International Conference onIslamic Microfinance

CENTER OF ISLAMIC BANKING & ECNOMICS

Held At:

Faisal Auditorium Islamabad - Pakistan

Organized By :

Islamic Microfinance : An Outreach Analysis in

Global Perspective

Presentation By :Dr Shabbir HussainMD, HHRD

International Conference on Islamic Microfinance organised by Al Huda in collaboration with

Akhawat13 June, 2011

PRESENTATION

MICROFINANCE MODELS

OUTREACH ANALYSIS

IntegratedApproach

MinimalistApproach

Credit Only

FINANCIAL INTERMEDIATION

· Working Capital· Fixed Asset Loans

· Savings

SOCIAL SERVICES· Education

· Health & Nutrition· Literacy Training

EDEVELOPMENT SERVICES· Entrepreneurship Training · Production/Skills Training

· Marketing

SOCIAL INTERMEDIATION· Community Mobilization

· Group Formation · Social Collateral

· Insurance

Credit + (Financi

al & Non

Financial)

“ Credit Plus” includes development and social services in comparison with “Credit

Only” approach

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

NGOs

Specialized Banks

Promotion of MED, training & helping linkage with banks

V/WOs

NGOs

Specialized Banks

Promotion of MED, training & providing Credit Support

V/WOs

Specialized Banks

Promotion of MED, training & providing Credit

V/WOs

NGOs as Facilitators

Three- Pronged

Approach

NGOs as Financial Intermediaries

Banks as MFIs

At the Poverty Line

Below the Poverty Line

Abject PoorSafety Net

Livelihood

GrowthM E D

Consumption Credit

I G A s

Classification Objective Approaches

The effectiveness of Microfinance approaches varies across different levels of

poverty

HHRD Qard Hasn

HHRD Murabah

HHRD Mudarba

OUTREACH ANALYSIS OF SELECTED INTERNATIONAL

MODEL OF MFIs

Outreach Analysis of Selected MFIs in South Asia

(Source: www.micromarket.org,

MFI # of Borrowers % Women

Cost per Borrower

Self Sufficiency Ratio

Grameen BankBangladesh

6,707,000 96 10 98.80

BRAC Bangladesh 6,397,635 96 12 106.65

ASA Bangladesh 5,422,787 96 7 187.17

Spondana India 1,188,861 96 8 159.07

Bandhan India 896,698 100 9 133.14

Cashpor India 303,243 100 15 102.00

AML India 565,806 100 14 111.53

Kash Pakistan 295,396 95 23 164.10

Khushali Bank Pakistan

405,111 48 15 79.70

FMBF Pakistan 229,443 42 23 90.43

WDB Sri Lanka 146,808 100 10 162.44

BRAC Sri Lanka 34,550 100 25 48.80

(Source: www.micromarket.org.

Poverty Transition Microfinance Burrowers

%

Very Poor to Moderately Poor 48 38.4

Very Poor to Non Poor 22 17.6

Moderately Poor to Non Poor 26 20.8

No Change 27 21.6

Non Poor to Moderately Poor 1 0.8

Moderately Poor to Very Poor 1 0.8

125 100

Microfinance is fast emerging viable tool to reduce Poverty

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)

Group Dynamics• Islamic values of brother/sister-hood improves

cooperation among the group members

Financing the poorest• Zakat and other charities can supplement MFI

activities (non-diversion of funds)

continued---

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/DefaultLess aggressive and use Islamic teachings to recover

loans

SOME MODES OF ISLAMIC FINANCE

PARTNERSHIP BASED

Musharka

Mudarba

TRADE BASED

Murabaha

Sal’m

Istisna

RENTAL BASED

Ijara

Diminishing

Musharka

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

13

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)

14

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)

15

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

16

Institution Type # of Institutions

Total # of Borrowers

% Total Loan Portfolio(Ud $)

% AverageLoan size (US $)

Cooperative 1 6,671 2 926,251 <1 132Village Bank (Syria)

1 2,298 1 1,838,047 <1 800

NGO 14 125,793 42 41,421,580 21 303Rural Bank (Indonesia)

165 74,698 25 122,475,158 62 1640

NBFI 3 4,293 1 1,893,207 61 595Commercial Banks 2 87,569 29 29,030,997 15 305Total 126 305,237 100 198,090,268 100 629

Outreach of Islamic Microfinance by Institution Type

Source : CGAP 2007

17

Country # of included Institutions

Percentage of Female

Total # of Borrowers

Total Outstanding Loan Portfolio

Average Loan Balance

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

Outreach of Islamic Microfinance

Source : Focus Notes No 49, August 2008, CGAP

Islamic Microfinance Programs across the Globe

Indonesia

Bangladesh

Afghanistan

Pakistan

Malaysia

India

Azerbaijan

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

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

Islamic Banking : Govt agencies ‘s organizations finances small and medium scale enterprises

AICMEU

Bait –un Nasr

Egypt

Syria

Lebanon

Yeman

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

Mu’assat Bayat Al-Mal : Affliate of Hezbollah comprises qard Al-Hasan 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

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%

78%

Formal

Non Formal

Interest Rates (in %) Formal vs. Non Formal

0

10

20

30

Formal Non Formal

Inte

res

t R

ate

Borrowing Pattern in Pakistan

Informal Lenders

Commission Agents

12%

Money Lenders

37%

Feed Dealers

12%

Others2%

Agra Input Dealerds

22%Shopkeeper

15%

c

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

1999 – 2011 MICROFINANCE IN PAKISTAN: HISTORICAL PERSPECTIVE

1999 2000 2001

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

PPAF begins disbursing microfinance funds

PPAF Phase I & II : US$ 300 Million

Khushhali Bank becomes operational

Microfinance Sector Development Programme (ADB)

Microfinance Ordinance

US$ 150 Million

5 Microfinance Banks

2005 2009

NMFB.

BRAC-PAK

2006

1.4 million

40 + MFPs

FMFBL,TMFBL,RMFBL, POMFBL,

NRSP, ASA

Kashf Bank

PPAF Phase III

2011

Major Microfinance Providers in PakistanMFIs 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

RSP

Others

NRSP PRSP SRSP TRDP Lachi Poverty Reduction Project Sungi Development Foundation Orix Pakistan Sindh Rural Support Program Taraqi Foundation Save the Poor Human Development Foundation

SCALE OF OUTREACH

Presentation By : Dr Shabbir Hussain,

NRSP KB Kashf FMFBL PRSP0

50000

100000

150000

200000

250000

300000

350000

400000

450000428075

405111

288076

229443

78878

Largest Providers of Microfinance( Number of active borrowers)

Data Source: Microwatch, PMN, Sep 2009

Current Outreach of all MFIs in Pakistan exceeds 1.85 million Active Borrowers

Presentation By : Dr Shabbir Hussain,

NRSP KB FMFBL Kashf TMFB0

1000

2000

3000

4000

5000

60005030

4150

32002880

1350

GLP of Largest Providers of MicrofinanceIn Pakistan exceeds 15 billion rupees

million rupees

DtSource: Microwatch, PMN, Sep 2009

Current Outreach1.83 million borrowers

Estimated Demand 27.7 million borrowers

Access

Quality

Products

Funding

Sustainability

Sustainability

Funding

Products

Quality

Access

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

29

An estimated 72 percent of people living in Muslim-majority countries do not use formal financial services

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).

Islamic microfinance is concentrated in a few countries, with the top three countries (Indonesia, Bangladesh, and Afghanistan) accounting for 80 percent of global outreach.

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.

Conclusion

Presentation By : Dr Shabbir Hussain,

TJAZAK ALLThank You!

Thank You

CENTER OF ISLAMIC BANKING & ECNOMICS

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