Islamic microfinance sector moves towards consumer-friendly debt instruments with borrower welfare in mind

AMMAN — After its establishment in 1976, and well into its blossoming in the early 2000s, the Grameen Bank in Bangladesh proved to the world of finance that non-predatory banking does in fact work.

Nobel Prize laureate Muhammad Yunus, who was the first to introduce Islamic tools and instruments of finance to the banking sector globally, was also amongst the first to utilise the concepts and mechanisms of microfinance in development, too.

Now, some 42 years later, the microfinance sector in Jordan has become one of the most important microcredit sources for Jordanians who do not meet the eligibility criteria for loans from commercial banks.

Shafea Kayed, a former microfinance credit officer at a commercial bank, said: “These microcredit facilities are the lifeline of some small businesses and families, whose members are unemployed or whose salaries are below the criteria.”

In 2018 the microfinance sector currently has more than 300,000 active clients across the Kingdom, said Ziad Rifai, vice chairman of the Jordan Microfinance Network, Tanmeyah; former 12-year director of Tamweelcom; and CEO of Ethmar, Jordan’s first Islamic microfinance enterprise.

Speaking on behalf of the network, which houses all nine official microfinance companies registered with the Central Bank of Jordan, Rifai said: “The aim of microfinance is not to make profit, but to develop micro businesses and help them become more productive.”

“These microfinance institutions are non-profit entities,” he said in recent interview with The Jordan Times, adding, “There are no dividends and there are no shareholders getting filthy rich in the process. Our aim is not to maximise returns on investment.”

Driven by the aspiration to initiate a more “just” and consumer-friendly microfinance sector, Rifai said he looked to utilise instruments of finance incumbent within Islam and the local culture, in order to build a more “sustainable” and balanced microcredit environment. For that purpose, Rifai said he left Tamweelcom to start Ethmar in 2015.

According to financial specialist and former compliance executive with the Arab Bank Abdul Hamid Dweik, employing Islamic instruments and tools of finance can reflect greater benefit on both the economy and society.

But interest rates are not the core of the question when it comes to the validity and utility of Islamic finance, Dweik argued.

“Sharia authorities have confirmed that interest rates are, in fact, necessary for a strong financial system, which today is the backbone of any economy,” Dweik said.

Recalling the fatwas and due diligence of Sharia authorities, Dwaik said both the dean of the Sharia Faculty in Mecca, Abdul Rahman Nasser, and Azhar Grand Sheikh Mohammad Tantawi approved the utilisation of interest in banking.

“To build a strong Islamic state, there must be a strong economy. And to achieve a strong economy, there must be strong financial institutions. And these institutions cannot exist without interest,” Dwaik, quoting Nasser, said to The Jordan Times.

“There are more than 15 tools of Islamic finance that we can utilise in microfinance today. The most widely used is the murabaha Islamic tool [a deferred-purchase financing tool], but it is also the most questionable,” Rifai elaborated.

Islamic financial institutions rely on it because it carries the lowest risk, compared to other tools of Islamic finance, which sometimes renders it no different in terms of exploitation, “Sharia-wise”, than traditional credit instruments.

There are other tools that are more welfare-oriented, Rifai highlighted.

“Despite it being halal, backed by fatwas from the local religious authorities and our in-house Sharia committee, we [at Ethmar] are working towards expanding our credit mix to depend more on Islamic partnership-based models, in which we and our clients share the risks and rewards of their ventures, instead of just sharing the rewards, guaranteed.”

Murabaha loans, three years ago, comprised some 80 per cent of the company’s credit facilities mix, and some 70 per cent of the Islamic finance sector’s overall issued credit. Now, come 2019, it comprises some 60 per cent of the company’s credit mix, Rifai said.

The company, he said, is adopting zero-interest instalment tools to facilitate credit without interest and make profit via commission, as a business development agent for the merchant.

The risk-reward equation is fruitful, he added. “Not only for the zero-interest instalment method, but for all of the company’s tools.”

Overall, bad debt does not exceed 5 per cent, according to the figures Rifai shared with The Jordan Times. “If the financing sector applies all of the instruments of Islamic finance, we can then contribute to building a fairer financial economy.”

In the last 20 years, the total number of cases filed by all registered microfinancing bodies at Jordanian courts of law, combined, does not exceed 10,000, Rifai underlined.

“No more than 100 people are currently serving time in prison at our behest... None of them women,” he added.

“We do not seek judicial intervention. Why would we? That would only kill the debt. We would rather be patient with our borrowers and clients, because once they’re sent to prison, the debt is dead.”

Ethmar only resorts to the authorities when the borrower disappears and changes their residence and contact details, to settle their debts, he said.

Islamic microfinance sector moves towards consumer-friendly debt instruments with borrower welfare in mind