Organized By :

CENTER OF ISLAMIC BANKING & ECNOMICS

Held At:

International Conference on Islamic Microfinance organised by Al Huda in collaboration with Akhawat 13 June, 2011

Islamic Microfinance : An Outreach Analysis in Global Perspective

Presentation By : Dr Shabbir Hussain MD, HHRD

PRESENTATION MICROFINANCE MODELS OUTREACH ANALYSIS

 Credit Plus includes development and social services in comparison with Credit Only approach
Minimalist Approach
FINANCIAL INTERMEDIATION y Working Capital y Fixed Asset Loans y Savings SOCIAL INTERMEDIATION y Community Mobilization yGroup Formation y Social Collateral y Insurance

Integrated Approach

Credit Only

EDEVELOPMENT SERVICES yEntrepreneurship Training yProduction/Skills Training yMarketing SOCIAL SERVICES yEducation yHealth & Nutrition yLiteracy Training

Credit + (Financial & Non Financial)

MF Models of Outreach based upon the integration level of supply chain

Three- Pronged Approach Promotion of MED, training & helping linkage with banks Specialized Banks NGOs as Financial Intermediaries NGOs Specialized Banks Specialized Banks Promotion of MED, training & providing Credit Support Promotion of Banks as MFIs
MED, training & providing Credit

NGOs as Facilitators

NGOs

V/WOs

V/WOs

V/WOs

The effectiveness of Microfinance approaches varies across different levels of poverty

Classification
At the Poverty Line

Objective
Growth

Approaches
MED

HHRD Mudarba

Livelihood Below the Poverty Line IGAs

HHRD Murabah

Safety Net Abject Poor Consu mption Credit

HHRD Qard Hasn

OUTREACH ANALYSIS OF SELECTED INTERNATIONAL MODEL OF MFIs

MFI

# of Borrowers

% Women 96 96 96 96 100 100 100 95 48 42 100 100

Cost per Borrower 10 12 7 8 9 15 14 23 15 23 10 25

Self Sufficiency Ratio 98.80 106.65 187.17 159.07 133.14 102.00 111.53 164.10 79.70 90.43 162.44 48.80

Grameen Bank Bangladesh BRAC Bangladesh ASA Bangladesh Spondana India Bandhan India Cashpor India AML India Kash Pakistan Khushali Bank Pakistan FMBF Pakistan WDB Sri Lanka BRAC Sri Lanka

6,707,000 6,397,635 5,422,787 1,188,861 896,698 303,243 565,806 295,396 405,111 229,443 146,808 34,550

(Source: www.micromarket.org,

Microfinance is fast emerging viable tool to reduce Poverty

Poverty Transition

Microfinance Burrowers

% 38.4 17.6 20.8 21.6 0.8 0.8 100

Very Poor to Moderately Poor 48 Very Poor to Non Poor Moderately Poor to Non Poor No Change 22 26 27

Non Poor to Moderately Poor 1 Moderately Poor to Very Poor 1 125

(Source: www.micromarket.org.

Outreach features of IMFIs

IMFI retains the basic operational format of MFIs
Banking with the poor at door steps Weekly/Monthly Repayments A Social/Development Program (to fulfill the social role of Islamic finance)

IMFIs have some distinguishing features:

Sources of Funds Other than external sources, can also use funds from zakah, awqaf, and other forms of charities Use of funds (Mode of Financing) Sale based and hiring modes (murabahah, salam, ijarah) Profit-sharing modes (Musharakah and mudarabah) Amount transferred to the poorest Islamic modes are sale based, the price of the asset is paid (no deductions are allowed)

continued--Group Dynamics
Islamic values of brother/sister-hood improves cooperation among the group members

Financing the poorest Social Development Program

Zakat and other charities can supplement MFI activities (non-diversion of funds)

behavioral, ethical, and social aspects in light of Islamic teachings

Targeting the family through women

Spouse co-signs the contract dealing with women more efficient and convenient Women disseminate knowledge to children

Dealing with Arrears/Default

Less aggressive and use Islamic teachings to recover loans

SOME MODES OF ISLAMIC FINANCE

Islamic microfinance represents the convergence of two rapidly growing industries: microfinance and Islamic finance.

PARTNERSHIP BASED

TRADE BASED

RENTAL BASED

Mudarba Musharka

Murabaha Ijara Salm Istis a

Dimi ishi g Musharka

Findings of IFC Commissioned Market Studies

 60 percent low income survey respondents prefer to Islamic Products over conventional products (West Bank & Ghaza)  25-30 percent reveal religious reason for not seeking conventional loans (Jordon)  40 percent of the poor demand Islamic financial services regardless of price (Yemen)  43 percent of respondents consider religious reasons to be largest obstacle in obtaining microcredit (Syria)  49 percent of rural population consider Sharia Compliant financial institutions (Indonesia)

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Outreach of IMFIs is very limited

 380,000 loans through 126 institutions operating in 14 countries  Bangladesh has largest outreach (100,000 +) with two active institutions . However it represent about one percent of its microfinance market  Syria and Indonesia has 3 % and 2 % of respective microfinance market  80 percent of global outreach is concentrated in three countries :Bangladesh, Indonesia and Afghanistan)

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Outreach of IMFIs in respect of women

 59 percent on average but up to 90 percent in Bangladesh are women borrowers of IMFIs  Overall percentage of female participation using Islamic Microfinance products is comparable to those using conventional microfinance products (66 %) globally (Mf Info Exchange 2007)  70 percent of products offered are Murabah based  Average operational efficiency ratio in Islamic Rural Banks is 20 % higher than 15 % operational efficiency ratio for conventional banks

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Outreach of Islamic Microfinance by Institution Type

Institution Type # of Total # of % Institutions Borrowers 1 1 14 165 3 2 126 6,671 2,298 125,793 74,698 4,293 87,569 305,237 2 1 42 25 Total Loan Portfolio (Ud $) 926,251 1,838,047 % Average Loan size (US $) 132 800 303 1640 595 305 629

Cooperative Village Bank (Syria) NGO Rural Bank (Indonesia) NBFI Commercial Banks Total

<1 <1

41,421,580 21 122,475,158 62

1 1,893,207 61 29 29,030,997 15 100 198,090,268 100

Source : CGAP 2007

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Outreach of Islamic Microfinance

Country # of included Percentage Total # of Institutions of Female Borrowers 4 1 2 105 1 1 1 1 1 1 1 3 1 3 126 22 n/a 90 60 80 50 12 40 100 86 n.a 65 45 58 59 53,011 323 111,837 74,698 1,481 26,000 2,812 6,069 132 7,000 50 9,561 2,298 7,031 302,302 Total Average Outstanding Loan Loan Portfolio Balance 10,347,290 162 96,565 299 34,490,490 280 122,480,000 1640 1,619,909 1094 22,500,000 865 2,973,293 97 746,904 123 145,485 1,102 586,667 84 35,200 704 1,891,819 171 1,838,047 800 840,240 146 197,891,882 541
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Afghanistan Bahrain Bangladesh Indonesia Jordon Lebanon Mali Pakistan West bank Gaza Saudi Arabia Somalia Sudan Syria Yemen Total

Source : Focus Notes No 49, August 2008, CGAP

Indonesia

 Microfinance Divisions of Islamic Banks (Islamic Rural Banks)  Islamic Financial Cooperatives referred as bait Maal wat Tamwil (BMT) ; BMTs are large network of over 2000 institutions serving millions of poor Indonesian Muslims. These are backed and supported by over hundred million members The products are based on Mudaraba, Murabaha, Musharaka, Ijara and qard Hasan

Bangladesh

 Islamic Bank Bangladesh  Social and Investment Bank  Al-Fallah and Rescue FINCA (Qard Hasan) Village Banking methodology with solidarity groups  Akhuwat , HDF, Islamic Relief, CWCD, Farz Foundation ,HHRD

Afghanistan

Pakistan Malaysia India Azerbaijan

 Islamic Banking : Govt agencies s organizations finances small and medium scale enterprises  AICMEU  Bait un Nasr

Egypt Syria

Mit Ghamar Project : Modern Islamic banking  Sanadiq project , Jabal Al-Hoss : Village Banks which can be replicated. The model is based on : (i) Musharka structure owned and managed by the poor (ii) financing based on Murabaha which provides high profit rates shared among members (iii) good governance through committees with sound election and voting procedures (iv) project management team responsible training of committee members (v) Financial management based on standardized bylaws,fair credit decisions and low transaction costs (vi) Financially viable operations with 100 % repayment rate (vii) equal access to both men and women (viii) UNDP provides matching grant equal to minimum share capital of village fund  Muassat Bayat Al-Mal : Affliate of Hezbollah comprises qard AlHasan financing on profit loss sharing mode. It is run by volunteers  Hodeidah Microfinance Program : Group methodology like Grameen but it uses Murabaha mode for financing

Lebanon

Yeman

OUTREACH ANALYSIS OF MICROFINANCE IN PAKISTAN

Roughly 80% of the current borrowing is from the non-formal sector in Pakistan However, the cost of borrowing from the non-formal sector is 4% higher
Borrowings by sources

22%

Borrowing Pattern in Pakistan

Formal Non Formal

78%

Int t t ( n %) Formal vs. Non Formal

Int rest Rate 30 20 10 0 For l on For l

Approximately 60% of the non-institutional lending is through money lenders, Shopkeepers, and agriculture input dealers

Informal Lenders Feed Dealers Others 2% 12% Agra Input c Dealerds 22% Shopkeeper 15% Commission Agents 12% Money Lenders 37%

PPAF begins disbursing microfinance funds

PPAF Phase I & II : US$ 300 Million PPAF Phase III

Microfinance Sector Development Programme (ADB)

US$ 150 Million 1.4 million 40 + MFPs

1999
PIR: PMN starts collecting and publishing member MFIs performance indicator report

2000

2001

2005
5 Microfinance Banks

2006

2009 2011

Khushhali Bank becomes operational Microfinance Ordinance

FMFBL,TM FBL,RMFBL , POMFBL,

NMFB. BRAC-PAK

NRSP, ASA Kashf Bank

MFIs

         

Akhuwat Asasah Orangi Pilot Project Sindh Agriculture & Forestry Workers Cooperative Orgn (SAFWCO) Community Support Concern Development Action for Mobilization and Emancipation Network (DAMEN) Center for Women Cooperative Development (CWCD) Kashf Foundation CWCD HHRD

MFB

       
        

Khushhali Bank Ltd Network Microfinance Bank Ltd Pak Oman Microfinance Bank Ltd Rozgar Microfinance Bank Ltd Tameer Microfinance Bank Ltd First Microfinance Bank Ltd Kashf Microfinance Bank Ltd NRSP Bank
NRSP PRSP SRSP TRDP Lachi Poverty Reduction Project Sungi Development Foundation Orix Pakistan Sindh Rural Support Program Taraqi Foundation Save the Poor

RSP

Others

Largest Providers of Microfinance ( Number of active borrowers) 428075 450000 400000 350000 300000 250000 200000 150000 100000 50000 0 SP
Presentation By : Dr Shabbir Hussain,

405111 288076 229443

78878

KB

Kashf

P SP

Data S urce: Micr

atch, PMN, Sep 2009

GLP of Largest Providers of Microfinance In Pakistan exceeds 15 billion rupees

6000 5000 million 4000 rupees 3000 2000 1000 0

5030 4150 3200 2880 1350

NRSP

KB

FMFBL

Kashf

TMFB

Hussain,

Presentation By : Dr Shabbir DtSource: icrowatc ,

, Se 2009

Only 5 to 10 % of the poor population in need of micro credit is currently covered

Current Outreach 1.83 million borrowers

Estimated Demand 27.7 million borrowers

Access

Access

Quality

Quality

Products

Products

Funding

Funding

ustaina ility

ustaina ility

Conclusion
An estimated 72 percent of people living in Muslim-majority countries do not use formal financial services Islamic microfinance is concentrated in a few countries, with the top three countries (Indonesia, Bangladesh, and Afghanistan) accounting for 80 percent of global outreach. Of the total US $ 500.5 billion global Islamic finance market, 36 percent is located in the Gulf Cooperation Council (GCC) countries (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and UAE), 35 percent in non-GCC Southwest Asia and North Africa, and 23 percent in Asia (primarily Malaysia, Brunei, and Pakistan) (The Banker 2007).

Bangladesh is a country where conventional microfinance products have the largest outreach exceeding 18 million borrowers and Islamic Microfinance represents only 1 percent of its microfinance market.
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` TJAZAK

ALL ` Thank You!

Presentation By : Dr Shabbir Hussain,

CENTER OF ISLAMIC BANKING & ECNOMICS

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