International Conference on Islamic Microfinance

International Conference on Islamic Microfinance

CENTER OF ISLAMIC BANKING & ECNOMICS

Held At:

Faisal Auditorium Islamabad

Organized By :

ISLAMIC MICROFINANCE IN DIFFERENT COUNTRIESNeed to serve the ultra-poor

ISLAMIC MICROFINANCE IN DIFFERENT COUNTRIESNeed to serve the ultra-poor

Fadlullah Wilmot Country Director

Islamic Relief Pakistan

Fadlullah Wilmot Country Director

Islamic Relief Pakistan

DESIGNING PROGRAMS FOR THE ULTRA POOR

DESIGNING PROGRAMS FOR THE ULTRA POOR

Conventional MF fails to reach the ultra poorConventional MF fails to reach the ultra poor

Microfinance has reached 150 million people but one billion people are living below the poverty line

Earn less than $1 / day (often less than $0.50 / day), and income very irregular - Income usually derived from manual labour or begging;

School-aged children working manual labour jobs instead of attending classes;

Severe malnutrition (i.e., access to only one meal per day);

High incidence of physical handicap;

Own few productive assets;

Frequent migration, transient lifestyles in search of work;

Landless, or own less than 1 acre of cultivable land (including homestead);

Poverty is inter-generational;

Highly vulnerable to natural disasters and health catastrophes

Without help for the poor there is no IslamWithout help for the poor there is no Islam

Have you seen him who denies Our religion? It is he who harshly repels the orphan and does not urge others to feed the needy. Woe to those who pray but are heedless of their prayers; who put on a show of piety but refuse to give even the smallest help to others.

The surah starts with a question as to who is the disbeliever

“It is he who harshly repels the orphan and does not urge others to feed the needy.”

They pray but “refuse to give even the smallest help to others,”.  

Allah wishes human life to be elevated, happy, based on pure motives and characterized by mutual compassion, brotherhood and purity of hearts and behaviour.  

Pakistan the lowest-performing South Asian country in reducing poverty Pakistan the lowest-performing South Asian country in reducing poverty

Average annual rate of poverty reduction (%)

-6

-4

-2

0

Bangladesh India Nepal Pakistan Sri Lanka

Weaknesses of Conventional Micro-financeWeaknesses of Conventional Micro-finance

Loans used for consumption

Assumption that the poor can be good entrepreneurs given access to credit

Asymmetric Information Problems

Economic Viability of MFIs

Charging Fixed Interest Rates

Higher Interest Rates and focus on short term loans

Low Rate of Return on Investment

High Dropout Rate and Non-Graduation from Poverty

Debt Trap

Non-Conforming to Religious Beliefs

Credit Rationing

Poverty eradication scheme of IslamPoverty eradication scheme of Islam

Poverty eradication scheme of Islam

Positive measures

Income growth

Functional distribution of

income

Equal opportunity

Preventive measuresControl of ownership

Prevention of malpractice

Corrective measures

Compulsory transfer: Zakat

Recommended transfer : Charity

Government responsibility

Islamic Financial ModesIslamic Financial Modes

Participatory MechanismProfit and Loss Sharing

Mudarabah

Musharakah

Musaqat

Muzar'ah

Direct investment

Non Profit and Loss SharingQard al Hasanah

Bai'mua'jjal

Bai'salam

Ijara wa iqtina

Murabaha

Jo'alah

Different countries and different regions different approaches Different countries and different regions different approaches

Indonesia

– Yogyakarta profit sharing with the ultra poor

– Aceh – group system with women entrepreneurs

Bangladesh – group system 20% ultra poor no charge, 60% moderate poor 7.5% service charge with any excess returned to borrowers 20% mini entrepreneurs with Islamic financing modes

Pakistan individual system using Islamic financing modes

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HeterogeneityHeterogeneity

The idea of heterogeneity and exclusion from/by existing models [non deliberate, via design and logic, unassailable] have been powerful concepts to draw policy attention and create urgency for action

Microfinance discourse

[‘poorest of the poor’ as landless, non agriculture, women]

The hard core poor/ ultra poor

[microfinance left outs, and throw outs. Not only poorer than the poor but differently so]

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Poorest Decile

2nd poorest decile

t-value

Male labour force participation (% of 15-60 years old)

91 89 1.83*

Female labour force participation (% of 15-60 years old)

15 10 3.40***

Child labour (% of 10-14 years old) 12 10 0.79

Primarily involved in day labour (% of labour force)

61 52 4.20***

Hours worked per day (mean) 6.45 6.49 0.32 Cash wage received per day (mean in Taka) 65 75 6.10*** Received in kind payment (% of day labourer) 6 3 2.38***

Owns cultivable land (% of HHs) 27 32 2.37** Leased in cultivable land (% of HHs) 22 22 0.02 Owns livestock (% of HHs) 67 70 1.05 Own at least one non-agriculture enterprise (% of HHs)

18 21 1.96**

Net annual revenue from the enterprises (mean in Taka)

25,059 28,653 1.69*

Receive remittance from within country (% of HHs) 16 17 0.53 Remittance received in 12 months (mean in taka) 3,959 6,101 1.36

Work harder, especially women

Earn less

Weak asset base

What about heterogeneity among the poorest?What about heterogeneity among the poorest?

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Informal safety nets as important as formal ones

Poorest 2nd decile

t-value

Participant of social safety net programme (% of HHs)

24 21 1.57

Receive informal charity in cash (% of HHs) 16 14 1.03 Receive informal charity in kind (% of HHs) 28 22 2.77*** Total amount received in informal charity (mean taka)

1,642 2,455 2.95***

The poorest lose out even in informal safety nets

What about heterogeneity among the poorest?

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Education and housing situation of the ultra-poorEducation and housing situation of the ultra-poor

Poorest 2nd decile t-value

Education Enrolment rate of 6-15 years old boys (%) 55 66 4.24*** Enrolment rate of 6-15 years old girls (%) 65 71 2.24**

Housing Amount of homestead land owned (mean in decimal)

6.15 7.23 2.14**

House wall is made of tin/brick (% HHs) 28 38 4.63*** Value of the house living in (mean in Taka) 21,276 28,380 5.90*** Owns any kind of toilet (% of HHs) 70 81 5.45*** Have electricity connection (% of HHs) 14 23 4.68***

The education opportunity divide

The living environment divide

What about heterogeneity among the poorest?

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Is there a spatial heterogeneity? Is there a spatial heterogeneity?

Poorest districts

Moderate poor districts

Male labour force participation (% of 15-60 years old)

88 91

Female labour force participation (% of 15-60 years old)

13 11

Child labour (% of 10-14 years old) 13 7

Primarily involved in day labour (% of labour force)

59 51

Hours worked per day (mean) 6.63 6.39 Cash wage received per day (mean in Taka) 64 66

Owns cultivable land (% of HHs) 30 32 Leased in cultivable land (% of HHs) 22 27 Owns livestock (% of HHs) 69 77 Own at least one non-agriculture enterprise (% of HHs)

16 28

Net annual revenue from the enterprises (mean in Taka)

25,449 24,646

Receive remittance from within country (% of HHs)

18 18

Amount of remittance received in 12 months 3,498 4,988

Vulnerable labour market engagement

Weak asset base

16

The poorest are heterogeneousThe poorest are heterogeneous

The bottom 10% are much worse off

The poorest living in the poorest areas are particularly vulnerable.

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GraduationGraduation

Mainstream poverty alleviation interventions by and large leave out the poorest

Safety net interventions are not designed to help the poorest graduate

Design Safety nets as stimulus package: interventions combining and sequencing safety nets and poverty alleviation instruments for graduation outcomes for a large majority of the poorest:

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Graduation FrameworkGraduation Framework

BRAC two-step modelBRAC two-step model

1. In 1985 BRAC realised its microfinance programmes were unlikely to meet the needs of the ultra poor.

2. Food donations provided a ‘breathing space’ for the poorest these would not remove chronic poverty.

3. Attempt to combine food relief with skills training program, to create a basis for enhanced household income in the future.

4. Regular compulsory savings of a few cents during the period of their food relief to build up a lump sum for investment.

5. Training on poultry and vegetable production for female VGF cardholders was given and they were able to access microcredit

6. At the end of the 24-month programme the ultra poor were eligible for microcredit

Poverty reduction as a 'two-step' process of livelihood protection and promotionPoverty reduction as a 'two-step' process of livelihood protection and promotion

Results mixedResults mixed

1. About 80% of the IGVGD beneficiaries joined BRAC’s regular microfinance programme

2. But only 70% continued beyond three years i.e. over 40% of the IGVGD beneficiaries fail to start the process of graduation.

3. Those who dropped had fragile socio-demographic structures – the female headed households who do not having a working adult male in the household and/or suffer from chronic illness, etc

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Need to look at Need to look at

Tackling the social and attitudinal constraints which reproduces a non-enabling environment for the ultra poor.

Asset transfer

Dealing with local elites

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Islamic MFIsIslamic MFIs

Social Development Program

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

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Problems facing Islamic MFIs Problems facing Islamic MFIs

1. Dilution in the Application of Islamic Modes of Financing

Main mode- murabahah or bai-muajjal.

– It is difficult to go out with the clients and buy the goods/assets from faraway markets

IMFIs delegates someone else (and inspects later)

Alternative is to use Profit-sharing modes

– Problem is the moral hazard problem--No book-keeping and difficult to monitor

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ConclusionConclusion

There are strong economic reasons for establishing Islamic alternatives to poverty-focused micro financing.

Traditional institutions of waqf, zakat, and qard hassan are important means of financing IMFIs

Thank YouThank You

CENTER OF ISLAMIC BANKING & ECNOMICS

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