Turning to Islamic Finance for Meeting Development Goals – I

It was the year 2006. It was my maiden assignment at the Islamic Development Bank to explore and take stock of the nascent Islamic microfinance sector. Microfinance had caught the fancy of developers and policymakers across the globe including my employer with the Nobel award for peace for that year going to Dr. Muhammad Yunus and the Grameen Bank.It was a privilege for me. Dr. Yunus was delivering a lecture at Jeddah. He sounded so convincing, promising to consign ‘poverty to the museums’. At the same time, to my dismay, he refused to budge from his time-tested model that considered ‘interest’ as a foundational idea. Bangladesh was leading the way with yet another highly successful experiment called BRAC. The BRAC model sounded so much more “Islamic”in spirit with its “finance-plus” or “finance-multiplied” approach of providing hand-holding and non-financial services beyond micro-credit. Yet, the idea of financing without the element of interest was quite alien to both BRAC and Grameen and to their thousands of replicator-projects springing up across the globe. None would even remotely consider a departure from the original rules of the game. The future of interest-free microfinance appeared bleak.

It appeared to me that conventional microfinance was underlined by some hard-to-break beliefs in the name of ‘best practices’. One, being profitable in the game of financing the poor was the key to sustainability of provider-institutions and hence, was a legitimate and desirable objective. Two, grants were inherently unsustainable and must not therefore, be used for absorbing operational costs. Indeed, the term “charity” was unfashionable enough to be excluded from any serious discourse on poverty alleviation. However,these so-called best practices had also led to some unsavoury outcomes over the years. Most importantly, there was no microfinance available for the poorest-of-the-poor.The high operational cost of microfinance with a further addition of the profit component had made it unaffordable to the very people who needed it the most. Profits had apparently made the MFIs an attractive destination for investment capital. However, soon it turned out that this new breed of sunrise institutions were sustainable only in the short-term. As the micro-credit bubbles routinely burst in one country after another, many enthusiasts correctly realized that the long-term sustainability of such institutions was under serious threat.

In a refreshing departure from the mainstream approaches and models, some development experts felt that microfinance must not violate the basic beliefs of the very people it was seeking to help. Else, this would lead to “self-exclusion” by the intended beneficiaries from the financial system and would aggravate the problem further.The UNDP had in the same year 2006, initiated a program called the Deprived Families Economic Empowerment (DEEP) for the poor and marginalized families in Palestine with IsDB as a partner. It was perhaps the beginning of the marriage between Islamic finance and microfinance that would later be known as Islamic microfinance. Towards the end of the program in 2017 it came to be known as Productive Families Economic Empowerment program. The progression from “Deprived”to “Productive” was hard to miss.

With a budget of over USD 100 million contributed by the Islamic Development Bank, the Swedish International Development Agency, the International Fund for Agricultural Development (IFAD), and the Arab Fund for Economic and Social Development (AFESD) the program benefited around 14,000 poor families through economic empowerment activities. It created over 32,500 job opportunities in the West Bank including East Jerusalem, and Gaza Strip, through financing potential micro and small existing businesses, establishing start-up businesses for poor, yet productive families, through grants or Islamic micro-financing. The program was designed to have three major components:

Micro-grants were for families in abject penury meant to support their income generating activities.These were provided as start-up capital. So far, over 8.3k families, identified based on poverty assessment tools have benefited and the success rate of such microenterprises is estimated to be over eighty percent.

Islamic microfinance using for-profit modes have been provided to about 5.6k microenterprises through partner MFIs. The partner MFIs received technical assistance from the program that was used for building their capacity of pro-poor targeting and for developing their human resources through training and onsite coaching. Customer awareness campaigns about the opportunities offered by Islamic microfinance products to progress out of poverty were undertaken in the target region.

A third component focused entirely on capacity development under which 250 staff members of executing NGOs,  MFIs  and government  officials  were trained in  the field  of  sustainable livelihood approach, poverty analysis, business planning and coaching, and feasibility study. Tools, manuals, forms and templates were developed to ensure the proper targeting of poor families, the assessment of their conditions and capitals, and harmonization of the execution throughout the different partners. Further, a capacity development program including a package of business planning, basic management training skills and specialized technical training was developed and conducted for 2,800 potential beneficiaries.

This program was unique in many ways. Palestine was facing a never-before financial and liquidity crisis in 2006 resulting in abject poverty and penury for large sections of its population.The program offered a comprehensive package and a combination of social security and economic empowerment tools supported by skills and business development services. It targeted empowerment of families (in contrast to the women-alone approach of Grameen and other MF providers) that was aligned with the cultural sensitivities of the region. And it introduced a range of for-profit Islamic microfinance products offered through a network of grassroots institutions. Notwithstanding the apprehensions arising out of ignorance about Islamic tools, voiced by most such institutions at the design stage, the program went on to address the challenge head-on through comprehensive training and on-site coaching. A text-book model of Islamic microfinance was in the making.

(To be continued)