“We have Muslim brothers who avail (financial) services but the way they avail (these loans) is against our culture, against our beliefs.” ~Muslim leader, Davao, Mindanao
Islam first reached the southern shores of the Philippines during the 14th century and played a critical role in unifying kinship groups in several Filipino communities. With stronger networks of brotherhood and newfound Islamic faith, these communities were able to resist colonization by Spain and America for over 400 years, preserving their culture and religion. Today, though the majority of Muslim communities are concentrated in the southern portion of the Philippines archipelago, some reside in pockets throughout the islands; Filipino Muslims comprise approximately 5% (4.7 million) of the Filipino population (Roces, 2009).
Community Economic Ventures, Inc (CEVI) was established with the intent of launching programs in impoverished regions, including communities that have been financially excluded based on ethnicity and religion. Seeking to break down boundaries between religious groups, CEVI began availing loans to Muslim clients since its inception; however, cultural and religious differences soon became too palpable, creating circumstances where microfinance was almost impossible.
Previously, Muslim clients would receive loans from CEVI through the group expanded methodology, joining with non-Muslim clients to form cluster associations. The loans, though individual, were approved on the premise that members of each cluster association would vouch for clients unable to make payments. About 3 years ago, loan officers began to notice that the cluster members would perform well for the first three cycles, however, feelings of distrust and discrimination soon surfaced, causing clients to become non-compliant with CEVI policies.
From the loan officers’ perspective, since Muslim clients did not have permanent businesses and/or did not have strong kinship ties to other cluster association members, they were most likely to default on loans. From the Muslim clients’ perspective, the loan officers exhibited discriminatory behavior by lending conservatively. When the Islamic clients’ loan amounts were not approved, it generated feelings of humiliation and exclusiveness. These negative sentiments coupled with the fact that interest-bearing credit is a violation of Islamic law led to a dreadful result – the social fabric of the cluster associations began to deteriorate and clients, both Muslim and non-Muslim, began refusing to repay their loans because they no longer felt accountable to CEVI.
Recognizing the need for a loan product more suitable to Muslim borrowers, CEVI has recently developed and launched an Islamic Finance product that is being piloted in Davao, Mindanao. By partnering with Davao Ministerial Interfaith, CEVI received the opportunity to reach out to Muslim leaders and engage in focus group discussions and vision exercises that ultimately led to the development of poverty alleviation strategies in the Davao area. Joining forces, CEVI and the Muslim leaders drafted a business partnership agreement and created a product that embodies elements compliant with Shariah, Islamic law.
So how does this product work?
The Islamic Finance product is based on the principle of profit sharing. Essentially, CEVI provides the required capital for income-generating activities, while the borrower offers labor and expertise. The profits are then shared between both parties based on a pre-determined ratio. The transactions are founded on the concepts of brotherhood and solidarity, whereby both parties involved are considered business partners that jointly bear risks and gains.
The diagram below describes the process in greater detail:
Vendors in the Muslim community work in networks, and keen to maintain control over the market, agree on specific price points for like products. Per the government, the average stated markup for each individual item is 20%, therefore the agreement between CEVI and the partner entrepreneur is based on weekly projections of profits equivalent to a 20% markup on goods – the client will retain 18% of the profits and remit the remaining 2% to CEVI.
With all the buzz and excitement around this new product, it is critical to remember what lies at the core of this product. Relationships. Relationships built on mutual respect and compassion.
Gaudioso Calibugan, CEVI’s Quality and Integration Officer, explained that as CEVI continues to explore this partnership with leaders in Muslim communities, “the critical piece is nurturing the relationship.” The expectation is that as CEVI strives to maintain and develop strong and healthy relationships with the leaders and clients, Muslim leaders will also respect and safeguard the relationships between CEVI and the Muslim clients.
A pioneer in Islamic Finance, CEVI is the only microfinance institution in the Philippines (according to the Microfinance Council of the Philippines) that has developed a microfinance model rooted in Islam that conforms to the religious and cultural beliefs of Muslim clients. To date, the project involves 10 clients with a total portfolio of Php 51,000 (approximately $1,186 USD). If the product proves to be successful, CEVI will extend the services to Muslim communities near branches throughout the Philippines. Hopefully as early as next year we’ll see Islamic loans from CEVI on Kiva!
Roces A, Roces G. Culture Shock! A Survival Guide to Customs and Etiquette: Philippines. Tarrytown, NY, 2009. 18-19.
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Kaajal Laungani is a Kiva Fellow at Community Economic Ventures, Inc (CEVI) in the Philippines. When not in the office or out in the field, she has been exploring the beautiful island of Bohol and soaking up the great Filipino culture.