IsDB

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IsDB Microfinance Experience
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THE ISLAMIC VISION OF DEVELOPMENT
Comprehensive Human Development
Maqasid Al-Shariah
Security Basic Needs
Capacity Building
Nafs (Self)
Property
Honour
Knowledge
Nutrition health
Higher Education
Governance
Protection
Science Technology
Deen (Religion)
Aqal (Knowledge)
Nasl (Posterity)
Education
Moral Education
Justice
Values
Sports
Research Development
Environmental preservation
Maal (Wealth)
Capacity Building
Islamic Financial Services Industry Institutional
Management of Wealth
Fiduciary Duty
Means to an end
Transparency
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Significant resources potential for Islamic
Microfinance Industry

1. More than 300 Islamic Financial Institutions
2. In over 65 countries
3. Managing assets of approximately US 1.0 trillion
   in Shariah compatible manner
4. More than 15 annual growth
5. Worldwide recognition

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Need for an Islamic Microfinance Development
Strategy

• Over 3 billion people living on less than two
  dollars a day
• Over 2/3 of world refugees are Muslims
• Lowest Five among IDB member countries account
  for over half a billion (528 million) of the
  worlds poor (with incomes below 2 a day)
• Lowest Ten account for over 600 million of the
  worlds poor
• Among 500 million micro-entrepreneurs currently
  Less than10, i.e. 50 million, can access credit
• The informal sector represents over 60 of the
  active population of most developing countries
• Over 7,000 Micro-Finance Institutions (MFIs) have
  difficulties to access the capital markets

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IDBs µFinance Current Strategy

• Poverty alleviation thru provision of suitable
  and sustainable access to financing.
• Capacity building
• Nurturing entrepreneurship support at grass roots
  level
• Introduction of Islamic financing modes

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Main Features of IDBs Current µFinance Scheme

• Country eligibility Low Income and LDMCs
• Mode of Financing Loan Service fee 0.75 to
  2.5
• Tenor 25 to 30 years with 7 t0 10 grace period
• µproject investment US 5,000 per project
• Maturity 3-5 years
• Beneficiaries contribution 10-20 of project
  cost

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IDB
Government
LDMC loan at 0.75 for 30 yrs incl 10 yrs grace
External auditors
loan
US at max. 2.5 pa
Central Bank
US account in commercial local bank
Financial Intermediary/NGO
20-22 pa (local currency)
Max 5 yrs incl 2 yrs grace
24-30 pa (local currency)
Repayment
Revolving fund 65 of markup
35 of markup (operational cost of NGOs)
Micro-entrepreneurs (in local currency)
Key Physical transfer money Reporting
to/instructing
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IDB µFinance Operations IDB µFinance
ACHIEVEMENTS AND IMPACT
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The poor request to start his assistance with a

• Promotional Social Safety Interventions Package
  
• Literacy Awareness, Counseling
• Vocational training Skills upgrading,, career
  guidance, Management,
• Entrepreneurship Business linkages promotion
  (Subcontracting, Franchising and Clusters and
  collaborative production networks),
• Community Development Basic skills,
• Other Poverty alleviation interventions such as
  Grants to education, house extension

SKILLS POVERTY LINE
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The poor request mobilizing Package of Business
Development Services
Counseling, Training Experiences Networking
access to markets
Counseling, Training Experiences
Networking access to markets
SKILLS POVERTY LINE
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The poor request mobilizing Package of Business
Development Services
Counseling, Training Experiences
Networking access to markets
Business Incubators Services
SKILLS POVERTY LINE
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The poor request mobilizing Package of Business
Development Services
Upgrading services for BDSIs and MFIs
Counseling, Training Experiences
Networking access to markets
Business Incubators Services
SKILLS POVERTY LINE
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The poor request mobilizing Package of Business
Development Services
Upgrading services for BDSIs and MFIs
Designing innovative BDS appropriate
technologies Adapted to the Poor needs
Counseling, Training Experiences
Networking access to markets
Business Incubators Services
SKILLS POVERTY LINE
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The poor request mobilizing Package of
appropriate Financial Services
VISION / STRATEGY / APPROACH
ECONOMIC POVERTY LINE
Continuing on Skills Upgrading assistance
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The poor request mobilizing Package of
appropriate Financial Services
VISION / STRATEGY / APPROACH
Capital loans
Micro-Grant
Consumer loans
Micro-Savings
Education loans
Micro-Pensions
Micro-Housing loans
Micro-Insurance
ECONOMIC POVERTY LINE
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Role of Micro-grants in IDB Microfinance
Operations

• Helps groups high-risk
• In immediate Conflicts and Post conflicts
  environments
• In severely disadvantaged rural areas
• In intervention situation for the chronically
  destitute

• To
• Rebuild livelihoods
• Replace lost assets
• Overcome social isolation
• Gain productive skills
• Graduate to economic self-sufficiency

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FROM IDB µFINANCE EXPERIENCE

• Microfinance Projects Design and implementation
  mechanism
• IDB may adapt Ready-to-Use Microfinance Frame
  work Package approach adopted CGAP consortium of
  donors.
• More IDB involvement in early phase of
  Projects/Programs formulation
• Investment in long-term programs in support of a
  few policy objectives rather than in short-term
  stand-alone projects

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IFS DEVELOPMENT PROGRAM THE WAY FORWARD
Awqaf
Sadaqa
Zakat
IDB Pov. All. Fund
Corporate Donations
Comprehensive Human Development
IFS Development Fund
Other IFS
Others
Community A
Community B
Community C
Individual 1
Individual 2
Individual 3
Individual 2
Individual 1
Individual 3
Individual 1
Individual 2
Individual 3
M I c r o f I n a n c e
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Lessons to be learnt from IDB experience
Special Services treatment

• Respect, connection with pertinent stakeholders
• Rapid response, and access to services

Flexible financing Products
Promotional Social Safety Net Interventions

• Information, Counseling
• Training, skills upgrading
• Marketing Assistance
• Technology devmt, transfer
• Business linkages

• Small initial loan sizes
• Larger loans over time
• Longer terms

WA
WA
ZA
Understanding the Poor Rights Needs
Variety of Products
ZWA
ZWA
ZWA

• Housing loans
• Education loans
• Life cycle products

No Collateral

• Group guarantee

Waqf applicable
WA
Zakat applicable
ZA
Zakat Waqf applic
ZWA
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Lessons to be learnt from IDB experience

• Making Economic Policies Growth Pro-poor
• Re-distributive policies (targeting the poor)
• Providing Social Safety Nets to poor
  marginalized groups
• Addressing Social barriers issues facing women
  in economic development

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Lessons to be learnt from IDB experience

• Making Economic Policies Growth Pro-poor
• Targeted programmes and projects to enable the
  poor to benefit from economic growth through
• Labour intensive projects,
• Telecommunications, electricity, roads,
  infrastructure,
• Food security projects, post-conflict/reconstructi
  on projects,
• Environment sustainability and renewable energy,
  micro-credit, cross-cutting projects, etc.

Continued
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Zakat Waqf Microfinance efficiency
Income of USD10 million Waqf _at_ 5 return, would
provide average loans of 100 to 5000 Poor
.90,000 benefeciaries would be covered if 90 of
the Waqf used in microfinancing.
Appropriate risk management Mechanism should be
established to protect the Waqf from
decay. Zakat, Takaful Funds may be the
alternative,
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Lessons to be learnt from IDB experience

• Promote Islamic Microfinance Houses (IMH)
• Objectives to complement the Comprehensive
  Human Development model by providing access to
  integrated Islamic Microfinance financial
  services to the poor in our member countries
• The Microfinance Houses Development Programme
  would initially entail a pilot project in 5
  member countries for creating and/or
  strengthening existing Microfinance institutions.

Continued
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Lessons to be learnt from IDB experience

• The IMH would also undertake other interventions
  which would strengthen the livelihood of the
  poor, such as
• Investments in public infrastructure, including
  roads, communications and education which provide
  a foundation for self-employment activities.
• Community-level investments in commercial or
  productive infrastructure (such as market centers
  or small-scale irrigation infrastructure) to
  facilitate business activity.

Continued
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Lessons to be learnt from IDB experience
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• Rural (esp. agricultural) finance
• Services like microinsurance, leasing, and
  remittances
• Social performance measurement
• Defining the lower limits of viable microfinance
  and
• Employing other interventions, including grants
• Replicable strategies for unlocking country-level
  capital markets for microfinance
• Role of donors relative to international equity
  and loan funds
• Cost-effective and sustainable ways to combine
  non-financial development services with financial
  services

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• ISLAMIC FINANCIAL SECTOR DEVELOPMENT AND QWICK
  WINS MICROFINANCE INITIATIVES
• IDB POVERTY ALLEVIATION FUND
• THE ISLAMIC MICROFINANCE DEVELOPMENT FRAMEWORK

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Model of an Ideal Islamic Bank

• A Universal Bank covering
• Commercial Banking
• Investment Banking
• Advisory Services
• Custodial Services
• Asset Management
• Zakat Management
• Awqaf Development
• Microfinance
• This bank should be a vehicle for equitable
  distribution of wealth.

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IDBs Role in Islamic Financial Sector Development
Previous Initiatives ? Equity investments in IFIs
? Establishment of eight infrastructure
institutions ? Research, training and technical
assistance ? Development of
financial products/funds (UIF, IBP) and Awqaf
sector

• Recent Initiatives
• Ten-Year Framework for Developing the IFSI,
  Joint Initiative
• Establishment of a Policy Dialogue Working Group
• IFSI Development Technical support proposal
• IFSI Development Program

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Macro Perspective Policy Regulatory Framework

1. Provide Supportive Legal, regulatory and tax
   framework
2. Ensure Macroeconomic Stability
3. Keep Inflation in Check
4. Curb Speculative Forces in Financial Markets
5. Integrate Awqaf and Zakah in National Policy
6. Support Civil Society Efforts

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Macro Perspective Policy Regulatory Framework
Resolves the Unresolved Issues in Banking Sector
Regulation and Supervision that Affect
Microfinance

1. Should there be Prudential Regulation for
   Non-deposit-taking MFIs?
2. Should Non-registered Entities be Prohibited from
   Lending?
3. How should Islamic MF be Separated from
   Conventional MF in a Dual System?

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Meso Perspectives Infrastructure, Networks,
Technical Service Providers

1. Transparency and Information High-quality
   auditors and rating agencies, credit bureaus,
   reliable information software - scarcely
   available to Islamic MFIs
2. Existing MF-specific Agencies expand scope to
   include Islamic MF or Existing Agencies for
   Mainstream IFIs to absorb MF services
3. Proactive role of Donors in Development of
   Islamic MF Rating

• Basic financial infrastructure, Range of services
  required to reduce transaction costs, increase
  outreach, build skills, and foster transparency
• Payment Systems Only large Islamic FIs have
  access to electronic payment systems
• 3. MFIs working for the poor may work through the
  larger Islamic FIs by forging alliances with them

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Micro Perspectives Islamic Microfinance Providers

• Diverse Organizational Structures
• Informal MF Providers,
• Member-Based Organizations,
• Non-Government Organizations,
• Formal Financial Institutions,
• Commercial Banks

Diversity should be given due recognition in
regulation Need to Develop an Integrated Structure
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Micro Perspectives Islamic Microfinance Providers

• Shariah Compliance
• Shariah Boards
• Fiqhi Issues
• Divergent Perceptions
• Confidence of Users
• Collective Resolution of Shariah Issues

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RECOMMENDATIONS
Concerted Efforts by ALL Stakeholders to Make
Finance Work in Muslim Communities through
Islamic Finance
Efficient Management of Community Assets, Combine
Social and Economic Agenda Effectively,
Cooperatives-NGOs
Recognize MF with Distinct Risk-Returns,
Undertake Direct and Indirect Financing, Linkage
with Grass-root NGOs, Facilitate Capital Market
Participation of MFIs
Islamic Financial Institutions
Preserve and Develop Community Assets, Undertake
TA, Transform the Destitute into Bankable
Clients
Awqaf Zakah Funds
Government Agencies
Create Supportive Policy and Regulatory
Environment for IMFIs
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THANK YOU