Photo: In Kyrgyzstan, borrowers are turning to Islamic microfinance as an alternative to commercial banks and MFIs. Photo credit: Kompanion Financial Group.

The Challenges of Mixing Business and Religion

By Emily Youatt, Kompanion Financial Group's Marketing & Development Specialist

The Challenges of Mixing Business and Religion

Emily Youatt, Kompanion Financial Group’s Marketing & Development Specialist, interviews Zamir Pusurov, Director of Kompanion Invest

In Kyrgyzstan, Kompanion Invest, the country’s only Islamic microfinance institution is trying to find a foothold in the country’s financial sector. In a country where over 85 percent of citizens are followers of Islam and many seek to run Halal businesses, offering Shari’a compliant financial services just makes sense.

But in an environment with no legislation outlining religious activity within the financial sector, Kyrgyzstan’s growing Islamic microfinance market is facing challenges as it tries to expand to offer its clients official Shari’a-compliant financial products.

The catch? Kompanion Invest was founded as a subsidiary of Kompanion Financial Group, a non-Shari’a compliant financial institution with ties to Mercy Corps. And though both companies are community development financial institutions with similar missions, the secular nature of its parent company means that Kompanion Invest faces an uphill battle in achieving full Shari’a compliance.

Emily Youatt, Kompanion Financial Group’s Marketing & Development Specialist, interviewed Zamir Pusurov, Director of Kompanion Invest, through a translator, to learn about how the company is working to carve out a space for Islamic microfinance in Kyrgyzstan.

Emily Youatt: Could you give us an overview of Kompanion Invest’s work in Kyrgyzstan?

Zamir Pusurov: Kompanion Invest works within the framework of the Kyrgyz Republic to provide the population with financial services to overcome poverty. Currently, in Kyrgyzstan, there are only two Islamic finance companies–one bank and one microfinance institution, Kompanion Invest.

Creating an Islamic microfinance company under Kompanion’s umbrella was the idea of Catherine Brown, Mercy Corps’ country director from 2003 to 2011. In 2011 Kompanion staff distributed questionnaires to 300 respondents to gauge their interest in Islamic microfinance products. We found that in the south of Kyrgyzstan there was a particular interest in and a need for alternative finance. So we decided to launch a separate company—Kompanion Invest.

EY: What are the differences between conventional microfinance and Islamic microfinance?

ZP: Murabaha finance, the type of Islamic financing offered by Kompanion Invest, is based upon product exchange for money. Under Shari’a law it is prohibited to make money from money, or wheat for wheat (in trade), for example. So, what Kompanion Invest will do is buy a product that the client wishes to invest in, and then the client pays us back the price of the item plus a previously agreed upon markup.

Kompanion Invest currently offers only Murabaha finance*, but there is another type of Islamic financing called Musharaka, which is based upon mutual profit share and loss between bank and client. Because of the size of our client base we currently offer only Murabaha finance. Musharaka is a more complicated type of financing, and clients need to be more prepared for this type of finance product before we can offer it.

Unfortunately, in Kyrgyzstan there is no legislation outlining the role of religion within financial markets, which makes it difficult for us to expand our microfinance products to potential clients. But we are working with the Kyrgyz National Bank to resolves these issues.

EY: Where is Islamic microfinance most popular currently?

ZP: It’s already very popular in Kyrgyzstan’s southern Jalalabad, Batken and Osh oblasts (provinces), but is still limited in scope. To scale up we are working on a business plan. We currently do not use advertisements, but rather we rely on word of mouth. Because there are only two Islamic finance companies, and we are the only company focused on microfinance, there is no competition. Kompanion invest is gaining popularity quickly.

EY: Can you tell us a little about Kompanion Invest’s client base?

ZP: Kompanion is currently giving loans to not only Muslim people, but people of other religions as well. Many non-Muslim clients like the principles of Islamic microfinance, so they apply for our financial products. Non-Muslim people sometimes have bad experiences with conventional microfinance, and so they are attracted to Islamic microfinance because of our honesty and commitment to morals.

EY: What do Kompanion Invest clients typically use financing for?

ZP: Typically Kompanion Invest clients use the financing for business investments, consumer investments and to build and repair their homes. Our clients are typically from low- and middle-income brackets within Kyrgyzstan. Because lending small amounts of money is more expensive, we have to include the middle-income households within our client base. A lot of our low-income clients apply for financing of about 3,000-4,000 som (USD $60-80) to buy sheep or consumer goods to boost their businesses and to increase their prosperity. In total, we have about 600-700 clients who are mostly based in southern Kyrgyzstan, but this number varies depending on the season.

EY: According to recent data there has been an increase in Shari’a-compliant businesses in Kyrgyzstan. Has this had an effect on the demand for Islamic microfinance?

ZP: Yes, there has been an increase in Halal businesses, but they usually take loans from conventional financial institutions. This is largely because the loans we offer are mostly targeted toward low-income households and startup businesses. Most big businesses go to banks for loans. But it is my personal opinion that businesses who take loans from banks are breaking Shari’a law and therefore are not completely Halal. We recently signed an agreement with the Association of Muslim People in Kyrgyzstan that recognizes that we are almost completely Shari’a compliant. The National Bank of Kyrgyzstan is also helping us in our efforts.

EY: What is Kompanion Invest’s biggest current challenge?

ZP: Our biggest problem is attracting investors. We cannot take investments from conventional investors like USAID because of our adherence to Shari’a law. The Islamic Development Bank (IDB) distributes money to Islamic microfinance institutions internationally, but Kompanion Invest currently doesn’t satisfy all of IDB’s requirements.

We will need to reach the requirements for IDB, and to do this Kompanion Invest must increase its capital and be in existence for more than three years. In the future we plan to work with IDB. Currently we receive money from Kompanion Financial Group, but next year we hope to make the switch to IDB to be more Shari’a compliant.

EY: If you receive investments from Kompanion (backed by Mercy Corps), how do you maintain Shari’a standards?

ZP: Kompanion Financial Group’s money is transformed to Shari’a norms. But yet, there are still minor things that prevent us from reaching full 100 percent Shari’a compliance.
I would say that Kompanion Invest is currently 95 percent compliant with Shari’a law. Current legislation in Kyrgyzstan does not allow us to be fully compliant, and it is difficult for companies in Kyrgyzstan to be fully compliant because Kyrgyzstan is a secular state.

To improve our compliance, at least one of Kompanion Invest’s founders and the majority of employees should be Muslim and should follow Islamic norms in terms of clothing and ethics. But under current Kyrgyz legislation this would be considered discrimination. Things like these are keeping Kompanion Invest from being completely compliant. Since our founder is ultimately Mercy Corps, and it is not an Islamic organization, we can never be considered fully Shari’a compliant, but we continue to work hard to increase our compliance.

EY: Have you seen any changes in Islamic finance in the past few years in Kyrgyzstan and Central Asia?

ZP: Islamic finance in Kyrgyzstan is changing and becoming more popular. In Tajikistan, legislation is changing to include protections for Shari’a-compliant financial institutions.
It is possible that one day Kompanion Invest may extend to Tajikistan and Afghanistan, where there is more demand for our products, because people are more religious in these countries. In Tajikistan, banks are not very well-developed because people are very religious and refuse to take money from non-Shari’a compliant financial institutions. The financial field in Tajikistan and Afghanistan is not very competitive at the moment, but there is so much potential.

* Since original publication, Kompanion Invest now offers non-Murabaha finance.

Editor’s Note:

This blog was previously featured on MercyCorp’s Global Envision and Next Billion Financial Innovation, and is reproduced with the permission of MercyCorps.

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