Islamic Microfinance - Challenges
Lack of education and training among clients and organization personnel constitutes a major challenge for the Islamic microfinance sector. Lack of trained manpower is a major constraint for its growth, expansion and consolidation. Presently there are only a handful of resource centers; and fewer training programs in native languages. There is an urgent need to develop resource centers and training material in native languages.
Lack of effective networking is another challenge. Networks are important because a large number of activities that cannot be undertaken individually can be done collectively by a network due to economies of scale and scope - such as, initiating dialogue on legal frameworks, regulations and taxes; creating and updating information base; conducting training programs etc. The Islamic world does not have an apex coordinating body in the area of Islamic microfinance. There are a few regional networks though. Compared to the size of the Islamic world, however, their number is quite small, and there is little coordination between them, resulting in duplication and lack of effectiveness.
In formulating a strategic response to the challenges, an important question needs to be answered - whether infrastructure and services should be microfinance specific or whether microfinance skills should be absorbed by existing mainstream providers, that work more broadly with mainstream IFIs - institutions like IFSB, AAOIFI, GCIBIFI and IIRA. As conventional microfinance markets mature and begin to integrate into the financial system, the mainstream service providers (rating agencies, auditors, management consultants, and bank training institutes, among others) are starting to adapt to meet the needs of financial institutions that serve poor clients. A similar development in the Islamic finance sector should take care of the meso-level requirements of Islamic Microfinance sector. The need for specialized microfinance support services should also be carefully assessed, particularly when microfinance is not as well integrated into the financial system.
As noted earlier, in the IsDB member countries, some top Islamic banks have access to systems such as electronic funds transfer and real time gross settlement system. Though the smaller microfinance institutions working for the poor may not be in a position to institute the systems themselves, they may work through the larger Islamic FIs by forging alliances with them.
Transparency and Information
An important meso-level initiative would be to provide for rating services specific to Islamic microfinance. Presently a number of conventional rating agencies undertake rating of credit quality, such as, CRISIL, JCR-VIS in South Asia. There are other agencies which take up overall risk assessment, such as, MCRIL, Microfinanza, Micro Rate and Planet Rating in South Asia, South East Asia, MENA and Sub-Saharan Africa. It is important that such agencies develop rating methodology for Islamic microfinance instruments. In order to encourage such agencies institutions like Islamic Development Bank can play a proactive role and establish a rating fund similar to one established by CGAP, Inter-American Development Bank and EU. This fund could initially reimburse to Islamic MFIs the entire cost of getting themselves rated by an Islamic rating agency, such as, IIRA. Subsequently the share of the cost of rating borne by the Fund could be reduced with an increasing share passed on the MFIs concerned. The ratings would substantially reduce information costs and help Islamic MFIs to obtain financing from the market.
Education and Training
Education and training are imperatives for an effective strategy for the growth and rejuvenation the Islamic microfinance sector. Since traditional banking is ill suited for collateral-free entrepreneurship-oriented microfinance, there is a need to create a cadre of microfinance experts by imparting training to persons with diverse experiences such as in banking, finance, investments, entrepreneurship development and community development. Even if there is a need for education for the clients in subjects like basic accounting and management; accounting is important because of the unavoidable need to calculate profits in case of participatory financing methods, such as, Mudarabah and Musharakah.
Since coordination between institutions offering microfinance services and those with different mandates (banks, NGOs, social funds, and rural development projects) is extremely limited, there is a strategic need for a coordinating body dedicated to the development of the Islamic microfinance sector. As pointed out earlier, networks are important because a large number of activities that cannot be undertaken individually can be done collectively by a network due to economies of scale and scope. Such regional networks and associations should further be networked at a global level. The global network and its regional member-networks can perform a variety of functions, such as, (i) initiating dialogue on legal frameworks, regulations, taxes (ii) resolution of divergence of views on Shariah compliance; (iii) providing exposure to worldwide microfinance good practices through development of resource center; (iv) designing and conducting training programs in microfinance facilitation and management; (v) development and maintenance of information base for use by member organizations; (vi) creation of infrastructure, such as, credit rating facility for microfinance etc. It can play a major role in development of financially sustainable microfinance institutions by promoting efficiency, self-sufficiency and sustainability goals for them by building both financial and managerial capacities.
Source: Islamic Microfinance - Challenges, Islamic Microfinance Development: Challenges and Initiatives, by Obaidullah, Mohammed, Khan Tariqullah published with permission.