, Revitalizing the World Economy Through Farz Methodology

8/3/2019 , Revitalizing the World Economy Through Farz Methodology

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REVITALIZINGTHEWORLDECONOMYTHROUGHISLAMIC

MICROFINANCE

FARZMETHEDOLOGY:

PRACTICE AND PROVEN RESULTS

PAPERPRESENTEDONTHESUMMIT

WrittenAndPresentedBy:FARHATABBASSHAH

CEOOF

FARZ

FOUNDATION

FARZFOUNDATION

THE

FIRST

SHARIAHCERTIFIEDISLAMICMICROFINANCEINTSTITUTE

OF

PAKISTAN


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REVITALIZINGTHEWORLDECONOMYTHROUGHISLAMIC

MICROFINANCE

FARZMETHEDOLOGYAMODELINPRACTICE

1. BACKGROUND

To achieve financial goals in such difficult times is by no means easy business. Farz

Foundation took up the task of fighting poverty when the microfinance world was

facing a unique and grave sustainability crisis and the Global Economy is facing the

biggest crisis of the history as well. Much to our amazement, the initial outcome is

quiteencouraging.

In spite of our funding constraints and lack of technical support, recoveries are 96

percent on time with zero percent PAR, while our one of a humble initiative of

livestockMudarbaha,thebusinessgrowthrateismorethan24%annual.

There are only 4% partners mismanaging their business. We even didnt give up on

them and gave out of the routine trainings to make them capable of honorable

earningandhelpalleviatepoverty.

There was a time when the trickle down effect demonstrated its outcomes, while the

time has come, the global economy does not seem stay alive without implementing

on my humble theory of Twist Up Economy, which emphasizes to make the three

billion poor our Productive Micro Partners(PMPs) to not only kick start a huge

potential economic cycle but also to build a wide international customer base. Farz

Methodology has been developed on the philosophy of developing micro partnership

with the poor on profit and loss basis. At present it is being implemented in Pakistan

and abroad. We the microfinance practitioners have done it and proved that it is

possible and promising to turn the threat into an opportunity. Our goal is to

empowerthepoorwithasenseofselfbelief.

2. THESECRETSOFOURSUCCESS

2.1.Weare100%ShariahCompliant

2.2.Weare80%AssetBased

2.3.Weare100%Socialperformancefocused

2.4.Weare100%commercial


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2.5.Wearevigilantsupervisors/monitors

2.6.Weworkthroughthetrade structures

2.7.WescreenourClients/partnerscarefully

2.8.WecustomizedproductsandthetoolunderShariahcomplianceaccordingtotheneed

ofthecustomer/partnerandthemarket.

2.9.Wearetransparent

2.10. Weprefersynergies

3. OURCOLLABORATIONS

3.1.WorldCongressofMuslimPhilanthropists

3.2.OxfordMicrofinanceInitiative

3.3.ChurchWorld

Service

Pakistan/Afghanistan

3.4.PakQatarFamilyTakaful

3.5.ProvincialMinistryofLivestock, Pakistan

3.6.UniversityofVeterinaryandAnimalSciences

3.7.PunjabAgriculturalandMeatCorporation,Pakistan(PAMCO)

3.8.Halal Research&DevelopmentCommittee(PAMCO)

4. OURREPLICATORS

FarzMethodologyisbeingreplicatedby

4.1.CameroonHalalMicrofinance(Cameroon,Africa)

4.2.TheNGOWorldFoundation(Pakistan)

5. OURMARKETINTELEGENCE

5.1.The

First

study,

Farz

Foundation

has

conducted

to

know

the

percentage

of

clients

comfortable

with InterestbasedLoans/Financing.100%clients(alreadygetting loansfrom interestbased

MFIs)respondedtheyarenotcomfortableandthe reasonwhytheyopted for interestbased

loansjustbecausetherewasnoalternative.Whenweofferedthealternative,62%werewilling

toacceptandtheremainingweresimplynotreadytobelievethereisanalternative.However

the100%untappedclients/partnersarereadytoworkwithinterestfreemicrofinance.


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5.2.Thesecondstudyweconductedwasrelatedtoproductivityofconventionalmicrofinanceto

alleviate poverty, results were shocking, only 4% were found positive while 96% loans were

misused.

5.3.The third study we conducted was related to comparative study of asset based model v/s

cashbasedmodel.Resultswereinfavorofassetbasedmodelas96%.

5.4.The fourth study was based on correlations and sensitivity analysis and we were able to

conclude

that

healthy

and

skilled

clients

99.5%

remain

successful,

so

just

disbursing

money/deliveringassetstothepoor,uneducated,unskilledand leavethemalone forearning

andpayingbackloansistherootcauseofthefailure.

5.5.The fifth study was focused on learning from the failure of the conventional microfinance,

and it guided us how to break the vicious cycle of the debt and ensure the economic

graduationofthepoorfrommicrotoSME.

5.6.We also learned that the ultra poor must be addressed through Zakah/Charity, by providing

themproductiveassets,abetterworkingpartner(AMudaribalongwithFarz),capacitybuilding

andcontinuous

supervision.

5.7.WealsocametoknowthattheFaithdrivestheclients/partnerstowardsaCreditDiscipline.

5.8.Similarlyfaithmotivatesstaffforthespiritualgainsandincentivestodomoregood.

5.9.Ahugemarketiswaitingforit.

5.10. Ourmarketintelligenceconveyedthatwecanfillthegapandmakeadifference.

So

all

these

studies

and

observations

inspired

us

to

reinvent

the

microfinance

by

adopting

a

pure Islamic innovativemodel,whichmustbeneedbased,marketdrivenand faithoriented.

Wealsorealizedthattheintegratedapproachisinevitableforthesuccessofpovertyalleviation

efforts, which can protect our poor partners, as well as our donors, investments and the

system.

6. OURCORECOMPONENTS:

6.1.ZAKAH/CHARITY Although, to address the ultra poor Farz is implementing the

Zakahand

Sadaqat,

to

uplift

them

and

to

make

them

able

for

earning

money

through

respectablemicrobusinesses,howeverFarztransfersallthesefacilitiesfromdonorto

poor in form of productive assets with capacity building in the particular area and

business education if needed. Farz aimsjust one time charity support to a targeted

ultrapoorandturnhim/her/them intoaproductiveclient/partnerwithanhonorable

micro business. Farz usually avoid going for business venture with the ultra poor

directlybyconsideringthemapotentialforcommercialization.


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6.2.EMERGENCYSUPPORT FarzProvidesQarzeHasnaonlytoitsexistingandefficient

clients/partners,atthetimeofanyemergencyatindividualorcollectivelevel.

6.3.RISKMITIGATION,SECURITYSUPPORT Farz offers Takaful (Islamic Insurance) &

saving (A unique and innovative Product of Farz Foundation named Farz

Committee/kamaity), Health care, where it is needed, capacity building, strong

monitoringand

supervision.

6.4.SOCIALPERFORMANCE Farzprovidestheclients/partners,protection,healthand

environment awareness/services, business education and also support in disasters.

Socialperformance isourmosteffectivetooltobuildthetrustbetweenourpartners

andus.

6.5.INSTITUTIONALDEVELOPMENT&SHARIAHADVISORYSERVICES

Farz Foundation Offers Islamic Microfinance institutions development services and

Shariahconsultancytofacilitatethesectortoexpandthepovertyalleviationefforts.

7. OURPRODUCTSINPRACTICE

7.1.FinancialProducts

7.1.1. MicroMudarbahainlivestock(Bhaiwali1,2,3)

7.1.2. MicroMurabaha7.1.3. MicroSaving(FarzCommittee/Kamaity)

7.1.4. MicroTakaful

7.1.5. HalalKarobar(HalalInvestment)

7.1.6. QarzeHasna

7.1.7. ProductiveZakah

7.2.NonFinancialProducts

7.2.1. BusinessDevelopmenttrainingforPartners/Clients

7.2.2. Healthcare

services

for

partners/Clients/Livestock

7.2.3. Future Protection Program (Education support for the children of the

partners/Clients).

7.2.4. Institutiondevelopment&Shariahadvisoryservices

PRODUCTSINPIPELINEA. BaySalam

B. DiminishingMusharkah


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C. Istesna

MICROMUDHARBHA(BHAIWALI)

Bhaiwali(Partnership)inlivestockoninvestmentandservicesbasisisthelandmarkproductof

Farz Foundation. It has proved to be sustainable, scalable, and highly profitable not only at

investorlevelbutalsoatourmicropartnersandorganizationallevel.Unbelievablefastgrowth

of

the

business

generates

high

returns

with

a

strong

social

impact.

It

also

addresses

foodsecurityandinjectsaviablecontributiontotheGlobalHalalMarketwhichhasthepotentialof

US$ 3 trillion. FarzFoundationhas initiateda Bhaiwali pilot project of 42 to48 monthsand

earnedbreakevenwithin first18 months, initiallyatasmallscale.Howevertheproducthas

provedsuccessfulasa4bottom lineventure. Farz isalsoaimingatdeveloping the required

structures and delivery mechanism from local to international markets. According to this

product, Farz and the poor farmers are service providers, while the third party works as

investor.

(Slide1)

PRODUCT

Level1

FEATURES

Product Name BHAIWALI-1

Objective Breeding

Size Unit of 6 Goats for one poor Family ( 5 Female Goats + 1 Male Goat)

Age of Animal 1 year or pregnant of 3 to 4 month

Kind Beetal

Size of Investment PKR: 100,000/ Unit

Period 42 to 48 Months

Modality of partnershipwith poor Family

50%(Farmer) 25% (Investor ) and 25% of the Farz Foundation atreproduced Goats

Modality of partnershipwith Investor

Investor gain 50% of the net profit

The parent Animals remain as owned by the investor and the Foundation can hold them backafter 42-48 months on behalf of the investor and can transfer the animals to another poor familyfor the same purpose with the consent of the investor.

(Slide2)

Level2


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FEATURES

Product Name BHAIWALI -- 2

Objective Qurbani Animals Production

Size 5 Male Goats for one poor Family

Age of Animal 6 month

Kind Beetal, Rajan Puri or Desi






Investors gain 25% of the net profit

Farz Share Farz Foundation gain 25% of the net profit

Mortality 30%

(Slide3)

Level3

FEATURES

Product Name BHAIWALI -- 3

Objective Meat Production

Size 10 Male Goats for one poor Family

Age of Animal 3 month

Kind Taidy






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Investor gain 25% of the net profit

Farz Share Farz Foundation gain 25% of the net profit

Mortality 30%

Note:TheMortalityisagainanopportunityforus,afterprovidingastateoftheartriskmanagementservices.

Byprovidingproperhealthandnourishmentcare,wecouldreducemortalityratioandturnitintoprofit.

3Murabaha(Tijarat)

Farzhassuccessfullydonean18monthspilotprojectandearnedvaluableexperienceandconfidenceregarding

theinternalandexternalbothchallengesandthemethodstoresolveissuesandproblems.Theassetbasedmodel

ofthisproductstopstheclientsfrommisusingthemicrofinancefacility.FarzFound24%profitviableforitselfand

theclientalso.

MICROMURABAHA refers to a type of sale in which the buyer knows the actual cost of

goods and the margin of profit of the seller and can be used the sale of tangible goods on

deferred payment basis (Bai Mujjal). The seller acquires an asset, which the buyer agrees to

purchaseatsomepointinthefuture.Thesellerisentitledtoaprofit,aslongastheexactprofit

marginisdisclosedinthecontract.Paymentsmaybespreadoutovertime.

(Slide4)

FEATURES

HEADS FEATURESTradesize PKR: 5,000to30,000Annualincreaseintradesize InaccordancewiththebusinessperformanceRateofprofit 24%Durationofinstallments 1yearExempteddays EidholidaysTotalinstallments 22Frequencyofpayment Fortnightly


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Collateral PersonalguaranteeCollateral2 Postdatedcheques

MICROSAVING(FARZCOMMITTEE/KAMAITY) FarzCommittee/KamaityisaShariah

compliant,innovatively

adopted

traditional

saving

product

of

Farz

Foundation,

locally

known

as

committee/Kamaity. Itwas introduced toknit theclientswitheachotheraswellaswiththe

foundation. This kind of method helps build the assets of the clients. This already existing

system of saving was made secure by formalizing and synchronizing it with the Farz

Foundationsoperations.Clientsareextremely happywiththisproduct.

Accordingtothisproduct,clientspooltheiragreedamountofmoneyeverymonthandgiveit

totheonememberofthegroupbynominatinghimorherthroughluckydraws.Luckydrawin

thiscontextisapprovedbyShariah.Farzplaysitsroleasacommitteemanagerforthisproduct.

Thisproducthasactuallyhelpedbuildassetsofthepeople.

Slide

5

PRODUCT FEATURES

Heads FeaturesCommitteeSize Min=PKR:100andMax=unlimitedPeriodofCommitteeCycle 11MonthParticipantsofCommitteeinEachGroup 10Members+1FarzFoundation=11NumberofCommitteeGroupsunderOneCluster

Min=1andMax=3

FrequencyofCommitteeInstallment FortnightlyFrequencyofCommitteeDraw(luckydraw)

EveryMonth

MICROTAKAFUL Farz isagainthe leadingorganizationtoadoptTakaful,analternativetoconventional insurance for the first time. Murabaha clients are covered through Islamic

InsurancewiththepartnershipofPAKQatarFamilyTakfulCompany.However it isstillunder

reviewforLivestockastakaful forlivestockisunavailableinPakistan.ThereforeFarzwillneed

to rely on conventional insurance till the time of its availability. We have no hesitation on

declaring the livestock insurance segment is still a challenge. Farz offers its product

developmentservicesalong with a pilot to manufacture the sound features of an innovative

livestockinsurance/Takafulproduct.


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FEATURESOFTAKAFUL

FarzFoundationextendsthisfacilitytothe100%membersofMurabahaclientsandtheirheads

ofthefamilies.

TAKAFULFEE TAKAFULAMOUNT

MEMBER 115 20,000

HEADOFTHEFAMILY 115 20,000

HALALINVESTMENT As a structured Halal Business avenue it is another trail blazinginitiativeby theFarzFoundation,and ithas laidthe foundation fornotonly institutionalizing

livestock business but has also opened up a structured investment avenue for those

institutional and individual investors looking for investment channels that provide safe,

profitableandShariahCompliantmodeofinvestment.

The livestock sector expected rate of return is highly competitive when compared to other

sectors, and undoubtedly, with institutional entry into this sector the returns may exceed

expectationsgiventhehugelivestockproductslocalandexportmarketpotential.

Institutional intervention was a dire needof this sectorwithout which it is impossible toget

optimalreturns.Furthermore,with institutional intervention inthissectorwillbringforefront

thestrongbackwardand forward linkagesand strengthenSMEsector induecourseand will

provide Farz Foundation, in particular, an edge to fully exploit inherent supply management

potential.

(Slide7)

NONFINANCIALSERVICES

BUSINESSDEVELOPMENTTRAININGFORPARTNERS/CLIENTS

TRAINING # OF DAYS TARGET PEOPLE FEE

INITIAL

BUSINESS

TRAINING

5 Days Poorest of Poor

Who intend to do

Free

BUSINESS

DEVELOPMENT

3 Days Running Business(Clients or Non-Clients)

Clients who will graduate from Murabaha(small) into Murabaha (Medium) and

Murabaha (Medium) into Murabaha (Large)

Free

BOOK KEEPING 2 Days Existing Clients Free

PRODUCT

QUALITY

7 days to

One Month

Home Base Micro Entrepreneur (HBMEs) Free


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HEALTHCARESERVICESFORPARTNERS/CLIENTS/LIVESTOCK

ThebiggestreasonforthelowproductivityaccordingtheWHOisthepoorhealthalloverthe

world.TheFarzFoundationpayskeenattentiontothisaspectandconductshealthawareness

workshopsandhealthcamps.

AWARENESSPROGRAM The greatest problem in the area we work is the water born

diseasesandweteachthemtoboilwaterbeforedrinking.Thegeneralprincipalsofcleanliness

forinstances,washinghandsbeforetakingmealsareemphasizedduringthetraining.

EYECARE Farz Foundation has launched its eye care program by starting free eye care

camps for poor people of the branch area. In these camps Farz Foundation provides eye

checkupfacilityandprovidespectaclestothepoorhomebasedmicroentrepreneurswithout

anycost.

HEALTHCAREOFLIVESTOCK FarzFoundationProvides100%healthcareservicestoour

partners for Livestock and also provides them medicine with the support of Livestock

departmentofPunjab.

FUTURE PROTECTION PREGAME (EDUCATION SUPPORT FOR THE CHILDREN OF THE

PARTNERS/CLIENTS). This program deals with educating the clients to provide education to

their children apart from picking the kids of the most vulnerable members and provide expenses for

theireducation.Thisisdonetoensurethebetterfutureofthecommunity.

8. CHALLENGES

8.1.SECTORLEVELCHALLENGE

As an emerging organization of an emerging sector we did not find any support to

make our beginning easy. However our strong commitment, clarity of vision, well

definedmissionandaclearroadmaphelpedustoachievethe impossible.Wewere

confidentfromthefirstdaythatthereisaroomforinnovationandpuritywaitingfor

ustofill.FarzFoundationisoneamongthefewthataimsandhastheabilitytochange

theworldeconomiccrisisintotheopportunityoflongtermsustainability.

8.2.OPERATIONSWITHOUTAPROPERINFORMATIONSYSTEM

At operational level it was a challenge to work, with limited staff, a comprehensive

integrated methodology but without any proper Customized Information System.

HoweverFarzisstillworkingwithMSExcelalongwithmanualreportingsystem.Dueto

limitedoperationswehaveaddressedthischallengebutinthelongrun,wehavetogo

foracustomizedMIS.

8.3.ISLAMICINSURANCEFORLIVESTOCKISSTILLACHALLENGE

Farz Foundation as the pioneer in operating with a Takaful product for our clients,

whichcovers their life,butat livestock,although we havecovered the riskofdeath,

theftandlossduringnaturaldisastersthroughconventionalinsurance,howeveritisa

temporaryarrangementandweseekIslamicinsuranceassoonaspossible.


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8.4.BUILDINGTHETRUST

Building the trust with the clients (already taped by conventional MFIs) as a

TrustworthyMFI,wasalsoachallenge,Particularlywhen weclaim,weareoffering

interestfreeservices,amajorityoftheoldandalsothenewclientsdidnotbelieve.But

ourtransparentsystemandsocialperformancefocusedmethodologymakeusableto

proveourtruth.

8.5.TOCHANGETHEMINDSETOFTHESTAFFHIREDFROMCONVENTIONALSECTOR

It isthehardestchallengetochangethe frameofmindofthestaffwepick fromthe

conventional sector. They gave us a very tough time and ultimately we decided to

prefer thenewyoungpeople forourorganizationandbuild theircapacityandmake

themthetrueandcommittedleadersofIslamicMicrofinance.

8.6.KEEPING HALAL AND HARAM TOGETHER IS ALSO A THREAT FOR THE WORLD

ECONOMY

It is also a big challenge not only for Farz Methodology operators but also for

microfinance policy makers and stakeholders to engage conventional MFIs in Islamic

Microfinancewithexistinginfrastructureandhumancapital.

Webelieveandalsohaveexperiencedthattotakeoffwitha faithbasedvehiclebya

contradictoryoperatorisablunder.Theironylies,maybewearenottakingitseriously

thatwearetryingtoprovidefoundationstoanewstructurethroughthepillarsalready

falling.ThemixtureofHalalandHaramwoulddefinitelygiveasetbackinthelongrun,

becausethecontradictionsnevermovetogethersmoothly.ThetargetclientsofIslamic

microfinance market feels aversion with Haram and the place where Haram is being

produced and stored and finally the people and the system operating it. So Farz

Foundationstrongly

as

well

as

logically

suggests

avoiding

this

kind

of

risk.

QOAT (From MohammedKhaledsarticlepastedonCGAP)

According to the 2008 CGAP focus note on Islamic Microfinance:Although there is ample evidence of demand for Islamic microfinance products,this demand can only be met if low-income clients are convinced that theproducts offered are authentically Islamic. Critics of Islamic finance productssuggest that the pricing of some products offered as Sharia-compliant too closelyparallels (or even exceeds) the pricing of conventional products. For example,some institutions offering Murabaha, seem to disguise interest as a cost markupor administration fee.

8.7.FARZMETHODOLOGYPROVIDESRESOLVE

Asan IslamicMicrofinancevehicleFarzMethodologyprovidesa resolveworldwide to

theorganizationsintendingtoaddresspovertythroughtherealandpureIslamicmodel

accordingtotheShariahprinciples.


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OneemergingorganizationofCameroonandonefromPakistanhavestartedreplication

ofFarzMethodologysuccessfully.However itneedsastrongbackupatpolicy levelto

facilitatetheorganizationsforsteppingintotheIslamicMicrofinanceSector.

Questioning the implementationcostsofaddinganewmodel toanexistingbusiness,

this is the time to redesign, refine and reinvent the systems and procedures with a

groundbreaking move towards a sustainable and profitable world. We need bold

decisionsandfoolproof implementation.Luckilythemodel,wearediscussinghasthe

potentialtoreturnveryhighprofitswithavisiblesocialimpact.Webelievethepeople

withstrongfaithwouldprefertogivetheservicesatevenmarginalcost,becauseofthe

fulfillment of their religious values. It is better to spend on developing a new

infrastructurethenspendingontosaveasinkingship.

8.8.ANDNOWTHEQUESTIONOFCOST

BELIEVEMEORNOT

8.8.1. WeconductedFivestudies

8.8.2. Wedeveloped threemajorproducts

8.8.3. Developedcustomized/general ShariahCompliantcontracts

8.8.4. Didtheir pilots (atalimitedclient/partnerlevel)

8.8.5. DesignedafullfledgedIslamicMicrofinanceMethodology

8.8.6. Developedtwooperationalandtwomonitoring manuals

8.8.7. Providedanumber

of

trainings

to

our

clients

8.8.8. Buildthecapacityof staff

8.8.9. DevelopStructures

8.8.10.Andmarketedourself

8.8.11.Justin,lessthan100,000USDand37months.Wenotonlysurvivedbutearned

theworldwideimageofaleadingIslamicMicrofinanceorganization.

THANKYOUVERYMUCH


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, Revitalizing the World Economy Through Farz Methodology

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