Mainstreaming Islamic Microfinance An Inclusive Approac

1
Mainstreaming Islamic Microfinance An
Inclusive Approach Muhammad
Khaleequzzaman Head Islamic Banking School of
Islamic Banking Finance International Islamic
University Islamabad Pakistan
2
Mainstreaming Islamic Microfinance An Inclusive
Approach

• 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

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Mainstreaming Islamic Microfinance An Inclusive
Approach

• 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

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Mainstreaming Islamic Microfinance An Inclusive
Approach

• 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
  Poors Access to Credit? .., The World Bank
  Washington, USA list is long

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Mainstreaming Islamic Microfinance An Inclusive
Approach

• 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

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Mainstreaming Islamic Microfinance An Inclusive
Approach

• Role of Islamic Microfinance helps resolving
  Issues
• 1. Developing social capital among clients and
  MFI instead of clients only

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Mainstreaming Islamic Microfinance An Inclusive
Approach

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

Survey Surveyed Countries Respondents 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) A recently conducted survey in Azad Kashmir exhibits 99 demand (4 Districts) A recently conducted survey in Azad Kashmir exhibits 99 demand (4 Districts)
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Mainstreaming Islamic Microfinance An Inclusive
Approach

• Role of Islamic Microfinance helps resolving
  Issues
• 3. 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

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Mainstreaming Islamic Microfinance An Inclusive
Approach

• 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

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Mainstreaming Islamic Microfinance An Inclusive
Approach

• Mainstreaming Islamic Microfinance
• Some Recommendations
• 1. 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

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Mainstreaming Islamic Microfinance An Inclusive
Approach

• Mainstreaming Islamic Microfinance
• Some Recommendations
• LINKAGE

Sharia Advisory Technology Transfer
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Mainstreaming Islamic Microfinance An Inclusive
Approach

• Mainstreaming Islamic Microfinance
• Some Recommendations
• 2. 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

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Mainstreaming Islamic Microfinance An Inclusive
Approach

• Mainstreaming Islamic Microfinance
• Some Recommendations
• 3. 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 gt 40,000 with 4.30 mil members
• Punjab gt30,000 with 1.20 mil members
• Transformation of PCBs to MFIs
• Pakistan gt 3.40 million approx.
• Punjab gt 1.20 million approx.
• Example Karakorum Coop. Bank under conversion
  in phased program Total 6 branches 2 Islamic MF
  Branches

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Mainstreaming Islamic Microfinance An Inclusive
Approach

• Some Recommendations
• 4. Market Leverage
• Once Ijara and Musharaka/Mudaraba have
  accumulated, IBs or IMFIs (as group) may
  securitize by issuing sukuk

5. IFI takes assets as agent of SPV
11. Payment of Exercise Price
Originator (IFI) (Ijara Assets)
Clients
6. IFI (as agent of SPV) leases assets to
clients
1. SPV is created
8. Rent
7. Rent
4. Payment
Vendor
Special Purpose Vehicle (SPV)
3. Price
9. Rent
2. SPV issues sukuk
Investors/IBs
10. Redemption of sukuk
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Mainstreaming Islamic Microfinance An Inclusive
Approach

• Some Recommendations
• 5. 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 Zakat and Sadaqaat Zakat and Sadaqaat Islamic finance (Murabaha)
Basic need fulfillment Development of entrepreneurship Capital investment Working capital
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Mainstreaming Islamic Microfinance An Inclusive
Approach

• Some Recommendations
• 6. 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

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Mainstreaming Islamic Microfinance An Inclusive
Approach

• 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

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Mainstreaming Islamic Microfinance An Inclusive
Approach

• 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

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Mainstreaming Islamic Microfinance An Inclusive
Approach

• THANKS