Moral and Ethics in Islamic Microfinance and Its Impact on Rural Poor’s Livelihood

1. Moral and Ethics in Islamic Microfinance and Its Impact on Rural Poor’s Livelihood EMPIRICAL STUDY IN BANGLADESH Dr.mizanurrahman Jaiz bank plc nigeria

2. outline OF PRESENTATION • Introduction • Objectives • Brief Literature Review on Microfinance in Bangladesh • Theoretical Concept on Ethics and Morality • Estimation of Ethics and Morality • Conceptual Framework • Sources of Data • Analytical Techniques • Impact of Microfinance on Clients Religious Practices • Impact of Microfinance on Family Income • Impact of Microfinance on Clients Wellbeing • Impact of Moral and Ethics on Clients Livelihood • Clients opinion on Challenges of Microfinance and its Way-out • Conclusion and Recommendations

3. Introduction of the study • Origin of Microcredit • Grameen Bank founded in Bangladesh in 1983 • Limitation of Microcredit and foundation of Islamic Microfinance • Islamic Microfinance (RDS) of IBBL founded in 1995 • Impact of Islamic Microfinance of Bangladesh in 2007 • Present Situation of Islamic Microfinance in the World • Conventional microcredit clients, only in Bangladesh is about 25 million • While, total Islamic Microfinance clients in the world is about 1 million. More than Half of them is in Bangladesh and over 80 percent of them is concentrated in Indonesia, Bangladesh and Afghanistan. • Different countries of Middle east, North Africa especially Sudan, Iran, Turkey, Ethiopia, Bangladesh, Pakistan, Malaysia and Indonesia have mentionable growth in Islamic Microfinance 3

4. Islamic Microfinance: Special Features • Shariah based Islamic micro-finance • Almost 94 per cent clients are women • Collateral free investment • Five members group is consists • Group members are the security of each others • Finance farming and off-farming activities • Generate Self-employment and income • Provides Welfare, moral and ethical services • Qard facilitates for tube-wells, sanitary latrines • Lowest profit rates • Highest recovery rate (99.95%) • Number of drop out is also mentionable. 4

5. Target Groups of Microfinance • Farmers • Sharecroppers • Persons engaged in off-farm activities • Fishermen • Poultry rearing • Livestock farming • Women and distressed people 5

6. Brief statistics of Islamic microfinance in Bangladesh • Islamic Microfinance Scheme (RDS) of IBBL started functioning in 1995. • Presently, the scheme is operating in more than 13,000 villages in 60 districts. • Some 0.67 million group members of around 22,206 centres of the country covering 94% are females. • As on 31st December 2012 the total disbursement is USD 618 million and the recovery rate is 99.58% • The scheme also provides welfare, moral and ethical services to the rural people of the country. • The total assets of Islamic microfinance in Bangladesh is half of the same in the world. 6

7. Literature review (Conventional) • Rahman (2005) in Bangladesh found that various loans program alone were not enough to alleviate poverty, unless they were sufficient environment with material and social capital • PKSF (2005) in Bangladesh found that absolute poverty was reduced by 9% during 1991 to 2000; moderate poverty declined by 5% during 2000 to 2004. • Chowdhury and Bhuiya (2004) in Bangladesh found positive impacts on human well-being, survival rate and schooling of children. • Amin, Rai and Ropa (2003) in GrameenBank, BRAC, ASA and found micro-credit programme was more successful to reach the poor, but less successful to reach the vulnerable poor. • Zaman(2001) assessed the impact of microcredit on poverty alleviation and women empowerment and found positive impact on income, decision making ability and in reducing gender disparity. • BIDS (2001) in Bangladesh found positive impact on the income of microcredit participants in comparison to non-program participants. • Khandker(2000) in Bangladesh found voluntary saving was increased, which was more pronounced in the cases of women than men. 7

8. Literature review (Islamic) • Fadlallah (2012) mentioned that most researchers in Turkey, India, Bangladesh and Ethiopia and others found that Islamic microfinance has a great impact on the poor’s economic independence. • In Pakistan, 86.8 per cent of surveyed people said that microloans were quite useful in achieving prosperity and increasing the purchasing power of beneficiaries. • In the Middle-east and North Africa found that this type of finance was the most able to achieve social and economic development goals. • In the Arab world, there are some successful experiences such as: Jabal Al-Hoss Funds Project in Syria, Al-Hasida Project in Yemen, and Al-Qard Al-Hassan Association in Lebanon. (Fadlallah, 2012) • Iranian experience is considered pioneer in the field of Islamic Micro-finance that is devoted to fund basic needs. Iran has nearly 3000 Qard Hasan funds in the urban and rural areas. Islamic microloans are also popular in non-Islamic countries. • Rahman (2008, 2009) in Bangladesh found that Islamic microfinance have positive impact on rural poverty alleviation especially on households’ income, crop productivity, and level of expenditure. 8

9. Conceptual framework of microfinance • Sources of Income Generating Activities • On-farm Activities • Crop • Fisheries • Livestock • Poultry • Off-farm Activities • Small business • Mat making • Bamboo works • Sewing • Van ridding • Labour selling • Factors Influencing IGAs • Age • Education • Asset holdings • Land size • Family labour • Rural infrastructure • Skill-building training • Efforts and endeavour • Morality and ethics • Poverty Alleviation • Income • Health • Sanitation • Drinking water • Education • Skills • Knowledge • Capacity • HHs assets • HHs welfare • Efficiency • Productivity 9

10. Objectives of the study • Literature review shows that conventional microcredit does not care about ethics and morality rather cares about poverty alleviation. • While, Islamic microfinance care about ethical and moral development of the clients • But none studied the ethical development of the clients and its impact on poverty alleviation. • Rahman (2008) focused on ethical and moral development and its impact in Bangladesh which have also been narrow in their focus. 1. So, the main objective of this study was to examine the linkage between clients moral and ethical behavioural changes as well as their income and demographic and investment factors, using modern econometric techniques. • Besides, the size of households, low level of literacy, lack of credits & training, weak infrastructure and poor transportation, weak resource base, faster growing population is aggravating the poverty level of the country. 2. Other objectives are to determine if the above factors which are most relevant in explaining poverty alleviation will have important implications for refining micro-finance policy. 10

11. Theoretical concept of moral and ethics • Syed Naqvi listed five elements of Islam’s moral and ethical system which significantly influence their economic behaviour which are: (i) Islam is a complete way of life; (ii) Allah is omnipresent; (iii) Allah owns all wealth; (iv) Individuals must be committed; and (v) the poor have a right to the wealth of the rich. • Islam: Ibn al-Qayyim emphasizes that it is preordained that grains will be obtained only after performing a certain chain of activities. Likewise, quenching the thirst or satisfying the appetite depends on drinking water or taking food. The same is true of all affairs in this life and affairs pertaining to the life hereafter. • Christianity: Being in debt is equivalent to servitude because of the immense burden to repay. Hence, “The rich rule over the poor and the borrower is slave of the lender” (Proverbs 22:7). • Judaism: "The first question an individual is asked in the afterlife at the final judgment is: “Did you conduct your business affairs honestly?” (Babylonian Talmud, Shabbos 31a). 11

12. Estimation of ethics and morality of clients • Opinions were sought from the clients about their awareness and practice of 10 different religious activities. • A four-point Likert scale was used to evaluate the borrowers, moral and ethical development, which were regular, very often, very rare and not at all. • The points of 10 statements were summed up and the total score of each borrower were divided by the highest score of 75 in order to create an index of acceptability. On or above 70% performance of the client was considered satisfactory. So, clients who scored more than 70% were coded one; and zero otherwise. • Mahmud (1999) created an acceptability index towards effectiveness of ADIP programme based on the 70% or above score which was coded as one to indicate that they were well-off under the ADIP’s microcredit programme, otherwise coded zero. • Begum (1998) created an awareness index based on 50% score in order to indicate that awareness level increased towards their living-standard; otherwise coded zero. 12

13. Practical estimation of ethics and moral 13

14. Sources of data and Analytical techniques • Primary data were collected from the field in Early 2013, through interviewing 150 clients from some selected areas, namely Amin Bazar, Savar and Manikgonj. • Impact of ethics and moral of the microfinance (RDS) clients on their livelihood was the major interest therefore assessment was made comparing clients’ present position (31 December 2012) with their base information (at the time of becoming member). • Recall method was used to find base information of the clients • Study areas were purposively selected based on the convenience of researcher’s data collection. • From the clients lists of the study areas a second list was prepared from clients having minimum 5 years membership; assuming that without having minimum 5 years involvement with microfinance activities impact assessment would not be feasible. From the said lists 150 clients (50 from each area) were randomly selected. 14

15. Impact of Microfinance on Clients Religious Activities 15

16. Income generation of household by sources 16

17. Households Income Model OLS estimation technique, using log in both sides, for this study which is as follows: where, Y = amount change of annual income of the household, I = amount of investment taken by the borrowers in 2006, TLS = total land size, AGE = age of the borrowers dummy (above 40 years of age is 1 and 0 otherwise), EDU = education dummy (up to 5 years of schooling is 1 and 0 otherwise), FMIGA = number of family members engaged in income generating activities, EMC = ethics and moral of the clients, and  are the coefficients of the variables to be estimated, and α constant for the equation and µ error term for the equation. 17

18. OLS Results of Household Income Model 18

19. Estimation of Well-being Based on the Clients’ Opinion The Logit model was applied to find out the probability level that the clients would be well-off due to the influence of particular explanatory variable. where, Pi = probability that borrowers were well-off, 1- Pi = probability that borrowers were not well-off, EDU = education dummy for the clients (up to 5 years of schooling is 1, 0 otherwise), FMIG= no of family members involved in income generating activities, DOM = duration of membership (Years), SFE = share of food expenditure to the total expenditure (%), EHC = expenditure on health care (taka), EAMC= ethics and moral of the clients. and = constant, = coefficient to be estimated and = error term. 19

20. Logit Model for Clients’ Well Being 20

21. Estimation of Ethical and Moral Change factors Logit model is used to find out the probability level that the clients could be better off due to the influence of particular explanatory variable Where, Pi = probability that borrowers were well-off, 1- Pi = probability that borrowers were not well-off, EDU = education dummy for the clients (up to 5 years of schooling is 1, 0 otherwise), DOM = duration of membership (Years), AGE= age of the borrowers dummy (above 40 years of age is 1 and 0 otherwise). and = constant, = coefficient to be estimated and = error term. 21

22. Logit Models Results of Clients Ethics and Moral 22

23. Clients’ Opinion towards Micro-investment Programmes • Clients’ opinion about the benefit of micro-investment programs on their skill, social and economic condition was assessed. • The clients opined that micro-investment program had brought positive changes in their skill and socioeconomic status. • It had also brought positive changes in self-confidence development, economic solvency, communication skill, and knowledge on business and religion practices are mentionable. 23

24. Major Problems Clients’ Face in the Study Areas 24

25. Conclusion and recommendations • Conventional microcredit also don't care about the ethical aspects of the rural poor, though it is obligatory in all aspects of life. Business and ethics should be interrelated. • Islamic micro-investment uplift overall socioeconomic plight, also cares about developing ethics and morals development of the clients as it can play a crucial role in alleviating poverty. • This study concentrated on the impact of ethics and morals and its contribution on poor people’s livelihood. • Results shows that clients participation in religious activities has greatly been improved after joining Islamic Micro-finance, there is still room to improve, especially knowledge on interest, its consequence, and way to get rid of it. So, frequent lectures in this issue may be organized, which can assist building clients’ ethics and morality. 25

26. Conclusion and recommendations (cont.) • Instead of investing their borrowed money to income generating activities, some of the clients utilised them in house repairing, children’s marriage ceremony and furniture purchase etc; which is clearly Shariah violation. So, proper monitoring and supervision should be done to develop their morals and ethics so that they remain Shariah complained. • Murabaha is the only mode is practiced in the study area; which is very much Shariah violation prone. So, practise of Musharaka along with Murabaha mode may reduce Shariah violation. Besides, this Musharaka mode will make clients’ clearly understand the difference between conventional and Islamic Microfinance. • Benevolent mechanism like, Qard, Kafala can also be practiced microfinance which can bring welfare for the clients. Although Qard is practiced to provide sanitation and pure drinking water to the clients but the areas and amount can be widen. 26

27. Conclusion and recommendations (cont.) • To alleviate ultra-poor’s poverty, an integrated approach including zakat and awqaf would be needed. Government efforts to employment generation, infrastructure development and electricity generation can also contribute alleviating ultra-poor’s’ poverty. • Demand-led effective training on different aspects of modern on-farm and off-farm activities, credit management, environmental pollution, nutrition, health care and ethical development has to provided to increase the productivity and efficiency. • Frequent training should be organised for improving the field supervisors’ knowledge, skill, moral and ethical values. • Average rate of dropout in microfinance is also alarming. So, the reason for dropout should be identified. Besides, proper selection of clients and regular monitoring can reduce the dropout rate. 27

28. That is the End THANK YOU 28

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