SHARIA PRINCIPLES, OPERATIONAL MECHANISM AND MARKETING STRATEGY FOR ISLAMIC MICROFINANCE.

1. SHARIA PRINCIPLES, OPERATIONAL MECHANISM AND MARKETING STRATEGY FOR ISLAMIC MICROFINANCE. Presented by: Jaafar Mohammad

2. Islamic Microfinance Micro finance has been defined As “ the provision of financial services to low- income people” the definition has two important aspects - provision of financial services and; - low income people. The target group has always been the low income people, commonly referred to as the un-bankable who traditionally have been excluded from the financial services due to their high risk and lack of collateral. SHARIA PRINCIPLES, OPERATIONAL MECHANISM AND MARKETING STRATEGY FOR ISLAMIC MICRO FINANCE.

3. Islamic Microfinance • According to multiple market surveys, Muslim population tend to have a high rate of rejection to conventional Micro-finance, hence impeding financial inclusion process. • According to CGAP paper back in 2008, suggested that almost 40% potential micro-finance clients reject non sharia compliant loans. • The rejection is mainly driven by religious factors mainly avoidance of Riba (Interest) SHARIA PRINCIPLES, OPERATIONAL MECHANISM AND MARKETING STRATEGY FOR ISLAMIC MICRO FINANCE.

4. Islamic MicroFinance Islamic Microfinance Micro finance has been defined As “ the provision of financial services to low- income people” the definition has two important aspects - provision of financial services and; - low income people. The target group has always been the low income people, commonly referred to as the unbankable who traditionally have been excluded from the financial services due to their high risk and lack of collateral. • Muslim population proportionately rank high in global poverty, with over half a billion living on under 2USD per day. • Many struggle to access liquidity, manage savings and expand their micro business. • Conventional micro finance assist the un-bankable or micro finance clients -female heads of house holds, pensioners, displaced persons, retrenched workers, small farmers and micro entrepreneurs- access funds and achieve their dreams, Islamic micro finance in addition to that, assist those who reject conventional micro loans, access funds through Sharia compliant means. SHARIA PRINCIPLES, OPERATIONAL MECHANISM AND MARKETING STRATEGY FOR ISLAMIC MICRO FINANCE. SHARIA PRINCIPLES, OPERATIONAL MECHANISM AND MARKETING STRATEGY FOR ISLAMIC MICRO FINANCE.

5. Islamic Microfinance • Islamic Micro finance can hence be understood as a provision of financial services to low income people in accordance with sharia principles. • The micro finance module has, to a great extent, the same objectives of sharia, which revolves on: • Reduction of poverty • Team work • Equity • Social and economic empowerment SHARIA PRINCIPLES, OPERATIONAL MECHANISM AND MARKETING STRATEGY FOR ISLAMIC MICRO FINANCE.

6. Sharia Principles • Introduction • Sharia is a body of legal framework within which public and private life of Muslims is regulated • Sharia has two primary sources and two secondary sources, the primary sources are; - The holy Quran - The prophetic tradition (Al Sunnah) • The secondary sources are: - The Ijma ( Juristic Consensus) - Qiyas ( Analogy) SHARIA PRINCIPLES, OPERATIONAL MECHANISM AND MARKETING STRATEGY FOR ISLAMIC MICRO FINANCE.

7. The Sharia Principles • Objectives of Sharia. • Scholars have enumerated five main objectives of Sharia under which all issues rotate around. These are; - Protection of Religion - Protection of life - Preservation of Intellect - Preservation of progeny - Protection of Property/ Wealth. • The five objectives are summarized in one main objective of “perpetuating good and warding off evil” SHARIA PRINCIPLES, OPERATIONAL MECHANISM AND MARKETING STRATEGY FOR ISLAMIC MICRO FINANCE.

8. Sharia Principles • Sharia has a defined body of rules and regulations relating to commercial transactions normally referred to as Fiqh al muamalat. • These rules are mainly derived from the main Sharia objective of property/ wealth preservation. • Sharia has developed means that assist in poverty reduction and alleviation: SHARIA PRINCIPLES, OPERATIONAL MECHANISM AND MARKETING STRATEGY FOR ISLAMIC MICRO FINANCE.

9. Sharia Principles • Sharia has also advocated for fair trade and commerce and redistribution of wealth among people and has taken different measures which include: • positive measures: - Income growth- Through work and proper spending - Distribution of income – acknowledging different groups in zakat - Equal opportunities – by supporting profit sharing • Preventive measures: - Prevention of malpractices- Riba, hording, gambling e.t.c SHARIA PRINCIPLES, OPERATIONAL MECHANISM AND MARKETING STRATEGY FOR ISLAMIC MICRO FINANCE.

10. Sharia Principles • Corrective measures • - compulsory Zakat • - Charity • There are specific Sharia principles that govern commercial transactions including micro-finance, which are; • Prohibition of Riba ( Interest): All form of interest is not allowed. This is because, Riba is mainly money paid for use of money, and which money is not a commodity from a Sharia point of view. SHARIA PRINCIPLES, OPERATIONAL MECHANISM AND MARKETING STRATEGY FOR ISLAMIC MICRO FINANCE.

11. Sharia Principles • Business risk must be taken to justify any income. The principle is also known as al kharaaju bi dhaman. • Transactions must be free of excessive uncertainty or ambiguity also known as Gharar al faahish. • No Gambling (Maysir) is allowed, as it amounts to having ones property unjustly. • No exploitation. This can either be through lack of understanding of the market or misrepresentation of facts by parties. SHARIA PRINCIPLES, OPERATIONAL MECHANISM AND MARKETING STRATEGY FOR ISLAMIC MICRO FINANCE.

12. Sharia Principles • Prohibition of trading in unlawful goods or services. • Its socially responsible. By working to minimize liabilities through hawala, al ibraa, extension of time for the distressed customer. SHARIA PRINCIPLES, OPERATIONAL MECHANISM AND MARKETING STRATEGY FOR ISLAMIC MICRO FINANCE.

13. Operational mechanism • Islamic microfinance operates within clear Shariah contracts. These include: • Debt based contracts • Equity based contracts • The debt based contracts are: • - Qardhassan • - Murabaha • - Salam • - Ijara SHARIA PRINCIPLES, OPERATIONAL MECHANISM AND MARKETING STRATEGY FOR ISLAMIC MICRO FINANCE.

14. Operational mechanism • Qardhassan: • This is a kind of borrowing where there is no expectation from the lender other than receiving of his Principle amount. It is a benevolent loan. Qard Hassanis the second most used contract in financing Microfinance. • Murabaha: • This is cost-plus mark up financing. Where a financial institution purchases an asset and sells it to the customer with a mark up. • According to CGAP survey, this is the most highly used contract. SHARIA PRINCIPLES, OPERATIONAL MECHANISM AND MARKETING STRATEGY FOR ISLAMIC MICRO FINANCE.

15. Operational mechanism • Salam: This is a forward contract. An advance payment is made against future delivery of commodity. Its mainly used in Agricultural context but its being extrapolated to other areas. • Ijara: This is a leasing contract where a financial institution leases an asset to a client for a period of time and mostly, sells the asset thereafter to the customer at the end of the lease period. SHARIA PRINCIPLES, OPERATIONAL MECHANISM AND MARKETING STRATEGY FOR ISLAMIC MICRO FINANCE.

16. Operational mechanism • Equity based contracts include: • Mudharaba: This where a financial institution offers working capital and the other party offers the work and management of the business. Profits are shared according to predetermined ratios. Any losses are bared entirely by the financial institution. • Musharaka: This is equity participation in a business venture in which parties share profits and losses according to predetermined rations. SHARIA PRINCIPLES, OPERATIONAL MECHANISM AND MARKETING STRATEGY FOR ISLAMIC MICRO FINANCE.

17. Operational mechanism • The above named contracts have their challenges in This is due to their inherent features. • The equity based contract always brings forward challenges related to Capital erosion, impairment and credit risk which can also be high if the customer is not managed properly. • The debt based contracts brings forward credit displacement risk and high operational costs due to their interactive operational nature mainly: Salam, Murabaha and Ijara, and erosion of capital incases of Qard hassan. SHARIA PRINCIPLES, OPERATIONAL MECHANISM AND MARKETING STRATEGY FOR ISLAMIC MICRO FINANCE.

18. Operational mechanism • Multiple risk mitigation mechanism have been developed to ensure smooth running of business. These include: • Credit Guarantee by a third party other than the partners in equity based contracts. • Performance guarantee in Murabaha contracts. • Training and educating the customers in basic book keeping and accounting. SHARIA PRINCIPLES, OPERATIONAL MECHANISM AND MARKETING STRATEGY FOR ISLAMIC MICRO FINANCE.

19. Marketing strategy • What is marketing all about? • Marketing is all about acquiring new customers and retaining the existing ones. This is achieved through: • Knowing your customer needs. • Knowing your competitor. • Knowing your business environment. This three areas will help an institution identify, anticipate and satisfy customers’ needs profitably. What to consider in a strategy: 1. The kind of target market: New market Developing market Developed market SHARIA PRINCIPLES, OPERATIONAL MECHANISM AND MARKETING STRATEGY FOR ISLAMIC MICRO FINANCE.

20. Marketing strategy • By understanding the market type, the institution will appreciate the level of potential demand. 2. The nature of the Institution: Microfinance institutions are not homogenous in nature and have various goals and target group. • Islamic Microfinance need to develop creative marketing plans to enable them penetrate the markets and attract customers. SHARIA PRINCIPLES, OPERATIONAL MECHANISM AND MARKETING STRATEGY FOR ISLAMIC MICRO FINANCE.

21. Marketing strategy The marketing plan should work to ensure; • Proper pricing • Sustainability • Innovation • Prioritizing clients • There are two main challenges: • Poor awareness- • They customers are not aware of the institution. • Poor understanding: they don’t know how it works and the various products. SHARIA PRINCIPLES, OPERATIONAL MECHANISM AND MARKETING STRATEGY FOR ISLAMIC MICRO FINANCE.

22. Marketing strategy • The way forward. • The Islamic microfinance should adopt an innovative way to address the marketing gap through: • Personalized interaction • Sales promotions • Direct marketing • Advertisement SHARIA PRINCIPLES, OPERATIONAL MECHANISM AND MARKETING STRATEGY FOR ISLAMIC MICRO FINANCE.

23. THE END THANK YOU Presented by: Jaafar Mohammad