Islamic Microfinance on the table

The use of Islamic microfinance as an alternative to conventional forms of micro-lending was on top of the agenda at the World Islamic Economic Forum roundtable in Phnom Penh yesterday, with industry experts split on its possible inclusion in Cambodia’s basket of microfinance product offerings.

At the meeting, attended by Deputy Prime Minister Men Sam An, small and medium enterprise development and higher education requirements in Cambodia were also discussed, with the event a precursor to the 11th World Islamic Economic Forum (WIEF) to be held in Malaysia this November.

Speaking on Islamic microfinance, Tun Musa Hitam, chairman of the WIEF Foundation, said that while microfinance institutions (MFIs) seemed “rudimentary to many”, they were key to the functioning of an economy like Cambodia’s.

“It may be useful for Cambodia to examine the viability of deploying the Islamic microfinance model, which is a hybrid of Islamic finance’s social principle and microfinance’s efficiency in reaching the poor,” Hitam said.

Islamic microfinance, like Islamic banking and finance, is based on the dictates of Shariah, where the loans should be interest free and take care of the welfare of the participants rather than accumulate wealth for the loan giver.

Other principles include not investing in business that are “haraam” or prohibited according to Shariah law, like dealing with pork and alcohol.

Syed Othman Alhabshi, deputy president of academics at the International Center for Education in Islamic Finance in Malaysia, said this model of microfinance, while being interest free, also charges loan takers only for the operation costs and utilises “cost-free capital”.

He said that currently MFIs are using “venture capital funds” to give out loans and given that MFI customers are not bankable the risk is high, leading to high interest rates to mitigate that risk, whereas, this was not the case with Islamic microfinance.

“We have endowment funds, where people give out of charity, and therefore there is no cost of capital,” Alhabshi said.

“What cost we have to bear is the cost of operations and cost of operations can be very low.”

Alhabshi said that the discussion was an attempt to introduce a similar model of microfinance in Cambodia, even if it isn’t called Islamic microfinance, but just uses the same principles.

Rami Sharaf, CEO of WorldBridge International, who attended the roundtable, said this model should not to be branded as Islamic microfinance but as possible “financial solutions” that have been “tested, experimented and worked” in two bigger ASEAN sister countries – Indonesia and Malaysia.

“It is worth learning and exploring from the best practices that they have there,” Sharaf said.

“What needs to be done is a proper introduction to at least explain what it [Islamic microfinance] is all about.”

Bun Mony, president of the Cambodia Microfinance Association and chairman of Sathapana Limited, said while there was no opposition to this model of financing, not making a profit would make it difficult for Cambodia’s MFI sector to grow and offer access to finance to more people.

“This strategy cannot grow if they don’t charge interest or make profit,” he said.

“What about [paying back] the interest or cost of funds from creditors or lenders,” Mony said, reffering to loans given to MFIs.

*This article was originally published on The Phnom Penh Post on 5 August 2015. Read the original article here.

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