Islamic Microfinance Cooperatives: Meeting Financial Needs Through Community Partnership

AL BARAKAH
MULTI-PURPOSE CO-OPERATIVE SOCIETY LIMITED
MAURITIUS

GLOBAL ISLAMIC MICROFINANCE WORKSHOP
7 & 8 October, 2013 – Dubai, UAE

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Microfinance & Models of Microfinance
Evolution of Islamic Banking, Finance & Islamic Microfinance
Global Models of Islamic Microfinance
The Cooperative Movement
Islamic Microfinance Co-operative Model
Formation ,Development , operation & sustainability of IFC
Case Study of AL BARAKAH Multi-purpose Co-operative
Society Limited
Opportunities with AL BARAKAH MCSL for Projects in
Mauritius
Conclusion

Islamic Microfinance Cooperatives To Meet The Financial Needs Of The Community

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Grameen Bank Model – (GBM-B. Desh)
 Has popularized collateral-free micro finance
 Replicated in many countries in a wide variety of settings
 Targeting of the poor/mostly women groups

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Village Bank Model – VBM widely replicated mainly in Latin
America and Africa. Implementing agency establishes a VB
with members.

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Self-Help Groups Model (SHGs) – (India), Formed with
members who are relatively homogeneous in terms of income.
Pools together its members’ savings and uses it for lending

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Credit Union Model (CUM) – (Germany), Financial
cooperatives are owned and controlled by its members.


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Islamic Microfinance is to provide financial
services to the poor and low income
segment of the society in a Shari'ah
compliant way


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Conceptual:
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Belief & conviction – CMF is based on riba/interest ... IMF is to provide the
poor/low income with an Islamic alternative to riba’
Pvt. alleviation is a religious obligation in Islam-ZZFS

Estimated 72 percent of people living in Muslim-majority countries
do not use formal financial services (Honohon 2007). -- incompatible
with Islamic financial principles.
It is has an integrated approach: charity-based & profit-based
Main objectives of IMF schemes is to alleviate poverty and to
assist the poor to become economically independent in a
Shari'ah-compliant manner
Since IB have not addressed the needs of financing the poor ,low
income, micro entrepreneurs, IMF is missing in IBF


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Potential
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Current statistical information shows that poverty in the Muslim World is
increasing
Current unstable political situation also indicates the trend of poverty in the
Muslim/Arab world

Future for IMF is promising
Even with the rapid progress and growth( 15-20 %p.y) of the
Islamic Finance industry IBFI have not addressed the needs of
financing the poor , low income, micro/medium entrepreneurs
IMF is missing in IBF
As IB have been away from microfinance, MFIs based on Islamic
principles are lagging behind. Hence the urgent need to promote
IMF.


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• Cost - Over years, CMFI have been offering financial services to the
poor at high rates of interest ( High Trans. Costs & monitoring)
• IMFIs will assist the poor and low income to business activities.
Initiatives to come from them. They should know that if they fail to do
so, Allah will not help them to improve their living standard.
“Allah does never change the condition of a people until they change in
themselves” (Rad 13: 11)

• Setting up as many as possible IMFIs would be a conduit to the
realization of the Maqasid Al-Shari’ah (Goals of Islamic Law). WL
• Equitable distribution of income and wealth.
“Wealth does not circulate only among the rich” ( 59: 7)

• Distribution of resources/Landholdings .. make full use of all the
resources under his/her disposal- Resources of the Ummah
• Democratisation of the financial system( IFC )- Participation
• Consider the poor also as vicegerents of Allah who can take care of
themselves, if they are provided with appropriate financial access and
equitable opportunities for social mobility.

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According to Prof. R.Wilson: “Formal Islamic banking first emerged
in the early 1960’s through credit unions of Muslim landowners in
Egypt and Pakistan .…. on a non-interest basis.”

(The evolution of Islamic banking and emerging trends in Islamic Finance)
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Interest Free Financial institutions (IFFI) of India are the forerunners
in the history of global Islamic financial movement. Tracing the
history of growth of interest free financial institutions …, it is reported
that such organized credit society had shown its presence as early
as 1890. According to the directory of Islamic banks in India, such
efforts in the organized sector in the style of the Patni Cooperative
Credit Society Ltd. was established in 1942…

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Study conducted by Bagsiraj (2003) shows that there are
institutions that have grown to a size of 14 Islamic Cooperative
Credit Society (ICCS) in India. (Dr Rahmatullah-IFFI of India in
crisis/Bagsiraj-IFII, published by KAU, Jeddah -2003

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“The history of Islamic Financial system in Thailand started with the
establishment of a cooperative society, Pattani Islamic Saving
Cooperative that operates based on Shari'ah in 1987… These
Islamic cooperative societies have successfully established
themselves as viable financial institutions in managing and
mobilizing Muslims in this region.” (Islamic banking in Thailand:
prospects and challenges (Sudin Haron & Kumajdi Yamirudeng)
Inheritance in the economic sphere - F.C.S eco system-riba
Initiatives /Scholars at work -No working model & since 1960’s IBF
started – Mit Ghamr 1963( IMFI/Coop)
Emergence of IFIs since 1960 & growth….
Types of IFI: F-B-T-L-FH
Satisfaction/Criticism/Dominance by ICB( HNW) & neglected areas
like Islamic microfinance & cooperatives


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Islamic microfinance is still in its infancy and business models are
just emerging
Village Banks Model: Jabal Al Hoss in Syria, Hodeidah
Microfinance Program in Yemen, FINCA implementing this model
in Afghanistan
Qard Al-Hasan Model: Mu’assasat Bayt Al-Mal in Lebanon,
Ukhuwat-Pakistan.
Grameen Bank Model: Bangladesh, a Shari’ah-compliant
replication has been attempted by Islami Bank Bangladesh Limited.
RoSCA Model: Rotating Savings and Credit Association, known in
Egypt as the gam’iya. (Mahmoud El Gamal & ors-2011).
Credit Unions: The fifth model that has been making its way since
the beginning and receiving attention is the variation of
Cooperatives/Credit Unions that are
member-based Islamic
Microfinance Cooperatives.


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Concept of cooperative in general:
- From the beginning of human society, cooperation has always been a
vital factor in human development.
- As a social creature, it is the natural urge of man to cooperate with
each other.
- Cooperation conveys the idea of helping each other and making joint
efforts to achieve a common goal.
Coop Movement emerged in the middle of the 19th century by the
Rochdale Pioneers.
24-Oct-1844, R/L, England, a group of people faced with economic
exploitation and deprivation set up a cooperative store, based on the
principles of self-help and mutual help.
Defined a set of principles (7) which became the basis for the
cooperative ideology (CI)
CI spread all over the world be it a capitalist, socialist or Muslim
society.
ICA & WOCCU

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A credit union is a financial cooperative that may accept savings,
deposits, provide credit and other financial services to its members.
(Interest-based)
CU are in effect community banks. Credit unions called by
different names:
 In Africa-Savings And Credit Cooperative Societies (SACCOS)
which emphasize on savings before credit.
 In
Afghanistan-(IIFC) Islamic Investment and Finance
Cooperatives which comply with Shariah.
IMFC are institutions based on the principles of Islamic Finance.
IMFC/ICU refer to financial cooperatives that offer retail financial
products in compliance with Islamic financing principles
Efforts over the past 30 years to set up Islamic Micro Finance Cooperatives around the globe
T&T, Canada, Cameroun, Malaysia, Thailand ,Tanzania, India,
USA, Indonesia, Australia, Pakistan, S.Lanka, Singapore,
Afghanistan …

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Why IMFC?
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Conceptual Framework
“Cooperate with all in what is good and pious and do not cooperate
in what is sinful and wicked…” (Q-5:2) Ta’awoun?
Legal Framework - less regulated than the corporate sector (Coop
Soc. Act ,CU Act) Shari'ah-compliant
Values
- Islamic Finance based on Islamic ethics: justice, sharing,
cooperation
- Cooperatives based on values: honesty, equity,equality, solidarity,
self-help, etc.
Easy formation & more elastic
Small seed capital requirement


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Why IMFC?
6. Community-based & more people-oriented, poor/rich (IEViews..),IF

services to the community
7. Common bond- Islamic brotherhood/Ukhuwat
8. Spread ownership of business and reduce concentration of wealth
9. Financial & Mgt. inclusion – embark the poor on board
10. Multi-purposes - open to any type of economic activity
11. Incentives & Benefits – Tax Relief
12. Democratic/Shuratic/Leadership – 1 man-1Vote
Consider the poor also as vicegerents of Allah who can take care of
themselves, if they are provided with appropriate financial access
and equitable opportunities for social mobility.


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Set-up- Formation meetings, Rules, Regulations, policies etc.
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Operating Policies and Procedures
A comprehensive set of standard operating policies and procedures is
required to establish Shariah-compliant credit unions, also called Islamic
Investment and Finance Cooperatives (IIFCs) in the developing world.
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Membership Policies and Procedures - Introduces guidelines in
relation to recruitment and acceptance of members - Member rights,
responsibilities and obligations form part of this policy area.
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Shares and Savings Mobilization - Mobilizing shares and savings in
an environment where sufficient funds from members are not sufficiently
available to meet the required cash-flow needs of the IIFCs is vital
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Shariah-Compliant Financing – Islamic product types, terms,
conditions and processes are in shariah- compliance and with all
applicable laws and regulations of the country in which they are applied.
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Assets and Liability Management - Asset liability management
(ALM) can be broadly defined as the continual rearrangement of both
sides of the IIFC’s balance sheet in order to maintain reasonable
profitability, to minimize interest rate risk, and to provide adequate
liquidity. When the officials declare a dividend rate on shares and
savings or change profit rates on ICFs, they are engaging in ALM
These decisions can impact liquidity and profitability.
Capitalization and Capital Adequacy
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Assets at an IFC are sourced in two ways: liabilities owed to members and
third parties, as well as capital that is owned by the IFCs .
Generally speaking, the more the assets side is financed by the IFC’s
capital the better. An IFC is required to constantly increase the amount of
capital/shares to maintain longevity and to continue to provide services to
its members.
To increase its capital, the IIFC must accumulate net profits.
Minimum capital requirements is set by the Government

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Collections :Effective collection policies are vital to the survival of the
IFC.
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collection policies and procedures that are in compliance with Shari’ah.
At the same time, they fully adhere to international best practices
employed by the credit union movement around the world.

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Provisions and Allowances for Bad Debt

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Accounting /Cash Operations Recording financial transactions with the aim
of producing meaningful financial statements that can be interpreted and
analyzed provides the basis for appropriate and timely decisions


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Internal Controls
Manual deals with establishing internal control system and determining
methods and measures to be used in order to control the IFC’s daily
operations, safeguard its assets and prevent possible fraudulent
activities, procedural mistakes and human errors.
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Human Resources
Finding suitable and qualified staff for IFCs -challenge. Human resources
policies set out criteria for finding and identifying suitable staff,
recruitment, training and staff retention.
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Procurement
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Both at the establishment stage and afterwards, IFCs need to procure
goods and services
Adequate management of procurement and ensuring that the IFC gets
the best value for price in a transparent way is very important.
Tendering procedures, selection of suppliers and vendors, receipt of
goods and services, responsibilities and the required approvals within
approving limits.

Information Technology & Security
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IFCs deal with thousands of members and various types of accounts. It
is very important that the IIFC management maintains high quality
information technology systems in place.
Minimizing exposure to risks associated with the information stored on
various devices and platforms, and ensuring authorized access etc.


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Geographical Background & Muslims in Mauritius
• Mauritius - gateway to Africa, South Asia & Asia
• Multi-religious society/Democratic:
Population: 1.3 M


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Index

Global Rank
(Mauritius)

Africa Rank
(Mauritius)

World Bank Ease of Doing Business 2012

19th out of 185
countries

1st

Democracy Index 2010

Full Democracy
24th out of 167

1st

Mo Ibrahim Index of African Governance 2012

1st for the 6th
consecutive year

Corruption Perceptions Index 2010 (Transparency
International)

39 out of 178

2nd

International Property Rights Index 2011

38 out of 129

2nd


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Budget speech 2008/2009 - Minister of Finance

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Mauritius wants to connect to this sophisticated and growing global
phenomenon that spans banking, non-banking financial services,
micro-finance, insurance and capital markets.

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We will also set the regulatory framework for leasing companies to
market products which are Shari'ah compliant. (60)

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And to level the playing field appropriate amendments will be made to
the legislation to make normal banking and Islamic banking tax
neutral.(62)


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Muslims presence in all walks of life: Islamic schools,
professionals, orphanage, business, politics, etc.
Muslims have contributed enormously in the development of
the economy
But as a community, little has been done to establish the
financial system of Islam.
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In 1990’s there was a keen desire by Muslims to establish an
Islamic bank in Mauritius.
To become part of the Islamic Finance global phenomena.
Preliminary work carried out- Research- Different Laws, Coop
Formation of an Islamic Financial Cooperative/Credit Union in the
Cooperative sector AL BARAKAH


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Formation meeting - promoters, committed members
Draft Rules, regulations, policies, procedures
Registration with the Registrar of Coop
Legal Framework
Operates:
Within the Co-operative Societies Act 2005 (Registered on 10th June
1998)
• Within the framework of its rules, regulations policies
• In accordance with Islamic Financial principles
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1.
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To provide an alternative to the interest-based financial institutions
for the community. (Community-based)
To provide halal investment opportunities and returns.
To contribute in a halal way to the overall development of the
economy.
To have a Mission – based (Not for profits) & Market-based (For
profits) approach to poverty alleviation
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All members of AB do not belong to the extremely poor or the destitute
category and are in a position to create wealth for themselves, for the
Islamic Microfinance Institution (IMFI)
For profit financing provides financial sustainability to AB


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VISION
To be a leading Cooperative Society in the field of Islamic
Finance for a fair and just society.

MISSION
To operate as a financial institution based on Islamic cooperative
principles and providing a wide range of services on an interestfree basis

GOALS
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To present a practical model of Islamic Micro Finance through
the co-operative sector.
To lay the foundation for an alternative financial system to the
Mauritian population at large.


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To provide savings facilities to members
To create a source of credit for its members for provident
and productive purposes.
To create the framework to enable members to manage
their financial resources for their mutual benefit.
To promote the welfare and economic interest of its
members
To promotes the concept of family empowerment


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Shari'ah Advisors:

Dr. Monzer Kahf (USA)
Br. Qazi Abdus Samad (Pakistan)
Br. Imtiaz Ali (T&T)


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Other Activities
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Creating awareness about Islamic Finance.
Organizing lectures, training, seminars, conferences,
workshop, trade fair

Coming projects Insha Allah
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AB Zakat Fund
Halal Tourism


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1. CAPITAL


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2. MEMBERSHIP


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3. PROFITABILITY


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1.
2.
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Individual/organisational/government level
Legal Framework
Public acceptance
Economic potential
Human Resource
Mass Education-Islamic Finance Education Programme IFEP
Competition


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Opportunities with AL BARAKAH for Projects in
Mauritius
Inflation rate (2012) = 3.9%

Economy grew by 3.3% in 2012
GNI/Capita (MUR Rs.) = 252,726


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Opportunities with AL BARAKAH for
Projects in Mauritius
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Legal & Regulatory Framework:
 The Banking Act 2004 - Amendments 2007
 The FSDA 2001 - (Non-banking activities)
 The Cooperative Societies Act 2005


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1. 15 years of operation
2. An eye-opener
3. Well-being of all citizens
4. Make use of all the resources and make it a priority to set

up Islamic Microfinance Institutions of mass-outreach for
community development.
5. Concurrently, we also have to educate the poor and the
community on the concepts, goals and principles of Islamic
Microfinance and to live a moderate and balanced material
and spiritual lifestyle to attain falah.


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192 Ahmad Block, New Garden Town, Lahore - Pakistan.
Ph: (92-42) 35913096 - 98, Fax: (92-42) 35913056
Email: info@alhudacibe.com
www.alhudacibe.com

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