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Forum for Group Discussion on Economic Issues Holds First Meeting

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By OUR STAFF REPORTER

 

The Forum for Group Discussion on Economic Issues (FGDEI), formed recently by Sahulat Microfinance Society (SMS) in association with Radiance Viewsweekly in order to deliberate upon issues relating to Islamic economics, finance and banking, held its first meeting at Dawat Nagar, Okhla, New Delhi on 25 February. The meeting started with a welcome note by Mr. Arshad Ajmal, Vice President of Sahulat.

Ms. Fauzia Jaan, research scholar, Jamia Millia Islamia, presented her views on the Issues of Service Charge in Interest Free Microfinance Institutions. She said that managing administrative costs has been quite an issue with almost all microfinance institutions. Microfinance Institutions argue in favour of high rate of interest on the logic that their administrative costs are higher because they cater to larger number of beneficiaries as compared to conventional banks.  Service charge is inversely proportional to the size of loan. Interest free microfinance institutions can control their administrative cost through group based lending instead of individual lending and using Bio-Teller machines instead of manual lending. The number of active loans per loan officer needs to be increased. Diversification of portfolios may be another such method, thereby avoiding putting all eggs in the same basket. She also recommended rebate on timely payment of instalments as incentives. Beneficiaries of the institutions should be trained. Such training efforts were taken by Islami Bank of Bangladesh and it yielded encouraging results. 

The other presentation was by Dr. Waquar Anwar, a Cost Accountant. He presented a paper on cost of administering an Interest Free Microfinance Entity and described its salient features through a Power Point Presentation. He began with the question whether cost of administration can be recovered from borrowers and said that it has been permitted by Islamic Development Bank, Jeddah and other fiqh bodies with the condition that it should be at bare minimum without any element of profit and marketing expenses.

Dr. Anwar said a contentious issue is the inclusion of cost of default by some borrowers in administrative overhead. Such abnormal costs may be recovered from share capital, admission charges or profit earned by other activities of the microfinance entity. The costs incurred have to be allocated and apportioned on the cost centres and finally absorbed on cost units.

Dr. Anwar discussed some possible bases for apportionment and absorption of costs. However, overhead absorption rate is required to be computed on a pre-determined basis as historical cost is not suitable for this.

In reply to the opinion that administrative overhead of microfinance institutions is more because they cater to higher number of clients, justifying high rate of interest, Dr. Anwar opined that it is a fallacy created by vested interests. As such units serve higher number of clients, the cost per unit is low. The cost is absorbed by more number of beneficiaries. 

A lively discussion followed these two presentations. Participants including Dr. Ausaf Ahmed, Dr. Javed Khan, Abdur Rahim Shariq, H. Abdur Raqeeb, Dr. Shahid Jamal Ahmad and Professor Abuzar Kamaluddin shared their thoughts on the issues raised by the two speakers. The participants included Dr. Hasan Raza and Rafeek Ahmed as well.



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