Though the Union Budget 2009-10 is dubbed one for Aam Adami (common man), it is not for Aam Musalmaan (common Muslims); for the vast majority of the Muslims in India is too poor and destitute to avail themselves of the welfare schemes of the government meant for them in the financial sector.
As the follow-up actions of the Sachar Committee Report (SCR) the government instructed the commercial banks to open more branches in Minority Concentrated Districts (MCD). During the year 2007-08, 523 and in the year 2008-09 till December 31 2008, 329 new branches were opened in MCDs. Reserve Bank of India also issued a circular to commercial banks to extend 15 per cent of loans to the minorities. As commercial banks are based on the minimisation of risks and maximisation of profits, this move is hardly going to benefit the poor Muslims.
Almost 75 per cent of Muslims in the country don’t get benefit from the formal financial services extended by the government due to their inability to provide the required collaterals against the borrowings and to find any guarantor for them. This problem would be furthered because of the recent ruling of the Supreme Court.
The Supreme Court has ruled that the principal debtor and the guarantor are both equally liable to be proceeded against for recovery of a loan by the creditor. “The legal position is clear that liability of the guarantor and principal debtor are co-extensive and not in alternative,” said a Bench of Justices Dalveer Bhandari and H L Dattu.
The present banking system serves no more than 40 per cent of the population, excluding the vast majority to participate in the development process of the country. The exclusion also occurs due to the accumulation of financial resources in hands of 20 per cent of the population which handles the formal financial institutions. Thus the big challenge India is facing is the financial inclusion of a large segment of the population.
This challenge could only be met through the proper application of microfinance. Microfinance in India today has reached out to almost nine crore population (the population earning more than $2 a day which is minimum requirement to get benefit from MFI) growing at the rate of 41 per cent in the year 2008 and 60 per cent in 2009. Outstanding portfolio of Microfinance Institutes (MFIs) in India is Rs. 351 billion grown at the rate of 97 per cent during the current year as compared to 72 per cent in the previous year. The data is collected through the 233 MFIs in India.
The main point of departure of microfinance from mainstream finance is its alternative approach to collateral and becomes the powerful tool to fight poverty. Microfinance is the only way to achieve 100 per cent financial inclusion.
Microfinance in India can be traced back in 1992 when NABARD linked SHG with banks. The working definition of microfinance was given by NABARD in 1998 which states: “Provision of thrift (saving), credit, and other financial services and products of very small amounts to the poor in rural, semi-urban and urban areas for enabling them to raise their income levels and improve living standards.”
Microfinance provides financial services for poor and low income people whose low income standing excludes them from formal banking systems. It provides credit up to Rs.25000 for the poor people devoid of options and hard-pressed for cash otherwise they avail interest-bearing credit. That segment could be served with interest-free credit or Islamic microfinance. Nowadays financial credit is treated as a human right. The poor need financial services to meet their life-cycle events such as birth, marriage, old age and in emergencies. In India 40 per cent of Muslim population is unbankable.
Out of nine crore clients or customers of MFIs in India, 80 per cent are women and 90 per cent have SC/ST and minority background.
Microfinance was earlier a social experiment but now due to its rate of growth, 72 per cent growth rate achieved by micro-credit – a part of microfinance in the year ended on March 31, 2008, it has now become a profit making sector for today’s money lenders. If it is made interest-free to lessen the burden on borrowers, not only the rate of growth would be increased but also poverty could be alleviated smoothly. The outreach of MFIs would also increase among the community which is devoid of the financial services of formal institutions.
Actually Islamic microfinance is a confluence of Microfinance and Islamic banking. Microfinance and Islamic Finance have some common features such as both work around wellbeing of a society as a whole, share risk and believe that the poor should take part in development process. But the difference lies here when conventional microfinance providers charge rates of interest that are benchmarked against mainstream banking rates whereas Islamic Finance is based on Equity Finance. Islamic Finance promises greater stability than conventional microfinance.
Economic deprivation is one of the big problems of Muslims in India and the leaders have to search out the way to alleviate it. The charity-based (Zakah and Sadaqah) solution to the challenge of poverty could not be sustainable because of its fluctuations and thus could not be part of the careful planning and implementation; besides it is meant for the extremely poor. Whereas the benefits from Waqf assets are sustainable; that is why the Sachar Committee Report recommends the establishment of Waqf Development Corporation to manage it properly.
The need of Islamic Microfinance is not only in India but all over the world because the 72 per cent Muslims the world over do not use formal financial services – credit, insurance, savings, etc. due to interest or riba in the system.
The community itself has to draw the strategy of economic empowerment and look for the given opportunities for them. Poverty eradication in Islam is a cherished goal and microfinance is the best way for Muslim organisations to practise it, considering the economic condition of the community in India. Islamic Microfinance Institutes (IMIs) should be established in every economically weak Muslim locality so that the poor Muslims could easily get financial services to meet their basic needs and develop a habit of saving which is quite absent from the culture of wage earners.
Jamaat-e-Islami Hind, under the project VISION 2016, has designed a strategy of establishing 500 units of IMIs all over India to alleviate poverty from the community gradually.
The Islamic Microfinance for poverty alleviation is more inclusive than Conventional Microfinance because it minimises the dependency on charity and facilitates the benefits to flow to the poorest of the poor and the destitute, who are not in a position to generate any income and wealth from the present day interest-ridden formal financial institutions.