MORAL AND ETHICS IN ISLAMIC MICROFINANCE AND ITS IMPACT ON RURAL POORS LIVELIHOOD DR. MIZANUR RAHMAN JAIZ BANK PLC NIGERIA EMPIRICAL STUDY IN BANGLADESH 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 2 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 3 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 4 TARGET GROUPS OF MICROFINANCE Farmers Sharecroppers Persons engaged in off-farm activities Fishermen Poultry rearing Livestock farming Women and distressed people 5 5 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 6 LITERATURE REVIEW (CONVENTIONAL) R a h m a n ( 2 0 0 5 ) i n B a n g l a d e s h fo u n d t h a t v a ri o u s l o a n s p ro g r a m a l o n e w e r e n o t

e n o u g h t o a l l e v i a t e p o v e rt y, u n l e s s t h e y w e re su ffi c i e n t e n v i ro n m e n t wi t h m a t e r i a l a n d social capital PK SF ( 2 0 0 5 ) i n B a n g l a d e sh fo u n d t h a t a b so l u t e p o v e rt y wa s r e d u c e d b y 9 % d u r i n g 1 9 9 1 t o 2 0 0 0 ; m o d e ra t e p o v e rt y d e c l i n e d b y 5 % d u ri n g 2 0 0 0 t o 2 0 0 4 . C h o wd h u r y a n d B h u i y a (2 0 0 4 ) i n B a n g l a d e sh fo u n d p o s i t i v e i m p a c t s o n h u m a n w e l l b e i n g , s u r v i v a l ra t e a n d sc h o o l i n g o f c h i l d re n . Am i n , R a i a n d R o p a (2 0 0 3 ) i n Gra m e e n B a n k , B R A C , ASA a n d f o u n d m i c r o - c re d i t p r o g r a mm e w a s m o r e su c c e ss fu l t o re a c h t h e p o o r, b u t l e s s s u c c e s s f u l t o r e a c h t h e v u l n e r a b l e p o o r. Z a ma n ( 2 0 0 1 ) a s se ss e d t h e i m p a c t o f m i c ro c re d i t o n p o v e rt y a l l e v i a t i o n a n d wo m e n e m p o we r m e n t a n d fo u n d p o s i t i v e i m p a c t o n i n c o m e , d e c i si o n m a k i n g a b i l i t y a n d i n r e d u c i n g g e n d e r d i sp a ri t y. B I D S ( 2 0 0 1 ) i n B a n g l a d e s h fo u n d p o si t i v e i m p a c t o n t h e i n c o m e o f m i c r o c re d i t p a r t i c i p a n t s i n c o m p a ri so n t o n o n -p r o g ra m p a rt i c i p a n t s . Kh a n d k e r (2 0 0 0 ) i n B a n g l a d e sh fo u n d v o l u n t a ry s a v i n g wa s i n c r e a s e d , w h i c h wa s m o r e p r o n o u n c e d i n t h e c a se s o f wo m e n t h a n m e n . 7 7 LITERATURE REVIEW (ISLAMIC) Fad lallah ( 20 1 2) me ntio ne d t hat m o st resear ch ers in Tu rk ey, I nd ia, B ang lad esh an d Eth io pia an d o the rs f ou n d tha t I sla mic m icro fi nan ce ha s a g rea t im pa ct o n the p oo r s e co no mic in d epen d en ce. In Pak is tan , 8 6. 8 per cen t of su rv ey ed peo p le said th at m icro lo ans wer e q uite u sef ul in ach iev in g pr osp eri ty and in cr easin g the pu r cha sin g p ow er of b en efic iarie s. In the M idd le- east an d No r th Afr ica fo u nd tha t this ty pe o f f inan ce wa s th e m ost ab le t o ach iev e soc ial a nd e con o mic d eve lop m en t go als. In the Ar ab wo r ld, ther e a re som e su cce ssf ul ex p erien ces such as: Jab al Al- Ho ss Fu nd s Pro jec t in Sy ria , Al- Hasid a Pr o je ct in Yem en , an d A l-Qa rd Al-Ha ssa n As s oc iatio n in Leb an on . (Fa dla lla h, 2 01 2 ) Ir an ian ex p erien ce is co nsid ere d p ion ee r in th e field of I slam ic M icr o- fin anc e th at is d ev oted to fun d b asic n ee ds. I ra n h as n early 3 0 00 Qar d H asan fu nd s in the ur ba n an d ru ral ar eas. Islam ic m icr olo an s a re a lso po p ular in n o n-I slam ic co u nt ries. R ahm an (2 0 08 , 2 00 9) in B ang lad esh f ou nd tha t I sla mic m icr ofin an ce h av e p o sit ive im pac t on ru r al po v ert y alle viatio n espe cially o n h o useh old s inc om e, c ro p p ro du ctiv ity, an d lev el o f e xp en dit ur e . 8 8 CONCEPTUAL FRAMEWORK OF

MICROFINANCE Factors Influencing IGAs 1. Age 2. Education 3. Asset holdings 4. Land size 5. Family labour 6. Rural infrastructure 7. Skill-building training 8. Efforts and endeavour 9. Morality and ethics Poverty Alleviation Income Health Sanitation Drinking water Education Skills Knowledge

Capacity HHs assets HHs welfare Efficiency Productivity 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 9 9

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 10 THEORETICAL CONCEPT OF MORAL AND ETHICS Syed Naqvi listed five elements of Islams 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 11 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 ADIPs 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 living12 12 standard; otherwise coded zero. PRACTICAL ESTIMATION OF ETHICS AND MORAL Statements Regular Very often Very rare Not at all Score (no.) 10 (0)

6 (4) 4 (6) 0 (10) Saying prayer 57 23 29 26 Know how to recite Holy Quran 113 - - 32 Reciting Holly Quran 31 47 39 28 Fasting 109

21 17 08 Inviting towards Islamic activities 48 29 37 31 Involvement with dowry 11 - - 134 Maintain Parda 57 33 30 25 Involve with interest

31 23 19 72 Misunderstanding with husband 21 19 07 98 Involvement with social activities 03 49 51 42 13 13 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 14 IMPACT OF MICROFINANCE ON CLIENTS RELIGIOUS ACTIVITIES Indicators Frequency Change Status At present At Joining Frequency Percentage Regular prayer 57 38 19 33.34 Know how to recite Holy Quran

113 49 64 56.64 Reciting Holly Quran 31 19 12 38.71 Fasting 109 56 53 48.62 Inviting towards Islamic activities 48 29 19 39.58

Involvement with dowry 11 11 0 0 Maintain Parda 57 31 26 45.61 Not Involve with interest 31 71 -40 -129.03 Misunderstanding with husband 21 43 -22 -104.76

Involvement with social activities 03 0 2 66.66 15 15 INCOME GENERATION OF HOUSEHOLD BY SOURCES Source of Income Off Farm Small Business Labour Selling Service Income On Farm Crops Fruits Vegetables Livestock Poultry Fish Others Total Household Income (US$/year) Present Joining Change of Income US$ Per cent

Level of Significance t-value Sig. 496 212 228 388 182 153 108 30 75 27.83 16.48 49.02 4.150 3.210 6.502 0.000** 0.003** 0.000** 231 22 47 51 23 31 210 1551

149 18 39 42 18 23 145 1157 82 4 8 9 5 8 65 394 55.03 22.22 20.51 21.42 27.78 34.78 44.83 31.99 4.890 2.501 2.242 20291 2.284 3.571 5.432 0.000** 0.021* 0.012** 0.022*

0.019* 0.004** 0.000** 16 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 constant for the equation and error term for the equation. 17 17 OLS RESULTS OF HOUSEHOLD INCOME MODEL Variables Coefficient t-value Sig. Constant 3.189 23.314

0.000** Log of Investment taken in 2012 1.010 2.402 0.020** Log of total land size 0.121 0.518 0.693 Log number of earning family members 1.210 2.110 0.028** Borrowers age dummy (above 40 years 0.322 2.726 0.019** Education dummy (up to 5 years schooling is 1; and 0 otherwise) 0.220

0.7183 0.470 Ethics and Moral (Dummy) 0.090 2.847 0.045* R-squared: 0.612 18 18 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. =0 + 1 +2 + 3 + 4 +5 + 6 + 1 [ ] 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 19

LOGIT MODEL FOR CLIENTS WELL BEING Variable (B) Standard Walld error Statistics Sig. Odd ratio EXP (B) Constant Duration of membership -0.756 0.242 0.723 0.071 1.432 14.44 0.251 0.343 0.000** 0.713 Education dummy (up to 5 yrs of Income generating family members Age of the clients dummy (up to 40 yrs of age is 1 and 0 otherwise) Share of food expenditure to the total expenditure (%) Health expenditure (taka) Ethics and morals

Cox and Snell R square: 0.198 -2log likelihood: 667.280 Overall accuracy: 82.8 0.020 0.211 -0.070 0.251 0.067 0.656 0.211 13.59 0.012 0.986 0.00** 0.906 0.987 0.787 0.931 0.011 0.008 4.946 0.018* 1.021 0.018 0.154 0.021 0.213

3.131 3.416 0.051* 0.050* 0.810 0.816 20 20 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 21 LOGIT MODELS RESULTS OF CLIENTS

ETHICS AND MORAL Variable (B) Standard Walld Sig. error Statistics Constant 1.21 0.451 Education dummy (up to 5 yrs of schooling is 1 and 0 otherwise Odd ratio EXP (B) 6.110 0.014** 3.008 0.672 0.161 13.016 0.000** 0.511 Age of the clients dummy (up to 1.411 0.316 40 yrs of age is 1 & 0 otherwise) 14.126 0.000** 0.243

Membership Duration (years) 11.021 0.003** 1.118 0.112 0.032 Cox and Snell R square: 0.198 -2log likelihood: 667.280 Overall accuracy: 82.8 22 22 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 23 MAJOR PROBLEMS CLIENTS FACE IN THE STUDY AREAS Problems Per cent Amount of investment is very small 93.55 Do not have any training programme

82.50 Investment getting period is very long 87.29 Gestation period for repaying investment is too short 91.50 Insufficient time for meeting 49.55 There is no place for organizing meeting 57.85 Need to produce fake buying and selling voucher 29.52 No Islamic school for their children 29.58 Woman has no control on their borrowed money 19.55 24 24 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 peoples 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 25 CONCLUSION AND RECOMMENDATIONS (CONT.) Instead of investing their borrowed money to income generating activities, some of the clients utilised them in house repairing, childrens 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 26 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 27 THAT IS THE END THANK YOU 28 28

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