RIHN (PLEDGE/SURETY) AND KAFALAH (SURETYSHIP) AS TOOLS TO REACH THE UNBANKED.

INTRODUCTION

Rihn or pledge is a security to which the lender may have recourse in the event of the failure by the borower to fulfil his obligations. The prophet pbuh borrowed from a jew against the security of an iron breastplate which was at the jew at the time of his demise. Related to the contract of Rihn is Kafalah. However, Kafalah means to take on the responsibility for the payment of debt or for person appearance in court.

Kafalah and Rihn interrelate in the case of debt, but they have different functions. In Kafalah, third party becomes surety for the payment of debt, but in Rihn the debtor hands over something as a pledge to ensure the payment of debt.In addition, a rihn is also regarded as a trustship, the creditor has to hold the pledged property as a trust.

It is lawful to become surety of a surety in the sense that there can be more than one surety at the same time for single obligation, i.e. joint surety or joint guarantee;each one is liable only for his share of the debt. If the jointly indebted people become surety for each other, each one of them is liable for the whole debt.

The contract of Rihn and Kafalah are instrumental tools to include or assist the unbanked population to have access to credit facilities that would otherwise take time to prove networth of their businesses or meet personal needs timely or to start a business for which the capital is required.

FACTORS CONSIDERED IN GRANTING CREDIT FACILITY IN TANZANIA.

In the provision of credit facilities to their customers, most of banks in Tanzania examine and analyse the volume of business transaction (account turnover) and the Rihn (pledge) or Kafalah (security). However, the reliance is on the account turnover. As a result, those who are not banking frequently or had not used banking and financial services in their lives (unbanked), their needs are hardly met timely and appropriately.

According to McKinsey report published in 2009, half the world is unbanked. According to the report, East African countries are not doing better and Tanzania has the lowest percentage of adults using financial services i.e 5%. Why? There are number of factors, some of which will take years to overcome while others requires bankers to change their approach. There is no reason why urban population where most banks are located arenot using financial services. As an experienced member of the sales team, it not rare to find that some dont bank because banks have perception problem- need people to deposit but have strict conditions on provision of credit facilities!

In today Tanzania, it is a common phenomenon for individuals and businesses to request bank credit criterias before they decide to bank with or without you. The requirement to have years or months of historical record of banking transactions demoralise the unbanked who are in need of immediate financial solutions for their pressing challenges. To attract this sidelined market segment, I suggest to the extent possible, banks to base their assessment of credit repayment ability on the viability of the similar businesses in similar or near-by location with proven records plus rihn or kafalah.

If not possible to benchmark and the unbanked is a start-up, I suggests tailor made basic entreprenuership training should be provided. Entreprenuership skills can be transferred through learning and coaching. In 2006, i carried out field work at an organisation called TASO in Uganda, it was clear that if you provide business training and provide micro-finance to those who have shown mastery on the concept presented, you save that family from going down to the extreme poverty. On another hand, a lot of SMEs are not banking but have assets to pledge as security or have guarantors, therefore rather than demand and depend on account turnover, the value of security can be a factor to set credit limit.

Finally, I believe combining entrepreneurship training and rihn or kafalah or setting credit limit using rihn/kafalah for SMEs can be a solution to reduce the unbanked population in developing countries and inculcate banking culture. However, until we walk the talk, this suggestions might not see the fruit of the day. Therefore, bankers should start to consider provision of basic entrepreneurship training to the unbanked and use value of rihn or kafalah to set credit limits in order in support national economic goals of reducing unemployement and poverty.