Dr. Shafiq Dhanani, Building a Successful Business Model for Islamic Microfinance

Mitra Bisnis KeluargaVentura - Indonesia

(Family Business Partners)

Microcredit Summit, Valladolid, Spain, Nov 2011

Challenges in Syariah Group Lending

Shafiq Dhanani

Main Challenges

Legal and Regulatory Approvals

Modification of MFI Governance

Product Design with Syariah Principles

Practical Implementation Issues

Conclusions: Syariah Group Lending?

Examples of MBK Clients & Houses

Weekly MBK Centre Meeting: 6 Stages

Read promise/ 5 main rules

Register Attendance

Repay instalments

Read promise/Close meeting

Information, Answer questions

Receive follow-up working capital

Legal and Regulatory Approvals

National Syariah Council: Full Presentation

(30 members) -->Recommendation

Amendment to Company’s Articles of Association –

Ministry of Justice

Approval by Regulator – Ministry of Finance, Capital

Market and Financial Institutions Supervisory Board

Separate Consultations/Endorsement by Ulama

Councils at provincial, district, sub-district and

village level

Modifications of MFI Governance

Syariah Supervisory Council reporting to MFI’s Board of

Directors

2 Members recommended by National Syariah

Council

Members employed by MFI

Functions of Syariah Supervisory Council:

Approve Syariah Product Design

Monitor Implementation of Syariah Product in the

field

Report to both MFI and National Syariah Council

Product Design

Most common Syariah Product is mark-up on Buying

and Selling (Murabahah): one-time purchase

More difficult Syariah Product is Profit-Sharing

(Mudharabah): What Profit-sharing Rate?

Different businessmen abilities

Different industries: trade, agriculture, processing, services

different scale of operations and location (urban/rural)

Expected Profit-sharing rate vs. Actual: difference must be given back to client, or client must pay more, at

the end of loan cycle

Separate Accounting for Syariah Product: Eventually full accounts of Subsidiary Unit

Fines and Penalties donated to social causes, not included in Company Income

Practical Implementation Issues

Data on business profitability & profit-sharing rate? Complex Field Surveys for different industries and business

scale

Regular updating of field surveys findings

Clients in same group but different profit-sharing rates?

Group Lending MFIs usually have hundreds of

thousands or even millions of micro-clients: How can MFI physically verify every year the profitability of so

many clients?

Most micro-clients do not keep written accounts, many

are illiterate…

Conclusions: Syariah Group Lending?

Many regulatory, design and practical challenges

Syariah lending Rare in Muslim Bangladesh,

Pakistan and Indonesia

Syariah Loan Products mainly used for

buying/selling

Why Syariah Group Lending Product in MBK?

Resistance / of local Ulamas in a few areas to: Conventional loans based on interest rate

Vested Interests

Resistance to fixed profit-sharing rate

Thank You

PT Mitra Bisnis Keluarga Ventura