Risk Management in

Islamic Financial Instruments

Sources of fund:

Common sources of fund for microcredit programs are members’ savings,

grants from external (western) donors and currently from the Palli Karma Sahayak

Foundation (PKSF), an organization established by the Government of Bangladesh to provide

loan to successful NGOs. Islamic NGOs are fund starved although they have ample

opportunity to expand and there is strong demand in the rural for Islamic micro financial

services. Only Islamic Bank has adequate resources to expand its micro financial services.

Four Islamic NGOs in the sample received some fund PKSF. International Islamic donor

agencies normally do not provide fund for microcredit, they are more interested in relief and

rehabilitation programs. Islamic NGOs also lack guidance for improving their management

and professional skills. That makes Islamic NGOs as followers rather than leaders in the

sector.

Future Trends: Both groups of NGOs will be focusing on two issues: expansion of programs by

accepting more and more members and achieving financial viability of the programs

Ahmed, Ashraf, and Hassan (2002) claim that a diversion of microcredit for consumption

purposes by the borrowers is one of the main reasons for credit default (in conventional

microfinance), but can be resolved if IMFIs are designed in an integrated manner to include the

two basic and traditional institutions of Islam, the

Awqaf

and the

Zakah

, with Islamic

microfinance into a single model.

Here is their model (Ahmed, Ashraf, and Hassan, 2002):

a. Organization:

In modern times, management inefficiency and increased government

involvement are two important factors leading to decrease in public participation in Zakat

and Awqaf management funds. As a result, government and donor agencies are increasingly

focusing on more private participation or NGO (nongovernment organizations) participation

in different development initiatives. Considering these factors, we propose that an NGO

abiding by Islamic ethics and norms with the poverty alleviation objective would be the ideal

form of organization.

b. Mission and Vision:

The vision of the NGO should be to create a poverty-free society

based on the Islamic principles of equality, social justice, and balanced growth. The mission of

the NGO should be collecting Zakat and Awqaf contributions from a specified locality and

providing a credit facility to the poorest segment of society.

c. Objective:

The main objective of the NGO should be to reduce poverty through the

balanced growth and development of different segments of society. The NGO should focus

primarily on developing microbusiness among the poor to enable them to attain a sustainable

income growth and eventually get out of the poverty trap. In addition to its core service of

providing collateral free microfinance to the hardcore poor, the NGO may also provide

financing for other items such as education, health services, and house building.

d. Key Functions:

Using an integrated approach, a single concern would be responsible for

the management of Zakat, Awqaf, and Islamic financing. This organization would perform

three key responsibilities:

1. Collecting and managing Zakat funds from prospective Zakat donors and other Zakat fund

management institutions.

2. Collecting and managing Awqaf funds from prospective Awqaf donors, and other Awqaf

fund management institutions.

In the initial phase, the NGO may concentrate on providing microfinance and collecting funds