Author: Md. Thowhidul Islam, an Associate Professor of Bangladesh Studies, Center for University Requirement Courses, International Islamic University Chittagong.
Poverty has been and still remains one of the oldest challenges to human civilization and development. Currently, there are 736 million people living under extreme poverty around the world, and it is estimated that additional 40 to 60 million people will be added in 2020 as a result of COVID-19 (World Bank, 2020). One of the successful tools that was used to alleviate poverty in different countries in the 20th and 21st century is Microfinance program. It is the activity or business of providing financial services, such as small loans, to poor people or new business that cannot use traditional banking services (Cambridge Dictionary, 2020). The idea of microfinance was pioneered by the Nobel-laureate Muhammad Yunus of Bangladesh. He founded Grameen Bank in 1986, the world’s first microfinance institution and won the Nobel Peace Prize in 2006. Since then, microfinance/microcredit has been adopted by hundreds of organizations around the world as a program to remove poverty.
When a microfinance program abides by the principles of Shari’ah (Islamic jurisprudence), it refers to Islamic microfinance. Islami Bank Bangladesh Limited (IBBL), a leading Shari’ah-based banking institution in South-Asia, established in 1995 an Islamic microfinance program named ‘Rural Development Scheme (RDS)’ with the objective of alleviating poverty by providing micro investment to the rural poor in Bangladesh. It has been designed with distinctive features that distinguish it from conventional microfinance (CM) programs. Presently, the scheme is being implemented through 297 branches in 24,632 villages under all 64 districts of Bangladesh (IBBL, 2020). It has 1.24 million members, 92% of whom are female, and around 33,000 centers are involved in this scheme (IBBL, 2020).
Since the inception of RDS, it has achieved remarkable milestones of success compared to CM programs in the country. RDS program earns a very nominal profit, while it grants loan without any collateral. It does not disburse loans in cash like CM programs, rather goods, which ensures its uses in income generating activities. There is a possibility of using money in non-productive activities in CM programs as the investment is disbursed in cash. In CM programs, an amount is deducted from the loan before disbursement for different reasons, while the interest is calculated on the total amount. There is no such deduction in RDS and the fund is directly used to purchase goods. Thus, the risk of diverting fund is minimized. The rate of return in CM programs is between 20 to 30%, while RDS executes 12.5% profit based on profit-loss-sharing method with 2.5% rebate for timely payment. Thus, a successful member has to pay 10% profit.
Moreover, RDS clients have to deposit Tk. 20 per week in a Mudaraba savings account, which can be withdrawn once after fulfilling their liabilities towards the bank. This ensures the sustainability of the fund. To promote the act of giving, they are encouraged to deposit a minimum of Tk. 5 per week to the Quard-El-Hasan fund, which is given to the extremely poor and unable clients to repay the installments. The receiver of Quard-El-Hasan has only to repay the principal amount. This approach ensures the inclusion of extremely poor in the program. CM programs usually do not pay attention to the poorest people under the following justification: “extending microfinance to the extremely poor not only does not save them, but also, because of the disability for repayment, makes them more indebted and will make them poorer in the future” (Dhumale & Sapcanin, 1998: 189). But in RDS, the poorest are targeted under the scheme of Quard-El-Hasan.
There is no gender restriction for availing RDS loan, while CM program mainly targets women. But in practice, the women clients are not necessarily the end-users of the fund. It has been reported that male household members usually tend to control the fund which creates tension within the family and even increases violence against women (Rahman, 1999: 49-92). Male members tend to utilize such funds usually in non-income generating activities, which increases loan-defaulting cases and, thus, leading those families to spiral further into poverty. On the contrary, RDS focuses on the family as a whole and every member of a family can avail the investment as Islam recognizes the family as the cornerstone of society. Both the recipient and spouse are responsible for the repayment.
One of the cardinal characteristics of the scheme is ‘group approach’. A group is formed consisting of 5 members and a centre is formed by two to eight groups. The centre conducts weekly meetings where different topics for ethical, moral and social development as well as contemporary issues for social awareness, rights and responsibilities are discussed. Regular attendance in these meetings is a pre-criterion for availing RDS investment. Each member of the group provides a guarantee against the other. RDS uses the Islamic financial sources such as Zakat, Waqf, Sadaqah etc. Aside from the financial services offered under RDS, the programme also provides non-financial services such as the humanitarian assistance program, education programme, capacity building and training program, health and medical care program, and the environment protection program. The basic differences between the CM programs and RDS are shown in the table below (Islam, 2018: 53-78):
|Indicators||Conventional Microcredit Program||RDS of IBBL|
|Basic principle||Based on man-made principles||Based on Islamic Shari’ah|
|views of poverty||Any individual having per day income less than US$ 1.0||Any individual having less than Nisab (no zakat is due on wealth) amount of income|
|Sources of Fund||External, client’s savings||External, client’s savings, Zakat, Awqaf, Sadaqah|
|Financing||Based on interest||Based on Islamic modes of financesuch as Mudarabah, Musharakah, Bai-Muajjal and free from interest|
|Financing the poorest||The extreme poor are left out||The extreme poor are targeted by integrating Zakat|
|Fund Transfer||In cash||In goods|
|Target group||Women preferred||Any member of family|
|Collateral||Collateral is required||Collateral-free|
|Deduction||Deduction at the beginning but the interest is calculated on total amount||No deduction|
|Interest/profit rate||Between 20 to 30%||12.5% profit rate with rebate of 2.5% for timely payment|
|Ethical development||No contribution to ethical development||Special contributions to moral and ethical development|
|Objective||Maximising profit without restriction||Maximising profit subject to Shari’ah restrictions|
|Relationship||Creditor-Debtor relationship||Partner, investor/trader, buyer/seller relationship|
|Risk||Risk free as interest is pre-determined||Profit-loss sharing between RDS and client|
|Dealing with defaults||It can charge additional money in case of defaulters Group/centre pressure||No provision to charge extra money from the defaulters Group/spouse guarantee, and Islamic ethics|
|Result||Bank’s interest is prominent, no effort to ensure growth with equity||Due importance to the public interest, ensures growth with equity|
|Work incentive||Material||Material and spiritual|
In every indicator of progress of microfinance institution, RDS has a remarkable status. This provides anecdotal evidence that there is a high demand of Islamic microfinance products. UNDP remarked that “the RDS scaling up process was made possible by a number of key enablers: cultural environment, a conducive policy environment, institutional and organizational capacity and a dedicated management with the vision to scale up the RDS programme in Bangladesh” (UNDP, 2012). Besides having potentials, RDS program faces several challenges including lack of resources and funds, weakness in building capacity, operational efficiency, risk management, unfavorable rules and regulations etc. If the challenges are met with sustainable policies and appropriate steps, RDS program would be able to contribute remarkably in alleviating poverty in Bangladesh.
In conclusion, it can be suggested that the concept of Islamic microfinance should widely be expanded among the development agencies, Zakat-payers and the mass people of society to enrich its resource. Comprehensive guideline and positive legal environment should also be developed for the industry. If Islamic microfinance is given ample attention by policy makers, it can confidently be said that the program would remarkably contribute in reducing poverty in different parts of the world as well as ensure sustainable socio-economic development.