Microlending and Islam: New lessons from the old world
By: Michael Looft
As a crowd-funding peer-to-peer lending platform, Kiva has helped to shape a nascent and burgeoning movement towards increased access to finance. For those not familiar with Kiva, our mission is to connect people through lending to alleviate poverty. We are based in San Francisco and currently work with 270 partners in 77 countries around the world, allowing them to raise funds for microfinance loans on our site. Over the past nine years our lenders have funded nearly $600 million in loans, helping well over a million of the world’s poor.
While Kiva’s model has inspired other crowdfunding sites that have extended much needed capital to additional contexts in new and innovative ways, Kiva itself has also been influenced by “old world” methods that continue to shape the lives of people around the world. Some of the best ideas are not new ones, but simply old ones assisted by new technology. In this case, we are talking about the confluence of finance, religion, and the Internet.
Wait, what was that in the middle? Religion? Yes! Kiva is using “old” religious ideas to help reshape modern microfinance.
In their best form, religions operate at the cutting edge of human thought and action. That’s not something we hear everyday. In fact, it’s not something that most people in the world agree with because we often see images of religions operating at their worst – particularly in geopolitics. But when it comes to economics, there’s a lot we can learn from those who seek to capture universal principles of the soul to create and maintain relationships based on justice. In fact, Kiva has learned a lot about this from our partners operating in areas steeped in religious tradition – particularly Islam.
Islamic (or Shariah) law bans interest on loans. Most other world religions used to do the same (for those interested in reading more on this topic, here is an interesting paper that discusses the history and evolution of usury within each tradition). Even the ancient Greek philosopher Aristotle cautioned against making money from money without any further obligation on the part of the lender. At its worst, interest can lead to exploitation, particularly among the poor. So, Islam raises a valid point in demanding financial products that increase the sharing of risk and level of engagement for investors.
Over the last few years, Kiva has been ramping up our support for Shariah-compliant products to accommodate our partners’ Muslim clients and, more importantly, to ensure a higher level of risk sharing. A common Islamic product that we fund is murabaha (purchasing goods for borrowers and charging a fee or mark-up). For example, if a client needs a goat, the bank buys the goat from a broker and sells it to the client at a mutually agreed upon markup – with a repayment schedule reflecting this markup. It is important to note that the Qur’an states that despite their superficial resemblance, profits from commerce are fundamentally different from profits from pure money-lending. One cannot forget that Muhammad and his companions were traders and this model conforms to their way of life – which is a foundational aspect of Shariah law.
One important characteristic of murabaha is that it ensures that a loan is used exactly as intended since the asset is purchased and resold to clients without cash changing hands. For example, Mostafa, one of Kiva’s loan recipients from Gaza, took out a murabaha loan from one of our Palestinian partners to buy a rickshaw. This $1,275 loan was fully funded on our site in just six days. The rickshaw was purchased directly by Kiva’s local partner FATEN for Mostafa, who then repays the total cost. The 42 people who lent money to Mostafa earn a social return, rather than a financial one – receiving principal payments back on a monthly basis. He is currently two-thirds the way through paying back his loan.
One loan product that we are thrilled to support is qard hassan (which literally means “virtuous loan” in Arabic). These loans generate no income for our partners since they do not contain a profit component (no fees, market, or any charges whatsoever). Fehmida, the woman in the photo below holding the blue card, is a widow in Pakistan who took out a qard hassan loan to buy a sewing machine for her business and she paid it back a year later. We have been able to support qard hassan programs in Iraq and Pakistan where individual donations to charity (called zakat in Islam) are directed into 0% interest loans to students and the extreme poor.
For its critics, a major flaw of Islamic finance is the assumption of altruism. Nonetheless, I would assert that this is its major strength. Of course, another criticism that is more difficult to disagree with is its high cost and cumbersome nature. So Kiva hopes that our 0% cost of capital can do much to grow the Shariah portfolios of our partners. Products like qard hassan, which generate no profit, are ones that we hope to replicate throughout the world and thus provide opportunities to people who would not otherwise qualify for a loan.
As we have increased our support for Islamic microfinance products, I have often heard people say, “Islamic finance? Isn’t that just charging upfront fees to simply get around the prohibition of interest?” This practice is indeed used in Islamic finance; but some might consider this “ihtiyal” – an Arabic word sometimes defined as a lawful means of achieving an unlawful objective. In fact, at Kiva, we set up special lines of credit to support other types of products that capture the spirit of Islamic finance – protecting vulnerable people from being exploited. We have been able to support profit and loss contracts, also known as mudaraba and musharaka in Islamic microfinance. These joint ventures require a continued investor involvement and a strong commitment to sharing the burden of risk.
The previous examples outlined above are products offered through a partnerships model, where we rely on local microfinance banks to service loans to clients. Over the past few years Kiva has also been leveraging mobile transaction technology in Kenya and the US by providing loans directly to clients without the need for a bank in the middle.
It is only a matter of time before crowdfunding and its variants effectively replace the traditional banking model that has long been so hyper-focused on minimizing risk and maximizing profits. Those days are coming to an end because the world is finally waking up and people are demanding that financial markets (and societies) be deconstructed and rebuilt on moral foundations rather than utilitarian ones. Crowdfunding platforms and models continue to flourish and evolve, with many of them and their funders based here in the Bay Area driving the innovation. Sites like Indiegogo and Rally are thriving, and there are currently more than 700 crowdfunding startups listed on Angel’s List. This revolution may come more swiftly than we expect. But it needs everyone’s help.
Kiva has tried to be a part of this revolution of risk sharing through offering our online community the opportunity to invest in products designed with the interests of clients at heart. But half a billion dollars is merely a start. If we are meant to give the underserved members of our world community a chance at a better life, each of us has to consider what steps we can take right now to make that happen. Perhaps it’s going online and loaning $25 to someone starting a small business. Or carving out a small percentage of your portfolio and dedicating it to the types of socially responsible products I’ve discussed in this blog post – products that are becoming our new way of life.
Imagine what the world would like look if every person and every bank were to take these small steps. I tell you, the world would be transformed. It would be beautiful.
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Michael Looft is the Regional Director for Europe and Asia at Kiva, where he is responsible for setting strategy and managing both portfolio and field staff. He holds an undergraduate degree in International Business with a concentration in finance from San Francisco State University, and graduate degrees from both St. John’s College and Harvard. At Harvard, Michael focused on designing Shariah-compliant microfinance products for Muslim communities and researching the impacts of faith-based involvement in the microfinance industry. While at Kiva, Michael has been instrumental in creating and building out Islamic microfinance programs throughout the Middle East. Michael writes and speaks extensively on the topic of ethical and responsible finance, specifically on how to incorporate Shariah principles into mainstream finance in order to increase the risk burden on lenders and to ensure borrower protection. His book, entitled Inspired Finance: the Role of Faith in Microfinance and International Economic Development is due out in late October.