How Do Islamic Digital Micro Finance Solutions Work? Everything You Need to Know

Digital micro finance solutions are an increasingly popular financial product in the Kingdom of Saudi Arabia. These lending products are fully compliant with Islamic law and are available at the touch of a button.

Highly accessible and inclusive, these financial products are opening up a wealth of possibilities to many more people and helping them achieve their financial goals. Read on to find out more about micro finance, how these products work, and whether they might be suitable for your needs.

What is micro finance?

Micro finance is a term used to describe the provision of financial services dealing with relatively small amounts of money. Micro finance provides personal lending solutions to people working across all sectors, including government and semi-government.

They are also often available to people who may not be able to access more traditional financial services. Retirees may also use these products, depending on income. In short, they are an accessible, affordable way of borrowing the money you need.

Typical loan amounts are anywhere from SAR 2,000 to SAR 50,000. Customers are usually eligible for a finance amount of three to five times their salaries, depending on where they bank.

Who might want to use micro finance, and why?

These products are designed to provide cash flow whenever you require it most.

• For instance, they could help you reorganize your spending to deal with emergencies. One can never know what is around the corner, and knowing that these products are available is reassuring. 

• They also allow you to live freely and meet your financial obligations without worry. Saudi nationals are using micro finance for a variety of family finance reasons, including for medical expenses or for university or school fees.

• Alternatively, they can be used to make larger purchases, such as for furniture or white goods. The idea is that people can get the cash to pay for what they need in a timely manner.

• Some micro finance products encourage applications for home business finance, allowing individuals to start or expand their small enterprise from home.

How are micro finance products compliant with Islamic law and other financial regulations?

Micro finance providers in the Kingdom of Saudi Arabia are under the supervision of the Saudi Central Bank. SAMA (Saudi Arabian Monetary Authority), the name of the regulatory authority, has strict rules that govern micro financing companies, and these companies must operate under license.

The goal of SAMA’s efforts is to ensure that financial institutions provide products that align with consumer needs, help provide financial stability, and assist in working towards Saudi economic growth. All micro finance products available in the Kingdom of Saudi Arabia have been rigorously tested to ensure they adhere to these principles.

Aside from this, personal finance in the Kingdom of Saudi Arabia must also adhere to Islamic law. Depending on your background, you might know that many financial institutions around the world charge interest rates on loans to make a profit.

However, all Islamic finance solutions will not charge interest, so in the Kingdom of Saudi Arabia, companies use a different way of working to make a profit. They instead work on the principle of buying something on the customer’s behalf and selling it to them at profit. So instead of interest rates, you will see the term profit rate. This is the additional amount that will be repayable in addition to the sum borrowed.

What are the typical terms and conditions?

Here is what to expect from a typical micro finance product.

• Any sum borrowed through a micro finance agreement is usually repaid over a period between three and 24 months. The amount that can be financed is usually between three and five salaries’ worth.

• At present, potential customers are encouraged to apply if their monthly salary is above SAR 2, 000 (or SAR 1,900 for retirees). Applicants must be between 20 and 60 years of age, or until retirement age. For retirees, applications can be made up to the age of 70.

• Customers must demonstrate between one and three salary deposits, depending on where they bank. If applicants bank with a bank linked to the micro finance provider, they are likely to only need one salary deposit. Either way, customers should demonstrate a good credit score.

• Profit rates are agreed upon at the time of taking the loan and will cover the entire lending period. Profit rates are currently offered at around 2% per month. If the customer wants to repay early, then it is typical that three months’ profit will be charged and added to the principal amount before the loan is considered repaid.

• The customer deduction rate is 45%. However, if their personal income is above SAR 25,00, this increases to 50%.

• The loan usually needs to be repaid using a direct debit.

How does digital micro finance work?

Micro finance products are available in branches but many people may prefer to access products digitally. Digital micro finance serves the customer quickly. Using a smartphone app or website, customers can apply for a product or service at their fingertips without going into a branch. The application process is simple and takes just minutes.

For maximum convenience, the whole process is fully digital. An instant decision is provided by AI without the need for human intervention. Once the application is approved, the finance amount is immediately deposited into the customer’s account.

Applying for finance digitally involves avoiding unnecessary travel, and is both fast and convenient.

Is micro finance compatible with existing loans?

Customers who already have current loans will need to find an alternative way of financing their expenses or purchases. Providing they have a good credit score, they can apply for a product known as “Top Up Finance” or “Additional Financing.”

Top Up Finance is a similar product to a micro finance product. However, repayments may take place over a longer period. The profit rate charged is usually higher, too.

What next?

If you are interested in a digital microfinance product, then it would be wise to research the best possible product to suit you. Variables such as where you bank, how long you have been salaried, your income, and where you work all affect whether or not you are eligible or how much you may borrow.

AUTHOR BIO

Saud Al Ghonaim is the CEO of Emkan Finance, a leading Saudi omni-channel FinTech brand offering innovative financing solutions such as micro, top-up, and installment financing to a wide range of audiences. He holds an MBA in Finance from the University of Akron and has 21 years of experience in a wide spectrum of retail banking, consumer finance, credit & risk management, products, development, sales management, and consumer finance operations.