Application Of Islamic Microfinance In Poverty Alleviation Economics Essay

Application Of Muslim Microfinance In Poerty altogethereviation Economics Essay pauperisation is one of the native problems in developing countries. It is estimated that around 80 percent of the worlds population is life sentence in countries where income distribution gap is widening. destitution rate is quite mellowed in all Muslim countries except a few countries in S turn outheast Asia and the Middle East. Poverty trains throw away as well been associated with high diversity onside low productivity. Half of the Indonesia population (about 129 zillion) is animateness under the exiguity line of $2 a twenty-four hour period. While in South Asia cardinal largest Muslim states Bangladesh and Pakistan alone account for 122 million each living downstairs the meagreness line where as vitamin C million Muslims of India is besides living below the penury line. (extraction Moslem Microfinance Development Challenges and Initiatives, IRTI website, 2007)Microfinance is a part of monetary function which drop by the waysides not unionly credit facility but also savings, insurance, and fund transfers to facilitate low-income sight. The World trampt estimates that in that respect argon over 7,000 microfinance institutions serving some 16 million piteous peck in developing countries. The total cash turnover of MFIs world-wide is estimated at $2.5 billion and the potential for new fruit is outstanding. (Source Micro facts info Snapshots of Microcredit, world(prenominal) Development explore boil down website, 2008-2009)The Microcredit Summit estimates that $21.6 billion is needed to cater microfinance to speed of light million of the worlds distressing peopleest families. The Summit planners said it should be possible to raise US$2 billion from embraceers savings alone and the final figure may be even high. (Source Micro facts entropy Snapshots of Microcredit, worldwide Development enquiry Centre website, 2008-2009)Fewer than 10 million out of the cholecalciferol million people who run micro and small enterp evolves defend inlet to fiscal reinforcer for their business and fewer than 2% of the measly people have nettle to fiscal operate (credit and savings) from sources other(a) than geters. (Source MICROFACTS Data Snapshots of Microcredit, Global Development Research Centre website, 2008-2009)The supporters of microfinance believed that it give help in reducing poverty and the pattern became more(prenominal) popular in 1974 when famine struck Bangladesh. At the time, Dr. Muhammad Yunus was a professor of economics at the University of Chittagong. He subsequently started Grameen curse which has been a wonderful success with more than 90 percent recovery rate. (Source unaw bes history of Grameen Bank, Grameen Bank website, 2010)Studies have also shown that during an eight year period, among the poorest Bangladesh with no credit service of any type, only 4 % pulled themselves above. But with onl y individuals and families with credit from Grameen Bank, more than 48% rose above the poverty line. (Source MICROFACTS Data Snapshots of Microcredit, Global Development Research Centre website, 2008-2009)In Pakistan there are 25 Microfinance institutions with the total deposit of $52.3 million which covers 1.83 million of population out of total population of 174 million (Fehmeen, 2010). Pakistan is ranked 6th in call of population with the labor force of 53.78 million as estimated for 2009. (Source CIA world circumstance book, Central Intelligence Agency website, no date) get wind 1 Unmet contract for Microfinance in Pakistan from 2008-2009Source Microfinance Hub WebsiteFrom the statistical figures of 2008-2009 it can be said that the population below the poverty line is 29,928,000 million which represents 17.2 % of the total population and the sluggish population is 26,448,000 which heart 15.2% of the total population that sums up to 32.4% out of the total population of Pakis tan. These people need microfinance support to improve their living measuring stick because the people living below the poverty line are not even able to submit basic necessities of life (Fehmeen, 2010).In this regard, the monetary Inclusion Program (FIP) has been implemented by SBP with support of the UK Department for international Development (DFID), which aims to transform the financial market with a clear objective lens to provide equitable and efficient market- ground financial services to the otherwise excluded poor and marginalized population including women and young people. FIP has developed an evidence establish policy and a realistic target of reaching out to three million microfinance users by the end of 2010. (Source Financial Inclusion Program, SBP, no date)Some facts about the outreach of Moslem Microfinance in different countries are mentioned in the Table 1.Region nary(prenominal) of Included Institutions% of Female clients (Avg.)Total no. of ClientsTotal Ou tstanding bring Portfolio (US$)Avg. Loan Balance (US$)Afghanistan42253,01110,347,029162Bahrain1N/A32396,565299Bangladesh290111,83734,490,490280Indonesia1056074,698122,480,0001,640Jordon1801,4811,619,9091,094Lebanon15026,00022,500,000865Pakistan1406,069746,904123West Bank and Gaza1100132145,4851102Saudi Arabia1867,000586,66784Sudan3659,5611,891,819171Syria1452,2981,838,047800Yemen3587,031840,240146Total63299,441197,583,155564Table 1 Outreach of Islamic Micro Finance by CountrySource CGAP Survey, 2007Islamic finance is still in its introductory phase, but it has achieved double digit growth both in Pakistan and around the world. Some of the well known Islamic finance instruments are Murabaha (Sale Contract), Musharakah (Equity Participation), Mudarabah (Partnership), Ijarah (Lease Financing), Bay Muajjal (sale on Credit or deferred fee sale), Bay Salam (Deferred Delivery Sale) etc.1.2 Problem StatementInterest based micro lending carries high interest evaluate and is impermissibl e in Islam hence, this say strives to analyze how the strut of debt and legality based Islamic finance contracts be utilize in providing Islamic micro financial services in Pakistan which has more than one quarter people living below the poverty line and huge hoidenish population.1.3 Objectives of the studyIt provide fall upon and analyze unlike instruments of Islamic microfinance that can eliminate poverty effectively than stuffy micro financing.It exit recognize and analyze the mix of debt and truth based Islamic finance contract used in providing Islamic micro financial services in Pakistan.It will explore the backdrop of opportunities for Islamic microfinance in Pakistan.It will discover the challenges that Islamic microfinance could face in Pakistan.1.4 Importance of the studyThisstudyhighlights the brilliance of Islamic microfinance to help compress poverty in Pakistan. As the poor are becoming poorer in Pakistan due to rising pretentiousness and very limited s ources of physical exercise, this question will discuss how the Islamic microfinance could help in poverty alleviation, equitable redistribution and employment foot.1.5 Research MethodologyThis query study will inquire that how remote Islamic microfinance would be helpful in reducing poverty in Pakistan. To substantiate the case for microfinance the study will analyze 5 major(ip) countries where microfinance is prevalent. Panel data on four variables which include per capita income, education which will be thrifty by dint of literacy rate, poverty measured through character of population living below the poverty line and inequality measured through gini co-efficient will be taken from the selected five countries. The period of study will be different for each country starting from when microfinance started in particular countries to the current period. Secondly, the research will identify and analyze the mix of debt and equity based Islamic finance contract which could be used in providing Islamic micro financial services in Pakistan. For this purpose, specific entrepreneurial activities with investment requirements will be identified and then the warning Islamic mode to be used in specific entrepreneurial activities with particular investment would be recommended.1.6 Plan of the studyThis study consists of five phases. Work in each phase would be reported as a separate chapter. The first chapter of study will cover the introduction which includes the background of the study, Problem statement, Objectives of the study, importance of the study and scope of research. The second chapter will cover the literature review of will the academic and practical give in Microfinance. The third chapter will discuss the research methodology i.e. the various tools and techniques that will be used to conduct research. The fourth chapter will include the data collection and findings obtained from the analysis of the data collected. The fifth chapter will compen sate the research conclusion based on the findings.1.7 Limits of the studyThis study on application of Islamic microfinance in poverty alleviation would be useful and provide experiential support to future studies on Islamic microfinance in Pakistan. There exist no full fledge Islamic microfinance border in Pakistan. Hence, the models and instruments discussed have not been put into practice and empirical analysis of performance will be hard to make.CHAPTER 2LITERATURE canvass2.1 What is Microfinance? check to Abedelhamid 1991 (p. 57-64).Microfinance is a set of financial services which provides loans to clients who are excluded from the conventional financial system on account of no or picayune collateral. In the third world countries, microfinance has become very popular because inflation tends to be high and volatile government is often incompetent and the needed legal framework for financial services is often missingMicrofinance is the training of a broad range of financi al services such as deposits, loans, comprisement services, money transfers, and insurance to poor and low-income households and, their microenterprises. Microfinance services are provided by three types of sourcesFormal institutions, such as rural lingos and cooperativesSemiformal institutions, such as nongovernment organizations andInformal sources such as money lenders and shopkeepers.Institutional microfinance is outlined to include microfinance services provided by both formal and semiformal institutions. Microfinance institutions are defined as institutions whose major business is the provision of microfinance services. (Source Finance for execrable Microfinance development Strategy, ADB website, 2000)2.2 History of MicrofinanceMicrofinance history dates back to the mid of the 18th degree Celsius when the philosopher Lysander Spooner was doing research on the advantages from small loans to entrepreneurs and farmers as a way to get people out of poverty.The economist Timot hy Guinnane at Yale had been doing some research on Friedrich Wilhelm Raiffeisens village bank movement which started in 1864 in Germany and by the start of the year 1901 the bank reached 2 million rural farmers. As per Timothy Guinnane explanation it was proved that microcredit could pass the two tests concerning peoples payback moral and the possibility to provide the financial service to poor people. Today, the boldness Microfinance has its roots in the 1970s when the Grameen Bank of Bangladesh was established.At that time a new span of microfinance initiatives introduced many new procedures into the sphere of influence. Pioneering enterprises started doing experiments with providing credits to the poor people. Increasingly, it was popular opinion that people could be relied on for repayment of their borrowings and it is feasible to provide financial services to underserved people through market based enterprises without subsidy. In 1974, put down bank was the first microfin ance and community development bank founded in boodle for the first time in USA. (Source History of micro finance, Global discover website, 2006)Today the World Bank estimates that more than 16 million people are served by some 7000 microfinance institutions all over the world. CGAP experts suggested that about 500 million families benefits from these small loans making new business possible. (Source Micro facts Data Snapshots of Microcredit, Global Development Research Centre website, 2008-2009)2.3 Present Situation and harvesting of MicrofinanceThe year 2008 is considered as the beginning of a challenging period for microfinance in a number of countries. The economic and financial crises that reached MFIs and their clients turned calm water into rough shores for many institutions in the industry. The year 2009 MIX Global 100 Composite be captures the effects of this changing environs, where global growth rates slowed for the first time in years, and many MFIs faced stagnant or rising costs, and in some instances a slow rise in credit risk.Figure 3 Growth Pattern of Microfinance in all continentsSource MIX Global website, 2009The 2009 edition of the MIX Global 100, surveyed 955 institutions from nearly 100 countries as illustrated in Table 2. As a group, surveyed institutions represented nearly 85 percent of the known pool of microfinance borrowers, serving 72 million borrowers with 37 billion USD in loans and dimension 22 billion USD in deposits from 67 million microfinance clients (Source MIX Global website, 2009).Table 22009 MIX Global 100 Composite Ranking Countries with Most MFIs in point 100CountryMFIs in Top 100All Ranked MFIsIndia2051Ecuador944Egypt612Philippines634Bangladesh59Cambodia513Bolivia422Bosnia and Herzegovina413Armenia37Mexico327Morocco35Dominican Republic22Jordan26Mongolia24Nepal216Peru254Serbia24Vietnam25Source MIX Global website, 2009Microfinance is assured as one of the tools that can drop-off as well as eradicate poverty. harm onize to Saefullah (2010) numbers of research have been conducted in order to measure the success of microfinance. The stories of Grameen Bank in Bangladesh, Bank Rakyat Indonesia (Indonesian People Bank) in Indonesia, Self-Help Group in India show the finis to which microfinance can eliminate poverty. Obaidullah (2008) has also done research that attempts to identify the annulus of microfinance.Table 3 Poverty Level and Financial Access in Bangladesh, Indonesia and TurkeySource Islamic Microfinance Development Challenges and Initiatives, 2008, IRTI, IDBName of Member Counrty kind-hearted Poverty index RankIncome poverty Index Population at a lower placePopulation in millionsNo. of poor in millionsFinancial access percentage (2007)$ 1 a day (%)$ 2 a day (%)Poverty LinePeoples republic of Bangladesh853682.845147.3712232Republic of Indonesia417.552.417.8245.45128.640Republic of Turkey213.418.72070.4113.249 blow of microfinance in household and community take componentsAccording to study of Chowdhury Bhuiya (2004) the wider impacts of BRAC (Bangladesh folksy and Advancement Committee) poverty alleviation program found that there was a positive impact on living normal as the survival rate and schooling of children improved.The Impact of microcredit on borrowers of Grameen Bank by Khandker (2003) illustrate that there was a positive impact on the households poverty reduction that availed the microfinance facility. Latif (2001) in his study on the effects of microcredit on the household saving of Bangladeshi borrowers cogitate that saving-income ratio was prodigiously higher for the guests of microfinance as compared to poor who were not participants of microfinance institutes.Another research conducted by zamang (2001) on the Impact of microcredit on poverty and vulnerability found that there is positive impact on income and decision making capability of poor development microfinance.Bangladesh Institute of Development Studies (2001) researched on the I mpact of microcredit on savings and informal borrowings discussed that microcredit increased savings and this was more prominent in women than men.hakeem (2000) in the study Impact of microfinance program highlighted the higher social dealing and mobility among women clients and the positive impact of microfinance on asset-ownership.Mosley and Hulme (1998) studied the possible conflict among growth and poverty alleviation. Their main finding is that the income and assets of the borrowers had increased due microcredit.Halder (1998) in the research identification of the poorest and the impact of credit on them asserted that the members of BRAC (Bangladesh Rural and Advancement Committee) consumed high calories as compared to non-members.Pitt and Khandaker (1996) explained in their study the Impact of microcredit on borrowers of BRAC, BRDB (Bangladesh Rural Development Board) and Grameen Bank that there was positive impact in women employment, total per capita weekly expenditure and womens non-land assets. Villagers attitude and other behaviors can be changed through credit programs.(The Challenge of Poverty and Mapping out Solutions undeniable Paradigm Shift from a Problem-Solving and Islamic Perspective Dr. Mohammad Omar Farooq)M.A.Hamid (no date) found in his research that from 200 customers of Grameen Bank 46 were willing to join the Islamic bank of Bangladesh limited and one of the three main reasons was that this Islamic bank will provide services of microfinance inwardly the limits of Islamic Shariah and Grameen Bank will not.Microfinance has a very essential role to play in development match to proponents of microfinance. As per UNCDF (2004) studies microfinance plays three vital roles in improvement. graduation exercise of all it helps needy people to fulfill their basic take and cling to against hazards and is also related with up gradation of household economic well-being and lastly it motivates women by their participation in economy and also advertise equality.Results of a research on monitoring and evaluation of PKSF (Palli Karma-Sahayak Foundation) (2005) sponsored microfinance programs shows that absolute poverty decreased by 9% and moderate poverty reduced by 5% through 1997 to 2000.Amin et al. (2003) in his study the Impact of microcredit on clients of Grameen Bank, BRAC and ASA concluded that Microcredit program was successful in reaching poorObjective of microfinance according to Otero (1999) is not just about providing jacket crown to the poor or run against poverty on an individual direct but it also has a responsibility on an institutional level. It seeks to create organizations that can provide their financial services to the poor, who are continuously ignored by the formal sector. According to Littlefield and Rosenberg (2004) study people that are below poverty line are not part of financial services sector of the economy so thats why microfinance institutions have established to provide solution to the se issues. MFIs become a major part of financial sector of country by providing these services to poor people and hence it can also access capital markets for the funding of their lending portfolios. (Otero, 1999)The overall collision of microfinance can be canvass on three things including level, type and its variable. Level defines its depth that on which level it has affected the target market whereas type of impact examines how it has benefited the people a abundant with the impact variables as mentioned in fig. 2.Impact of microfinance on household can be accessed on two levels household and community through its types by considering its different variables. It can be scrutinize through income, education, empowerment and other social things as well.Level s of ImpactTypes of ImpactImpact VariableEconomic VariablesIncomeHousehold AssetsHousingAccess to food adult male bang-upEducationHealthConfidenceSkillsEmpowermentSocial CapitalSocial NetworksSocial MobilityHouseholdCommunity SocialEconomicFigure 2 Impact of Microfinance in House hold and community levelSource Eoin Wrenn, 20052.4 Challenges for MicrofinanceThe achievement in microfinance in the world has been impressive carnal knowledge to the status in the 1970s. However, a number of major problems remain.2.4.1Policy development environment for financial sectors programsThe policy environment for microfinance in many countries still remain unfavorable for sustainable growth in microfinance operations. For example, in countries such as Peoples Republic of China, Thailand, and Viet Nam, the ceilings on interest rates limit the ability of MFIs to provide increased and continuing access to an increasing segment of the excluded households.2.4.2Inadequate financial al-QaidaIt is other major problem in the world. Financial infrastructure includes legal, information, and regulatory and supervisory systems for financial institutions and markets. Most governments have not focused to work out financial infras tructure that supports, strengthens, and ensures the sustainability of such institutions or programs and promotes participation of private sector institutions in microfinance. The other major financial infrastructure-related problems include lack ofA legal framework conducive for emergence and sustainable growth of lowly financial institutions,Regulatory and supervisory systems for microfinance in countries where the microfinance subsector is attacking a level of maturity, andEmphasis on development of accounting and auditing practices and professions2.4.3Limitation of retail level institutional capacityMost retail level institutions do not have adequate capacity to expand the scope and outreach of services on a sustainable basis to most of the potential clients.Lack capacity to supplement funds,Are unable to provide a range of products and services harmonious with the potential clients characteristics.Do not have an adequate network.(Source Finance for short Microfinance devel opment Strategy, ADB website, 2000)2.5 Islamic MicrofinanceAccording to Mufti Muhammad Taqi Usmani( no date) , from years Muslims are move to frame their style of living according to Islam thats why they restrict themselves within the limits of Shariah which on the basis of Islam prohibits the practice of Riba or interest in any of the financial or trade activities.According to Dr. Abbas Mirakhor, Executive manager of the IMF as referred by Chaudhri(2006)An important function of Islamic finance that is rarely noted is the ability of Islamic finance to provide the vehicle for financial and economic empowerment to convert dead capital into income generating assets to financially and economically empower the poorIslamic Microfinance is the way of financing to the underserved population without using the concept of interest. Microfinance is already more structurally aligned to applying Islamic equity financing structures. As microfinance programs are based on group sacramental man duction of risk and personal guarantee while maintenance of trust and candor is tied to the availability of future funds.2.5.1 Importance of Islamic MicrofinanceIn his storied book Wealth of Nations,Adam Smith argued that participation in unearthly sects could potentially pass two economic advantages to adherents. The first could be seen as a reputational signal while the poor might look identical to potential employers, lenders, and customers, membership in a specific group could convey a reduction in risk associated with the particular individual and at long last improve the efficient allocation of resources. Second, religious groups could also provide for extra-legal means of establishing trust and sanctioning miscreants in intra group transactions, again reducing dubiousness and improving efficiency, especially where civil remedies for failure to uphold contracts were weak.(Case study Islamic microfinance and socially responsible investment Anderson and Noland, 1988).Isla mic finance techniques could give thousands of entrepreneurial poor the access to microfinance an option they might not consider if traditional, interest-based commercial message loans were offered. More experimentation and practice in the field should contribute to more knowledge and a better understanding of effective loan rake mechanisms using Islamic banking principles (Muhammad Ramzan, 1996).2.5.2 Islamic approach to poverty alleviationAll principles or laws in Islam owe their origin to its holy book the account book and the sayings and deeds of its illusionist (peace be upon him) encapsulated in books of Hadith. A saying of the visionary (peace be upon him) forcefully drives home the central message of Islam regarding poverty Poverty is almost like disbelief in God.. On another occasion, the Prophet (peace be upon him) is reported to have said Allah I seek psychiatric hospital with you from the affliction of poverty (Soruce Sahih Bukhari read, study, search online Volu me 8, Book 75, Number 379).Islam views poverty to be a curse to be eradicated through productive efforts. Poverty is in conflict with enrichment of self (nafs), which is one of the primary objectives (maqasid) of Shariah. Islamic jurists have unanimously held the view that it is the collective province (fardkifayah) of a Muslim auberge to take care of the basic needs of the poor. (Obaidullah, Muhammed (2008)2.5.2.1CharityCharity occupies a central position in the Islamic scheme of poverty alleviation. The broad limit for charity in Islam is Sadaqa. When compulsorily mandated on an eligible Muslim, Sadaqa is called Zakah. When Sadaqa results in issue of benefits that are expected to be stable and permanent (such as, through gift of a physical property), it is called Sadaq-e-jariya or Waqf.Establish Prayer and dispense the purify Alms (Zakat) and bow in worship with those who bow (Al-Quran, (243))The research paper by Professor Habib Ahmed (no date) asserts that Zakah play an im portant role in eliminating poverty and a significant impact of Zakah can be seen if the macroeconomic policies are in the alignment with poverty reduction objective.Zakah is the third among five pillars of Islam and payment of zakah is an obligation on the wealth and production of every Muslim. The primary issue with a zakah or sadaqa-based solution to the challenge of poverty is the issue of sustainability. Funds mobilized through these tools tend to fluctuate from time to time and may not lend themselves to careful planning and implementation. Further, these funds are meant mostly for the extremely poor and function as a safety net for meeting their quick and basic needs. Benefits from waqf, assets are of course, meant to flow to the community at large and also on a sustainable basis (M U Chapra, 2008).It has been In FY 2009, just about Rupees 150 billion were paid by people in Pakistan in charity, of which 90 percent was for the purpose of paying Zakat. (Dawn, September, 7, 20 09)According to Dr Mohammad Omar Farooq people when pay Zakah should be concerned with its impact on the society in the long or short term to get the solutions for poverty alleviation.In another research conducted by Nafis Alam (no date) states in his study Islamic venture benignity a tool for community development that Islamic charities are significant influential tool for sustainable community development.2.5.3 Islamic Microfinance ProductsIslamic approach to poverty alleviation is a composite of a mission based and market-based interventions. Islamic Microfinance need not be restricted to not-for- clams modes alone. Islam permits for-profit trade and creation of wealth. It depends on the customer that what he/she wants to do with the money either needs just security of the money against which he/she may not take up the profit or wants to invest the money and share both profit and loss.The poor need a range of microfinance services, such as, micro-savings, micro-credit, micro-eq uity, micro-Takaful and micro-remittance. In the mount of mainstream Islamic finance, people come across a host of for-profit modes through which such services may be provided to the poor. These could be used for microfinance with insignificant modifications wherever needed (Obaidullah, 2008).Micro-SavingsMicro-savings is a critical financial service for poor and excluded households. Poor people want secure, convenient deposit services that allow for small balances and transactions and offer easy access to their funds. However, microfinance institutions across the ballock tend to neglect this product while giving undue importance to micro-credit. The contract underlying a savings product must be free from elements of Riba and Gharar.This constitutes one of the most well known Islamic products, consisting in a cost-plus profit financing transaction in which a tangible asset is purchased by an Islamic institution at the prayer of its customer from a supplier. The Islamic institutio n then sells the asset to its customer on a deferred sale basis with a markup reflecting the institutions profit motley contractual options for designing savings products are wadia, qard hasan and Mudarabah (Obaidullah, 2008).Micro-CreditThe Islamic alternative to interest-based conventional loan is trade based or lease-based credit that permits the ownership and/or use of commodities or physical assets needed for productive ente