islamic microfinance - an inclusive approach [m. khaleequzzaman] mainstreaming islamic microfinance...
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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