Micro Credit Through ‘Bai-Muajjal’ Mode of Islamic Banking Financing System Essay

ABSTRACT

The rural-based industrial sector in developing nations contributes greatly towards
economic development by generating employment opportunities and mobilizing rural
savings towards productive sectors. Micro-credit given by Islamic banks through the Bai-
Muajjal mode of financing is a unique means of developing saving habits among rural
entrepreneurs. The article includes the outcome of the author’s research process
developed to discover how the Bai-Muajjal mode of Islamic banking finance serves to
institutionalize the saving habits of rural-based small industry owners and to what extent
this lending technique successfully mobilize rural savings towards productive and profitable
projects.

The article consists of three different sections. Firstly, it highlights the methodological and
theoretical aspects used for the research. The second section includes a brief description
of different financing modes of Islamic banks and an empirical, study-based discussion as
to how different Islamic banks lend funds to the rural-based small industry owners in
Bangladesh. The final section of the article represents an analysis of the research result
showing to what extent the Bai-muajjal mode of Islamic banking finance contributes to
developing savings habits among rural entrepreneurs and mobilizing the savings towards
productive projects.

NTRODUCTION
The rural-based small and cottage industry (SCI) sector in developing nations contributes greatly
towards economic development by generating employment opportunities and mobilizing rural
savings towards productive sectors. It is revealed from many researches that this SCI sector is one
of the most neglected sectors of economy in almost all least developed and developing nations of
the world. Among others rural-based small entrepreneurs suffers from lack in working capital,
institutional credit facilities and poor management. Due to the shortage of capital they are
compelled to borrow funds from local moneylenders at a high rate of interest. This practice brings
endless miseries to the rural-based small industry owners. With regards to the burden of debts of
the rural poor there is a proverb in developing nations, which says, ‘The rural poor are born in debt,
lives on debts and die in debts’.

It is observed from the study that most of the rural people are savings minded and they try to save
from whatever little earnings they have. Unfortunately, the efforts of these people remain
unattended. Formal as well as informal lending organizations seldom consider the issue of rural
savings as an important factor for generating working capital for rural SCI owners.
Institutionalization of saving habits through lending procedures might contribute to a greater extent
in developing saving mentality among rural-based SCI owners and also to mobilize these savings
towards productive sectors.

In recent years different Islamic banks in Bangladesh started giving micro-credit towards grass-root
level SCI projects in rural areas1. Some of the lending procedures of this financing system are
designed in such a way that in order to obtain a micro-credit, a client must show minimum personal
savings in order to be qualified for a loan. Islamic banks normally use the Bai-Muajjal mode of
financing while lends funds to the grass-root level small and cottage industries in rural areas of the
country. In this article, I tried to highlight on how Islamic banks micro-credit policy through the Bai-
Muajjal mode of financing contributes towards developing and institutionalizing saving habits of
their clients.

The study was carried out in Bangladesh and used a theoretical model; ‘Institutional-Network
Approach’ (Alam 2003). The theoretical frame of references was developed during the tenure of
my research on the subject, ‘Islamic Banking Finance to Small and Cottage Industries’ at the Lund
University, Lund, Sweden. While conducting the empirical study, I interviewed 125 rural-based
small industry owners who were clients to different Islamic banks in the country. These clienteles of
Islamic banks were running grass-root type (poultry/dairy firms and handloom industries) of small
and cottage industries. Among others, the Social Investment Bank Limited (SIBL) is one of the
Islamic banks that give micro-credit to grass-root level SCI owners under Bai-Muajjal mode of
financing. Based on the said theoretical perspective, empirical data are analyzed, in order to see
as to what extent the Bai-Muajjal mode of financing of Islamic bank contributes towards developing
saving habits and the way the bank institutionalized this habit of the rural SCI owner. The article
also highlights on the extent to which this particular lending procedure of the bank assists clients in
making proper utilization of their borrowed funds and also in developing lender-borrower network
1 The Social Investment Bank Limited (SIBL) is one of the few Islamic banks that render financial services
in the money market of Bangladesh. Besides other sectors of economy the bank gives micro-credit to the grass-root level small and cottage industry owners under its Bai-Muajjal financing mode. The loans are given in kind and ranges from minimum US $ 100 and maximum US $ 500. relationships. In order to understand the lender-borrower relationships in depth, a qualitative nature of research methodology was used in the study. Since, case studies reveal various facts about a
particular phenomenon and allow a researcher to get very close to his or her informants, I used a
case study method while collecting data from the field.

The article is designed in a few major sections. Firstly, it includes a brief description of the theoretical and methodological approaches that was used in the study. The discussion in the second section highlights on Islamic banks and its different investment techniques. The third section includes a detailed description of the Bai-Muajjal lending procedures that the Social Investment Bank Limited uses, while lending micro-credit to the grass-root level SCI owners. The final section of the article represents an analysis of the results obtained from the study.

THEORETICAL AND METHODOLOGICAL APPROACHES

Based on Whitley’s (1992a) ‘Business System’ institutional approach, an analytical frame of references is developed to study the lender-borrower relationships between different financing organizations and rural-based small and cottage industries. The theoretical model is designed in such a way that different small and cottage industries as well as financing organizations of similar nature are grouped and institutionalized into different ‘SCI systems’ and ‘Financing Systems’. The theoretical model is also used to carry out a comparative study as to how financing organizations under different financing systems differ from each other, while lending micro-credit to small and cottage industry owners under different SCI systems.

In order to achieve the said objectives, I developed the concept of four components of different SCI systems and financing systems. These components for example, are nature of organization, market organization, employment systems and authority and control systems. Accordingly to Whitley (1992b) a comparative analysis of the ‘business system’ is the systematic study of these configurations and as to how they become established in markets. Like Whitley’s (1992b) ‘Business Systems’, the Islamic Financing System is seen as a, ‘financing business system of its own, with a foundation based on religion, having its own rules governed by the Islamic laws’. These rules differ from those of other financial systems. Like Whitley’s (1992a, 1992b) Business System, financing organizations of similar nature are grouped into different financing systems. Thus, the concept of different financing systems for example; the Market-Based Financing System (MBFS), the Islamic Financing System (IFS), the Cooperative Financing System (CFS), and the Traditional Money Lending System (TMLS), is developed in the theoretical framework and these are viewed as particular arrangements of hierarchy-market relations that become institutionalized and relatively successful in a particular context. A similar arrangement is also done to institutionalize different rural-based small and cottage industries. The rural-based small and cottage industries of similar nature are thus, grouped into three different SCI Systems, such as the Grass-root level (GL), the Season-based (SB) and the Semi-mechanized (SM) SCI Systems. Similar nature of financing organizations under different Financing Systems and small and cottage industries under different SCI Systems are regarded as economic actors acting within these organizational fields.

Since, the concept of network as part of the hierarchy-market relationships is poorly developed in Whitley’s (1992b) ‘Business Systems’ approach, Jansson’s (2002) network institutional model was also taken into consideration for developing the network aspects in the theoretical frame of references. In his network institutional model, Jansson (2002) highlights network relationships between the multinational corporations (MNC) in India and major external parties in the product/services market like customers, intermediaries, competitors and suppliers. It also gives some examples of external institutional factors that affect the networks. Like the network relations between the MNC and major external parties’ financial organizations in the present study influence and are influenced by various commercial actors in the financial market and other markets in Bangladesh. Since one of the main objects of the research was to study the network relations between financial organizations and other major external parties in the financial market, especially the small and cottage industries, regarding the use of the network approach among many others (for example, Rasmussen, 1988; Kuklinski ; Knoke, 1988; Anderson and Carlos, 1976; Easton ; Araujo, 1991; Elg ; Johansson, 1992; Easton, 1992; Håkansson, 1993; Aldrich ; Whetten, 1981; Emerson ; Cook, 1984, Jansson, Saqib ; Sharma, 1995.), I found the concept of Janssons’s (2002) model appropriate for the present study. Thus, based on the existing theoretical models as mentioned above, the ‘Institutional-Network’ theoretical frame of references (Alam, 2003) was developed for studying the lender-borrower relationships between economic actors in different Financing Systems and SCI Systems, especially with regards to financing towards small and cottage Industry (SCI) sector. The theoretical model also includes various background societal institutions like country culture, legal systems, religion, family/clan, government etc., that have direct as well as indirect influences on the lending and borrowing activities between different financing organizations and the rural-based SCI owners. The article is designed to highlight the empirical finding with regards to lender-borrower relationships between small and cottage industries under the grass-root level (GL) SCI system and Islamic banks under the Islamic Financing System (IFS).

The word ‘Ijara’ indicates leasing. The leasing purchase is another technique followed by Islamic
banks in financing customers. This system is almost similar to the leasing activity provided in
traditional banking. Leasing is a contract between the bank and the customer to use particular
assets. In this case the bank is called lessor and the customer is called lessee who wants to use
the assets and pays rent. Zineldin (1990), in this regard argued that the leasing agreement is
based on profit sharing in which the bank buys the movable or immovable property and lease it to
one of its client for an agreed sum by instalments and for a limited period of time into a saving
account held with the same bank. These instalments are invested in Mudaraba investment
(Venture) for the customer’s account. The accumulated profit generated from the payments, and
the payments themselves are invested in the bank’s investment ventures over the time period of
lease, contributing to eventual purchase of the leased assets
Ijara-wa-iqtina (Leasing purchase)
According to the Western leasing system the lessee pays specific rentals and a fixed rate of
interest over a given period for the use of specific assets. But in the Islamic banking system of
leasing the risk related to leasing has to be shared between the bank and the lessee, in case of
any damage to the leased assets. The contract is called ‘ijara-wa-iqtina’ i.e. leasing purchase,
when the ownership of the assets is transferred to the clients after the completion of the leasing
contract.
Quard E Hasan
Quard E Hasan means an interest-free loan given by the Islamic bank to the needy people in a
society. The practice of dealing with this sort of investment differs from bank to bank. Quard E
Hasan is normally given to needy students, small producers, farmers, entrepreneurs and
economically weaker sections of the society, who are not in a position to obtain loan or any
financial assistance from any other institutional sources. The main aim of this loan is to help needy
people in a society in order to, make them self-sufficient and to raise their income and standards of
living.
ISLAMIC BANKING FINANCE TOWARDS SCI SECTOR
One of the major aims of Islamic banks under the Islamic Financing System is to render financial
services to the rural-based small and cottage industry sector. In many ways, Islamic banks are
similar to other privately- owned formal financial intermediaries. The main difference is that an
Islamic bank neither accepts deposits nor invests funds to its customers on interest. Instead, the
bank shares profit or loss. Nienhaus (1993) in this regards observes that the rural based small and
cottage industry owners are not being benefited much either by the state-owned or the privately
owned financial organizations. One might therefore find it interesting to observe how an Islamic
bank acts as ‘bank for rural SCI owners’; for example, how far an Islamic bank, with its motive of
investing funds on a ‘profit and loss sharing’ basis, may contribute towards financing and promoting
rural-based small industry sector.
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LENDING FUNDS THROUGH BAI-MUAJJAL MODE: AN EMPIRICAL REVIEW
As mentioned earlier, one of the Islamic banks called Social Investment Bank Limited (SIBL) gives
loans to the small and cottage industry owners in rural Bangladesh. These clients of the bank are
involved in poultry/diary firms, handloom industries etc. These sorts of industries are grouped and
institutionalized as the Grass-root level (GL) SCI System in the study. An in-depth interview was
conducted with 40 small and cottage industry owners belonging to the Grass-root level (GL) SCI
Systems. Among these respondents 20 are poultry firm owners and 20 handloom industry owners.
The bank gives loans to clientele under the Bai-Muajjal mode of Islamic banking finance. The
lending procedures under this financing mode initiate in a different way than the normal loan giving
process followed by other conventional banks. A brief description of lending policy of the Social
Investment Bank Limited towards the rural base grass-root level SCI owners is discussed in the
following section.
The bank initiates groups and teams among customers
This bank gives interest-free loans to its customers on the condition that they first create a group
amongst themselves. Customers who intend to take loans are asked to form a group of five
members before the request for a loan may be assessed. Each group requires a volunteer group
leader to organize all aspects of the business and to assist the other group members in various
activities. In such a group-wise loan, group members are jointly liable for the mistakes the other
members might make. The bank then forms a team, which consists of five individual groups of
poultry farmers. All the groups within a team are in turn also responsible for each other’s activities
and they relate every instance back to their designated team leader. The group leaders of five
different groups work as members of a team-executive-committee and this committee selects
one president, one cashier, and one secretary.
The bank’s staffs are responsible for training the group leaders. The training consists of information
sessions where everyone learns general ideas and techniques about their production activities. For
example, in case of poultry firm, the team leaders of the poultry firms are taught how to care of
chickens at every phase of the chickens’ life; this includes how one ought to administer medicine
and other nursing aids when the need arises.
Structure of the group organizing by the bank
Under the supervision of the Social Investment Bank Limited staff, grass-root level SCI owners
(respondents) organized the different groups comprised of five farmers in each group who were
interested in borrowing funds from the bank. An officer is usually assigned by the bank to organize
meetings with each group on different days of the week. Thus, each group has the opportunity to
contact the bank directly, through the representative officer of the bank. In case the clients feel the
need to discuss about any business or personal issue they may discuss the same with the officer.
Opening of a savings account with the bank
In order to obtain a loan from the bank, every member in a group is required to open a savings
account with the bank and deposit an agreed-upon amount of money every week. The savings
accumulate gradually and steadily using this method, for up to ten weeks. The respondents opened
savings accounts with the bank under their own names. These types of accounts are called
‘Mudaraba Savings Accounts’ (Profit & Loss Savings Accounts). After the account had been
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opened, each member of a group was expected to begin depositing both a minimum amount of TK.
25 and a maximum of TK. 502 every week.
Collection procedure of the weekly deposits
It is the group leader’s duty to collect money during the week from the members of his or her group
and to record how much each person contributed in a ledger. At the end of every week, the leader
submits the entire sum of cash, along with the record of names of the depositors, to the cashier of
the team. The bank officer in charge of supervising the projects visits the project-site once in a
week and collects these deposits from the cashier of team. The amount that is collected is then
credited to the respondents’ savings accounts.
Requirement of minimum deposits
The staffs of the bank responsible for collecting information about customers determines whether
various project proposals submitted by different customers intended to initiate using the bank’s
money were feasible. The bank handles the weekly sum of savings quite carefully because a
customer’s deposit figure must exceed 5% of the loan he/she applied for or he/she will not be
entitled to receive any loans from the bank. For this reason, the bank officer regularly gives
business advice that will be necessary if his clients are to succeed. He encourages them to be
punctual with the deposits of their weekly savings so as to avoid hassles. Apart from this regular
advisement and encouragement, the bank officers in charge of the project also give the
respondents training in their respective fields of expertise.
Bank officers’ direct contacts
During the ten-week saving period, it is also the duty of the bank officer-in-charge to inquire about
each borrower’s working capability and the types of business they are interested in for the future.
The bank officers meet every group at different times to educate them about the Islamic banking
systems, and particularly about its techniques and its aims. At the same time, he also gives them
information about how their new banks have developed.
After the saving period ends
When the ten weeks of the term of the savings with the bank came to an end, the group leaders
arranged a meeting with all the individual members of each group. In this general meeting, a
resolution is drafted and passed regarding the amount of loan each member intended to borrow
from the bank. A copy of this resolution was then prepared for the bank officer when he came to
visit the site. After considering this resolution, the visiting bank officer fixed a date with each
individual member of the various groups and asked them to come to the bank with their group
leaders to sign the contract for the loans.
Payment of loans
When the above-mentioned processes ended the bank-sanctioned loans to the clients on a Bai-
Muajjal (Credit plus profit) mode of financing. As mentioned earlier, under this mode of financing,
the bank does not issue the agreed-upon loan amount to the customer in cash, as is the custom of
most conventional banks. When they signed their loan agreement with the bank, the respondents
under review were asked by the bank to select a raw material supplier and to bring a pro-forma
2 1,00 USD is equal to 57.4000 BDT, Live Rates as of 2001.06.24 (http://www.xe.net/ucc/convert.cgi)
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invoice for the price of the raw materials that they required for their industry. The respondents
promptly complied and immediately sought suppliers and collected invoices from them. Another
bank officer was in charge of supervising this aspect of the project and giving any professional
assistance that was required of the clientele. Once the bank authorities were satisfied with the
invoice prices, the quantity of materials etc., made necessary arrangement to pay the money
directly to the suppliers. Soon after the payment was made to the suppliers of raw materials, the
bank officer responsible follow up the matter in order to be sure that the customer received the raw
materials. The bank then debits the same amount from each customer’s savings account, in
accordance to the amount each had stated was necessary for his/her specific needs. In this way,
the bank ensures that the fund borrowed by small and cottage industry owners will be directed
efficiently and that the customer will be successful in achieving his or her goal.
Direct supervision of borrowed funds

The SIBL allows its customers free access to their entire borrowed fund, with an important
stipulation; before one is able to get unlimited access, one must prove to the bank that the amount
being lent will only be spent to buy raw materials or other accessories for the development of the
farm. In order to do this; the customer must produce new invoices from the vendors of the raw
materials each time he visits the bank. They may then utilize the whole amount all at once, or
however else they may see fit. This is allowed to takes place only after the loan has been
sanctioned and credited to the individual’s Profit and Loss Savings Account.

Profits charged by the bank
A further condition within the SIBL’s lending policies under Bai-Muajjal mode that deal with the
clients in the Grass-root level SCI System is that the bank officials who deal with them calculate a
percentage of profit on top of the invoice price after the customers present their invoices for the
materials they intend to buy. The principle of the Bai-Muajjal mode of financing is that the bank first
buys goods for customers and then sells these goods back to them at a profit. The bank realizes
the principal amount of loans plus the profits from customers in separate, equal instalments. In this
particular case, the SIBL charged the small and cottage industry owners 14% of their net profits
made on the goods bought by the bank for the customer. Soon after the purchase was made, the
respondents became the owners of the goods and were responsible for its proper use.

Security
As a security measure, the bank asks the respondents to produce their land property title
documents as well as a letter of recommendation either from a person notarized by the bank or
from an influential customer of the bank in the locality.

Repayment of loans
The repayment of loans, including profits, was divided into a number of equal instalments. The
SIBL fixed the instalment rate of repayment of the loan. This repayment time starts two weeks after
the customer receives the loan or soon after the product is ready for sale in the market.
BAI-MUAJJAL MODE OF FINANCING AND ITS EFFECTS ON SMALL AND COTTAGE
INDUSTRY OWNERS: A CRITICAL ANALYSIS

The study reveals that the mobilization of the rural savings is one of the prime aims of the
organizations in the IFS, where their lending techniques develop the saving mentalities among the
customers, especially the rural-based SCI units. It is noted from the above discussions that the financing organizations within the Islamic Financing System while lending funds to firms in the Grass-root level SCI System demands deposits from their customers. The clients in this SCI
System accumulate these deposits through individual savings. Financing organizations in the IFS
supervise and monitor the customers’ savings activities through certain established rules. In this
section a detailed analysis is done to see how changed saving habits are regulated and savings
are mobilized towards productive projects by the financing organizations in the Islamic Financing
System through Bai-Muajjal lending mode of financing.

It is noted from the empirical record that the Social Investment Bank Limited through its Bai-Muajjal
lending technique develops new ways to save i.e. how saving is institutionalized to become new or
behavioural rule of these organizations. It is also found that the development of new saving habits
among the SCI owners promotes network ties with different actors within and outside the SCI units.
Since the Islamic Financing System introduced its special lending policy in the Grass-root level SCI
System, the saving of the SCI owners is governed by the new rules creating another saving habit.
In order to borrow funds, the Grass-root level small and cottage industry owners are required to
abide by these saving rules. Thus, through the lending process new saving habits of the rural
people have been institutionalized.

Habits viewed as an institution
Habits originate as serial repetition of behaviour within the complex interaction of human beings.
Habits are either hereditary in nature or grows through imitation, but in both cases based on
replication of a precedent. Every society considers social habit to be a significant factor in
determining social law and customs, and vice versa. According to Veblen (1919, p.239), institutions
themselves are comprised of ‘settled habits of thought common to generality of men.’ Man is
socialized by societal agents and forces, thus habits are an outcome of social behaviour, customs,
traditions and law. Habits influence economic as well as non-economic activities of human beings
in their everyday life.

Habit play out in human life in various ways. Some habits are natural, essential for living such as
physical necessities of eating and sleeping, whilst other habits are acquired from the social
environment. Habit, as mentioned, is also established in human life through imitation of others.
Regardless of the mode of entrenchment, habits have a great impact on the economic and social
activities of a society. Good habits reduce the social burden and, arguably, vice versa. Hodgson
(1988,p.127), observes as “We acquire habit in various ways. Sometime it is through the imitation
of others. This does not always result from full conscious choice, as all animal species are born
with some capacity to imitate. The development of the intellectual and political skills of young
children is based largely on imitation, and we retain this faculty in later life, other without conscious
thought about what we are doing”.

While discussing on the subject rural savings and saving habit of Grass-root level small and
cottage industry owners, I think it is needed to highlight on traditional saving habits that play an
important role in rural economy of Bangladesh. In order to have an overview on that the first part of
the next section includes a brief discussion on the overall position of the traditional saving habits
and sources of rural savings. Then, it discusses the extent to which the organizations in the Islamic
Financing System contribute to mobilizing the rural savings towards the productive sectors.

Traditional habits of savings
Veblen (1919) views habits as either hereditary in nature or that they grow through imitation. The
author further argues that institutions themselves are comprised of settled habits of thought
common to the general public. Saving habits influence economic as well as non-economic activities
in almost all societies. Ashe and Cosslett (1989, p. 94) reports that the household savings in the
informal sector is an essential element in the growth of developing economies, partly because the
informal sector is larger than the formal enterprise or public sectors.

It is observed from the study that the rural-based SCI owners are usually habituated to save funds.
Saving tendencies are a hereditary part of these people’s nature. The majority of respondents in
the SCI units in rural areas informed that, although they used to save money on their own initiative,
they could hardly use these funds in a profitable way. It was also known from the study that the
rural-based SCI owners are used to saving money for different purposes. Some of these are
discussed below.

Motives behind the traditional savings
Saving is found to be a very common habit among the majority of the rural-based small and
cottage industry owners. But the motive behind creating saving differs from person to person and
from family to family. While interviewing the Grass-root level small and cottage industry owners it
was found that almost all respondents were trying to save a little from what they had. But the
motive behind the savings was different. 21 respondents among 40 SCI owners interviewed
expressed the motive of savings was to accumulate funds for the matrimonial ceremonies of their
children. Ten clients intended to use savings for buying gold or land. Three of them intended to
spend for religious and cultural functions and seven invest in business. These figures are
demonstrated in percentage by the following figure.
Figure 2. Utilization of savings
25%
52%
5%
18%
Gold or land
Matrimonial
ceremonies
Cultural and
Religious
functions
Invest in
business
(Source: Field study on SCI in Bangladesh 1997)

The above figure shows that more than 50% respondent having children were worried for the
marriage of their daughter and they start saving a little of what they have for their matrimonial
ceremonies. Only 18% showed their interest in utilizing their savings for the business or productive
purposes. They were afraid of using their savings funds for business purposes because of their
lack of entrepreneurial mentality, the risk involved, and the lack of experience in business.

Therefore, large amounts of rural savings are not being utilized in any productive activities, instead
being locked in unproductive sources.

CHANGING SAVING HABITS: THE ROLE OF THE ISLAMIC FINANCING SYSTEM.
The lending policy of the financing organizations in the IFS gives prime priority to the saving habits
of people. As one of their lending principles, owners of the grass-root level SCI owners are
required to deposit a certain percentage of the borrowed funds with the bank. They are required to
make these deposits from their weekly savings. The following section includes a discussion about
various reasons as to why the Social Investment Bank Limited give preference to their clients
accumulate weekly deposit, thereby creating new habits of saving for these organizations and in
that way institutionalizing new ways of saving.
Developing a saving mentality

The SCI owners in the grass-root level SCI system are poor rural people, who have very little
educational qualifications and professional skills. They are therefore, unable to understand how to
save in a proper way for example using savings in productive ways. In order to develop the saving
mentality among rural SCI owners the financing organizations within the Islamic Financing System
arrange their lending activities in such a way that the borrowers initiate group savings before they
apply for loans. It takes a few weeks for the SCI owner in the grass-root level SCI system to obtain
a loan. During this period, the Islamic banks contact their customers from time to time, to discuss
various issues concerning their projects, and to monitor the progress of the group savings in order
to develop the proper savings mentality. Thus, the organizations within the Islamic Financing
System establish close contacts with the SCI owners in the grass-root level SCI system and
encourage them to save and plan how and in which way to spend their savings. In developing the
saving mentality of the clientele the bank assists and encourages them to accumulate their idle
funds and to use the same for productive purposes.

Educating about saving habits
As noted above, although the SCI owners in the grass-root level SCI system are poor, many of
them spend whatever they have saved in unproductive ways, for example, on dowries at marriage
ceremonies. Since the organizations within the Islamic Financing System do not start lending
before the groups savings are initiated, the lending rules themselves educate the clients about the
advantage of savings. Moreover, bank officials, through personal contact, discuss various issues
regarding the drawbacks of the old saving habits. Thus, it is concluded that the rural SCI owners
are educated about how to make proper utilization of their savings in productive ways. New saving
habits are thereby being institutionalized. By giving them a proper understanding of the value of
their savings, the lending organizations within the IFS encourage poor SCI units to start saving
from the little they have in their hands.

Uniting customers’ efforts
The bank also had the idea of developing the saving habits to establish unity among people from
different walks of social life. The lending activities initiated through the group savings established
unity among rural people of different social categories, since it encourages different individual SCI
owners to work together in harmony. Thus, new saving habits not only unite the rural SCI owners
but also their skills and efforts. This ultimately results in the investment of funds towards productive
activities. The rule to collect individual savings encourages customers to fulfill the group obligations.

Thus, the savings of the individuals are mobilized from unproductive uses towards
productive fields.

INSTITUTIONALIZATION OF SAVING HABITS
In his discussion of social life and group behaviour, Hughes (1939) observed that anything socially
established can be called an institution. It is mentioned earlier sections that the rural people in
Bangladesh try to save from whatever income they have, but this habit is neither taken care of nor
guided by any lending organization. Human habits do not change without a change in catalytic
circumstances. For example, if one is inclined to believe that a change of habits or a development
of a new habit in everyday life is like to be of benefit, materially or financially, one may not hesitate
to transform habits as a conscious act of volition. Within the societal domain, however, it may
require an institutional process or policies adopted by either by the government or the individual
institution. By way of example, let us refer to the case of saving habits among people in a society.
Needless to remind, that every spending that is incurred by people may not be productive. This, no
doubt, happened due to certain behaviour or routine activity, which people are customized into
over the years. A proper motivation and guide for people to save money may end up with a good
result if, in return, they are shown a profit oriented and productive project in which to invest their
savings.

Bai-Muajjal mode of savings as observed in the earlier section, changes socially established saving
habits of rural-based SCI owners. The traditional habit is changed to a newly developed saving
habit. The entire lending procure of the Islamic bank is consists of certain rules, procedures which
in a way was used in organizing the behaviour of the bank’s clientele. Thus it may rightly be said
that, through the Bai-Muajjal lending process saving habits of the rural SCI clientele are institutionalized. Regarding institution Jansson (2002) observed that, an institution usually means rules, procedures, and conventions typical for a more specific way of organizing human behavioura (legitimized) social grouping of some kind- for example family, clan organization, nation, market game or ceremony. Within these institutions are found rules and conventions typical of specific organization, which led to habitual and routinized behaviour or action. The critical analysis of the Bai-Muajjal mode of Islamic banking finance indicates that the entire process of savings and its uses contribute towards developing other new habits. For example, the people of the different SCI units start to think along the lines of productive activities. The savings activities are organized and arranged in such a way that they develop lender-borrower relationships and establish close ties with co-workers within the locality. Furthermore, the newly developed, saving habits direct them to think in advance regarding a particular project in which they might invest their savings. The traditional, saving habits of SCI owners discontinue with the gradual development of new habits.

This mobilization of the savings takes place through institutionalization of new saving habits. Institutionalization of saving habits is a process of changing spending behaviour of the rural poor and promoting a goal oriented saving habits among these people. The following figure demonstrates the processes by which the entire credit giving process of the Social Investment bank Limited regulate and institutionalized the saving habits of the rural-based grass-root level SCI owners.
Figure 3: Process of developing saving habit by Bai-Muajjal financing
Institutionalization of saving habits through lending process
It is noted from the above figure that the entire lending procedures used by the Social Investment
Bank to give loans to the owners of the grass-root level SCI system contribute to the deinstitutionalization
of old saving habits and institutionalization of new saving habits. The saving
habits of the clients are established through certain rules. The process used by the bank is a
unique means of organizing human efforts and behaviour. It is thus concluded that an important
part of the lending policy of this bank is aimed at institutionalizing saving habits of the rural-based
SCI owners and organizing savings towards productive activities.
Characteristics of the institutionalized saving habits
CONTRIBUTE TO
GROUP SAVNINGS
AS ISLAMIC BANK
ADVICES
THE INDIVIDUAL SAVINGS
ALONG WITH BANK
CREDITS
USED FOR PRODUCTION
SAVINGS OUT OF
INDIVIDUAL EARNINGS
OPEN INDIVIDUAL ACCOUNT
AND DEPOSIT THE WEEKLY
SAVINGS TO THE BANK
I
S
L
A
M
I
C
B
A
N
K
A
D
V
I
C
E
S
THE BANK GRANTS LOANS
BASED ON THE INDIVIDUAL
SAVINGS
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? The new institutionalized saving habits of the SCI owners in the grass-root level SCI system
are characterized by the following factors.
? Savings are generated from self-earning
? Savings are initiated and supervised by the financing organizations in the Islamic Financing
System
? Savings are deposited with the financing organization
? Customers knows about the purposes of their savings
? Savings are returned back to customers as capital for production
? Capital formation is done through depositing savings with the financing organizations
? Savings are utilized in productive sectors
? Savings are utilized in a proper way to create job facilities
? Saving habits develop network relations within the co-workers and with financing
organizations.
CONTRIBUTION OF INSTITUTIONALIZED SAVING HABITS
The following section includes a brief description regarding the contribution of the institutionalized
saving habits.
Generates working capital
It was observed from the study that working capital is a major hindrance for rural-based small and
cottage industry owners, lack of which often compels them to use their borrowed funds to
overcome their capital shortage rather than investing it for production. In this regard Ashe &
Cosslett (1989), observes that the lack of working capital often leaves owner little resources other
than to buy from certain suppliers on credit and at very high prices, thus exacerbating the common
problem of chronic indebtedness.
A lion’s share of working capital may be generated from the private savings of the rural people. To
a certain extent the inadequacy of working capital can be overcome by inculcating the habit of
savings in the business nature of the small and cottage industry owners. Apart from that, the lack
of entrustment among the rural based small industry owners is also another major hindrance that
makes financial intermediaries fail to realize their expected benefit from their investment. It is found
from the study that major portion of working capital of the grass-root level SCI owners interviewed
comes from other sources than personal savings. Among 40 respondents, to raise funds for
working capital, 15 borrowed funds from friends, 20 from relatives and 5 used their family savings.
This figure is shown in percentage by the following figure.
19
Figure 4. Sources of working capital
Friends
38%
Relatives
49%
Family
savings
13%
Source: Empirical studies on grass-root level SCI in Bangladesh (1997)
It is noted from the above figure that only 13% of SCI owners raise their working capital from
personal or family savings. This indicates that rural-based SCI owners use other sources than
personal savings. In case they fail to raise funds from friends and relatives they are bound to use
borrowed funds as working capital, which ultimately hampers production activities and results in the
deficiencies of cash flow.
When the Islamic banks give loans to the grass-root level SCI units, they want to make sure that
they have sufficient funds for their working capital. Since SCI units in many cases used their funds
for other purposes than they were originally borrowed for, the savings give the financing
organizations an assurance that the borrowed funds would be used for the right purpose.
Proves credit worthiness and adds security
The study reveals that as a rule, in order to obtain a loan the SCI owners in the grass-root level
SCI system must deposit a certain amount of their savings with the bank. This stipulation not only
ensures saving but also allows Islamic banks to judge the credit worthiness of rural-based small
and cottage industry owners. Islamic banks, like other conventional banks, also take freehold
properties as a security from customers. In many cases there is no problem even for rural-based
SCI units to give such securities. Due to economic hardship, it is tough to give any cash amount as
security. As part of their lending policies, financing organizations in the Islamic Financing System
encourages borrowers to save. This ultimately makes financing organizations sure that borrowers
are really worthy of giving credit to. A saving attitude also makes customers mentally strong and
encourages them to work hard to prove their worthiness to the lending organizations.
Creates mutual obligations between the parties
The lending of funds by Islamic financing organizations to grass-root level SCI units may be termed
as ‘giving and taking policy.’ By this term, I want to mean that the lending policy of the financing
organization in the IFS is arranged in such a way that, borrowers first of all must deposit in order to
be qualified for a loan. It creates a mutual obligation between the lenders and borrowers. The SCI
20
owners are bound to fulfill their obligation by depositing savings with the bank. Once customers
comply with this condition, as rule the bank gives loans to them. This system makes the SCI
owners conscious of making proper use of their borrowed funds. It also develops initiative among
SCI owners to work hard and to be sincere in dealing with bank loans and encourages them to
save more as they need to repay the loans after a certain period of time. The amounts of loans are
of course higher than the savings that SCI owners deposited with the bank. The obligation of the
bank is looked from the standpoint that they become more vigilant to observing that the loans are
being properly utilized, failure of which might cause a great financial loss to them. Thus, it is
concluded that the Bai-Muajjal lending policy of the Islamic Financing System through developing
saving habits creates mutual obligations between the lenders and borrowers.

CONCLUSION
In conclusion it may be said that as seen above the spending habits of the people in rural
Bangladesh are habits influenced by societal institutions (Alam 2000, 2002) such as family/clan,
religion, country culture etc. Since a major portion of rural savings is not used in productive
purposes, it brings economic misery in a society and contributes towards intense poverty among
rural people. A least developed country like Bangladesh is in need of an organization-based guide
to safeguard the rural savings and to make use of these idle funds. Since many rural poor are not
aware of the proper utilization of their savings, the institutionalization of saving habits through the
Bai-Muajjal mode of lending procedure, educate them to spend their savings towards productive
venues. It is thus, apparent from the above discussions that the Bai-Muajjal mode of Islamic
banking finance is a unique means of institutionalizing and developing saving mentality among the
rural-based small and cottage industry owners and mobilizing their savings towards productive
purposes.

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