MicroFinance Models

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Establishment – IDB Group
Established 1981
Established 1994
Established 2008
Established 1975
Established 1999
Source: IRTI Annual Report
Islamic Research and Training Institute SSuccessful Islamic Microfinance ccessf l Islamic Microfinance
Model ‐ Insights into Latest Market Development
Prof Dato’ Dr Mohd Azmi Omar
Director General
Islamic Research and Training Institute
Islamic Development Bank
azmiomar@isdb.org
Presentation Outline
Source: IRTI database
1
Introduction
2
State of Islamic Microfinance
3
Microfinance Models
4
Financing Instruments
5
MicroFinance Models
6
Case St dies
Case Studies Islamic Research and Training Institute 2
Introduction
• Microfinance services provide opportunity to the
poor for their social and economic development.
development
• Microfinance industry is growing rapidly in the world.
• Microfinance institutions growth : about 35 percent
from 1616 in 2005 to 2178 in 2010.
percentage
g of active borrowers increased byy 108
• The p
percent from 48.1 million to 100.1 million over the
same time period.
• About
Ab
2 % off the
25%
h world’s
ld’ population
l i is
i poor but
b 100
million only have the access to financial services
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Muslim Poor and the State of Islamic Microfinance in the Global Microfinance Programs
the Global Microfinance Programs
• 1/3rd of world
world’ss poor are Muslims
• 72% of them don’t use formal financial services
25‐40%
40% of Muslims refrain from utilising interest
• 25
based Finance
• Islamic Microfinance (IsMF) represents less than 1%
of global microfinance programmes
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Microfinance Models
• Models in Both Conventional & Islamic
Domains:
o Joint LiabilityGroups (JLG) – Grameen model
o Self Help Groups (SHG) – Pooling of funds by
group members (India)
o Community/Village Banks – BPRS in Indonesia,
Jabal Hoss, Syria
o Credit Unions/Cooperatives – BMT in Indonesia
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Financing Instruments
y Not for Profit Modes: Zakah, Awqaf, Qard Hasan;
Kafala; Hawala
y For‐Profit Modes:
y Participatory Modes: Mudaraba, Musharaka,
Muzaraa
y Debt‐based Modes: Bai Muajjal/ Murabaha, Ijara,
Salam, Istisna, Istijrar
y Fee‐Based Modes: Wakala, Juala
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Islamic Replications of Conventional Models p
• Strengths
• Simplicity
• Transparency
• Standardized procedures & documentation
• Higher staff efficiency and professionalism
Higher staff efficiency and professionalism
• Replication of best practices from conventional microfinance
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Islamic Replications of Conventional Models
• Weaknesses
• Overwhelming concentration of murabaha
• Less emphasis on project viability
• Not for the poorest of the poor
Not for the poorest of the poor
• High cost of finance
• “Women only” approach
y pp
• Perpetuation of debt
• Similar
Similar problems as those with conventional problems as those with conventional
microfinance e.g. Over‐Indebtedness, Exorbitant Financing Rates, Mission Drift, Unethical Collection Practices
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Indigenous Islamic Models
•
•
•
•
•
Qard Hasan Funds Funds
Baitul‐Mal‐wa‐al‐Tamweels (BMTs) ‐ Indonesia
Zakah Funds Funds
Awqaf‐Based Institutions Composite Models
Composite Models Islamic Research and Training Institute 9
Indigenous Islamic Models
• Strengths
Strengths o Institutionalization of charity and good‐giving o Institutionalization of voluntarism Institutionalization of voluntarism
o More diversified products: debt‐based, participation‐
based and not‐for‐profit o Low/ zero/ negative cost of finance o Safety net + skill enhancement + business development services o Family empowerment Islamic Research and Training Institute 10
Indigenous Islamic Models
• Weaknesses
o Lack of transparency o Poor accountability and governance structures Poor accountability and governance structures
o Low operational efficiency and high operational costs costs
o Encouragement to continued dependency on charity charity
o Poor linkage with formal financial system Islamic Research and Training Institute 11
Composite Model of Islamic Microfinance
Composite Model of Islamic Microfinance
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Composite Model of Islamic Microfinance
Composite Model of Islamic Microfinance
• Strengths
Strengths • Combine access, sustainability and affordability considerations considerations
• Combine mission‐based approach with market‐
based instruments
based instruments • Use best‐fit instruments and modes Flexible pricing and product design
• Flexible pricing and product design Islamic Research and Training Institute 13
Composite Model of Islamic Microfinance
Composite Model of Islamic Microfinance
• Weaknesses
Weaknesses •
•
•
•
•
Conflicting organizational culture Conflicting policy and regulatory framework
Conflicting policy and regulatory framework Lack of transparency P
Poor accountability and governance t bilit
d
Unresolved Shari’ah issues Islamic Research and Training Institute 14
Case Studies of Islamic Case
Studies of Islamic
Microfinance
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IDB – Microfinance Development Program
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IDB’s Achievements in MDP : 1429 – 1432H (2008 – 2011)
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Case of Islamic Microfinance : Dairy Products Business Line
500 Farmers Households
60 productive Households
(Owning Land & Shelter for Milk cows)
(Priority to Women Head of household)
Cooperative
University Graduates mainly
veterinary
Storage Facility
Livestock
Marketing Facility
Business Incubator Facility ( 140 beneficiaries)
(Source: abdelaziz slaoui, 2012)
1
Islamic Microfinance in Palestine: use of Islamic Products
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Islamic Microfinance Initiatives by ISFD (Islamic Solidarity Fund for Development), IDB
Solidarity Fund for Development), IDB Islamic Research and Training Institute 20
Islamic MicroFinance Support Program USD 500 million
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Islamic MicroFinance Support Program USD 500 million
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Islamic MicroFinance Support Program USD 500 million
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Wasil Foundation Pakistan
Foundation Pakistan
• Started
Started in 1999 as a conventional in 1999 as a conventional
microfinance
• No of beneficiaries: 138
No of beneficiaries: 138
• In 2012 Wasil Foundation fully converted to I l i Mi fi
Islamic Microfinance
• Current no of beneficiaries: 109,000
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Wasil Foundation Pakistan – Financing Instruments
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Akhuwat Pakistan Pakistan
•
•
•
•
Started in 2001 with a donation of Rs 10,000 (USD105)
Credit Pool now has grown to Rs. 50 crore
Cumulative disbursement is Rs. 2.40 billion F t
Features:
o Loans given from Credit Pool are interest free (Qard
Hassan) o Credit Pool create through philanthropy/spirit of Muakhat
o Activities centered in Mosque and Church o Combination of Volunteerism and necessary compensation y
p
o Replication instead of expansion o Borrowers are donors as well Islamic Research and Training Institute 28
Akhuwat Pakistan Pakistan
•
•
•
•
•
•
Total no of Branches: 150 Total
no of Branches: 150
Presence in 49 Cities and towns in Pakistan Total no of borrowers : 177,200 l
fb
200
Recovery Rate : 99.85 % Staff : 750 A new model in Micro Finance
A new model in Micro Finance Islamic Research and Training Institute 29
Akhuwat Pakistan Pakistan
• Borrowers
Borrowers are donors as well are donors as well
• Small Donation boxes are placed at work places homes carts etc
places, homes, carts, etc. • Borrower contributes Rs. 2 to Rs. 5 daily. • More than 50,000 active borrowers • Donation is not compulsory p
y
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Akhuwat Pakistan Pakistan
•
•
•
•
•
•
•
Low Cost Operations
Low
Cost Operations
Interest Free ‐Sharia Compliant Use of Mosque/Church f
/Ch h
Volunteerism Borrowers becoming donors Family Loans
Family Loans Local Philanthropy ‐ Sustainability Islamic Research and Training Institute 31
Akhuwat Pakistan Pakistan
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Akhuwat Pakistan Pakistan
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Conclusion
• There
There is no one size that fits all is no one size that fits all
• Waqf, Zakat and Qard Hassan models of microfinancing for poverty alleviation have for poverty alleviation have
been proven to be successful • But the questions are sustainability and size B h
i
i bili
d i
(scale and scope) Islamic Research and Training Institute 34