Cambodia mulls inclusion of Islamic finance in microcredits

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Al Serkal Mosque_Phnom Penh
Al Serkal Mosque in Phnom Penh is Cambodia’s largest mosque. It was donated by Al Serkal family from the United Arab Emirates after the fall of the Khmer Rouge and refurbished and reopened in March 2015. Picture: Cambodia Islamic Association (CIA)

Cambodia, a country whose official religion is Buddhism, but which has a sizeable Muslim minority, is thinking about the possibility to include Islamic finance in its country-wide microfinance initiatives as an alternative to conventional loans. This idea was discussed at a roundtable session organised by the World Islamic Economic Forum (WIEF) Foundation that took place in Phnom Penh earlier this year, an event acting as a precursor to the 11th World Islamic Economic Forum to be staged in Malaysia in November.

The discussion was held between renowned industry experts, namely Syed Othman Alhabshi, Deputy President Academic of the International Center for Education in Islamic Finance, or INCEIF, in Malaysia, Kunrat Wirasubrata, Acting Director of the Islamic Development Bank’s group regional office in Kuala Lumpur, Tarek M. Genema, Consultant at Phnom Penh-based financial consultancy firm VTrust Appraisal, and Muhd Ramadhan Fitri bin Ellias, Executive Vice President and Head of Shariah Management with Maybank Islamic Berhad, Malaysia.

The penalists acknowledged that Islamic microfinance can be seen as a “hybrid solution” that combines social and ethical principles of Islamic finance with microfinance’s efficiency in reaching out to the poor. Even more, under Shariah-compliant finance, financing is interest-free and actually aimed at the welfare of the participants rather than just at accumulation of wealth for those who provide the financing. In other words, one of the major objectives of Islam – to support the most vulnerable – is identical with the general mission of microfinance. On a broader scope, the idea is also to financially assist Cambodian people who are excluded from the banking system, to enable more charitable projects and, in general, help develop the economy of the country.

“It may be useful for Cambodia to examine the viability of deploying Islamic microfinance,” said Tun Musa Hitam, chairman of the WIEF Foundation, in a speech at the event, adding that microfinance institutions “are key to the functioning of an economy like Cambodia’s.”

For INCEIF’s Alhabsi, the main difference between Islamic and conventional microfinance in technical terms is the cost of capital. While conventional microfinance loans carry relatively high interest rates and are provided by risky venture investments, the interest-free model of Islamic microfinance covers financing mainly through endowment funds to which people contribute out of charity.

“Therefore there is no cost of capital,” Alhabshi said, “and cost of operations can be very low.”

There is also the notion that Islamic microfinance could open a window for mainstream Islamic finance services in Cambodia. So far, there are no Islamic banking services available at all in the country, whose Muslims account for more than 2 per cent of the population, or approximately 350,000 people. They are mostly from the ethnic group of the Cham people who live in eastern and southern Cambodia in in towns and rural fishing villages on the banks of the Tonle Sap and Mekong rivers and in southern Kampot province.

Since the end of the Khmer Rouge era, during which Cambodian Muslims were prosecuted and more than 100 mosques were destroyed, their number is growing again and demand is rising for halal services of different kinds. But, so far, the Cham are unable to follow Islamic law when they borrow money, even if they want to, because there is no Islamic banking infrastructure in the country, not even informal cooperatives.

In addition, Islamic microfinance in Cambodia could help establish and financially strengthen small and medium business ventures of Cham Muslims, which, in turn, could eventually become interesting for Islamic banks in Southeast Asia and the Middle East once they have reached a critical size. And for the broader unbanked part of Cambodia’s Buddhist population, Islamic microfinance could be branded simply as a – religiously neutral – “ethical financing solution,” a strategy that has been successful in Indonesia and Malaysia, the conference suggested.

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Reading Time: 3 minutes

Al Serkal Mosque in Phnom Penh is Cambodia’s largest mosque. It was donated by Al Serkal family from the United Arab Emirates after the fall of the Khmer Rouge and refurbished and reopened in March 2015. Picture: Cambodia Islamic Association (CIA)

Cambodia, a country whose official religion is Buddhism, but which has a sizeable Muslim minority, is thinking about the possibility to include Islamic finance in its country-wide microfinance initiatives as an alternative to conventional loans. This idea was discussed at a roundtable session organised by the World Islamic Economic Forum (WIEF) Foundation that took place in Phnom Penh earlier this year, an event acting as a precursor to the 11th World Islamic Economic Forum to be staged in Malaysia in November.

Reading Time: 3 minutes

Al Serkal Mosque_Phnom Penh
Al Serkal Mosque in Phnom Penh is Cambodia’s largest mosque. It was donated by Al Serkal family from the United Arab Emirates after the fall of the Khmer Rouge and refurbished and reopened in March 2015. Picture: Cambodia Islamic Association (CIA)

Cambodia, a country whose official religion is Buddhism, but which has a sizeable Muslim minority, is thinking about the possibility to include Islamic finance in its country-wide microfinance initiatives as an alternative to conventional loans. This idea was discussed at a roundtable session organised by the World Islamic Economic Forum (WIEF) Foundation that took place in Phnom Penh earlier this year, an event acting as a precursor to the 11th World Islamic Economic Forum to be staged in Malaysia in November.

The discussion was held between renowned industry experts, namely Syed Othman Alhabshi, Deputy President Academic of the International Center for Education in Islamic Finance, or INCEIF, in Malaysia, Kunrat Wirasubrata, Acting Director of the Islamic Development Bank’s group regional office in Kuala Lumpur, Tarek M. Genema, Consultant at Phnom Penh-based financial consultancy firm VTrust Appraisal, and Muhd Ramadhan Fitri bin Ellias, Executive Vice President and Head of Shariah Management with Maybank Islamic Berhad, Malaysia.

The penalists acknowledged that Islamic microfinance can be seen as a “hybrid solution” that combines social and ethical principles of Islamic finance with microfinance’s efficiency in reaching out to the poor. Even more, under Shariah-compliant finance, financing is interest-free and actually aimed at the welfare of the participants rather than just at accumulation of wealth for those who provide the financing. In other words, one of the major objectives of Islam – to support the most vulnerable – is identical with the general mission of microfinance. On a broader scope, the idea is also to financially assist Cambodian people who are excluded from the banking system, to enable more charitable projects and, in general, help develop the economy of the country.

“It may be useful for Cambodia to examine the viability of deploying Islamic microfinance,” said Tun Musa Hitam, chairman of the WIEF Foundation, in a speech at the event, adding that microfinance institutions “are key to the functioning of an economy like Cambodia’s.”

For INCEIF’s Alhabsi, the main difference between Islamic and conventional microfinance in technical terms is the cost of capital. While conventional microfinance loans carry relatively high interest rates and are provided by risky venture investments, the interest-free model of Islamic microfinance covers financing mainly through endowment funds to which people contribute out of charity.

“Therefore there is no cost of capital,” Alhabshi said, “and cost of operations can be very low.”

There is also the notion that Islamic microfinance could open a window for mainstream Islamic finance services in Cambodia. So far, there are no Islamic banking services available at all in the country, whose Muslims account for more than 2 per cent of the population, or approximately 350,000 people. They are mostly from the ethnic group of the Cham people who live in eastern and southern Cambodia in in towns and rural fishing villages on the banks of the Tonle Sap and Mekong rivers and in southern Kampot province.

Since the end of the Khmer Rouge era, during which Cambodian Muslims were prosecuted and more than 100 mosques were destroyed, their number is growing again and demand is rising for halal services of different kinds. But, so far, the Cham are unable to follow Islamic law when they borrow money, even if they want to, because there is no Islamic banking infrastructure in the country, not even informal cooperatives.

In addition, Islamic microfinance in Cambodia could help establish and financially strengthen small and medium business ventures of Cham Muslims, which, in turn, could eventually become interesting for Islamic banks in Southeast Asia and the Middle East once they have reached a critical size. And for the broader unbanked part of Cambodia’s Buddhist population, Islamic microfinance could be branded simply as a – religiously neutral – “ethical financing solution,” a strategy that has been successful in Indonesia and Malaysia, the conference suggested.

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