Islamic Microfinance: Financing model for economic growth in Côte d’Ivoire
At the crossroads of conventional microfinance and the principles of Islamic Finance is Islamic Microfinance, a concept that is rapidly growing and which enables millions of disadvantaged people, be they Muslims or otherwise, access innovative financial services aimed at assuring their well-being. The principles of Islamic Finance are simple and clear, and based on the fundamental belief that money does not have any intrinsic value and that all risks should be borne by both parties the lender and borrower. Islamic Finance is an economic system which lies on five core principles, namely; i) prohibition of interest rates; ii) prohibition of uncertainty; iii) prohibition of investing in illegal activities/industries; iv) profit and loss sharing; and v) prohibition of using tangible assets as collateral.
Islamic Microfinance differentiates itself from conventional microfinance systems by the simple fact that it offers accessible and adaptable financial products to all sectors of the economy. The concept contributes to financing viable products through participatory financing which expands the possibility of implementing investment projects and favouring economic growth. Today in Côte d’Ivoire, there are two distinct sectors that are directly linked to economic growth; the agricultural and small-and-medium-sized (SME) sectors. These two sectors contribute to the tune of 25% and 18% respectively towards the national GDP and employ more than 70% of the working population. As regards the agricultural sector, producers are mainly in the northern part of the country, a predominantly Muslim region. In recent years, Côte d’Ivoire has proved itself as one of the
world’s top producers of several agricultural products such as cocoa, cashew nuts, kola nuts to mention but a few. Yet, only 13% of conventional microfinance institutions are present in these regions, and where Islamic microfinancial institutions are yet to set up businesses.
In terms of agricultural finance, Islamic finance offers products such as Salam, which is well adapted to the sector. Salam is a forward financing transaction where the seller is obliged to deliver specified goods/assets to the buyer on a pre-agreed date in exchange for payment made out in full at the singing of the contract. Salam has a number of advantages especially for agricultural producers, notably, the absence of interest rates, profit and loss sharing with the financer, in addition to direct financial contribution to cover overhead expenses such as salaries and taxes. In this regard, Salam is an ideal financing model for activities like agriculture, handicrafts as well as SMEs. The SME sector makes up 80% of the economic fabric of Côte d’Ivoire and contributes up to 18% of the country’s GDP. Looking at these statistics it can easily be said that Côte d’Ivoire’s economy is mainly run by the SME sector. Financing businesses is at the heart of Islamic Finance.
Islamic microfinance institutions have an array of participatory financial products such as Mudaraba and Musharaka, which easily adapt to the needs of SMEs. In the case of Mudaraba, the financing bank can take full responsibility for funding the entire investment project as a business associate. This kind of funding is suitable for startup SMEs looking for initial capital. Musharaka, on the other hand, is a contract between two or more parties and is mainly used to fund projects where profits or losses are shared on a prorata basis depending on the capital contributions of the concerned parties. The Musharaka financial instrument aims to essentially fund an investment project that is considered profitable while remaining compatible with the principles of Islamic Finance. The investment using Musharaka is a contribution from parties who are supportive of one another in the event of loss and who share the profits if and when the venture is profitable.
As such, Islamic Microfinance has a great potential to respond to the needs of several economic sectors through the use of innovative and participatory financial instruments. Nonetheless, the sector is still in its nascent stages in Côte d’Ivoire. The Ivorian Islamic microfinance market is mainly made up of two players, notably, Raouda Finance based in the economic capital, Abidjan and Al-Barakat, in Daloa, a town in the mid-west region of the country. In addition to the issue of geographical distribution in the country, (for example Raouda Finance has only 4 branches in the southern part of the country) these microfinance institutions face a number of major challenges such us the lack of a governing framework which takes into consideration the specificities of Islamic Finance, and insufficient resources as well as lack of skilled workers in the domain.
The operations of Islamic Microfinance institutions are generally impeded by the governing framework which does not take into consideration their particularities, despite the fact that Ivorian authorities have up until now tolerated their operations. The temptation to go back to conventional financing options is real given the insufficient resources of islamic microfinance institutions. There is also a lack of skilled personnel particularly with regard to certain complex aspects of Islamic financial concepts such as the profit and loss sharing (PLS). Financial solutions based on PLS require a good understanding the principles of risk management.
Furthermore agents working in MFIs have been trained in conventional financing models and therefore end up using inappropriate terminology such as « we can give you a loan to the tune of…. » «…. the interest rate is….. ». Islamic microfinance is a financial paradigm capable of triggering a buzz in the Ivorian financial landscape especially with regard to sustainable economic growth for the country. However, its development highly depends on the political and economic will of the country’s decision makers.
About the Author
Mohamed Agrebi is the Senior Operating Officer at Making Finance Work for Africa (MFW4A), hosted by the African Development Bank (AfDB). Since 2010, he has been working for MFW4A. Mohamed also leads on MFW4A's Islamic Finance-related activities. He holds an executive master degree in Islamic Finance and Banking from “Ecole Superieure des Sciences Economiques et Commerciales de Tunis”. In 2017, he authored a research paper on the prospects of Islamic Microfinance in Côte d’ivoire.