Muhammad Zubair Mughal Chief Executive Officer Alhuda centre of Islamic banking and economics Experiences in Regulating and Supervising.

Muhammad Zubair MughalChief Executive Officer

Alhuda centre of Islamic banking and economicswww.alhudacibe.com

Experiences in Regulating and Supervising Islamic Microfinance Institutions -

Pakistan as Case StudyAt

Regulatory and Supervisory Framework in Islamic Microfinance

18th – 19th March, 14 - Khartoum – Sudan

Contents

Basic Principles of Shariah Based Microfinance. Source and Mechanism of Islamic MF Products Type of Islamic Microfinance Institutions in Pakistan Legal and Regulatory Structure of Islamic MFIs State Bank of Pakistan Guidelines for Islamic

Microfinance. Shariah Compliance for Islamic Microfinance Licensing , Reporting and Operating Criteria.

Basic Principle of Shariah Based Microfinance

Prohibition of Interest Care for the poor is a religious obligation in Islam Asset Based Financing Risk Sharing Sanctity of contracts Financing in Halal/Shariah Compliant Activities. Micro Takaful ( Islamic Micro Insurance) Beneficial for both Muslim and non-Muslim

“Assisting the poor is a pillar of Islam”

Islamic finance is the outcome of religion in bankingOverview of Islamic Microfinance Mechanism Source of Islamic Microfinance

• Quran• Sunnah• Ijma’a (jurist

consensus)• Ijtihad &

Qiyas (analogy)

Sources of Islamic Microfinance

Islamic Microfinance Products Mechanism

Trainings & Quality HR

Shariah Compliant Funds

Free from Gharar

Micro Takaful

Free from Interest

Financing

Shariah Vetted Products

Shariah Compliant

Investments

Moral Ethical SocialPoverty Alleviation Element

and more….

A

Misconception removedIslamic

Microfinance is a system not

the Religion, it can be utilized & operated by both Muslims

and Non-Muslim

Communities for Poverty Alleviation,

Social & Economic

Development.

Factors to be considered while doing IMF

IslamicMicro

Finance

Ensure Shariah Compliance

Islamic Microfinance Institution Worldwide

• 300+ Islamic Microfinance Institutions operating in 32 Countries

• USD 1 billion Market Size.

• Indonesia, Bangladesh, Pakistan and Afghanistan have 80% share of Global Islamic Microfinance industry (CGAP)

• 2 Million Active financing Clients.

• Murabahah & Qarz-e-Hasan are the Major Products.

• Share of Islamic Microfinance in Islamic Finance industry & Microfinance Industry is less than 1%

Global - Islamic Microfinance Industry

Grameen Model: Amna Iftikhar – Malaysia, Islami Bank Bangladesh Limited etc.

Village Bank Model: Sanadiq program -Jabal al-Hoss, Syria, FINCA - Afghanistan etc.

Credit Union Model: Muslim Credit Union (Tobago), The Amwal Credit Union etc.

Cooperative Model: AlBaraka MPCS – Mauritius, Al- Khair Coop. – India, Muslim Community Coop.– Australia, Karakorum Cooperative Bank – Pakistan.

Self-Help Group: Aameen Society – India

For Profit Banks/MFIs : Ghana Islamic Microfinance Banks – Ghana, HSBC Amanah – U.K, Bank Islami - Pakistan

`

Compatibility IMF Products with MF Models

and more….

IMF’s Product for all Level of Poverty

10

Qarz-e-Hasan, Murabahah,

Ijarah, Mudarabah

Transitory Vulnerable

Transitory Poor

Chronic Poor

Extremely Poor

Zakat, Sadqa, Ushar

Salam, Istisna and

other products

Non-Poor

Transitory Non-Poor

The legal and regulatory framework of Islamic micro-finance

Pakistan as Case Study

Legal & Regulatory Framework

Pakistan

• Population - 180 million

• Muslim population - 97%

• GDP – USD 225.1 billion

• Per Capita Income – USD 1260

• Category – Lower Middle Income• Poverty Rate – 22.3% (less than USD 1.25/ per day)

• Microfinance Industry – Developing• Lack of Funding (Least interest of Donors) in

Islamic microfinance while demand of Islamic Microfinance is rising Source: World Bank (website)

14+ Islamic Microfinance Institutions operating in Pakistan

350 + Branches of IMFI’s 500,000+ Active financing Clients.

Murabahah & Qarz-e-Hasan are the Major Products.

Micro Takaful, Micro Saving, Branchless Banking etc.

Pakistan - Islamic Microfinance Industry

Pakistan - Islamic Microfinance Industry

Institution Islamic Microfinance ProductsAkhuwat Qaraz-e-Hasna, MicroTakaful, Grants

Ihsaas Trust Murabaha, Musharakah, Salam

Asasah Mudaraba, Musharaka

Muslim AID Murabaha

Islamic Relief Murabaha and Qarz-e-Hassan

Wasil Foundation Murabaha, Ijarah, Salam & Istisna MicroTakaful

HHRD Murabaha, Mudarabah

NRDP Qard-e-Hasana, Murabaha

NRSP Murabaha - Mudarabah with BOK for funding Source

NaymetBank Islami, Farz Foundation.BOK, etc.

Qard-e-Hasana, Murabaha, Salam

Pakistan & Islamic Microfinance Industry

• Innovation:• Micro Takaful• IT Integration (Mobile Banking) in Islamic Microfinance• Livestock Product with Islamic Microfinance operation• Micro energy & Micro Saving products

• Challenges:• Unavailability of Shariah Compliant fund• Reluctance of Donor Agencies for Islamic Microfinance• Accounting & I.T systems., Rating Agencies. • Law and order in Northern part of Pakistan

• Future Prospects:• Rapid growth of IMFIs with high acceptability from the

Muslim community.• Govt. Interest and IDB Support• AlHuda Centre of Excellence in Islamic Microfinance

MFIs, IMFIs, NGO’s, Rural Support Program: Registered and Supervised by SECP under Companies’ Ordinance 1984 (Section 42)

Trust, Foundations, Waqf, Cooperatives etc: under joint companies ordinance 1861

Microfinance Bank: Regulated by State Bank of Pakistan

Islamic Banks/Banks with having IMF operation: Regulated by SBP

Type of Islamic Microfinance Institutions in Pakistan

Option 1Establishment of Full-fledged Islamic Microfinance Bank (IMFBs)

Option 2Islamic Microfinance services by Full fledged Islamic banks

Option 3Islamic Microfinance services by conventional banks

Option 4Islamic Microfinance services by conventional microfinance banks (MFBs)

State Bank of Pakistan Guidelines for Islamic Microfinance Business by Financial Institutions

Option 1Establishment of Full-fledged Islamic

Microfinance Bank (IMFBs)

Licensing Nation wide Microfinance Banks; Province wide Microfinance Banks; Region wise Microfinance Banks; District wide Microfinance Bank Application Compliance with Legal framework and Prudential

regulations Bank draft of PKR 500,000 by applicant Appointment of Shariah Advisor by applicant according to fit and

proper criteria of SBP. Shariah vetted Products along with product structure and its

beneficial use. Ensure the Expertise, Shariah Compliance Mechanism, Quality HR,

Policies, Manual, Procedure etc.

Option 2Islamic Microfinance services by full-

fledged Islamic Banks

Mode 1 - Islamic Microfinance counters at existing branches

Mode 2 - Stand alone Islamic Microfinance branches and mobile banking

Mode 3 - Independent IMFBs as subsidiary of MFBs

Mode 4 - Developing linkages with IMFBs and IMFIs

Option 3Islamic Microfinance services by

Conventional Banks

Mode 1 - Microfinance counters at existing branches Mode 2 - Stand alone Islamic Microfinance branches

and mobile banking

Mode 3 - Establishing Independent Islamic MFBs as Subsidiaries of conventional Banks

Mode 4 - Developing linkages with IMFBs and IMFIs

Option 4Islamic Microfinance services by Conventional Microfinance Banks

Eligibility Criteria: Shariah Advisors Particulars (SAP) according to the fit

and proper criteria of SBP Shariah Compliant Deposit and Financing Products. Infrastructure and Logistic requirements Required changes in Memorandum and Articles of

Association allowing the acceptance of deposits on PLS basis

Segregation of Funds (Islamic and conventional) Set up Separate Islamic Microfinance division (IMD)

Establishment of Islamic Microfinance Division (IMFD)

Policies Procedures/ Practices Shariah Compliance Capital Adequacy Cash Reserves and Statutory Liquidity Requirement

(SLR) Financing need, source and utilization Products mechanism SOPs/ Manuals Risk management Compliance with SBP directives, Role and responsibilities Human Resource Training periodically

Compliance to be ensured by IMFI in: System and Control

Internal Audit

Accounting Records

Utilization of Conventional Branch Network

Shariah Compliance Shariah Supervisory Board at Central Bank /SECP

Internal Shariah Advisor

Shariah Audit/Shariah Review

Shariah supervision of Islamic Microfinance Network

AlHuda Center of Islamic Banking and Economics160 B, Ahmad Block, New Garden Town, Lahore - Pakistan.

Ph: (92-42) 35913096 - 98, Fax: (92-42) 35913056Email: [email protected]

www.alhudacibe.com