Islamic Microfinance - An Inclusive Approach [M. Khaleequzzaman]

Mainstreaming Islamic Microfinance – An Inclusive Approach

Muhammad KhaleequzzamanHead Islamic Banking

School of Islamic Banking & FinanceInternational Islamic University Islamabad Pakistan

Islamic Microfinance - An Inclusive Approach [M. Khaleequzzaman]

Contents Poverty and gap analysis Issues of microfinance Role of Islamic microfinance for inclusion –

Case of Islamic Microfinance Review of some Islamic banking products for

use in microfinance Mainstreaming – Issues and some

recommendations

Mainstreaming Islamic Microfinance – An Inclusive Approach

Islamic Microfinance - An Inclusive Approach [M. Khaleequzzaman]

Poverty and Microfinance Landscape Incidence of Poverty

PRSP (2003) 32.1% Economic Survey (2009) [PC: 24.5% TFFS: 36.1%

Financial Inclusion – (Access to Finance Study 2009) Formally Served 11% Informally Served 33% Financially Excluded 56%

Microfinance Providers [PMN Network] 32 Coverage as % of Potential Poor Population

Economic Survey 3% 1.6 m Active Borr. PMN 18% 1.0 m Active

Borr. Microwatch 13%

To reach 3.0 million target, US$ 600- to 700 million (Rs. 49 to 57 billion) is required [PMN 2007]

Mainstreaming Islamic Microfinance – An Inclusive Approach

Islamic Microfinance - An Inclusive Approach [M. Khaleequzzaman]

Issue of Microfinance Weakening Social Collateral

Hidden transcript – Some women borrowers committed suicide [Rahman, A., “Micro Credit Initiatives ……. Who Pays?”, World Development, Volume 27, No.1, 1999.]

Poorest are rarely looked after [Hashemi, S, and Rosenberg, R. ”Graduating the poorest ……..CGAP, Washington DC, USA. ]

Mistargetting/Program officers bend rules in unobservable way[Baker, J. L, “Evaluating the Impact of Development Projects on Poverty- …….”, The World Bank, Washington DC., 2000. ]

Brokerage raises cost of already expensive transaction

[Barki, Husna, & Shah, Mehr, “The Dynamics of Microfinance Expansion in Lahore”, PMN, and ShoreBank Islamabad, Pakistan, 2007]

Violation of social collateral by lenders themselves

[Bastelaer, “Does Social Capital Facilitate the Poor’s Access to Credit? …………….., The World Bank Washington, USA] {list is long}

Mainstreaming Islamic Microfinance – An Inclusive Approach

Islamic Microfinance - An Inclusive Approach [M. Khaleequzzaman]

Issue of Microfinance Sustainability

Most of the programs are not sustainable in Pakistan Overall Operational and Financial Sustainability records at

89% and 74%, respectively. High interest rates eats up sustainability of clients

Transparency Flat interest rates, un-explained fees, hidden charges

High Cost Debt Economy than Real Economy Separates finance from real economy Absence of cooperation when client loses

Exclusion Self-exclusion due to prohibition of interest Poorest of the poor and Women in gender segregated

societies

Mainstreaming Islamic Microfinance – An Inclusive Approach

Islamic Microfinance - An Inclusive Approach [M. Khaleequzzaman]

Role of Islamic Microfinance helps resolving Issues1. Developing social capital among clients and MFI instead

of clients only

Mainstreaming Islamic Microfinance – An Inclusive Approach

Negative Social Capital

MFIFard al KafayahAdlIhsan

ClientsJoint Liab.Info. Discls.Self-esteemPayment

-Deceit and Coercion

-Mistrust

-Idleness

-SelectionBias

-Inefficiency

-WillfulDefault

Negative Social Capital

Islamic Microfinance - An Inclusive Approach [M. Khaleequzzaman]

2. Meeting Demand For Islamic Microfinance (20-98%)

Survey Surveyed CountriesRespondents preference (%)

CGAP 08 Jordan, Algeria, and Syria 20 - 40%PlaNet Finance 07 West Bank and Gaza 35% - 60 % USAID 02 Jordan 24.9%IFC/FINCA 06 Jordan 32%Frankfurt School of Fin & Mgmt 06

Algeria 20.7%

IFC sponsored Study

Yemen 40%

IFC 2007 Syria 43-46%Bank Indonesia 2000

Indonesia (East Java) 49%

A recently conducted survey in Azad Kashmir exhibits 99% demand (4 Districts)

Mainstreaming Islamic Microfinance – An Inclusive Approach

Islamic Microfinance - An Inclusive Approach [M. Khaleequzzaman]

Role of Islamic Microfinance helps resolving Issues3. Promoting Entrepreneurship

Debt not allowed in Islam as usual practice Asset creation and entrepreneurship is promoted

4. Transparency and Sanctity of Contracts Islamic values prevent violation of contract and require

disclosure of full knowledge relating to financial transaction

Mainstreaming Islamic Microfinance – An Inclusive Approach

Islamic Microfinance - An Inclusive Approach [M. Khaleequzzaman]

Mainstreaming Islamic Microfinance: Issues for Mainstreaming

Regarding MFIs Limited number of IMFIs (i.e. 4 – 6) Limited resource base of IMFI Ineligibility of collecting savings Product concentration in Murabaha Capacity building of MFI Sharia advisory

Regarding Islamic banks Perception about microfinance as high risk area Informal sector environment Absence in rural areas Absence of credit guarantee scheme

Mainstreaming Islamic Microfinance – An Inclusive Approach

Islamic Microfinance - An Inclusive Approach [M. Khaleequzzaman]

Mainstreaming Islamic Microfinance: Some Recommendations1. Downscaling Islamic Banks

Corporate Social Responsibility: Fard al Kafaya Business case: Profits and high rate of recovery Limitations: Informal sector/regulatory implications,

absence in rural areas Possible Course of Action:

Phase – I: Linkage with MFIs [Mudaraba or Musharaka] Urban Operation through Islamic MF Division or Cell

Phase – II Linkage continues Extension of branches in rural areas

Mainstreaming Islamic Microfinance – An Inclusive Approach

Islamic Microfinance - An Inclusive Approach [M. Khaleequzzaman]

Mainstreaming Islamic Microfinance:Some RecommendationsLINKAGE

Mainstreaming Islamic Microfinance – An Inclusive Approach

Islamic Bank

MF NGO MF NGO MF NGO

ClientsClients

Clients

ClientsClients

Clients

ClientsClients

Clients

Savings Financing

Sharia Advisory & Technology

Transfer

Islamic Microfinance - An Inclusive Approach [M. Khaleequzzaman]

Mainstreaming Islamic Microfinance: Some Recommendations2. Downscaling Commercial Banking and Establishing IMFBs –

SBP Guidelines Full-fledged Islamic Microfinance Banks (IMFBs) Islamic Microfinance Services by Full-Fledged Islamic

Banks Islamic Microfinance Services by Conventional Banks Islamic Microfinance Services by Conventional

Microfinance Banks

Mainstreaming Islamic Microfinance – An Inclusive Approach

Islamic Microfinance - An Inclusive Approach [M. Khaleequzzaman]

Mainstreaming Islamic Microfinance: Some Recommendations3. Involving Cooperatives

Legitimacy: Cooperative societies Act, 1925 Bodies corporate, Eligible to collect savings and

intermediate for financing Members of Provincial Cooperative Banks (Refinancing

Facility) Number of cooperatives:

Pakistan: > 40,000 with 4.30 mil members Punjab: >30,000 with 1.20 mil members

Transformation of PCBs to MFIs Pakistan: > 3.40 million approx. Punjab: > 1.20 million approx.

Example – Karakorum Coop. Bank under conversion in phased program [Total 6 branches 2 Islamic MF Branches]

Mainstreaming Islamic Microfinance – An Inclusive Approach

Islamic Microfinance - An Inclusive Approach [M. Khaleequzzaman]

Some Recommendations4. Market Leverage

Once Ijara and Musharaka/Mudaraba have accumulated, IBs or IMFIs (as group) may securitize by issuing sukuk

Mainstreaming Islamic Microfinance – An Inclusive Approach

11. Payment of Exercise Price

5. IFI takes assets as agentof SPV Originator (IFI)

(Ijara Assets)

Special Purpose Vehicle (SPV)

Investors/IBs

6. IFI (as agent of SPV) leases assets to clients

1. SPV is created

9. Rent

2.

SPV issues sukuk

3. Price

10. Redemption of sukuk

Vendor 4. Payment

Clients

7. Rent 8. Rent

Islamic Microfinance - An Inclusive Approach [M. Khaleequzzaman]

Some Recommendations5. Inclusion

Diversification of approach and products includes self-excluded

Zakat and sadaqat – divine tools of grant – enables poorest of the poor to benefit from microfinance – systematic approach meeting consumption and then production needs

Zakat and Sadaqaat

Islamic finance (Murabaha)

Basic need fulfillment

Development of entrepreneurship

Capital investment

Working capital

Transformation of hard core poor

Mainstreaming Islamic Microfinance – An Inclusive Approach

Islamic Microfinance - An Inclusive Approach [M. Khaleequzzaman]

Some Recommendations6. Order of Product Offering

Phase – I [1st to 3rd cycle] Murabaha Salam

Phase – II [4th to 5th cycle] Ijara Diminishing Musharaka for durable assets only

Phase – III [Graduated after 5th cycle] Mudaraba & Musharaka

Mainstreaming Islamic Microfinance – An Inclusive Approach

Islamic Microfinance - An Inclusive Approach [M. Khaleequzzaman]

Liquidity requirements (hiring of tractor & implements, sowing, purchase of water, hiring of labour, etc.)

Input requirements (seed, fertilizer, pesticides)

Advantages: Meeting total needs, lower credit risk

Some Innovations: Murabaha & Salam – Agricultural Financing

Liquidity

Hiring for land prep.

Inputs in kind

Sale of fertilizers, seed, pesticides

LiquidityNeed

Hiring for Harvest +

Marketing Exp.

SALAM

SALAM

MURAB

LiquidityNeed

Hiring for land prep.

Inputs in kind

Delivery

Payment

Delivery

NOV

APR

NOV

JUN

Mainstreaming Islamic Microfinance – An Inclusive Approach

Islamic Microfinance-Sustainability & Mainstreaming [M. Khaleequzzaman]

Some Innovations: Istijrar: [Taking from supplies bit by bit]

Repeated Sale Contract: An agreement between a buyer and a seller that the buyer will take from seller the goods he needs with or without fixing the price and without explicit offer and acceptance at each time. This has been agreed by majority of schools from the viewpoint of Istehsan.

Need for the Instrument: In case of daily or weekly supplies, it is not practicable to execute Murabahah each and every time.

Two types:

1.The price is paid after a predetermined period

2.MFI leaves some money with the buyer and he uses this money for purchase of goods whenever needed but in a predetermined period

What is Required: Product Development Effort

Mainstreaming Islamic Microfinance – An Inclusive Approach

Islamic Microfinance - An Inclusive Approach [M. Khaleequzzaman]

THANKS

Mainstreaming Islamic Microfinance – An Inclusive Approach