Muhammad Zubair Mughal Chief Executive Officer Alhuda centre of Islamic banking and economics www.alhudacibe.com

2. Muhammad Zubair Mughal Chief Executive Officer Alhuda centre of Islamic banking and economics www.alhudacibe.com Experiences in Regulating and Supervising Islamic Microfinance Institutions - Pakistan as Case Study At Regulatory and Supervisory Framework in Islamic Microfinance 18th – 19th March, 14 - Khartoum – Sudan

3. 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.

4. Basic Principleof 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”

5. Overview of Islamic Microfinance Mechanism Source of Islamic Microfinance Islamic finance is the outcome of religion in banking • Quran • Sunnah • Ijma’a (jurist consensus) • Ijtihad & Qiyas (analogy) • Islamic Microfinance Products Mechanism • Sources of Islamic Microfinance

6. A Misconception removed Islamic 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. Micro Takaful Free from Interest Financing Free from Gharar Shariah Compliant Funds Shariah Vetted Products Trainings & Quality HR Shariah Compliant Investments Factors to be considered while doing IMF and more…. Poverty Alleviation Element Moral Ethical Social Islamic Micro Finance Ensure Shariah Compliance

7. Islamic Microfinance Institution Worldwide

8. Global - Islamic Microfinance Industry • 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%

9. Compatibility IMF Products with MF Models • 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:AameenSociety – India • For Profit Banks/MFIs : Ghana Islamic Microfinance Banks – Ghana, HSBC Amanah – U.K, Bank Islami - Pakistan • `

10. IMF’s Product for all Level of Poverty and more…. Salam, Istisna and other products Non-Poor Transitory Non-Poor Qarz-e-Hasan, Murabahah, Ijarah, Mudarabah Transitory Vulnerable Transitory Poor Chronic Poor Zakat, Sadqa, Ushar Extremely Poor

11. Legal & Regulatory Framework • The legal and regulatory framework of • Islamic micro-finance Pakistan as Case Study

12. 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)

13. Pakistan - Islamic Microfinance Industry • 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.

14. Pakistan - Islamic Microfinance Industry

15. 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

16. Type of Islamic Microfinance Institutions in Pakistan • 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

17. State Bank of Pakistan Guidelines for Islamic Microfinance Business by Financial Institutions • Option 1 • Establishment of Full-fledged Islamic Microfinance Bank (IMFBs) • Option 2 • Islamic Microfinance services by Full fledged Islamic banks • Option 3 • Islamic Microfinance services by conventional banks • Option 4 • Islamic Microfinance services by conventional microfinance banks (MFBs)

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

19. Option 2 Islamic 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

20. Option 3 Islamic 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

21. Option 4 Islamic 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)

22. 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

23. Compliance to be ensured by IMFI in: • System and Control • Internal Audit • Accounting Records • Utilization of Conventional Branch Network

24. Shariah Compliance • Shariah Supervisory Board at Central Bank /SECP • Internal Shariah Advisor • Shariah Audit/Shariah Review • Shariah supervision of Islamic Microfinance Network

25. AlHuda Center of Islamic Banking and Economics 160 B, Ahmad Block, New Garden Town, Lahore - Pakistan. Ph: (92-42) 35913096 - 98, Fax: (92-42) 35913056 Email: info@alhudacibe.com www.alhudacibe.com