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Report on the forum held under the theme “Development of Islamic Microfinance: Challenges and Perspectives”

Republic of Senegal
Ministry of Economy and Finance
Office of the Minister of State
Technical Assistance Unit for Savings and Loan Cooperatives AT-CEPC

Report on the forum held under the theme “Development of Islamic
Microfinance: Challenges and Perspectives”

The General Council for Islamic Banks and Financial Institutions
(CIBAFI) and the Islamic Research and Training Institute (IRTI), parallel to
the Islamic Development Bank (IDB) Board of Governors meeting held in
Senegal from 28-30 May, 2007, organized a forum on 27 May, 2007 at the
Méridien President Hotel Dakar under the theme “Development of Islamic
Microfinance: Challenges and Initiatives”.

The forum was attended by many various nationality representatives of
microfinance institutions (MFIs) and other partners working in the
microfinance sector.

After listening to the words of Dr. Ahmad Mohamed Ali, President of
the Islamic Development Bank and Shaikh Saleh Abdullah Kamel, Chairman
of Dallah Al-Barakah Group, H.E Abdoulaye Diop, Minister of State/Minister
of Economy and Finance delivered an inaugural speech welcoming all
participants to the forum.

The inaugural speech pointed out that the most important challenges
facing our countries are basically summarized in those problems concerned
with economic growth, development, poverty alleviation and the creation of
employment opportunities. In this context, the provision of financial
services, especially credit services, should be considered a dire need the
forum should work on satisfying.

Thereupon, the process of promoting activities that generate profit and
create employment opportunities during the current decades focused on
expanding the finance service base, in order to reach out to peoples of limited

For that purpose, the financial system should assume a crucial role, not
only by promoting economic growth but also by facilitating the reach of
financial services to peoples more susceptible to poverty and destitution.
Accordingly, numerous initiatives, such as the pioneer attempts of Grameen
Bank, Bangladesh and the village branches of Bank Rakyat Indonesia (BRI)
have proved their success. The institutions, by applying a collective risk-
monitoring system that secures the repayment of the granted credit, provided
financial credit inline with the incomes of some of the classes deprived from
receiving finances through traditional means.

Notwithstanding the numerous efforts of the traditional banking system
to bring about this goal, many peoples within the poverty line are still denied
its financial credits, a matter that is attributed to the following restrictions:
– Absence of relevant resources;
– High credit costs;
– Absence of necessary collateral.

At that point, it seemed necessary to discover other financing sources
more capable of alleviating poverty. The microfinance institutions thus
emerged with a view to furnishing easier means for underprivileged peoples
to obtain credits.

It is conceded today that in the event micro-financing can coordinate
between objectives, social and economic, and can make use of the relevant
legislative framework, it will therefore become an effective poverty
alleviation tool; for its fundamental principles are based upon trust, solidarity
and mutual cooperation. Micro-financing makes way for the creation of new
horizons for small contractors, those willing to expand their activities and
entrepreneurs by granting them credits on a regular basis that can bare high
values provided no difficulties will be faced in their repayment. This should
be done under an official framework to which vocational training or
consultancies may be provided to small contractors.

At the outset, it is worth mentioning that microfinance institutions
assumed a significant role under the framework of reducing poverty, a role
that can expand to comprise financing small and medium enterprises (SMEs)
that serve as a catalyst for the growth of our economies.

Nevertheless, whether the matter relates to facilitating the process of
granting credits to the poor, or to taking part in financing small projects, or
rather small and medium enterprises, micro-financing is considered the
backbone strategy for combating poverty.
As such, micro-financing is deemed to be an influential factor in the
process of alleviating poverty. It is worth mentioning that depriving the poor
from the benefits of the traditional banking system disqualifies them from
taking part in the development process. Now, and after the remarkable
increase in the numbers of the poor in the Islamic countries has been noted, it
seems vital that this subject be brought up for discussion.

In Senegal, the new initiatives have been applied; the baking and
financial environment has been changed by the establishment of microfinance
institutions. The institutions have the capacity to integrate the very poor into
the development process, and to grant them the opportunity to produce goods
and services which act as a source of income and a minimum level of luxury.

The problem of financing the activities of the destitute brackets,
especially in the unofficial sector, has placed the microfinance sector in a
unique status, by way of analyzing the elements of growth and socio-
economic development in Senegal. For such purpose, it was necessary to
define the procedures needed for poverty alleviation, and to embark on the
analysis of the relation between developing the structures of microfinance and
poverty alleviation.

Taking these considerations into account, microfinance is regarded as
one of the best means for alleviating poverty; this has gained the recognition
of the government of Senegal, so much that due attention was paid to the
matter in the Strategic Document on Poverty Alleviation (SDPA), which
represents the reference and coordination framework of the Senegal economic

Today, 1,200,000 urban and rural families in the 95% Muslim populated
Senegal benefit equally from the support provided by microfinance. The

beneficiaries include groups, village societies, farmer organizations and
regular individuals.

In cooperation with the donors, the government of Senegal has exerted
numerous efforts in the following fields:
– Setting a special legal system for microfinance and a special section for
the accounts of microfinance institutions;
– Mobilizing sources of foreign finance in the form of decreasing interest
Supporting the Technical Assistance Unit for Savings and Loan
Cooperatives (AT-CEPC) entrusted by the Ministry of Finance to
supervise over the microfinance sector;
– Implementing a preset microfinance national policy;
– Setting a fund to support microfinance processes.

It is worth mentioning that the IDB is not far from the microfinance
sector in Senegal; it has offered financial aid to many structures by offering
open-end credit lines under the Economic Promotion Fund (EPF). For
– Supporting the PAME/AGETIP project which aims at integrating
Senegalese students studying the Arabic language into micro projects
(Alliance de Credit et d’Epargne pour la Production (ACEP) is considered
the body responsible for granting program-related credits);
– Offering open-ended credit lines at microfinance institutions for the
program supporting small and medium enterprises;
– Granting financial aid to the Technical Assistance Unit for Savings and
Loan Cooperatives (AT-CEPC) and funding the seminar held in 2006 on
Islamic Financing which was intended for the officials of microfinance
authorities in Senegal.

The efforts exerted by the government and its partners had their
positive impact on the expedited growth of the above mentioned sector.

The concept of credits offered by microfinance institutions to peoples
has also included offering credits to several sectors of small enterprise
activities in addition to small and medium enterprises. Small and medium
enterprises facing financial difficulties, and on the verge of declaring
bankruptcy, made use of the financial aid granted to them by the microfinance

institutions; a matter that allowed for their restructuring and enhancement and
enabled them keep their employees.

Moreover, microfinance institutions, in cooperation with the
commercial banks, are now geared towards the new trend of increased
investment in the remittances of immigrants by sending their incurred costs to
remote and secluded areas.

In fact, we can now see that in addition to financing the social
infrastructure in Senegal (establishing schools, medical centers, mosques),
immigrant deposits are, through microfinance institutions, now geared
towards financing social housing, water projects in villages and fields
(sinking wells), lighting by solar energy, creating small projects or institutes
in the agricultural field, animal raring, hunting, transportation, mechanical
workshops, selling car spare parts, handicrafts, restoration works, barber
shops, telecommunication centers and internet cafes, small-scale trade,
importing and exporting and paying school tuition fees for students.

Such various sources of financing had their great impact on
employment, income, family consumption and Gross Domestic Product
(GDP). As such, microfinance institutions that proved to be an effective tool
for combating poverty, assisted localities in settling poor segments near their
lands as a result of the availability of profit-generating activities; a matter that
curbed the phenomenon of displacement and even migration.

Yet, there now exists another area that also calls for the attention of the
Senegalese experts: how to spread the Islamic finance system on the national
level; an area that they have indeed embarked on considering.

The Islamic financing system, contrary to traditional financing
systems, is founded on the prohibition of setting a fixed interest rate to loans
and deposits; in other words, it prohibits usury or illicit gains (see The Holy
Qur’an, Surah 2, Al-Baqarah, verses 275 – 278). It is well known that the
Islamic principle states that parties shall have equal shares of probable profits
or losses; accordingly, the following forms have spread:
– Murabaha or selling at a marginal profit;
– Leasing/Renting;
– Deferred sale;
– Bay’ Bes-Salam;

– Co-Participation (musharaka);
– Speculation (mudaraba) ;
– Interest-free, or good loans.

In Senegal, authorities contemplated on how to implement the Islamic
principles, especially after:
– The limitation of the practices of some Senegalese Muslims who fear
usury and therefore refuse to earn interest on their deposits whether such
deposits are placed in banks or in microfinance institutions;
Defining the forms of Islamic finance which better meet the needs of
microfinance clients (Murabaha and deferred sale in Syria, Yemen and

According to what is stated above, we find that microfinance and
Islamic finance have so many points in common. Islam is founded upon
moral, social and religious principles that secure justice and equality in the
community as a whole. The principles of Co-Participation in the realized
losses, rights and duties and property rights, and the fact that the violation of
these rights is prohibited do all exist in the Islamic Law. Such Law represents
the corner stone of the financing system.

In conclusion, it is worth mentioning that the current volume of deals
made by 200 Islamic financial institutions in the Islamic world approximately
amounts to 300 billion Dollars.

These significant results are the outcome of the collective efforts of
bankers, economists and eminent Muslim researchers, made over decades with a
view to providing financial and Islamic solutions to the economic issues of the
Muslims. In this respect, Islamic finance is considered a emerging industry that is
flourishing all over the world.

In the context of the great initiatives launched under the auspices of H.E.
Abdullah Wad, President of Senegal, opening the door to long-term Islamic finance
like sokouk (Islamic obligatory asset-based loans) has proved to be a proper
solution for the constraints imposed by the scarcity of permanent resources, and
accordingly their high cost.

At a time when the West Africa Economic and Monetary Union (WAEMU)
is adopting a number of reforms related to improving the legal framework of

microfinance institutions (MFIs), this forum constitutes an opportunity to raise
questions about broadening the scope of these reforms in order to introduce
regulations, compatible with Islamic micro-financing, in the member states of the
aforementioned union.

Following the official inauguration of the forum by the minister of state for
economy and finance, successive workshops chaired by moderators were held. The
following themes have been addressed in these workshops:
– Islamic micro-financing: a synopsis on the current situation, development
framework and strategies;
– Islamic finance: legal, political and regulatory environment for the state’s
– Vistas of promoting institutions specialized in microfinance products and
– Establishing microfinance structures and markets.

Through these fora, a number of microfinance experts coming from various
backgrounds exchanged views. The participants were reminded that Prophet
Mohammed (Peace and Blessings of Allah be Upon Him) was the pioneer of
microfinance, having once given 2 Dirhams to one of his followers: one to buy food
and the other to buy a tool that he could use to do some activity that would provide
him with a steady income to fulfill his needs.

The themes, that were thoroughly discussed, shared the same view
presented by the minister of state, in his statement, concerning the importance of
microfinance for combating poverty and the potential capacities of microfinance,
especially that it is hardly known in West Africa where Islamic finance services are
afflicted by an acute shortage.
The following general facts were discussed during the forum:
– The raised levels of poverty in the member countries of the Islamic development
Bank (IDB) ;
– The wide gap between finance services and the needs of the poor peoples;
– The inadequacy of legal and regulatory frameworks as well as financing
– The ability of microfinance services to meet the needs of the poor peoples.

Thereupon, the forum put forward the following recommendations:
– Integrating Islamic microfinance into government initiatives as an instrument for
combating poverty;
– Underlining the role of governments that should direct their efforts to creating
conducive environments for sustainable microfinance growth in order to alleviate
– Coordinating between various banks and ministries in order to avoid any conflicts
that may arise in the practices exercised, knowing that the degree of effectiveness
of microfinance institutions is influenced by government policies;
– Taking the status of women into account when combating poverty;
– Setting legal and organizational frameworks relevant to the process of developing
Islamic micro-financing in IDB member states; a matter necessitating
reconsideration of the current regulations;
– Creating a network for microfinance institutions abiding by Islamic Law
– Reaching solutions that satisfy the financing needs of the institutions especially
those pertinent to long-term resources;
– Identifying a new approach to Islamic Financial Engineering through the
outcomes of Islamic financing;
– Studying the role of Islamic zakat (elms giving) being the tool for alleviating
poverty (zakat as a source of financing) ;
– Utilizing the Waqf in financing small industrial work centers, such as financing
the procurement of equipment and financing current assets (through the Waqf),
and in promoting partnerships and diversifying rendered financing services;
– Establishing ties between the education and training sector on one hand and the
private sector on the other.

Based upon these considerations, participants in the forum have agreed
upon the importance of setting factors that take cognizance of the causes of Muslim
peoples willing to invest their funds in savings and credit activities without having
to pay interest. In so doing, they abide by the principles of their Islamic religion in
which they strongly believe. For the achievement of this purpose, immediate
procedures relating to the following must be undertaken:
– The education of peoples and raising their awareness concerning the various
forms of Islamic funding;
– Banks and insurance companies should take a considerable part within the sector
and the inter-coordination between their activities;
– The strategy of Islamic financing within the framework of combating poverty by
utilizing the zakat and waqf.

In this context, zakat is proposed to be used as a sort of fund for loans
guarantee or insurance. In the event of failure to repay the borrowed loan, it will
merely be considered a bad – debt case, and no liability will fall upon the borrower.
On the contrary, the waqf capital should not be touched.

It can thus be concluded that Islamic micro-financing faces numerous
challenges, amongst which are the following:
– How can the Islamic micro-financing system be integrated into our statutes?
– Are Islamic financing forms compatible with small projects?
– What are the structures that can be used to present Islamic-financing products?

On the other hand, the needs of small project can be summed up in the following:
– Financing on the short and long terms ;
– Technical assistance ;
– Security.

In order to satisfy those needs, questions were posed on the institutions
capable of taking part in the financing program.

From the responses received from the forum participants, it seemed evident
that the IDB as well as non-governmental organizations (NGOs) were the two
bodies capable of such a task. Accordingly, participants requested that the zakat be
used in financing the insurance or solidarity funds, and that the waqf be used in
financing the technical assistance funds.

From the forum, the following may be deduced:
– It is possible to limit the needs of the poor by utilizing the concept of Islamic
– It is necessary to pay more attention to increasing resources on the level of
Islamic financing institutions ;
– The irrelevance of stressing the presentation of collateral, for it can sometimes be
directed towards non-poor peoples ;
– It is necessary that banks promote the products of micro-financing and face
challenges in order to alleviate poverty by diversifying the financing operations.

In this context, and in accordance with the fundamental objectives, the IDB
intends to present proposals for the elimination of negative repercussions, reviving
the Islamic financing system, enhancing the abilities of the poor as well as

augmenting inter-cooperation between Islamic countries. Such intentions will be
put into effect by setting a mechanism that will enable the granting of credits, while
abiding by the rules of Islamic Law “Shari’a”.

The closing session of the Islamic Financing Forum was chaired by Mr.
Othman Cek, former IDB Vice President.

Stated above was the statement issued by the Islamic Financing Forum held
in Dakar on 27 May, 2007 at the Méridien President Hotel.

Gabriel Diop

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