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VF AzerCredit Evaluates Possibility of Reaching Out to More Unbanked through Islamic Microfinance

VF AzerCredit Evaluates Possibility of Reaching Out to More Unbanked through Islamic Microfinance

For more than a quarter century, Islamic banking and finance has been developing from an idea and an expression of Muslims` distinct identity to a mature and fast-growing industry. The Islamic banking system is an important component of Islamic finance. Islamic finance has unique features because its foundation is laid on the principles and rules of Islamic law (sharia), which states that everything is owned by Allah and man has only been permitted to use it. Accordingly, the use of funds is governed by several regulations. In a general first assessment of Islamic banking, the risk and equity sharing characteristic stands out. The most essential feature of Islamic banking is the prohibition of interest (riba). Islamic law accepts the capital reward for loan providers only on a profit- and loss-sharing basis, working on the principle of variable return connected to the actual productivity and performances of the financed project.

According to different surveys, a considerable number of people living in Muslim-majority countries do not use formal financial services even when such financial services are available; some people view conventional products as incompatible with the financial principles set forth in Islamic law. Hence, in recent years, some microfinance institutions have stepped in to service low-income Muslim clients who demand products consistent with Islamic financial principles—leading to the emergence of Islamic microfinance as a new market niche.

VF AzerCredit in the light of the above said and regarding that several potential clients in regions have numerously expressed their wish for having access to Islamic funding, has decided to do thorough research in this field to unlock the potential of serving the poor who currently reject microfinance products that do not comply with Islamic law.

Thus, VF AzerCredit signed an agreement with AlHuda Centre of Islamic Banking and Economics to explore current state of the Azerbaijani market in view of Islamic microfinance and identify possible challenges to the development of Islamic microfinance products. According to the agreement, AlHuda CIBE, which is based in Pakistan and operates to promote Islamic banking and finance via education, training, and awareness building around the globe, conducted the market research in different parts of Azerbaijan, including Baku, to support the initiation of Islamic microfinance in the country.

"This accord is a milestone for the foundation of Islamic microfinance in Azerbaijan, with a 99% Muslim population that has been waiting for quite a long time. This is the first step towards fulfilling their financial needs according to Islamic principles", Samir Jafarli, Deputy CEO of VF AzerCredit said.

According to Muhammad Zubair Mughal, CEO of AlHuda CIBE, the research has confirmed that there is a very high demand for Islamic finance in rural and semi-urban areas, however, still the legal framework in Azerbaijan needs to be improved to validate the advancement of Islamic finance in the country. "It’s hoped that in the coming days this issue will be sorted and Islamic retail banking will start in an effective manner", he said.

The recent picture requires all stakeholders to lobby for the establishment of favorable regulatory environment and increase awareness, among others, to open access to Islamic financial services in Azerbaijan.

Mr. Zubair Mughal, CEO of AlHuda CIBE and Mr. Samir Jafarli, Deputy CEO of VF AzerCredit at the signing of the agreement.

January 2013

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