In part one of this write-up, we heard from an authentic hadeeth from Abi Dawud 1641, how the prophet, may the peace and blessings of God be upon him, his family and companions, demonstrated the way forward for the conduct of Islamic microfinance.
Our attention must concentrate on the practical aspects of the prophet’s conduct because this aspect of the prophet is that which lifted the beggar out of his poverty.
As the saying goes; “action speaks louder than words”. The actions of leaders must be more than their words. Ali ibn Abi Talib, the last khalifa of Islam once said, “People are in need of leaders who take action and not those who merely talk.”
We must begin to eschew accomplishing good deeds with our mouths and begin to follow our words with actions to achieve success.
Now we will focus our attention on the methods used by Islamic microfinance firms for fund mobilization and financing clients’ projects and customers.
Islamic microfinance must be shariah compliant to be valid for such a purpose.
First of all, it must be devoid of riba (usury or interest), maysir (gambling), gharar (uncertain trade transactions), jahala (indefiniteness in a contract) and illicit products that are impermissible as far as the shariah is concerned.
In fact, the dire need for shariah compliance in Islamic finance business has led to opening of the flood gate for research into product development in Islamic finance, whilst conventional finance has remained clung to only interest-based deposits, donations and loans.
In other words, the insistence on shariah-compliant products by Islamic banks around the world has never been a hindrance to establishing and developing a sound and solid Islamic microfinance product.
There have been myriads of mechanisms used for mobilizing funds for the operations of Islamic microfinance, however, we will concentrate on the 3 major ones:
Equity; Islamic microfinance raises some of its funds through partnerships or participatory modes called musharakah or modern equity.
Deposits; customer deposits are also regular sources of funds for the Islamic microfinance firm. They come in the form of wadiah, (safekeeping) and qard al-hasan (benevolent loan) without interest.
Mudarabah; this in particular, is based on profit-loss sharing basis, with depositor as the rabbul-mal (financier/ capital provider) and the Islamic bank becomes what we call the muddarib (entrepreneur/ business manager)
Charity; the last but not the least is gathering funds through charity, which comes in the form of sadaqah (voluntary alms), zakat (compulsory annual alms), hiba (gifts), tabaru (willingly benefiting from someone without getting anything in exchange) and awqaaf (Islamic endowment fund).
It is important to make this distinction that sadaqa, hiba, and tabaru have their equivalence in conventional finance, however, zakat and awqaaf are the sole preserve of Islamic finance governed by special fiqh rules and regulations.
Further, it is important to note that deposits sometimes attract gifts from Islamic banks, to simply discourage people from keeping their monies at home and also for the bank to widen it sources of finance base.
Another very important aspect of Islamic microfinance that is sine qua non, is its modes of financing.
Several modes of financing have been adopted by Islamic banks to finance clients’ projects and customers in the industry. It is however important to note that some of the tools used by Islamic banks to mobilize funds for the bank are also regularly used to finance clients’ projects.
The only distinction here is the time at which they are being used. The first one is the partnership profit-loss sharing modes. They are musharakah and Mudarabah. Note that in Mudarabah there are only two partners; the entrepreneur and the financier of the business. Profits accrued from the business are shared based on a pre-agreed-upon ratio, when there is a loss, the financier, who is the provider of capital loses his money and the entrepreneur also loses his efforts.
However, with musharakah there can be more than two parties, and all of them are entitled to provide both capital and expertise, unlike mudarabah. Profits in musharakah are shared based on a pre-agreed-upon ratio but losses are shared based on equity participation in the business.
Another important mode of financing is sale-based modes such as Murabaha. It is the type where sellers are mandated to declare the cost and profit of their goods in the market to potential customers. Murabaha is currently the biggest on the asset side of Islamic banks. It involves a request by a client of a bank to purchase a certain item. The bank will then buy and possess the item and then sell it to the client with a markup profit, thus cost plus profit.
In addition, there is ijarah which is a lease-based mode of financing. This is equivalent to the conventional lease mode but it is strictly devoid of interest, and the lessor maintains ownership responsibilities of the asset. It involves the sale of a defined usufruct of any asset for a defined period in exchange for definite rent. Assets that are consumed when in use cannot be an object of ijarah. So, for example, food, fuel, water, electricity and similar items are not leased in ijarah contract.
And the last but not the least, is qard al-hasan, which is benevolent loan or interest-free loan. It is a loan with a stipulated period for repayment in the future without interest. Meaning only the principal is repaid.
The use of zakat, tabaru, sadaqah, equity, qard al-hasan and awqaaf by Islamic microfinance firms around the world especially in countries like Pakistan, Malaysia, Indonesia, Bangladesh, Afghanistan etc. has lifted millions of people from poverty.
Lifting people out of poverty also means changing the status quo of these human beings to become useful assets to society. Islamic microfinance has also fueled entrepreneurship in poverty-stricken communities around the world.
Unlike the conventional system of finance, Islamic finance makes people who have skills without capital very useful to their environment.
And Allah knows best!
My thanks go to the online International Open University, Ghana for supporting me with academic materials to make my writing possible. Am also grateful to the management of www.mypublisher24.com, especially Osumanu Al-Hassan and Yaw Obeng Manu for giving me the opportunity to share, and spread Islamic finance knowledge on their media outlet.
May God reward you abundantly.
YAHAYA ILIASU MUSTAPHA
The writer is an Islamic Banking and Finance patron and advocate in Ghana
Email:yahaya0246873726@gmail.com
Facebook account: facebook.om/Yahaya.iliasu.94
0506218343 / 0246873726
