Islamic micro-finance: Challenges and opportunities

Micro-finance is not a new concept in Bangladesh. The country has already earned worldwide reputation for micro-finance activities. Especially as a mark of the highest recognition the Grameen Bank micro-credit has earned the Nobel Peace prize. In addition to Grameen Bank, a number of NGOs (non-governmental organisations) are also actively engaged in micro-finance activities ensuring the ultra poor population's access to credit without any collateral. The main objective of micro-finance is poverty reduction by helping the ultra poor segment of the society seize loan facilities and increase their economic status through self-employment.
On the other hand, the financial sector is gaining momentum in the country as the economy is experiencing a sustained growth rate of more than six per cent. An obvious outcome of this steady economic growth is expansion of the financial sector.
The banking sector is experiencing development in the areas of launch of new products, expansion of network and regulatory reforms by the central bank, maintenance of international-level compliance like BASEL II and BASEL III, CAMEL rating and so on. And one of the most significant developments in relation to financial products is the introduction of Islamic financial products.
Bangladesh is the third largest Muslim-majority country in the world with a population of around 160 million, 90 per cent of whom are Muslims. A banking system on the basis of Islamic principle came into reality after the OIC recommendation at its Foreign Ministers' meeting in 1978 at Senegal to develop a separate banking system of their own. After five years of that
declaration, the first Islamic bank of Bangladesh was established in 1983.
At present, out of 49 banks in Bangladesh, seven full-fledged Islamic banks and 19 Islamic banking branches of nine conventional banks are working in the private sector on the basis of Islamic Shariah. Islamic banks in Bangladesh since their inception have been gaining popularity in spite of some problems with their operation.
The reason behind this is a large number of religious-minded people prefer the Islamic banking facilities. As there were no other options, customers had to turn to the traditional interest-based banking products. So, the trend reveals the fact that there is a bright prospect for Islamic banking in Bangladesh.
Micro-finance is nothing new, but Islamic micro-finance is a new banking product, which is naturally going to face some challenges like all other products at the entry level.
CHALLENGES: It seems there is a gap between the ideals and the activities of Islamic banks in Bangladesh. A similar problem may be expected in the case of micro-finance also. In their reports, booklets, bulletins and posters these banks express their commitment to strive for establishment of a just society free from exploitation. However, little progress has been achieved so far in that direction.
Islamic micro-finance will have to adapt its functions to modern business practices. Its policy and strategy should be formulated to counter the traditional interest-based micro-finance and more attention should be given to promoting the image of Islamic micro-finance. At the same time, strategies have to be carefully devised so that its Islamic character and solvency of a micro-finance institution (MFI) is simultaneously promoted.
The Islamic banks have not yet been successful in devising an interest-free mechanism to place their funds on a short-term basis. They face the same problem with financing consumer loans and government deficits. Secondly, the risk involved in profit-sharing seems to be so high that almost all of the Islamic banks in Bangladesh have resorted to those techniques of financing, which fetch them a fixed and assured return. Presently 60-70 per cent investments of Islamic banks are made on a mark-up basis (Murabaha and Bai-Muajjal etc.). As a result, the ideal modes of investment (Mudaraba and Musharaka) are quite absent in their practices. A similar type of challenges is expected to be faced by Islamic micro-finance at the initial stage.
OPPORTUNITIES: As a policy matter the Bangladesh Bank (BB) is encouraging financial institutions of all categories to divert their efforts towards small and medium enterprises (SMEs) and micro-level investment portfolios with that end in view. In this regard they have formulated regulations and guidance accordingly. Naturally Islamic micro-finance could play a vital role in this regard.
There is a widespread criticism against those who provide high interest-based micro-credit services in the country. Even some critics think that instead of poverty alleviation the high interest-based micro-credit is increasing poverty in some cases. Another allegation is that micro-credit organisations are investing their interest income in urban high profit generating ventures instead of refinancing the fund in the greater interest of the ultra poor community.
If Islamic micro-finance is introduced by offering better Shariah-based welfare-oriented micro-finance facilities, there is a greater scope to finance ventures in the agriculture sector like poultry, dairy, fisheries and other micro-level agriculture projects based on the profit-loss sharing system of Islamic finance.
When it comes to poverty alleviation of Bangladesh, in addition to ethical issues there are problems with approaches to reducing poverty. So far we have seen that more or less all the efforts have failed to yield any significant result. We need to throw light on how programmes are being designed for reducing poverty. Once a very praiseworthy decision was taken to solve the problem of begging on streets, but afterwards we have not seen any further action plan or activities to this end.
Islamic micro-finance has got a wide and unexplored prospect in Bangladesh and as such more research is needed on micro-credit products and their applicability to poverty alleviation.
The writer is PhD researcher at the Department of Marketing
of University of Dhaka.
 seahsan@gmail.com