12 Points on How to Do Islamic Microfinance in India

Originally authored on June 30, 2008

Large section of Indian Muslims are poor. They also tend to get excluded from the formal banking and financial system for a variety of reasons including their aversion to Riba (commonly understood as interest). Though the Indian poverty alleviation initiatives have drawn world-wide appreciation, they show no signs of taking the religious or cultural sensitivities of the Muslim population into account. A large number of indigenous Baitul-Maals have sprung up in Indian cities and small towns as a response to this challenge. These Baitul Maals, if strengthened and rejuvenated with better management and control systems, injection of capital, greater transparency and disclosure, have an enormous potential of making a dent on poverty among the millions of Muslim men and
women. The following are my first-cut thoughts on the issue and I welcome critical suggestions and comments from readers.

  1. There is a need to do away with collateral requirement as the poor, destitute and even moderately poor are simply not in a position to offer collaterals. Unfortunately, some Baitul Maals in India do insist on such collateral.
  2. Fortunately, Prof Muhammad Yunus of Grameen has showed us how to do microfinance without collateral using “group financing” and “graduated financing”. Baitul Maals in India should go for formation of groups (Usrah/Halaqa). They should not be called Self-Help-Groups (SHG)s to differentiate them from the ones that are formed as part of the Riba-based bank-NGO-SHG linkage programs. A good amount of systematic effort goes into formation of these groups and one can learn a lot from the Indonesian Baitul Maals.
  3. Unlike government-sponsored micro-credit programs providing lump-sum loans, Baitul Maals should provide financing in small amounts aiming for a continuous relationship with the beneficiaries and clients. Most Islamic microfinance institutions around the world now use this method of delivering financial services. On the basis of track record of payment of a beneficiary, the amount of financing may be increased in each successive round.
  4. A Baitul Maal should have clearly distinct Funds for Zakah, Sadaqa, Tamweel, and Tamin (or Takaful). Each one of these Funds should have clear accounting and control systems in place to keep track of movement of funds. Zakah Fund should be used only for the eight categories of beneficiaries identified by the Holy Quran (9:60) and explained by the Sunnah. The specific nature of utilization should follow the guidelines issued by the Shariah scholars associated with the Baitul Maal. A major portion of Zakah Fund should ideally be earmarked for meeting consumption needs of the extremely poor and the destitute.
  5. The beneficiaries of Zakah (likely to use them for immediate consumption) should not be forgotten once the payment of Zakah has been made. They must be provided with some skills or know-how to make them economically active. Qard Hasan from the Zakah and Sadaqa Funds should be provided to them to finance purchase of required tools or working capital to start a nano or micro-enterprise.
  6. Baitul Maals should be linked to Awqaf properties in the locality which are essentially in the nature of community-held physical assets like land, buildings etc. Such assets should be used for providing various vocational, entrepreneurial and managerial skills to make the poor “economically active.”
  7. Tamweel basically refers to “for-profit” financing and is targeted at groups or member-based-cooperatives, once these are in place. There are various modes of such financing, such as, Bai-Muajjal and Ijara that are similar to hire-purchase and Musharaka and Mudaraba that are basically partnerships between the client and the Baitul Maal. Standard contracts for these modes should be used. Proper book-keeping should be ensured for determination of profits for participatory modes of financing to take place. Such financing may be targeted at those among the clients who have crossed several stages of Qard-Hasan financing or at new clients from among the moderately-poor to generate profits that can ultimately sustain all operations.
  8. A portion of the profits and membership fee may be earmarked to create a Tamin or Takaful Fund to provide a cushion to members or their family members in the event of adversities, such as, accidents, sickness, deaths and other perils resulting in loss of wealth and earning ability. Several experiments in micro-takaful are now on in several countries, such as, Sri Lanka and Indonesia. A component of the Zakah Fund may also be legitimately used as a credit-guarantee mechanism for the Gharimeen (one burdened with debt) according to zakat rules in the Holy Quran ( 9:60), thus, covering credit risk in debt created through Bai-Muajjal and Ijara modes of financing.
  9. In order to avoid any possibility of social discord and cultural issues, Baitul Maals should aim for “family empowerment” instead of “women empowerment” as most mainstream microfinance practitioners seem to harp on. At the same time “Sisters Only” Baitul Maals should be set up to take care of poor and destitute among sisters who are required to either provide for or add to the family incomes.
  10. Donor assistance from government agencies or development agencies, may be welcome for strengthening the resources of a Baitul Maal, but should not become the very raison d’être of setting up the organization. A Baitul Maal may be started only after a comfortable level of equity/ membership capital is raised from members themselves.
  11. Baitul Maals must form an active second-tier organization for providing several supporting services that may be procured in an economical manner only through collective action. The services include: training of staff and managers of member-Baitul-Maals; development of Standard Operating Procedures (SOP), IT-based accounting and control systems, legal and advisory services for member Baitul-Maals; commissioning a single Shariah-Board to which all fiqhi issues should be referred to by individual Baitul-Maals; advocacy with governmental and law-enforcement agencies (this is of extreme importance in a country like India where laws and regulations change often creating major uncertainties for all players); and provision of marketing support and business-matching services.
  12. Finally Baitul-Maals must inculcate a spirit of Asabiyah or social solidarity among themselves. Cooperation should be the key word. The differences of aqeedah, madhhabs, jamaats and the like must not make the Baitul-Maals lose sight of their immediate objective of efficiently providing financial services and making a dent on poverty.

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