The role of Islamic financial institution in financing microfinance in Palestine
This case study in Palestine is one of the most important case studies that aim to focus on some pioneering roles of Islamic microfinance models.
Although the principle of Islamic Microfinance concept is considered new approach in Islamic finance, but it’s still facing challenges and difficulties. Palestine is a Muslim country with very high percentage of poverty and surrounded by different political, economical and economic problems, that’s why we choose this case study specifically to find some solutions for this challenging and difficulties. According to World Food Program WFP (2014) Palestine economy went down through a recession especially in Gaza which faced a negative growth of economy and had affects on unemployment rate which is increased to 43%. The youth unemployment in Gaza increased to 60 % and overall unemployment in West Bank and Gaza increased to 27 % in 2014.
The Palestinian economy is supported by government, but this support can’t be a sustainable or suitable long-term solution for a nation to be developed. so, it is important to implement some of the best Islamic micro financing models which will make the economy adaptable to change and dynamic by creating entrepreneurial opportunities in the SMEs and agriculture which will open a number of job opportunities to reduce the unemployment rate .
Therefore, the objective of this case study is to identify challenges and opportunities in Islamic micro finance industry by showing the current status of Islamic microfinance in Palestine and also, provide a sustainable multiple-stages financing model which will eliminate poverty in complying with the Islamic permissions and regulations, also it includes topics which are related to Islamic microfinance institution’s outreach, products offering, and overall financial performance in Palestine. This case study also shed light on lessons learned and objectives and it also provides recommendations to MFIs that may be reason for developing their current products mix to include Islamic microfinance products which will be covered later on in this case
Overview ofislamic Microfinance in Palestine Fast facts about Palestine according to year 2012
Life expectancy 73.3
Adult literacy rate 93.8%
Real GDP growth 0
GDP per capita 1.261
Population 3.9 million (2.4 in west bank and 1.5 in Gaza strip )
Poverty rate 34.5%
Unemployment rate 22.8%
Population growth rate 3.7%
According to studies in Islamic microfinance it seems that over half of Palestinians live in Poverty and they present: 45.7% in the West Bank and another 79.4% in Gaza which is very bad indicator.
With the turning off of subsidies and support to Palestine in 2006 the number of people who live in deep poverty, (defined as those living on less than 50 cents a day) nearly doubled to over 1 million.
Unemployment, has increased in the first quarter of 2008 from 22.6% – 25.8% in Palestine as a whole which is large amount. In the West Bank unemployment actually lowered from 19% to 16.3% while in the Gaza it has increased considerably under the Israeli siege (29.8%45.5%).
Labor force participation as a whole in Palestine is 40.6%3.
According to the United Nations Relief and works Agency (UNRWA) 46% of Palestinians do not have enough food to meet their daily needs. The number of people who live under poverty line , nearly doubled in 2006 to over 1 million.
The studies proved that out of four Palestinians one of them who is in the West Bank and Gaza Strip was living under poverty line in 2010, said the Palestinian Central Bureau of Statistics (PCBS). This was divided into 18.3% in the West Bank and 38.0% in Gaza Strip.
With only 23% of the microfinance demand in Palestine covered by Microfinance Institutions (MFIs) and almost half of Palestinians in the West Bank and Gaza living under the poverty line, demand and ask for microfinance services in Palestine. Moreover, as result of restrictions of Israel’s governmental policy on the transportation, services and goods, and the high unemployment rate, most of Palestinians have turned into entrepreneurial and self-employment activities, which are consequently, reason for increasing demand of microfinance services in the country.
The demand of microfinance in Palestine was estimated to be between 150,000 and 190,000 Palestinian households according to Planet Finance, 2011 Faten’s rating report5., it is also estimated that 96,000 households demand Small and Medium credit and a further 200,000 households demand small balance savings accounts and money transfer services.
The micro finance institutions consists of thirteen institutions with different characteristics and structures one of them is (AL RAFA BANK) the 13 non banking financial institutions are active and include the demand for Palestinians network for small enterprises and micro finance (SHAREKA ) and eight of which are reporting regularly to the Microfinance Information eXchange (MIX) market.
According to the main focus of (outreach report) published by Sharakeh (www.palmfi.ps) for September 2011, the numbers of active members of the network clients the microfinance institutions declined by 3% compared to December in year 2010 to reach 43,133 clients with an outstanding loan portfolio of USD 74.72M. The largest two MFIs in Palestine are; UNRWA and FATEN, they serve over 27,000 clients which is considered more than 50% of the market of active borrowers. Both of the MFIs are well supervised and funded, and often they get benefit from foreign technical assistance and are considers the strongest in the Palestinian sector.
Despite the diversity of demand, most of Palestinian MFIs offer only microloans as saving which is not allowed under the shari’a and under current regulatory framework. It could be easily stated that MFIs operating in Palestine face many operational, political, regulatory, economic, challenges, which raises their operating costs more than the national benchmarks and affects the quality of their portfolio impacts in their growth plans.
Islamic Microfinance Landscape in Palestine:
Currently, The most outstanding seven MFIs, namely; Faten, PARC, Reef, Islamic Relief Palestine, ACAD, PFD, and Asala are providing services for Islamic microfinance in Palestine, they serving more than 3,300 clients with a total financing portfolio of USD 11,416,678, as reported to the 2011 Islamic Micro and Small Medium Enterprise (MSME) Finance Survey. Six out of the seven MFIs offer Qard Hassan (HALAL LOAN), (zero interest rate loans) to clients and also offer the principle of profit and loss sharing and Murabaha ( original cost plus mark-up). ACAD operates in rural areas and offers two products other than Qard Hassan, which are Murabaha, and Musharaka, more over that ACAD has the deepest outreach and has one of the lowest average financing amounts per client,
Islamic Microfinance Providers in Palestine in 2010: Outreach and Scale
MfA name Number of active clients Gross financing portfolio Financing products
Faten 1013 4,468,551 Murabaha
Parc 122 303,909 Murabaha
Reef 769 3,511,529 MurabahaMusharaka
Acad 471 822,075 Qard Hasan MurabahaMusharaka
Pdf 163 161,842 Murabaha
Asala 378 648,772 Murabaha
Total 3336 11,416,678
Microfinance Legal Framework in Palestine
The Microfinance model is not regulated in Palestine; MFIs were not known and are registered with the Palestinian National Authority bodies under different legal authorities (i.e. UN agency, NGO, charitable organizations, subsidiaries and cooperative, etc.). The power to license, monitor and supervise MFIs. The supervisory authority of all MFIs in Palestine – nonprofit organizations and according to the Banking Law (November 2010) All existing NGOs are required and related to Islamic Microfinance Case Studies become companies (either for-profit or non-profit).
There are external environmental challenges in Palestine. For that reason, people in general especially who live under poverty line suffer from restrictions on the free movement of goods and services. These restrictions affect the citizen’s ability to repay their loans due to their shortage in cash liquidation because they are forced to pay for their daily life needs , the same fot organization’s ability to effectively control and monitor operations and to provide trainings. Over the years of conflict in Palestine, rescheduling of loans by different MFIs has impacted the credit environment. The use of Israeli currency pre-empts the PMA from having its own monetary policy, which creates currency risk for the clients. The organization has done well to survive amidst the challenging political and economic environment in the country.
*Management and Organization Structure
ACAD has its head office in Ramallah and has set up its seven urban and rural branches in all the major towns of the West Bank and Gaza strip. ACAD has a small team of 42 staff members (55% are on the field) which includes 8 managerial staff members at the HO. ACAD needs to review the staff allocation; more than 40% of staff is handling administrative activities which influence negatively the performance of the MFI. ACAD’s microfinance operations are led by the General Manager, Mr. Samir Bargouthi. Mr. Samir has been managing ACAD since 1992. He is supported by two senior managers, the Head Operations and the head of Finance & Administration. Among the senior management, ACAD also has a Compliance Officer who performs the role of the internal auditor in ACAD, as outlined in the organizational chart below.
ACAD has a reasonable performance on governance and strategy due to experienced Board members, the good experience of senior management in working in challenging local conditions, helps in loan products design and linkages with microfinance networks and financial institutions.
However, lack of experience of microfinance among the Board members, a centralized organizational structure, high dependence upon international donors and adverse economic and political outlook in the country has limited the grade.
Islamic Microfinance Products in Palestine
1. Purchase and sales contracts
2. Leasing contracts,
3. Partnerships (profit and loss sharing) contracts( Musharkah, Murabaha and Mudarabah )
4. Lending contracts.
5.qard Hassan (zero interest loans )
And many other Islamic financial products which mentioned before in details in the part related to Islamic microfinance products.
These products defined the target take over for all clients engaged in productive
economic activities such as agriculture, commerce, services, and manufacturing.
Loan Classification Loan amounts Payments Number of installments Grace period Minimum profit sharing %
Murabaha /Musana’a up to 1500 monthly basis 6-18 0-3 NA
Murabaha /Musana’a 2000-3000 monthly basis 6-24 0-3 Na
Murabaha /Musana’a 3500-5000 monthly basis 6-36 0-3 Na
Murabaha /Musana’a 5000-7000 monthly basis 6-36 0-3 Na
Murabaha /Musana’a 500-4000 monthly basis 6-24 0-3 30%
Prospects for Micro Finance Industry in Palestine Islamic microfinance offers many opportunities to turn the current status from recission into a socio-economic boom. The disparity of wealth, poverty, hunger is not accepted in Islam. It speaks about the equity and will of helping hands socially and economically. Aid is not enough to bring sustainable growth for a nation. A nation requires effective and well-designed financial policy to throw the poverty in the museum. Despite having so many challenges, Palestine gets enough sympathy from the international developed countries in the face of Aid programs and Zakat. These aid funds can be effectively utilized in the Islamic micro financing schemes. According to (Yunus 2007) philanthropy got one life but never comes back, but business got much means to live. Therefore, society friendly business model can elimenate poverty by generating income for the aid funds.the corporate business has very important role to make the world better place to live in through helping the poor to generate their income from many sources like investing in smes by giving and providing funds for them as corporate social responsibility. This will help poor people in the production cycle by increasing their ability to purchase by making them economically satisfied through Islamic micro financing. Palestine economy is mainly based on agriculture . Islamic microfinance can play a vital role in investing agricaltural production and fishing industries. Issuance of rules and regulations and establishment of separate monitoring department from the government side will support Islamic microfinance develop very rapidly in Palestine. Also the islamic microfinance open the gate of employment to the youth as motivation for them. And that’s By providing small halal loans and proper training to these unemployed to achieve remarkable success in Islamic microfinance.
Multiple- Stages Model for Islamic Micro Finance in Palestine
Islamic microfinance can play a vital role in advancing socio-economic development for the poor and small entrepreneurs without charging interest because it’s prohibted in islamic law. The micro entrepreneurs can greatly be motivated by the ethical attributes of Islamic microfinance.so, it is very important to develop a suitable model of Islamic microfinance, which take the political, social and religious sentiment of a particular country into consideration like Palestine and work effectively to come over the poverty. For the propose of multiple-stages financing framework, we have divided the borrowers into three segments namely, the poor people, the poorer people and the poorest people1. These segments are incorporated with different Islamic financing models in accordance with the principles and features of those models. The most important thing in the framework is the fund. There will be a central fund monitored and administered by the board and government. The board members will be selected by both the IMFIs and the government. These funds will be restricted and accumulated by three sources of funds called Zakat , Corporate Social Responsibility Window (CSR) and International Aid or donation. After that the fund will be convert from the three models into the IMFIs cconditions. The IMFIs responsibility would be to identify and evaluate the three segments of the poor people to whom they will hand over micro investments. The segments of the poor can be selected according to the income, owning of land or farm land or the amount of property or any other assets they own and the number of children or family member they have. The monitoring board will establish a training and development units which train the investors and the borrowers. It reprents How they are managing their fund and how they will be able to run their business profit. The training unit will also help them to improve their position and to take part in consultation from time to time. The IMFIs will prepare package products to help different segments of poor people. The IMFIs has a recovery plan by creating a Risk Fund which is accumulated by the repayment and deposit share of the clients. In order to make it easy for the people The poorest segment will only give an administrative fee, which will go directly to the risk fund. The percentage of repayment and deposit will be differ according to the segment of people whether the poor and poorer. The poor will pay installments; according to predetermined ration accepted by both IMFIs and the borrowers, of the loan and give a certain percentage as provisional deposit and the rest of the profit after paying installment and deposit will be taken by them. The provisional deposit will act as collateral but this deposit will help investors to manage their own business without taking any more loans. There will also be a provisional deposit and rest of the profit will be taken by the clients. The poor people will take rest and execution in payments due to their conditions. They will only be obliged to pay administrative fees as mentioned before. So basically, the Zakat fund will be provided to them as Quard-e-Hasan and Hiba.
Recommendation and Conclusion
The most common object of (Yunus 2007) is that the poverty is not only related to the poor but also it is related to the system which is influenced by institutions, agencies and policies. The main purpose of our study is to get rid of poverty and to link with the famous Nobel Prize winner’s view it can be said that if an accurate and suitable financial framework is designed and established in a war affected country like Palestine, the economy and the fate of those poor will affect all of the countries in all actvities towards the development now and in the near future. The success of an effective financial strategy for the improvement and development of Islamic microfinance demands that by the efforts by the stakeholders involved like the poor, the investors, firms, stakeholders, NGOs, NPOs, government agencies such as Ministry of Finance, the monetary authority and the capital market authority.so my recommendation will be both at micro and macro Islamic level. The fund controlling and management members will be selected from the both government or public sector and private sector firms and they will be accountable for their actions in fund. The case study of government in Palestine will create awareness to develop Islamic microfinance. The government will take several steps to issue suitable, modern situation to demand rules and regulation to support and enhance Islamic microfinance. The successful and profitable businesses require being motivated to contribute in poverty areas by providing fund as CSR or donations. That’s why the big businesses will encourage small entrepreneurs. The international donors and people who provide fund will understand that the fund they are supplying as it aid has been utilizing in proper manner in socio-economic development and poverty reduction. The government will achieve several steps to increase Zakat fund. And this can achieve by Trained and qualified staffs. The creditors need to be involved in training and development programs at every time to be updated and to carry out their business purposes successfully. The IMFIs will find that the markets for the produced items by the borrowers. So the IMFIs play an important role to reach the good products to the customers in the domestic market as well as in the international market. R&D researches need to be continued to measure efficiency and effictiveness of the loans and recommend policies to both Governments and IMFIs which will be financed by the both parties.
So I have to take these recommindations into consideration and promote the measures into action, according to the challenges of Islamic Micro finance. Proper management of the overall system can ensure healthy Islamic microfinance in Palestine. Again referring the famous quotation of(Yunus 2007), “Run the engine and the engine will run the system automatically.” For decades, the main concentration of the world in Palestine was only war, conflicts, devastation and casualty but hardly any attention was paid to the poor people waiting to change their life by empowering themselves financially. Now it is time to come up with some innovative, effective and worthy ideas to hand over them opportunities of developing their socio-economic condition by Islamic microfinance case study in palestine.