Establishment IDB Group

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2 Establishment IDB Group Established 1981 Established 2008 Established 1975 Established 1994 Source: IRTI Annual Report Established 1999 Islamic Research and Training Institute

3 Successful Islamic Microfinance Model Insights into Latest Market Development Prof Dato Dr Mohd Azmi Omar Director General Islamic Research and Training Institute Islamic Development Bank

4 Presentation Outline 1 Introduction 2 State of Islamic Microfinance 3 Microfinance Models 4 Financing Instruments 5 MicroFinance Models 6 Case Studies Source: IRTI database Islamic Research and Training Institute 2

5 Introduction Microfinance services provide opportunity to the poor for their social and economic development. Microfinance industry is growing rapidly in the world. Microfinance institutions growth : about 35 percent from 1616 in 2005 to 2178 in The percentage ofactiveborrowersincreasedby 108 percent from 48.1 million to million over the same time period. About 25% of the world s population is poor but 100 million only have the access to financial services Islamic Research and Training Institute 3

6 Muslim Poor and the State of Islamic Microfinance in theglobalmicrofinance Programs 1/3 rd of world s poor are Muslims 72% of them don t use formal financial services 25 40% of Muslims refrain from utilising interest based Finance Islamic Microfinance (IsMF) represents less than 1% of global microfinance programmes Islamic Research and Training Institute 4

7 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 Islamic Research and Training Institute 5

8 Financing Instruments Not for Profit Modes: Zakah, Awqaf, Qard Hasan; Kafala; Hawala For Profit Modes: Participatory Modes: Mudaraba, Musharaka, Muzaraa Debt based Modes: Bai Muajjal/ Murabaha, Ijara, Salam, Istisna, Istijrar Fee Based Modes: Wakala, Juala Islamic Research and Training Institute 6

9 Islamic Replications of Conventional Models Strengths Simplicity Transparency Standardized procedures & documentation Higher staff efficiency and professionalism Replication of best practices from conventional microfinance Islamic Research and Training Institute 7

10 Islamic Replications of Conventional Models Weaknesses Overwhelming concentration of murabaha Less emphasis on project viability Notfor thepoorest of thepoor High cost of finance Women only approach Perpetuation of debt Similar problems asthosewith conventional microfinance e.g. Over Indebtedness, Exorbitant Financing Rates, Mission Drift, Unethical Collection Practices Islamic Research and Training Institute 8

11 Indigenous Islamic Models Qard Hasan Funds Baitul Mal wa al Tamweels (BMTs) Indonesia Zakah Funds Awqaf Based Institutions Composite Models Islamic Research and Training Institute 9

12 Indigenous Islamic Models Strengths o Institutionalization of charity and good giving o Institutionalization of voluntarism o More diversified products: debt based, participationbased 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

13 Indigenous Islamic Models Weaknesses o Lack of transparency o Poor accountability and governance structures o Low operational efficiency and high operational costs o Encouragement to continued dependency on charity o Poor linkage with formal financial system Islamic Research and Training Institute 11

14 Composite Model of Islamic Microfinance Islamic Research and Training Institute 12

15 Composite Model of Islamic Microfinance Strengths Combine access, sustainability and affordability considerations Combine mission based approach with market based instruments Use best fit instruments and modes Flexible pricing and product design Islamic Research and Training Institute 13

16 Composite Model of Islamic Microfinance Weaknesses Conflicting organizational culture Conflicting policy and regulatory framework Lack of transparency Poor accountability and governance Unresolved Shari ah issues Islamic Research and Training Institute 14

17 Case Studies of Islamic Microfinance Islamic Research and Training Institute 15

18 IDB Microfinance Development Program Islamic Research and Training Institute 16

19 IDB s Achievements in MDP : H ( ) Islamic Research and Training Institute 17

20 Case of Islamic Microfinance : Dairy Products Business Line 60 productive Households (Priority to Women Head of household) 500 Farmers Households (Owning Land & Shelter for Milk cows) Cooperative University Graduates mainly veterinary Storage Facility Livestock Marketing Facility Business Incubator Facility ( 140 beneficiaries) (Source: abdelaziz slaoui, 2012) 1

21 Islamic Microfinance in Palestine: use of Islamic Products Islamic Research and Training Institute 19

22 Islamic Microfinance Initiatives by ISFD (Islamic SolidarityFundfor Development), IDB Islamic Research and Training Institute 20

23 Islamic MicroFinance Support Program USD 500 million Islamic Research and Training Institute 21

24 Islamic MicroFinance Support Program USD 500 million Islamic Research and Training Institute 22

25 Islamic MicroFinance Support Program USD 500 million Islamic Research and Training Institute 23

26 Wasil Foundation Pakistan Started in 1999 as a conventional microfinance No of beneficiaries: 138 In 2012 Wasil Foundation fully converted to Il Islamic Microfinance Current no of beneficiaries: 109,000 Islamic Research and Training Institute 24

27 Wasil Foundation Pakistan Financing Instruments Islamic Research and Training Institute 25

28 Islamic Research and Training Institute 26

29 Islamic Research and Training Institute 27

30 Akhuwat 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 billion 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 o Replication instead of expansion o Borrowers are donors as well Islamic Research and Training Institute 28

31 Akhuwat Pakistan Total no of Branches: 150 Presence in 49 Cities and towns in Pakistan Total no of borrowers : 177,200 Recovery Rate : % Staff : 750 A new model in Micro Finance Islamic Research and Training Institute 29

32 Akhuwat Pakistan Borrowers are donors as well Small Donation boxes are placed at work places, homes, carts, etc. Borrower contributes Rs. 2 to Rs. 5 daily. More than 50,000 active borrowers Donation is not compulsory Islamic Research and Training Institute 30

33 Akhuwat Pakistan Low Cost Operations Interest Free Sharia Compliant Use of Mosque/Church h Volunteerism Borrowers becoming donors Family Loans Local Philanthropy Sustainability Islamic Research and Training Institute 31

34 Akhuwat Pakistan Islamic Research and Training Institute 32

35 Akhuwat Pakistan Islamic Research and Training Institute 33

36 Conclusion There is no one size that fits all Waqf, Zakat and Qard Hassan models of microfinancing for poverty alleviation have been proven to be successful But the questions are sustainability and size (scale and scope) Islamic Research and Training Institute 34