Financial Inclusion and Shari’ah Financing

President Rodrigo Duterte delivered his last State of the Nation Address last week, but economists say poverty and unemployment will remain high even after his term ends. The National Economic and Development Authority (NEDA) projected the country’s poverty rate to average between 15.5% and 17.5% this year, partly due to the coronavirus pandemic’s adverse effects on the economy. NEDA also noted that joblessness will remain elevated at around 7% to 9% by 2022.

These projections highlight the need for financial inclusion – that state wherein everyone, especially the poor and vulnerable, have effective access to financial services that could help improve lives. Millions of Filipino families are poor, while economic and social inequality remains a challenge. This is especially true in the case of Muslim Filipinos, who comprise 10% of our population. The three poorest provinces in the country are predominantly Muslim.

We must strive to enable our Muslim brothers and sisters to lift themselves from the quagmire of poverty. One way of doing this is by giving them access to financial services that are in accord with their laws and traditions.

Most Impoverished

The poorest regions, based on PSA’s 2018 Family Income and Expenditure Survey (FIES), are ARMM, Region 9, Region 8, CARAGA, and Region 12. Four of these regions are in Mindanao, but the most impoverished is the Bangsamoro Autonomous Region, which has a whopping 61.3% poverty incidence. This means that 3 out of every 5 persons in the region are poor. The situation is even worse in the provinces of Lanao del Sur, Sulu, and Basilan, where nearly 2 out of every 3 people are poor.

The situation is aggravated by the fact that many Muslim Filipinos do not have access to financial services which could help raise their productivity and standard of living. Islam prohibits interest charging, as this equates with usury (riba); forbids speculative transactions involving risks (gharar); and avoids transactions on sinful things (haram), such as pork, alcohol and gambling. With these tenets, Muslims’ participation in the formal financial system remains low.

Shari’ah-Compliant Financing

Sharīʿah (also spelled sharia) is the Islamic religious law that governs the day-to-day life of all Muslims. As it covers all aspects of life, a truly inclusive financial system necessitates Sharia-compliant financial services for Muslim Filipinos.

In recent years, there has been much interest in Islamic financing in the Philippines. Conferences on the topic, initially led by civil society organizations, were held as early as 2015, followed up by forums sponsored by international financial institutions and government agencies. In 2018, the Bangsamoro Organic Law mandated the development of an Islamic banking and finance system in the country. This was strengthened by the passage of RA No. 11439 in 2019, which allowed the operation of domestic and foreign Islamic banking players, to facilitate the development of Islamic finance in the country.

Despite these laws, however, there remains only one Islamic bank in the country, the Al-Amanah Islamic Investment Bank. There are reports that foreign Islamic banks – including Qatar Bank and Malaysian institutions CIMB Islamic and City Credit Investment Bank ¬– had expressed an interest in setting up operations here, but these are yet to come to fruition. In the meantime, a few microfinance institutions, such as the Peace and Equity Foundation, the ASA Philippines Foundation, and the Center for Agriculture and Rural Development (CARD) are filling in the gap, making financial services such as banking, credit, microinsurance, remittance, and other services available to Muslim communities.

The Paglambo Project

The Paglambo Project is a Sharia-inspired microfinancing program that CARD started in 2018. It was the product of a series of dialogues and learning visits between two Ramon Magsaysay awardees: the Dompet Dhuafa, an Indonesian non-profit organization, which won the Magsaysay Award in 2016, and CARD, which won the Magsaysay Award for Public Service in 2008. The Dompet Dhuafa ran a very successful Islamic microfinance and banking scheme, which inspired CARD to develop a similar Sharia-compliant program for Muslims in areas where they operate.

Initially, Paglambo only had two units in Marawi, Lanao del Sur and Shariff Aguak, Maguindanao. However, the program expanded quickly, proving the need for microfinance to serve Muslim communities. The project grew from only 56 Muslim families as members to 4,182 after only a year of operation. Following a visit by project staff to Dompet Dhuafa’s offices in Indonesia, the project introduced an education loan program which uses the Murabahah concept of the Islamic financial system. The Murabahah concept allows the borrower to obtain money from the lender to buy goods for his or her business.

The parties agree on the mark-up on the goods, thus, the lender gets a fixed profit based on the agreement, and eliminates the interest system which Islam prohibits. Since many Muslim families needed help to support their children’s schooling, a Kafalah Islamic contract was added to the existing Sharia financing contract. This is just one of many ways by which CARD redesigned its financial products to respond to the needs of the community.

To date, the Paglambo Project has 35 units in Lanao del Sur, Maguindanao, Zamboanga City, Basilan and Tawi-tawi. Its client-members number 43,000, with a capital build-up of P76.5M. The average loan repayment rate is very high, at 96.54%. Notably, its unit in Kapatagan, Maguindanao had a 100% repayment rate despite the COVID pandemic.

Among the contributory factors are cultural sensitivity and respect for the community. CARD’s staff made courtesy calls to Muslim elders to introduce the program. They also coordinated with village leaders and like-minded organizations in the area.

Communication was key, as attested by the manager in Kapatagan, whose unit members grew because she was able to explain that the financial products under Paglambo is halal or in accord with Islamic faith. When the pandemic hit the region, they had initial setbacks, but she created a viber group to keep communication lines open. This spelled the difference, as daily interaction in the group made the members feel a sense of unity and encouragement, which supported them through the challenges of the pandemic. She said that this was the key to their 100% loan repayment rate.

Call to Action

Islamic microfinance can deepen financial inclusion. Not only because it delivers Sharia-compliant products for Muslim communities, but also because it is specifically created to support the needs of the poor and underserved. The need for public and private financial institutions to offer Islamic banking and financing service is urgent, especially amid the pandemic that is wreaking havoc on the lives of the poorest and most vulnerable. Islamic financing can help micro, small and medium enterprises offering Halal products and services. With more providers, we can help our Muslim kababayans thrive even during this pandemic.*

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Dr. Jaime Aristotle B. Alip is a poverty eradication advocate, with more than 35 years of experience in microfinance and social development. He is the founder of the Center for Agriculture and Rural Development Mutually-Reinforcing Institutions (CARD MRI), a group of 23 organizations that provide social development services to 7.4 million economically-disadvantaged Filipinos nationwide and insuring more than 28 million lives. CARD’s innovative financial and enterprise development services targeting the poor has won many accolades, including the Ramon Magsaysay Award for Public Service in 2008, and for Dr. Alip, the prestigious Ramon V. del Rosario Award for Nation Building in 2019. Dr. Alip is an alumnus of the Harvard Business School, the Southeast Asia Interdisciplinary Development Institute and the University of the Philippines.