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2nd IMFN Round Table Conference

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Produced by: Islamic Microfinance Network

Author: Moaz Ahmed

©2018 Islamic Microfinance Network

Content of this publication maybe freely quoted or re-printed, but acknowledgement is requested, together with a copy of the publication containing the quotation or reprint.

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About IMFN:

We aim to bring forth Islamic microfinance and Shariah compliant financial tools as a mechanism to eradicate poverty. Therefore, IMFN serves as a platform for Islamic microfinance practitioners to jointly work for strengthening of the industry.

As the hub of Islamic Microfinance, we work towards increasing both the demand and supply forces of the industry; create awareness about the utility of the existing products, discuss the scope and potential of market growth, promote innovation, increase outreach and provide industry information.

IMFN is a non-profit organization registered under the Trust Act of 1882.

Dr. Amjad Saqid

Chairman IMFN

Ms. Mariam Shakir

Chief Operating Officer

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Introduction:

The second IMFN Round Table Conference was held on 21st June, 2018, at University of Central Punjab,

Lahore. The conference consisted of two agenda items: Standardization of Indicators of Islamic

Microfinance and Product Innovation and Development. The main objective was to share the findings of

the:

1. First IMFN RTC

2. Conference Side Event

Round Table Conference (RTC), was held on July 24th, 2017, it initiated the talks to standardize the

participants agreed that it was necessary that standardized industry indicators are identified in order to

differentiate between the Shariah-Compliant Microfinance and the Conventional Microfinance methods.

By identifying a list of performance indicators it will provide same grounds for comparative study for both

the conventional and Shariah-Compliant Microfinance Funding.

Conference Side Event, the conference side event, was conducted and the findings were used to identify

the industry indicators and by doing so, it intended to engage all the practitioners, as well as the academia

personal to achieve it.

On the basis of the findings a Draft List of Indicators was developed, which is presented below:

Calculation/Formula

Indicator Category

Indicator Profit Generating Model Charity Based Model

1. Financing Structure

Debt Capacity Ratio Debt/Income Debt/(Grant + Charity)

2. Financial

Performance Indicators

Operational Self Sufficiency

Income from MF Activities/(Expenses +

Provision)

(Income from MF Activities + Grant Income)/(Expenses + Provision)

Financial Self Sufficiency Income from MF

Activities/(Expenses + Provision+ Inflation)

(Income from MF Activities + Grant Income)/(Expenses + Provision +

Inflation)

3. Productivity

Indicators

Productivity/Loan Officer Loan/Loan Officer Loan/Loan Officer

Productivity/Staff Loan/Staff Loan/Staff

Productivity/Procurement Officer

Procurements/Procurement Officer

Procurements/Procurement Officer

4. Outreach Indicator

Outreach

Number of Enterprises * Weight

Number of Enterprises * Weight

(Weight to be assigned for: Lending, Trade Based, Partnership based approaches, lowest to highest respectively)

5. Revenue Indicator

Yield on Gross Portfolio Income from MF lending/Portfolio

Voluntary Charity/Portfolio

Return on Inventory Profit on Sale of

Inventory/Cost of Goods Sold

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6. Products &

Clients

Partnership Based Number of Outstanding

Partnerships

Asset Based Number of Owned Financing Assets

7. Products &

Services

Voluntary Charity Voluntary Charity Collected from Beneficiaries

Market Linkages Number of Clients linked to

Open Market

8. Client

Protection

Disclosure of Price

Market based Pricing OR Negotiated Pricing

Disclosure of Cost & Profit

Profit Rate Calculation *

Flat Rate - Murabaha, Musawama etc

0% Profit - Qarz Hasan

Declining Profit - Diminishing Musharaka

Market Based - Salam, Istisna

* Profit Calculation for Market Based products should be based on the negotiated pricing rather than on the end profit. The profit should also factor in the Risk & Cost for Storage.

Other Potential

Indicators

(Not discussed

in Focus Group) Profit Recognition in

Market Based Products

Profit for Market Based products should be accured

on average of past performance. This should be factored in the OSS &

FSS Calculations

9. Pricing

Indicator

Product Based Costing Product Type Pricing Indicator Should include:

Product Based Costing

Market Based Products e.g; Salam, Istisna

Profit = Price at Delivery of Goods - Cost of Goods Delivered

Cost of Goods Delivered = Negotiated Price + Overhead Costs

Trade Based Products e.g; Murabaha, Musawama

Profit = Sale Price - Cost of Goods Sold

Cost of Goods Sold = Purchase Price + Cost of Purchase

Partnership Based Products e.g; Musharaka, Mudaraba

Profit = Revenue Share - Investment during Period

Investment During Period =

Financial Investment + Overhead Costs

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Opening Note:

The opening note was presented by Dr. Amjad Saqib,

Chairman IMFN & Executive Director Akhuwat, setting

the tone of the conference with his heart-rending words.

He said that in addition to the need of standardizing

performance indicators for Islamic Microfinance,

collective efforts need to be put in place for the sector’s

growth. Despite the appreciable performance by the

sector in the past few years, supportive legal and

regulatory set-up, and unbelievable recovery rates,

Pakistan is still far behind the world as far as

microfinance is concerned. Countries including

Bangladesh that have lesser population than Pakistan, have a higher number of active borrowers.

Therefore, Islamic microfinance institutions should work on their outreach, diversify their

product portfolio, and penetrate into rural markets where demand exists. Dr. Saqib concluded

by saying that the growth of the sector is indispensable and all stakeholders should get our heads

up and work for it. It is a big challenge but with collaboration, it can be overcome.

Chief Guest Note:

Our Chief Guest, Dr. Athar Azim Khan, the Director of School of Accounting and Finance at

University of Central Punjab, welcomed and thanked the participants for their participation. He

focused on the potential role of the academia in the growth of Islamic Microfinance Industry. He

emphasized that one of the important ways that universities and academia can and should

contribute to this is Research. For instance, in the process on the standardization of the

indicators, if there is any need of research work to be done, the universities can contribute a lot.

He said that it is unfortunate that we have stuck to the same list of 6-7 products, Islam has not

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given us a list of products but the rules that must not be violated; hence, the sector needs to

work around these rules and innovate and develop new

products according to changing global needs. He stressed

on the significant role academia can play in this process.

Dr. Azim concluded by saying that the two type of

microfinance, conventional and Islamic, should not be

seen as completely mutually exclusive. There are a lot of

things in conventional microfinance that compliment

Islamic microfinance and help in the growth of

microfinance, so we should look into that as well.

Session 1: Standardization of Industry Indicators

The RTC was officially kick started by Mr. Yasir Tariq, Global Manager Islamic Relief Worldwide,

and our moderator for the conference. He highlighted the fact that we as practitioners of the IMF

have seen that there are two categories of indicators available globally.

1. Given by CGAP

2. Given by Mixed Market

Unfortunately, these two categories were developed keeping the conventional microfinance in

front, and rightly so because still the IMF is a small chunk of the total microfinance industry.

Following are the issues faced by IMF institutions because of these indicators:

The conventional Microfinance does not incorporate Shariah principles’ knowledge in its

indicators. Islamic Microfinance products which are Shariah based products, have their

own specification which are not catered by the conventional MF Indicators.

These Indicators don’t quantify two major concepts of Islamic MF, that are Muwakhat

(Brotherhood) and Ehsaan (Courtesy) anywhere.

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All the indicators of Conventional MF are developed on the basis of lending rather than

on trade or partnership basis, which is the sole of IMF. So, when these conventional

indicators are applied on IMF product it gives us adverse effects.

The conventional indicators don’t cater forward market profitability and market risk,

because the conventional microfinance is simple that someone lends money and charges

interest on it, but IMF is different.

And so on….

Taking the above mentioned and other issues in to context, we can feel that there is a need of

some indicators for IMF that can depict our growth correctly. Indicators that can show the

difference between Conventional and Islamic Microfinance Industries.

After this slight foreword, Mr. Yasir Tariq presented the first draft list of the “Islamic Microfinance

Indicators”, which were discussed one by one. This list included the indicators that were

completely different for Islamic Microfinance as compared to the conventional MF.

There were 9 indicator categories and their IMF Indicators. All the categories that were presented

are taken from the mixed market, but the indicators are not completely taken from the mixed

market. And the indicators were calculated in two models, i.e. Profit Generating Model and

Charity Based Model. Profit Generating Model’s formulas are designed for the profit generating

products e.g. Murabaha, Salam etc. The formulas for Charity Based Model are designed focusing

on Qard-e-Hasan.

The first category in the list is Financing Structure, its indicator for IMF is Debt Capacity Ratio, it

formula of calculation for the Profit Generating Model is simple “Debt/Income from Microfinance

Portfolio”, but for the Charity Based Model, it is different as the organizations that run on the

charity based model receive grant and charity. So for charity based model the formula will be

“Debt/Grant + Charity”. On this indicator there was a lot of discussion on the charity based model,

Dr. Athar Azim pointed out that a lot of MF Institutions take grants as a source funding, he

emphasized that we must distinguish between how much of the charity and grant is considered

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as income and how much of the charity is a part of the microfinance funds, because if it is not

distinguished the value will be extremely high. Mr. Yasir Tariq, suggested that we can only record

grant income for operations expense. Comments on this subject are welcomed.

Second category presented was Financial Performance Indicators, it has two Indicators,

Operational Self Sufficiency (OSS) and Financial Self Sufficiency (FSS). The calculation formulas

for Profit Generating Model are same as the Conventional Microfinance i.e. For OSS, “Income

from MF Activities/ (Expenses + Provision)” and for FSS, “Income from MF Activities/ (Expenses

+ Provision+ Inflation)”. However, for Charity based model, the Income from MF Activities is not

applicable as there are no products sold and no income coming from that, so the income from

MF activities is replaced by the means from which IMF Institutes get their income and that is

Voluntary Charity and Grant Income. So for the Charity based Model the formula for OSS will be,

“(Voluntary Charity + Grant Income)/ (Expenses + Provision)” and for FSS it will be, “(Voluntary

Charity + Grant Income)/ (Expenses + Provision + Inflation)”.

Before the third category, Dr. Abdul Sattar added that we must include ‘Shariah Complaince’ and

‘Shariah Audit’ in the key indicators of IMF. Secondly, he said that we must add ‘Customer

Centrality’ in the key indicators list of IMF, that will ensure the sustainability of the borrower. The

third thing he added was that we must not omit the word ‘governance’ from the IMF indicators,

as it is naturally in-built in any shariah based initiative. Mr. Yasir Tariq cleared some confusions

by declaring the working paper as the first draft which will be changed as the suggestions and

feedback keeps coming.

Coming on to the third category, that is Productivity Indicators, has three indicators,

Productivity/Loan Officer, Productivity/ Staff and Productivity/ Procurement Officer. In this

category just one thing was added that we need to add Loan/ Procurement and Sales Officer for

our sales models e.g. Murabaha etc. along with Loan/ Loan Officer and Loan/ Staff.

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The fourth category in the list is Outreach Indicator, the indicator is of course Outreach. The

normal concept of the outreach calculation is the number of borrowers, but in the IMF Indicators’

draft list, a weighted model was proposed, i.e. Number of Borrowers* Weight, the proposed

distribution of weight was Lending Models getting the lowest weight and the Musharka Models

getting the highest weight. Because if you have 10 clients of Musharka the are far bigger in

number and also in amount at times, so you get a higher value for outreach. The discussion was

open to suggestions, Dr. Athar Azim added that if we go we this weight, the depth of outreach

will be compromised, as we are not considering the amount of loan we are just concerned about

that it is distributed in a larger number of people, so it will not make a good realistic indicator

and we should consider that. It was discussed briefly and then it was decided that it will discussed

in detail in the next meeting.

The fifth category that is Revenue Indicator, has two indicators i.e. Yield on Gross Portfolio and

a new indicator added for the profit generating model, Return on Inventory. The formula for

Yield on Gross Profit in Profit Generating Model is “Income from MF lending/Portfolio” and in

Charity Based Model it is “Voluntary Charity/Portfolio”. The formula for the second indicator that

is specifically for the Profit Generating Model is “Profit on Sale of Inventory/Cost of Goods Sold”.

Mr. Ali Khan suggested that there should be an indicator Return On Assets, that was welcomed.

The sixth category is Products and Clients, in which again there are two indicators one is

Partnership Based and the other is Asset Based. The partnership based indicator is simply

calculated as the Number of Outstanding Partnerships and the Asset Based is calculated as The

Number of Owned Financing Assets. A question that was put forward for discussion in the

upcoming meetings was that whether “rented” assets should also be added with the owned

assets.

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The next category is Products and Services, which includes Voluntary Charity and Market

Linkages. Voluntary Charity is of course seen in the context of Charity Based Model; the

calculation is simply The Amount of Voluntary Charity Collected by the Beneficiaries. The second

and very important indicator which the conventional industry doesn’t work on is the Market

Linkages, IMF Industry does work on it, and creates a lot of market linkages nowadays, so we can

measure that by The number of Clients Linked to the Open Market.

As the first session concluded, the participants were requested to share their feedback with IMFN

after working on these indicators.

Dr. Amjad Saqib reiterated the need that participants must share their feedback timely. He

appreciated this effort by the IMFN team. It was decided that there will be a steering committee

formed which will meet next month to see the proceedings on this subject. The participants were

requested to share the nominees from their organizations for the committee.

Following is given the updated list of Indicators:

Calculation/Formula

Indicator Category Indicator Profit Generating Model Charity Based Model

Financing Structure Debt Capacity Ratio

Debt/Income Debt/(Grant + Charity)

Financial Performance Indicators

Operational Self Sufficiency

Income from MF Activities/(Expenses + Provision)

(Income from MF Activities + Grant Income)/ (Expenses + Provision)

Financial Self Sufficiency

Income from MF Activities/(Expenses + Provision+ Inflation)

(Income from MF Activities + Grant Income)/(Expenses + Provision +

Inflation)

Productivity Indicators

Productivity/Loan Officer Loan/Loan Officer Loan/Loan Officer

Productivity/Staff Loan/Staff Loan/Staff

Productivity/Procurement Officer Procurements/Procurement Officer

Outreach Indicator

Outreach Number of Enterprises * Weight Number of Enterprises * Weight

(Weight to be assigned for: Lending, Trade Based, Partnership based approaches, lowest to highest respectively)

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Revenue Indicator Yield on Gross Portfolio Income from MF lending/Portfolio Voluntary Charity/Portfolio

Return on Inventory Profit on Sale of Inventory/Cost of Goods

Sold

Products & Clients

Partnership Based Number of Outstanding Partnerships

Asset Based Number of Owned Financing Assets

Products & Services Voluntary Charity

Voluntary Charity Collected from Beneficiaries

Market Linkages Number of Clients linked to Open Market

Client Protection Disclosure of Price Market based Pricing OR Negotiated Pricing

Disclosure of Cost & Profit

Profit Rate Calculation * Flat Rate - Murabaha, Musawama etc

0% Profit - Qarz Hasan

Declining Profit - Diminishing Musharaka

Market Based - Salam, Istisna

* Profit Calculation for Market Based products should be based on the negotiated pricing rather than on the end profit. The profit should also factor in the Risk & Cost for Storage.

Other Potential Indicators

(Not discussed in Focus Group)

Profit Recognition in Market Based Products

Profit for Market Based products should be accured on average of past performance. This should be factored in the OSS & FSS Calculations

Pricing Indicator Product Based Costing Product Type Pricing Indicator Should include:

Market Based Products e.g; Salam, Istisna Profit = Price at Delivery of Goods -

Cost of Goods Delivered

Cost of Goods Delivered =

Negotiated Price + Overhead Costs

Trade Based Products e.g; Murabaha, Musawama

Profit = Sale Price - Cost of Goods Sold

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Session 2: Product Innovation and Development

The second session was about Product Innovation, the agenda of this session was to share some

local case studies of innovative models for IMF and to deliberate on the current challenges.

The session started with the introduction, every participant introduced himself and his company.

After the introduction, Mr. Fareed Shahid from SABCO Solutions gave a presentation on

Challenges for Energy Product Financing. The challenges included:

High degree of skepticism on quality of products being presented

Product Price perceived to be high

Given the product price, the % for sustainability is questioned

Product Availability

Limited technical knowledge results in repeated recurring costs

After the presentation, some of the participants presented

their models for IMF. The first model was presented by Aas

Foundation, The Green Energy Consumption Program, based

on Solar Products, which is being taken forward in

collaboration with SABCO Solutions. The basic idea of this

program is that there should at least one light is every house

in the areas where the Electricity does not reach. The program

is currently in operation in the areas of Cholistan, it started

with 40 households and now there are 1200 households

benefitting from it. Fundamentally, it is a Murabaha based

program where the product is sold on debit basis and the collection is done in 3-6 installments.

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Mr. Shehryar from Harness Energy, which manufactures Solar

Products, presented the Harness Energy model, the basic concept

was that they give the solar products to the MF institutions on 15%

discount. For instance, if a product is worth 1000 PKR, the Harness

Energy will provide it to a MF customer e.g. AGAHE Foundation in

850 PKR. The return policy is very lenient, if a damaged product

comes back, they just replace it without asking a lot of questions.

Mr. Mukrma Ashraf from Agahe Pakistan presented their Roshan

Gharana Model. The purpose of this product was to provide finance

to potential borrowers living in off grid / energy shortage areas to

meet their household energy needs. The finance will be provided by

Agahe Pakistan for purchase of IFC certified products bundled with

IEC certified solar fan kits. Agahe Pakistan is privileged to be the first

MFI to introduce solar home systems on a financing platform in

Rajanpur and Muzaffargarh areas.

Dr. Kashif presented the Akhuwat Musharka Model, the product

was Musharka and it was based on the fixed assets, the concept was

to identify the borrowers of Akhuwat who have went through at

least one loan cycle. After the identification the clients were asked

if they want to expand their business by buying a fixed asset. And

then 10% was contributed by the Client and 90% was contributed by

Akhuwat, and it was an 18-month contract within which two kind of

products were given, fixed repayment and flexible repayment, fixed repayment was simple that

everything was divided in 18 months, flexible repayment was for the businesses that are

seasonal, so there was flexibility in buying the products.

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The last speaker was Mr. Mumtaz Iqbal who shared the challenges

in the Kashf Foundation Murabaha Model in KPK, he said that overall

the program was a success but, it was not financially viable, he

further added that we don’t have a classically sustainable Murabaha

model in Pakistan which the Institutes can follow, the programs are

there, but most of them are in the pilot stages.

In the end Mr. Yasir Tariq again requested the participants to share their feedback and thanked

them for their presence.

Key Take Aways:

The RTC was the second of a series of six meetings on the Indicators Standardization

A steering committee will be formed which specifically look into the matter on regular

basis

The next meeting on this subject is scheduled on 19th July, 2018 (tentative)

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A Special Thank You to Our Partners Islamic Relief Worldwide

and Our Venue Partners University of Central Punjab, the RTC

would not have been a success without them.

EVENT PARTNERS VENUE PARTNERS

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VENUE PARTNERS

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List of Participants:

1. Dr. Amjad Saqib Chairman/ Trustee

2. Dr. Athar Azim Director, School of Accounting and Finance, UCP

3. Mr. Yasir Tariq Global Manager MF, Islamic Relief Worldwide

4. Mr. Muhammad Adnan Program Manager, Islamic Relief Pakistan

5. Mr. Jasim Sheikh Microfinance Performance Systems Lead, Islamic Relief Pakistan

6. Mr. Zaheer Iqbal MF Finance Officer, Islamic Relief Pakistan

7. Mr. Ali Khan Partner, A. F. Ferguson

8. Mr. Abdul Qadir Muhammad Senior Consultant, A. F. Ferguson

9. Mr. Ali Qamar Partner, Ernst & Young

10. Dr. Kashif Malik Associate Professor, LUMS

11. Dr. Abdul Sattar Abbasi Director Center of Islamic Finance, CIIT

12. Mr. Mumtaz Iqbal Kashf Foundation

13. Mr. Khalil ur Rehman Research Officer, Al-Huda CIBE

14. Mr. Mian Babur Hamid Director, Al-Khidmat Foundation

15. Mr. Ahmed Qadeer Program Manager, Al-Khidmat Foundation

16. Mr. Barak Ullah CEO, AGAHE Pakistan

17. Mr. Mukrma Ashraf Communication Officer, AGAHE Pakistan

18. Mr. Tahir Latif Executive Director, NEYMAT Trust

19. Mr. Imran Mumtaz Representative, Islah Trust

20. Mr. Mustafa Shahid DAMAN

21. Mr. Arshad Mahmood Program Manager, Akhuwat

22. Mr. Mujahid Hussain CEO, Aas Foundation

23. Mr. Fareed Shahid CEO, SABCO Solutions

24. Mr. Muhammad Shehryar Founder, Harness Energy

25. Ms. Mariam Shakir COO, IMFN

26. Mr. Khawaja Meeran Public Relations Associate, IMFN

27. Mr. Moaz Ahmed Operations Associate, IMFN

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