them on the Kiva Zip website, and provide ongoing support over the course of their loans. Trustees never handle the money. And their public reputation is tied to the repayment record of the borrowers they endorse.

Kiva cultivates a community between borrowers and lenders. Kiva Zip strengthens these relationships even more by letting borrowers and lenders exchange messages, including words of encouragement, updates from borrowers as they succeed, and notes about how loans have helped businesses thrive.

How does the transaction between lenders and borrowers at Kiva executed? Lenders visit the Kiva Zip website, browse loan profiles, get more information on individual loan pages, and choose which borrowers they want to make a loan to. Once a loan is fully funded, Kiva Zip sends the loan amount directly to the borrower. Over the course of the loan term, the borrower promises to pay their lenders back in regular installments. As the lenders get their money back, they can relend the money, or withdraw it from Kiva Zip.

It may be noted that the success of zero cost direct loan model is heavily dependent upon availability of advanced mobile payment technology.

It is quite obvious that the Kiva Zip lenders come forward to lend purely out of benevolence. They do not receive any financial returns, while being exposed to many risks – risk of default that may be due to poor execution of a business plan, or to the borrower experiencing a catastrophic accident, or even to fraud on the part of the borrower or the trustee. Additionally, Kiva also makes the lender bear the exchange rate risk involved in multi-country transactions. The borrower is kept insulated from adverse movements in exchange rates in a spirit of benevolence.

As of the end of August 2013, the Kiva Zip pilot had disbursed loans to about 1,400 borrowers via about 15,000 lenders in Kenya and USA. The parent Kiva.org has made over 600,000 loans till date by over 1,000,000 Kiva.org lenders.

Kiva was never meant to be an Islamic microfinance experiment. But it is adjudged now as the world’s best Islamic microfinance experiment because it shares the ideals and goals of an Islamic economy – of a riba-free world for its poor borrowers and aims to achieve this in a sustainable manner through enhanced efficiency. This is in sharp contrast to the high-cost of world of conventional loans by mainstream MFIs as well as of murabaha loans by Islamic MFIs.

Kiva has some great lessons for managers of zakah, sadaqa and cash waqf funds as well. Of course, zakat or sadaqa-funded microfinance experiments may emulate the Kiva model with a view to achieving efficiency and offer zero-cost Islamic loans in a sustainable manner.

There is another positive dimension of the Kiva model as well for Islamic social funds. In case of zakah, sadaqa and cash waqf, Shariah emphasizes on flow of funds either to beneficiaries designated by Shariah (as in case of zakat), or by the donor himself/ herself (as in case of sadaqa and waqf). For instance, the Kiva model if replicated for zakat can transparently bring together the muzakki (zakat payer) and mustahiq (zakat beneficiary) on an M2M platform. It would help fulfill the Shariah conditions relating to distribution of zakat as well as the governance requirements of sadaqa and waqf (compliance of donor’s intentions) in a more effective manner.

Mohammed Obaidullah | April 19, 2014