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What are Microloans, are they Halal and can they be used to Combat Poverty?
Microloans have been heralded by many as a key tool to combat poverty. Mohammed Yunus, a Bangladeshi Muslim entrepreneur was even awarded a Nobel Peace Prize for pioneering the use of microloans to help the poor. In this article, we will look at what exactly they are as well as providing the Islamic perspective.
What are microloans?In a nutshell, microloans are small loans for impoverished borrowers. These borrowers are usually excluded from conventional loans due to a lack of collateral (i.e. guarantee) or credit history.
For example, consider a poor person earning less than £2 a day in a developing nation. They would most likely not have a bank account. If they wanted to borrow money, their options would be limited to friends, family or even the local loan shark.
Microloans exist to solve this problem. You don’t need any collateral or a bank account to be eligible. The amount borrowed could even be as low as £10.
Microloans are a branch of microfinance which is a suite of financial services targeting the poor. This includes other services such as savings, insurance, and payment facilities. The focus of this article is on microloans.
Why the fuss?It’s easy to understand why the idea is so popular. Improving access to finance can be a game changer. Giving poor people a loan can allow for additional investment into their small business. This can then help them become more self-sufficient.
It can also protect people from loan sharks, who charge exorbitant rates trapping people in a cycle of debt. The UN loved this idea and declared 2005 as the ‘Year of Microcredit’.
However some critics argue that microloans have largely failed in their initial objective of getting people out of poverty. A key factor behind this is many borrowers using loaned funds for day-to-day needs instead of strictly using them for business purposes. Interest payments can also make it difficult for borrowers to come out ahead.
That being said, it has still been proven to improve lives [1]. Being able to meet day-to-day needs is a crucial key first step. With this solid base, people can direct more attention to productive pursuits that could enable them to be more self-sufficient.
There is also research showing that microloans have boosted entrepreneurship. All in all, microloans are a net positive.
Is it halal?This depends on whether interest is being charged. If it is, then no it wouldn’t be halal. As Muslims, we know how unethical interest is and how it usually means a net transfer of wealth from the poor to the rich.
Researchers studying the effects of microloans have also commented on how microloans can also drive borrowers into debt traps [1].
Unfortunately, many of the big mainstream investors do charge interest on their microloans.
Sadly, posterchild Grameen Bank, winner of a Nobel peace prize through founder Mohammed Yunus, also charge interest.
However all hope is not lost. In the next section, we will look at halal alternatives.
Do halal alternatives exist?We have established that microloans are a good idea in principle.
However we need to make sure they are delivered in a halal manner. You’d be glad to hear that there are a plethora of halal options. This is particularly true in Muslim majority countries. We’ll cover how this can be done and will provide some examples of this being done in practice.
The halal approachMuslim organisations delivering microfinance typically do so via a Qard Hasan. This is basically an interest-free loan that is mentioned a number of times in the Quran.
“Who is it that will lend to Allah a good loan which Allah will multiply ?many times over? for them, and they will have an honourable reward?” (Qur’an 57:11).
This structure is also more compassionate to borrowers that face difficulties in repayment. Lenders must extend repayment times and can even voluntarily waive repayment of part or all of the loan.
ExamplesA great example of a Muslim organisation that provides this type of microloan is Islamic Relief. Instead of providing handouts, their aim is to provide a “hand up”. This approach allows small entrepreneurs to become more self-sufficient.
They report that approximately 99% of the loans are repaid [2]. These funds can then be lent out again compounding the benefit of the original capital.
There are many local organisations in Muslim majority countries who offer Qard Hasan microloans. One such example is Pakistani-based Akhuwat.
Instead of focusing solely on giving microloans to businesses, they also fund other services. This includes education, health, marriage, and emergency support.
According to their website, they have distributed over $800m in interest-free loans and have an exceptional repayment rate of 99.9% [3].
A quick word on other approachesThis article is focused solely on loans. Therefore we’ve only covered organisations that provide Qard-Hasan (interest-free loans). However some Muslim organisations are also employing investment tools such as mudaraba and musharaka. This is where they provide capital up-front as a partner in the business venture and take a share of any profits made.
This then allows microfinance companies to move from being purely charitable enterprises to commercial operations. And that is usually important if any project is going to properly scale.
Final wordsSo there we have it. Helping the least well-off among us to become more self-sufficient is a noble pursuit. However our solutions should be ethical and in line with the shariah.
That’s why it is great to see Muslim organisations taking the lead in offering interest-free loans. However it’s worth remembering that microloans alone cannot win the war against poverty.
In our view this is also an area that is ripe for innovation. One of the biggest challenges is the cost of delivering these small loans.
Visionary Muslim-owned FinTechs leveraging technology or even utilising low cost cryptocurrency could revolutionise the sector.
If you found this article interesting and want us to cover any other aspects of Microfinance, do let us know!
References- https://www.researchgate.net/publication/277891006_Micro-credit_is_necessary_but_not_sufficient_for_entrepreneurs_in_desperate_poverty
- https://www.islamic-relief.org/category/strategic-business-units/islamic-social-finance-strategic-business-units/islamic-microfinance/
- https://akhuwat.org.pk/akhuwat-islamic-microfinance/
The post What are Microloans, are they Halal and can they be used to Combat Poverty? appeared first on IslamicFinanceGuru.
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Islamic Mortgage Rates: Is Islamic Finance More Expensive than a Conventional Loan?
One of the common misconceptions among potential homeowners is that Islamic financing is too expensive compared to conventional financing – which couldn’t be further from the truth.
It is the case that a decade or two ago, Islamic financing was more expensive, as pioneers in U.S. Islamic finance created an authentic Shariah-compliant alternative to a mortgage and worked through U.S. regulatory processes and approvals.
But now, home buyers don’t have to choose between their finances and their values. Home buyers can find Shariah-compliant home finance options that are not only competitively priced but even offer additional financial advantages. It’s a win-win.
Islamic home financing is not more expensiveAs the #1 U.S. provider of Islamic home finance, Guidance Residential has not only made it its mission to offer a Shariah-compliant alternative to a mortgage, but also to provide it at a competitive price that makes it an affordable option.
How Islamic Home Finance Companies Benchmark their RatesIslamic financing is not a mortgage loan — it is based on a completely different foundation. Despite that, Islamic home financiers typically benchmark their rates with the prevailing mortgage rates in the United States. This is done partly to make it easy for consumers to comparison shop as they look for the right home financing. It is not riba, as no loan is involved. Guidance Residential have examined this method of calculating a profit and found it to be completely Shariah-compliant.
It’s also important to note that any financing in the United States has to follow governmental rules and regulations. So Islamic financing will look similar externally to a mortgage. Again, however, under that surface, it’s a completely different product. Comparing Islamic financing with a mortgage loan is like examining two different cakes with similar icing on top. At Guidance Residential, our cake is halal.
Why Choose Islamic Financing vs Conventional MortgageGuidance Residential’s customers choose Islamic home finance for many reasons. The first is that it matches their values.
The biggest dilemma facing American Muslim home buyers is that the Islamic faith prohibits the use of riba, or interest, and that is what a conventional home loan depends upon. In Islam, a loan is meant to be a charitable act, and the lender should not profit from it. So a home finance model based on profiting from a loan is not acceptable, especially if an alternative is available.
Guidance Residential was founded as a solution to this problem. Our alternative to a mortgage loan was developed with the help of six top scholars of Islamic finance, and it’s completely free of riba, or interest. This model is built on the Islamic financial concept of musharakah, or co-ownership. It is not a loan at all, but rather a joint purchase. After the home is purchased, the homeowner gradually buys out our share of the home over the course of their contract. An independent Shariah board continues to monitor Guidance Residential’s services to ensure that everything remains completely Islamically sound and authentic.
Because of this foundation, Islamic home finance is also significantly more just and equitable than a traditional mortgage, which makes it appeal to home buyers of other faiths as well. Guidance Residential is not a lender, but rather a partner with the homeowner. The company is happily bound to rules of morality, such as capping fees and assuming some of the financial risks as appropriate with a joint venture. The more closely people examine this co-ownership model, the more appealing they tend to find it.
When it comes to home financing, Guidance Residential’s focus is authenticity and integrity– not only because homeowners already have enough to cope with financially, but also because it’s the right way to conduct business.
Avoid hidden fees by choosing Islamic financingTraditional mortgages have historically been associated with fees that can end up increasing a home buyer’s costs in unexpected ways. With a conventional mortgage, for example, if a homeowner is unable to pay their bill on time, they are charged a late penalty, up to an additional 5%. On a $2,500 mortgage, that could mean an extra $125 in late payment fees. Part of that covers administrative expenses, while the rest is profit from the customer’s difficulties. Fees like these can hide behind low up-front costs, hurting customers when they’re already struggling. Guidance Residential, on the other hand, charges only a small fixed fee to cover the administrative expenses associated with a late payment. Islamic guidelines discourage profiting from someone else’s distress.
Some lenders also charge a fee if a home buyer makes extra payments to pay off the home early. Guidance Residential does not charge this prepayment penalty either.
As a broader principle, Islamic financial laws require all costs to be disclosed, so home buyers can rest assured that all fees are transparent up front.
Calculate the Cost of Home Financing with Guidance ResidentialYou can also instantly calculate an estimate specific to your personal situation with our finance calculators online.
Connect with Guidance Residential TodayChoosing an option for home finance can be daunting. Fortunately, our expert Account Executives are there to help! Contact us and a Guidance Residential Account Executive would be happy to answer any questions you may have.
Your Guidance Residential Account Executive is here to help with any questions. Looking to refinance or purchase? Rates have dropped to historic lows! Have a friend or family member who is looking for a home? Call 1.866.Guidance, or start an application today!
- See if you Pre-Qualify in less than 10 minutes.
- Ready to start your home search? Get Pre-Approved today.
Originally published in June 2013. Updated in June 2021.
The post Islamic Mortgage Rates: Is Islamic Finance More Expensive than a Conventional Loan? appeared first on Blog | Guidance Residential | Islamic Home Financing.
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MICROCAPITAL BRIEF: UBL of Pakistan to Offer Shariah-compliant Housing Loans to Akhuwat Customers
Pakistan-based organizations United Bank Limited (UBL) and Akhuwat recently signed an agreement under Mera Pakistan Mera Ghar, a government-backed housing program, whereby Akhuwat will recommend certain of its low-income customers to UBL for access to “low-cost” housing loans. Based on the number of square meters of the housing unit, UBL is offering loans of PKR 3.5 million (USD 22,600) to PKR 10 million (USD 64,700), with terms ranging from five years to 20 years. Applicants must be between 25 and 60 years of age and can name up to three additional co-applicants. The financing is Shariah-compliant – conforming with Islamic law – as it uses diminishing mushrakah, a mechanism through which the borrower shares homeownership with the bank. As each payment is made, the bank’s share is drawn down and the borrower’s share increases until the asset is fully transferred to the borrower.
UBL President Shazad Dada said, “With the extensive hands-on expertise of Akhuwat on our side, UBL will be further able to provide streamlined and more focused low-cost housing finance solutions to deserving candidates across the country.”
Established in 2001, Akhuwat is an NGO with 800 branches in 400 cities, providing Islamic microloans, healthcare, clothing and education. As of 2019, Akhuwat reported total assets of PKR 15 billion (USD 96.9 million).
Headquartered in Karachi, UBL is a commercial bank owned by UK-based Bestway Group. UBL provides deposits, loans, credit cards and an incoming international money-transfer service. For the first quarter of 2020, UBL reported gross revenue of PKR 22 billion (USD 142 million) and net profit of PKR 5.1 billion (USD 32.9 million). In 2019, UBL reported GBP 9.9 billion (USD 13.9 billion) in total assets. Bestway has been UBL’s majority shareholder since 2002, when it invested USD 210 million in the firm. In 2018, Bestway financed the launch of UBL Digital, a mobile banking app which had 700,000 active users in Pakistan by 2019. Bestway’s portfolio also includes Pakistan’s Bestway Cement and UK-based retailers Well Pharmacy and Bestway Wholesale.
By Sophie Fiala, Research Associate
Sources and Additional Resources
Daily Times article
https://dailytimes.com.pk/762214/ubl-akhuwat-islamic-microfinance-to-offer-exclusive-low-cost-housing-finance-solutions/
Akhuwat homepage
https://akhuwat.org.pk/
UBL homepage
https://ubldigital.com/
UBL 2020 annual report
https://www.ubldirect.com/corporate/portals/0/Unconsolidated%20financial%20statements%20with%20directors%20report%20-%20Mar%202020.pdf
UBL housing loan information
https://www.ubldigital.com/Banking/UBL-Ameen/UBL-Ameen-Network/Consumer-Banking/Mera-Pakistan-Mera-Ghar
Bank AL Habib profile on Mera Pakistan Mera Ghar
https://www.bankalhabib.com/mera-pakistan-mera-ghar
Bestway Group homepage
https://www.bestwaygroup.co.uk/
Bestway Group 2019 annual report
https://www.bestwaygroup.co.uk/files/Bestway-Group-Annual-Report-2019.pdf
Akhuwat 2019 annual report
https://akhuwat.org.pk/wp-content/uploads/2020/01/report-2019.pdf
Previous MicroCapital article on Islamic banking
https://www.microcapital.org/microcapital-brief-bankislami-tpl-life-offering-shariah-compliant-hospitalization-funeral-coverage-for-covid-19-in-pakistan/
Did you know that MicroCapital publishes the MicroCapital Monitor newspaper each month? Find more at https://www.microcapital.org/products-page/.
The post MICROCAPITAL BRIEF: UBL of Pakistan to Offer Shariah-compliant Housing Loans to Akhuwat Customers appeared first on MicroCapital.
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