MEETING OF FORUM FOR GROUP DISCUSSION ON ECONOMIC ISSUES


A meeting under the banner Forum for Group Discussion on Economic Issues (FGDEI) commenced on 25th Feb 2013 in Dawat Nagar, Okhla, New Delhi. This forum has been formed by Sahulat Microfinance in association with Radiance Viewsweekly in order to deliberate upon issues relating to Islamic economics, finance and banking. The meeting started on a welcome note delivered by Mr. Arshad Ajmal, Vice President, Sahulat Microfinance Society. Ms. Fauzia Jaan, research scholar, Jamia Milia 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 institution. 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. 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 Islamic Bank of Bangladesh and it gave 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. 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 pre-determined basis as historical cost is not suitable for this. In reply to the opinion that administrative overhead of microfinance institutions are 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 discussed followed these two presentations. Participants including Dr. Ausaf Ahmed, Dr. Javed Khan, Abdur Rahim Shariq, H.Abdur Raqeeb, Shahid Jamal Ahmad and Professsor Abuzar Kamaluddin shared their thoughts on the issues raised by the two speakers. The participants included Dr. Hasan Raza and Rafeek Ahmed.