International Conference onIslamic Microfinance

CENTER OF ISLAMIC BANKING & ECNOMICS

Held At:

Organized By :

Overview of Microfinance

June 2011

Presentation Outline

• Financial Exclusion

• The Opportunity

• Challenges

“In developing countries financial exclusion is pervasive, Pakistan is no exception”

Bank Loan per 1,000 adults

Deposit Accounts per 1,000 Individuals

Bangladesh2.5

India19.7

Thailand92.1

USA3,790.2

Brazil101.1

UK4,484.4

Pakistan4.0

Indonesia15.8

Kenya11.1

Sri Lanka14.2 Malaysia

25.7

Argentina105.4

Insurance density in USD$

Insurance Density: Gross Premium per capita

Bank Branches per 1,000 Adults

Page 9

Access Strand

Finscope Pakistan

11% 1% 32% 56%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Total

%

Banked Other Formal Informal Financially Excluded

The Formally Served

The Informally ServedThe Financially Excluded

The Financial Market Development Frontiers

Page 10

Access Strand by Province

Finscope Pakistan

11%

12%

11%

11%

4%

30%

1%

1%

0%

0%

0%

2%

32%

35%

34%

28%

13%

26%

56%

52%

55%

60%

84%

42%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Total

Punjab

Sind

KP

Balochistan

Azad Jamu Kashmir

Pro

vin

ce

%

Banked Other Formal Informal Financially Excluded

In Punjab, Sind, NWFP and AJK, people have access to some form of financial service either formal or informal but the issue of financial exclusion is most severe in Balochistan (84%) followed by NWFP (60%). In Balochistan not only a high percentage of people no access to formal and informal financial service but even the percentage of banked and those with access to informal financial services lags far behind other provinces.

The access scenario looks relatively bright in AJK due to the earthquake in October, 2005. In order to receive government subsidies and livelihood support, people are required to have a bank account in which aid money can be deposited. According to one estimate 1.8 out of 3.5 million of Kashmiri population has been affected by the earthquake.

Page 11

Access Strand by Urban/Rural

Finscope Pakistan

11%

15%

9%

1%

1%

1%

32%

31%

33%

56%

53%

57%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Total

Urban

Rural

Urb

an/R

ura

l

%

Banked Other Formal Informal Financially Excluded

Interestingly, the scale of financial exclusion - though high - is quite similar in urban and rural areas as is the scale of the informal financial services. However, the difference lies in the percentage of people who are banked or unbanked. In urban areas 15% people are banked while only 9% people are banked in rural area.

Page 12

Access Strand by Gender

Finscope Pakistan

11%

19%

4%

1%

1%

1%

32%

38%

28%

56%

42%

68%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Total

Male

Female

Gen

der

- R

esp

on

den

t

%

Banked Other Formal Informal Financially Excluded

The issue of financial exclusion along all parameters i.e. those who are totally excluded from availing any kind of financial services, informal services and the banked is most striking along gender lines. There are wide gaps between men and women who are banked, informally served and the financially excluded

Page 13

Access Strand

Finscope Pakistan

11% 1% 32% 56%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Total

%

Banked Other Formal Informal Financially Excluded

The Formally Served

The Informally ServedThe Financially Excluded

48% or 12 million people say they would like to have their own bank account

31% or 13 million people say they would like to have their own bank account

25 million non-banked adults say they would like to have their own bank account

“Reforms that promote access to financial services should be at the core of the development agenda...

Better access to finance not only increases economic growth, but also helps fight poverty, and reduces

income gaps between rich and poor people.”

- Dr. Asli Demirgüç-Kunt

Senior Research Manager, Finance & Private Sector,The World Bank

Relationship between Financial Exclusion and poverty exists….

*Source: : http://maps.grida.no/go/graphic/poverty-by-country-share-of-population-living-under-usd-2-per-day-2004

There is a moderate to strong relationship between GDP per capita and usage of financial services

Presentation Outline

• Financial Exclusion

• The opportunity

• Challenges

DNA of two paradigms• Microfinance

– Finance/Banking

– Low income segment

– Resource Allocation

• Islamic Finance

– Finance and Banking

– Resource allocation

– Equity

It may be sad but it is a fact that Islamic banking is emerging as a second line of defense for the International Commercial Banking “offering Halal products” and bringing in new untapped markets to the “fold”. Islamic banking, like its conventional counterpart, is fast becoming “banking of the rich, by the rich, for the rich.” But what about the egalitarian social and economic objectives of Islam? What about claims of superiority of Islamic model over capitalistic model on grounds of equity and Justice. What about the Maqasid al Shariah? Are theseforgotten in the pomp and show of the world of high finance?Source: International Institute of Islamic Business and Finance, Dr. Mohammed Obaidullah

An Excellent Policy Framework

Microfinance Islamic Finance• Islamic Banking

Department in SBP-2003

• Guidelines for Islamic Financial Products – 2003

• Models for setting up Islamic MF Bank – 2006

2000

2009

Microfinance Market

20Source: Hashemi, Syed and Richard Rosenberg. Graduating the Poorest into Microfinance – Linking Safety Nets and Financial Services. CGAP, Washington DC. 2006 and HIES, 2004-2005

Microfinance (Credit, Deposit,

Insurance and Remittances)

Transitory Vulnerable(17.1MM)

Transitory Poor(12.4MM)

Chronic Poor (4.6MM)

Extremely Poor (0.8MM)

Safety Net Programs

Total 29.5 MM Adults

Assuming 50% adult poor require credit services:

Microcredit potential is approx. 15MM

Current Penetration

11.33%Non-Poor (21.7MM)

Transitory Non-Poor(32.2MM)

Micro Credit

Foot print is spread across Pakistan

...With different institutional Models

Industry Players and their market share Infrastructure

• 8 Microfinance Banks (MFBs)

• 4 Rural Support Programs (RSPs)

• 5 Specialized Microfinance Institutions (MFIs)

• 31 NGOs• Staff: 10,700*• Outlets: 1,480*

22*Source: MicroWATCH (Jan-Mar 2009). Pakistan Microfinance Network, Islamabad. June 2009

…and diversified portfolio exposure

Survey Surveyed CountriesRespondents preference (%)

CGAP 08 Jordan, Algeria, and Syria 20 - 40%PlaNet Finance 07 West Bank and Gaza 35% - 60 % USAID 02 Jordan 24.9%IFC/FINCA 06 Jordan 32%Frankfurt School of Fin & Mgmt 06

Algeria 20.7%

IFC sponsored Study

Yemen 40%

IFC 2007 Syria 43-46%Bank Indonesia 2000

Indonesia (East Java) 49%

A recently survey Conducted by AlHuda CIBE in Azad Kashmir exhibits 99% demand (4 Districts)

Demand of Islamic Micro FinanceDemand for Islamic Microfinance

Pakistan’s ExperiencesInstitution Mode of Finance

Akhuwat AIM – interest free loan

Qaraz-e-Hasna

CWCD Murabahah, Ijarah, Salam & Istisna

MicroTakaful

NRSP – NWFP Murabahah

Mudarabah with BOK for funding Source

Khawendo Kor Murabahah but in limited scale

Islamic Relief Murabahah and Qarz-e-Hassan

KKCB Murabaha and MicroTakaful

Helping Hand

Muslim Aid

Naimat Islamic Microfinance

Farz Foundation

Takaful Pakistan Limited

Murabahah

Murabahah

Murabahah

Murabahah - MicroTakaful

MicroTakaful

Islamic Microfinance Presence in Pakistan

Presentation Outline

• Financial Exclusion

• The Opportunity

• Challenges

11

Increasing Financial Penetration

Global Demand

Global Outreach

Pakistan Outreach

India Outreach

Bangladesh Outreach

South Asia Outreach

6 8 15 32 6017 2044

88

163

3 510

40

110

0

50

100

150

200

250

300

350

2007 2008 2012(P) 2015(P) 2018(P)

Equity Debt Deposit

28Equity Rs.52B; Debt Rs.143B; Deposit Rs.105B

Incremental Rs.

36B in 4 years

Meeting Financing Requirement

22

Incre

men

tal

264

B in

anot

her 6

ye

ars

29

Building the HumanResource Base

33

230

4,370

6,899

Senior Management

Middle Management

Field Staff

3M 6M 10M

Senior 400

600

667

Middle 6,200

9,400

12,667

Field 13,400

30,000

53,333

Total 20,000 40,000 66,667

Productivity Benchmarks

1%

19%

80%

150 borrowers/

staff

How do we overcome these challenges..

• Focus on Institutional strengthening

• Legal framework for MFIs

• Partnership between SBP, PPAF and PMN can address policy issues

• Thinking out side the box (BB, the missing middle, deposit mobilization, synergies /partnerships)

31

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