MICROCAPITAL STORY: Malam Ahmad Dogara Advocates Islamic Microfinance Banking in Nigeria to Eradicate Poverty

In a presentation at the Micro-Finance Investors Forum in Kano, Nigeria, Malam Ahmad Dogara of the Association of Oasis Associates, indicated that Islamic microfinance could be an excellent substitute for conventional microfinance already being used in the country. According to a report in the Daily Triumph, the economist lamented that despite prior success of conventional microfinance, these services were still not reaching all the poor and some of the money went to activities unrelated to helping entrepreneurs. Mr. Dogara pointed out that in some Muslim communities conventional microfinance has been rejected principally for its non-compliance with Islamic law, particularly with regard to interest. He explained “Islamic microfinance could arguably help the current short comings, since it focuses on achieving social justice, disallows exploitation and battles poverty as well.”

Approximately 50 percent of Nigeria’s population, or 67 million people, are Muslim and approximately 40 million people are in need of microfinance services. 75 percent of Nigerians still live on less than USD 1 per day according to Hajiya Talutu S. Bashir, another presenter at the Nigerian forum. According to the MIX Market, the microfinance information clearinghouse, there are at least 13 MFIs in Nigeria, serving over 500,000 borrowers. As argued in a recent report on Microfinance Gateway, an online resource for the microfinance community, this lack of microfinance outreach is due in large part to the population’s desire for Sharia compliant services. The report, entitled “Microfinance in Nigeria and the Prospects of Introducing Its Islamic Version There in the Light of Selected Muslim Countries’ Experience” found the influence of the Islamic prohibition against usury remains quite strong in Nigeria, and particularly in Kano.

Islamic microfinance is still in its infancy. According to a 2007 survey of 125 institutions in 19 Muslim countries by CGAP, a microfinance policy and research organization, Islamic microfinance had an outreach of only 380,000 customers, accounting for only one-half of one percent of total global microfinance outreach. The results of the survey, entitled “Islamic Microfinance: An Emerging Market Niche”, found that Islamic microfinance is very concentrated in a just a few countries with Indonesia, Bangladesh, and Afghanistan accounting for 80 percent of all Islamic microfinance outreach.

Islamic microfinance is at the confluence of two rapidly growing industries: microfinance and Islamic finance. The size and growth of the Islamic finance industry has increasingly caught the attention of investment fund managers worldwide. According to a 2008 report by CGAP entitled Can Islamic Finance Go Micro?, the overall Islamic finance industry is estimated at USD 500 billion in assets, with growth rates almost 50 percent higher than conventional banks. The report concluded that the Islamic finance industry is well placed to address the needs of people in Muslim-majority countries, 72 percent of whom do not have access to formal financial services.

Islamic rules of finance most notably ban the use of interest, but they also require transactions be linked to real, durable assets – thus precluding speculation or short-selling. They also prohibit investment in activities deemed inconsistent with Sharia, such as alcohol or gambling, and require that contracts be mutually agreed upon and stipulate exact terms and conditions. The most widely offered Sharia compliant contract is murabaha, or cost plus markup sale contract. According to the CGAP survey over 70 percent of Islamic microfinance products offered are murabaha.

By Laura Anderson, Research Associate

Additional Resources:

CGAP September 2008: Can Islamic Finance Go Micro?

Daily Triumph: Dogara advocates Islamic micro-finance banking

CGAP: Home

CGAP August 2008: “Islamic Microfinance: An Emerging Market Niche”, by Nimrah Karim, Michael Tarazi, and Xavier Reille

Microfinance Gateway: Home

Wikipedia: Islam by Country

Microfinance Gateway: “Microfinance in Nigeria and the Prospects of Introducing Its Islamic Version There in the Light of Selected Muslim Countries’ Experience” by A. Mohammed & Z. Hasan

MIX Market: Nigeria MFIs