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Islamic Microfinance Five Year Strategic Business Plan (2014-2019)

“Expanding Financial Inclusion in Bangladesh through Islamic Microfinance”

Submitted toIRW

Revised: 10.08.2014

Submitted byIslamic Relief, Bangladesh House-10, Road-10, Block-K Baridhara, Dhaka, Bangladesh

Contact PersonShabel Firuz, Country Director

Contents

Executive Summary......................................................................................................................... 3

Strategic Vision for Islamic Relief Bangladesh Microfinance Programme.................................3

Background and present position of IRB’s MF Interventions.....................................................4

Five Year Business Plan..................................................................................................................6

Budget Summary:.......................................................................................................................... 13

Narratives of IRB’s Institutional Microfinance ‘5-year Strategic Business Plan’......................14

Target beneficiaries/ clientele and Market...................................................................................14

IRB’s Islamic Microfinance geographical coverage:...................................................................15

Financial products and services:.................................................................................................16

Profit Rate Policy for investment (Bai-Murabaha):......................................................................16

Groups, methodology and delivery mechanism:........................................................................16

Monitoring and Internal Controls..................................................................................................18

Strategy to grow:............................................................................................................................ 18

Funding:.......................................................................................................................................... 19

Operations...................................................................................................................................... 20

Staffing:........................................................................................................................................... 20

Growth and Composition of Staffing Requirements...................................................................21

Systems and Policies..................................................................................................................... 21

Human Resource Development Strategy.....................................................................................22

Risk and assumption..................................................................................................................... 23

Efficiency and productivity...........................................................................................................24

Financial Projection (In GBP)........................................................................................................25

Diagram of the business plan 2014 -2019......................................................................................288

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Executive SummaryIslamic Relief Bangladesh started its microfinance programme in 1996. These small scale microfinance projects expanded and since 2005 the programme has been operating through an institutional microfinance approach utilizing Islamic Microfinance principles. IRB applied for its microfinance business license to Microcredit Regulatory Authority (MRA) but the license from MRA was not possible due to gaps in IRB’s governance/registration status and profitability issue. However, IRB will reform its governance, update registration status and make an effective business plan to reach its profitability within three years of its microfinance operations for seeking re-registration (MRA license) of its I-MFI to assist in the development of the Islamic Microfinance sector in Bangladesh and provide a demonstration model of Islamic Microfinance through Institutional approach.

Since 2012 IRB has been piloting Self Help Group (SHG) an alternate approach to making low-cost finance available to the ultra-poor. IRB has been strategically developing, researching and piloting Qard-al Hasana financing using the Self Help Group (SHG) model. IRB confidently promotes Qard al-Hasana through SHG approach on a sustainable basis as groups manage the micro financing by themselves without any operational cost and are the possessors of the loan revolving fund, therefore this model seems to be effective.

In the first phase of PPA-PROVED (2013-2014), IRB took different initiatives in promoting Islamic Microfinance across Bangladesh by organizing trainings for capacity building of local I-MFIs/MFIs and NGOs, commissioned research works on I-MF in Bangladesh, organizing national seminar with wider stakeholders and developing I-MF networking for relationships building with related government body, selected local MFIs/I-MFIs, academics, and Private Islamic Banks.

Over the next five years, IRB will establish its I-MFI as one of the leading among I-MFIs to assist in the development of Islamic Microfinance in Bangladesh and provide a demonstration model of Islamic Microfinance through Institutional approach; in parallel IRB shall build on its established relationships to promote I-MF across Bangladesh amongst other established MFIs/Banks through policy engagements and capacity building initiatives with local partners/ I-MFIs and also develop, strengthen SHG approach as an additional tool for operating I-MF on a sustainable basis to ultra-poor target groups

Strategic Vision for Islamic Relief Bangladesh Microfinance Programme

IR Bangladesh will assist in the development and expansion of Islamic Microfinance in Bangladesh and provide a demonstration model of Islamic Microfinance through Institutional approaches and Self-Help Group model. Its objective is:

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Strategic Objective: To contribute to reduce poverty of the rural poor in Bangladesh by providing Islamic Microfinance services and strengthening the Islamic Microfinance system in Bangladesh by establishing sustainable Islamic Microfinance Institution, capacity building, demonstrating and advocating for widening shariah compliant interest-free financial access for small-scale entrepreneurs and ultra-poor households.

To achieve the strategic objective, IR Bangladesh will accomplish the following over the next 5 years:

Objective 1: Contribute in creating a favorable environment for the expansion of Islamic Microfinance in Bangladesh through policy dialogues with policymakers, regulators, funders via awareness raising, capacity building and advocacy related activities.

Objective 2: Promote Islamic Microfinance across Bangladesh by encouraging wider private banking sector involvement, capacity building of local I-MFIs/MFIs and NGOs, and through developing technical relationships and partnerships with selected local MFIs/I-MFIs.

Objective 3: Register an I-MFI with the MRA to directly serve at least 10,800 low-income entrepreneurs, especially vulnerable households, with Islamic Microfinance products and services by the end of 2019.

Objective 4: By ensuring portfolio quality while increase outreach and efficiency with its institutional approach, reach to financial self-sufficiency by the end of year three (2016-2017).

Objective 5: Institutionalise and strengthen SHG model as an additional low-cost approach of providing Islamic Microfinance to the ultra-poor.

Background and present position of IRB’s MF Interventions:Building on earlier and ongoing Islamic microfinance projects, Islamic Relief Bangladesh has been implementing a programme namely “Poverty Reduction of Vulnerable Households through Small Scale Entrepreneurship Development (PROVED)” with the aim to increase incomes of poor households through self-help group approach by providing Islamic Shariah Compliant Microfinance to contribute towards achieving MDG1 (reduction of poverty and hunger) through improving livelihoods of the rural poor people in northwest part of Bangladesh. The programme encapsulated a number of smaller Islamic microfinance projects under one umbrella and supported capacity building of existing and new SHGs, SHG strengthening, extending Qard al Hasanah loans to additional SHG members, undertaking research and policy level works to raise awareness on Islamic microfinance challenges and prospects in Bangladesh.

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Funded by DFID PPA, the programme has been ongoing since January 2013. The PROVED project was an integration IRB’s microfinance based livelihoods projects. A total number of 4509 poor families have benefited through this project in two sub districts (Mithapukur and Pirghacha) in Rangpur district. Of them, 1501 women from Mithapukur Upazilla are the direct beneficiaries of the PPA funded element of the project and received Islamic Microfinance product Qard Al Hasan financing through Self Help Group approach. Self Help Groups have been formed and operational to achieve the goal of the project. In addition to financial supports to 1501 beneficiaries, all 4509 beneficiaries are being provided financial services from other IRB’s projects and are aware of different social issues -rights, health, nutrition, accessibility etc.

IRB wants to continue this PROVED programme through operating Islamic microfinance product Qard Al Hasana through community financing mechanism -SHG model (foster these 4509) beneficiaries for a certain period of time (at least for next two years) to build SHG as strong platform for revolving based Islamic microfinance by the beneficiaries to contribute to poverty reduction. IRB helped forming an Apex Body of SHGs to institutionalize the SHG model. This apex body has been registered with government’s local co-operative department recently and will have overall coordination and management responsibility to support SHGs. This apex body will be nurtured and empowered in a way that in two years time this apex body will have capacity to manage SHG led activities including Islamic Microfinance.

IRB will take the leading role in bringing NGOs, MFIs, the private sectors, Government agencies, and civil society to work together to create a conducive environment for leveraging Islamic Microfinance In Bangladesh which has a huge potential, as a good number of poor Bangladeshi people like to practice in their economic activities through “Shariah” based Islamic financial system.

The DFID PPA fund will provide significant prospect, focus and momentum to develop a strategic direction based on different research findings, sharing and consensus among key stakeholders to create a foundation to support establish its I-MFI to assist in the development of Islamic Microfinance in Bangladesh and provide a demonstration model of Islamic Microfinance through Institutional approach and to promote I-MF across Bangladesh through policy engagements and capacity building initiatives with local partners/ I-MFIs.

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Five Year Business Plan:

Strategic Objective: To contribute to reduce poverty of the rural poor in Bangladesh by providing Islamic Microfinance services and strengthening the Islamic Microfinance system in Bangladesh by establishing sustainable Islamic Microfinance Institution, capacity building, demonstrating and advocating for widening shariah compliant interest-free financial access for small-scale entrepreneurs and ultra-poor households.

Objectives Intervention/Activities required to achieve

goals

Output/Indicators of Achievements

Activities will be done

(2014-2019)

Critical Assumption

14-15 15-16 16-17 17- 18 18-19

Objective 1: Contribute in creating a favourable environment for the expansion of Islamic Microfinance in Bangladesh through policy dialogues with policymakers, regulators, funders via awareness raising, capacity building and advocacy related activities

1. Organize training on I-MF to I-MFIs /NGOS/ Islamic Banks / Policy Makers / Academics.

2. Develop a national Islamic Microfinance platform and networking body, Regular activities to strengthen network body

1. Trained human resources available for expanding I-MF in Bangladesh.

2. Strong Islamic microfinance platform is created to promote and develop I-MF and encourage MFI, NGOs and other private sector to engage in

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Government positive attitude on I-MF development

Normal political environment;

Positive response and commitment of private Islamic Banks Commercial Banks and other private sector positive role in developing/ expanding I-MF.

3. Organize policy dialogues with policymaker, regulators

4. Identify policy gaps of relevant Institutions/ regularity body for l-MF and prepare recommendations to contribute to formulate/approve policy for I-MF

promoting I-MF across Bangladesh.

3. Support created amongst stakeholders to address any I-MF policy gaps and contributed in drafting of I-MF policy in Bangladesh.

4. Policymakers, regulators and other stakeholders aware and contribute to new I-MF policy development.

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Objective 2: Promote Islamic Microfinance across Bangladesh by encouraging wider private banking sector involvement, capacity building of local I-MFIs/MFIs and NGOs, and through developing technical relationships and partnerships with selected local MFIs/I-MFIs.

1. Workshops and policy dialogues with Private banking sector leaders and Encourage private banking sector expansion of I-MFI

2. Continuous communications with Private Islamic Banks and other commercial banks through meeting and workshop

3. Support capacity building of local IMFIs/MFIs and evolve technical relationships to explore operational opportunities with private Islamic Banks; vet

1. Increased investment in I-MF, I-MF expansion by banking sector and created new funding source for I-MF.

2. Private banking sector have expanded I-MF projects and are funding other NGOs to increase I-MF clientele

3. Increased I-MF clients through local NGOs and MFIs; developed partnerships with private Islamic Banks for fund generation

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√ √ Positive cooperation from Private Islamic Banks, positive attitude to invest in I-MF sector.

Creditability of Local NGO to Invest fund

potential of local partner MFIs.

Objective 3: Register an I-MFI with the MRA to directly serve at least 10,800 low-income entrepreneurs, especially vulnerable households, with Islamic Microfinance products and services by the end of 2019.

1. Register a local Register a new local entity with JSC to initiate IRB’s Institutional I-MF activities

2. Applied for MRA Registration to obtain business license

3. Marketing and developing web based online fund accumulation mechanism

4. New branch office open

5. Group formation, Beneficiaries/clients selection

6. Murabaha, Bi-salam and

1. Obtained registration from JSC

2. Obtained a MFI business license from MRA

3. Receiving funding from local personal and corporate donor

4. Five branch offices open.

5. 360 groups formed and 10800 new beneficiaries are served under I-MF programme

6. 10000 clients are served with I-MF

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Governing body composition might be an issue for registration process

Previous IRB’s applications and negative impression of MRA Authority might be an issue in ensuring business license

Unstable political situation, natural disaster. Ensure funding

Favorable political environment, staff

Objective 4: By ensuring portfolio quality while increase outreach and efficiency with its institutional approach, reach to financial self-sufficiency by the end of year three (2016-2017).

diminishing Musharaka investment and repayment made.

7. I-MF Product selection for Institutional Microfinance

1. Applied for grants, Qard Al hasana, commercial source for capitalization

2. Selection of market driven easy and clients friendly I-MF product

3. Ensure staff efficiency, strong

products and services

7. Suitable I-MF products identified and developed for clients

1. Secure grants from different sources, Qard Al Hasana, noriba functional, savings collection from Clients to ensure sufficient investment

2. Repayment of Investment will keep in above standard ( 98%)

3. Ensure excellent repayment rate, staff efficiency,

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efficiency and fund availability.

Stable political situation of the country, Organizational approach to the local donor

Suitable political environment of the country, Natural disaster

Objective 5: Institutionalise and strengthen SHG model as an additional low-cost approach of providing Islamic Microfinance to the ultra-poor.

portfolio management, review risk and mitigation strategy

1. Organize training sessions for SHG leaders on SHG management, financial management and leadership development.

2. Regular follow up and monitoring SHG activities

3. Orientation and Trainings for SHG’s Apex body leaders

4. Refine bi-laws and develop a

develop planning for risk and risk mitigation.

1. SHGs sufficiently developed and strengthened to self-manage and sustain own activities.

2. SHGs capacity for self-management strengthened.

3. Capacity of SHG Apex body leaders developed to continue support to SHGs.

4. SHGs as well as Apex body of SHGs

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Stable political environment

No severe disaster in the project area

Honesty and integrity of SHG leaders.

Willingness of Apex body leaders

simple operational manual for SHG Apex body

have well developed bi-laws and operational manual

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Budget Summary: Total budget for the two years extension period is GBP 225,000. Below table describes the summary of budget plan.

Cost Description Percentage (%) Total L.C. Total R.C Total GBP

Personnel Cost 39.80% 11,539,191.43

89,544.81

89,544.81

Direct Charitable Expenditures 54.49%

15,798,000.00 122,593.41

122,593.41

Assets and Non Capit. assets 1.18%

341,000.00 2,646.18

2,646.18

Running Cost 4.54% 1,316,433.60

10,215.60

10,215.60

Office Support Cost 0.00% -

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Total 100.00% 28,994,625.03

225,000.00

225,000.00

** Loan revolving fund is GBP 77,600, which is merged in above mentioned row “Direct Charitable Expenditures”

Detail budget is available in IRW’s approved format.

Narratives of IRB’s Institutional Microfinance ‘5-year Strategic Business Plan’

Islamic Relief Bangladesh will create a locally registered I-MFI to assist in the development of Islamic Microfinance in Bangladesh and provide a demonstration model of Islamic Microfinance through Institutional approach. Islamic microfinance is not common in Bangladesh, although Bangladesh is the home of microcredit, at present there are thousands of Conventional Microfinance Institutions (MFIs) working for poverty eradication but unfortunately still poverty is a central ailment for over all development and it has not been declined significantly. The interest rate still high, C-MFIs are not care about the spiritual, moral and ethical dimension of the rural/urban poor but it is the important issues in the all aspects of human life.

As Islam has a complete code for all mankind, it might be applicable in every sphere of life whether business, service or any other parts of human life. It has also placed central focus on poverty alleviation to establish dignity and self-reliance through a consciously participatory development agenda. But still Islamic microfinance initiatives in Bangladesh are very few. Further, these few institutions are not integrated into the formal financial systems. Islamic microfinance initiative can display wide variations in the models, instruments and operational mechanisms. While, in terms of reach, penetration and financial ability, Islamic microfinance institutions lag far behind their conventional counterparts they certainly have potential to score better in terms of richness and variety. Islamic microfinance institutions similar to conventional microfinance institutions use group financing as morale collateral, taking women beneficiaries and aiming at alleviation of poverty.

In considering the above issues, Islamic micro-financing is an opportunity for Bangladesh, where a good number of Bangladeshi citizens like to practice in their economic activities through “Shariah” based Islamic financial system. The Islamic Microfinance models have been formed through the concept of shariah based Islamic finance i.e. Bai- Muajjal, Murabaha, Ijara & Bai-Salam. All these models have so far been proved as feasible way of financing in the Bangladeshi context at the micro level.

Target beneficiaries/ clientele and MarketIRB will target the poor and marginalized women (age 18-55 years) in targeted areas. In wealth ranking, they will be the bottom line households in community. They do not have significant productive assets; income level is low and irregular (average £ 10 - 20 GBP per week); low scope of savings and limited access to institutional micro credit.

A profile for target peri-urban and rural microfinance beneficiaries is included below. It was determined from IRB’s other livelihoods/ I-MF ( Qard Al Hasana) led Livelihood project’s experiences and also discussion with leading MFI’s ( BRAC, ASA, Grameen Bank) beneficiaries as well as their Branch office staffs.

Target Micro entrepreneur/ clients

Age 18-55 (20-40 most frequently)

Sex Female: 100%

Marital Status Married, widow and woman headed families

Education Primary to secondary school, 75% illiterate

Type of business Agriculture production & livestock and micro enterprises in service, production or trade

Location Rural area and peri urban location

Land 10 decimal – 60 decimal in maximum HHs , very few have 100 to 150 decimal ( 5% of total beneficiaries)

Savings Savings in small amount, sometimes no savings

Repayment capacity £ 10 - 20 GBP per month

Reason for Loan Working capital and asset acquisition, , seeds & material purchase for agriculture, livestock raising etc.

Effective Amount demanded

£ 100 - 300 GBP – working capital

£ 100 - 250 GBP asset acquisition or livestock

Access to bank credit No, due to lack of guarantors and assets

Access to NGO/MFIs credit

Few of them, however no access to Islamic Microfinance product and services

Income flows Daily, Weekly and Monthly

IRB’s Islamic Microfinance geographical coverage:

IRB will start its Institutional Islamic Microfinance programme in northern district- greater Rangpur, since north-west part of Bangladesh is one of the poorest regions among other areas of Bangladesh. In 2005, Bangladesh Bureau of Statistic (BBS) estimated poverty rate in north-west in Bangladesh - 34.50% (lower poverty line) and 51.20% (upper poverty line).

Seasonal unemployment is common phenomena in this area. Consequently, unemployment creates monga (‘Monga’ is a Bangla word, means seasonal food crisis) in every year during a particular period. People of this area needs support, Islamic MF project will be a good opportunity for the poor people to develop their livelihoods.

Financial products and services:

a. Savings product: Mudaraba Islamic Micro Savings: IRB will collect compulsory savings from its members/clients under a savings product named “Mudaraba Islamic Micro Savings”. Mudaraba is a contract between two parties in which one party will provide capital and other party will manage the business. Clients are capital provider -Sahib-Al-Maal and the user of this fund ( IRB) is Mudarib. As per Shariah principles, the Mudarib will conduct the business independently following Shariah principles.

b. Investment products: IRB will extend investment to its members/clients who comply with set terms & conditions relating to its investment policy. The investment product(s) of IRB is governed by the guidelines of Islamic Shariah Principles under the particular mode of investment. IRB has selected three modes of investment to operate its Microfinance Scheme among which Bai-Murabaha Mode of investment will be emphasized in its day to day investment activities. However, investment under the remaining two modes may be allowed to the clients if it is deemed viable to the authority of IRB in the following years. Other products are i) Bai-Salam & ii) Diminishing Musaraka/ HPSM

Profit Rate Policy for investment (Bai-Murabaha): IRB will operate its Microfinance program under Islamic Shariah mode and follow mark-up sale based products. IRB will add the mark-up profit with the cost price of goods purchased against investment amount as per guidelines of Islamic Shariah prescribed for Bai-Murabaha mode of investment. Mark-up profit for one year investment may be 12% (flat mark-up), this rate needs to be changed in times depending on the market situation. In Bangladesh, MRA ( Microcredit Regulatory Authority) has fixed a policy for interest charging for conventional MFIs, as IRB will operate under MRA license therefore IRB’s Murabaha mark up profit will not be more than MRA interest policy. The mark-up rate will be charged by IRB, is determined by calculating the market-related cost of funds, long term projected operating margin and expected loan losses. IRB changes its Murabaha mark-up as its cost structure evolves to ensure profitability

Groups, methodology and delivery mechanism:i. Group formation:

IRB’s Islamic microfinance programme is group (samity) based, a group will be consisted of minimum 20 members and gradually be increased up to 35 members. Community

Organizer/Laon officer of IRB will facilitate to form a Samity with the members who live in the same village/para. To form a samity following process will be maintained:

Members who live in the same proximity can form a Samity (maximum 1 km distance of Samity centre)

Members must know one another. Must fulfil the membership criteria. The persons who are involved in small & micro business, agriculture, livestock

rearing and other IGA will be eligible to enrol in a Samity with an expressed aim of savings and accessing investments from IRB.

A Samity will be formed on the basis of self-selecting membership method who trust each other and fulfill the membership criteria

A Samity is to be formed with persons who are in viable and legal economic activities.

Distance of Samity members must not be more than one kilometre from the Samity centre.

Community Organizer/loan officer will meet the target villagers individually and in group to discuss about the objectives and aim of IRB microfinance program and facilitate to form a Samity whereas, branch manager will declare a Samity after all verifications.

After formation of a samity, the members of Samity will confirm small groups, management committee and settle functions of management committee, The Samity will conduct a weekly meeting at the place and time agreed by all members of the Samity. Loan and savings collection will take place in the samity meeting.

ii. .Methodology and delivery mechanism:

The group completes a short orientation on IRB’s microfinance program as well as procedure of loan and savings. At the same time, the members participate in basic business training sessions. Afterwards, members can apply for murabaha investment. IRB’s investment committee will scrutinize the application process has been complete and transparent; checks that the members will be able to successfully use and repay the loan and then approves loans. After the application is approved, clients complete a final pre-investment orientation before receiving goods. Investment is confirmed within a week of the pre-investment training. All members of the group who applied for investment support must be present at the branch office to complete required signatures, sign a promissory note. A procurement committee is form for group wise materials procurement as murabaha investment.

Immediately following investment, Community Organizer (CO)/Loan Officer( LO) and branch staffs check to see that the goods/materials were invested in business activities are in existence and working good way, to encourage sound management of the investment, and ensure timely repayment. Group leaders collect the weekly repayment of each member and deposit it at the branch office. After confirming the amounts and issuing receipts, the branch cashier will deposit repayments at a local bank or in the branch office safe until a

deposit can be made. Throughout the loan cycle, CO/LO visit borrowers to monitor repayment, provide support and advise on record keeping and business management.

Monitoring and Internal ControlsIRB will have a comprehensive system of monitoring at the field level to ensure high quality and transparent services and to avoid fraud by CO/LO. Branch management will visit each group at least twice during the loan cycle and generally more often to confirm repayment data and monitor clients businesses. These operational checks are confirmed by financial monitoring by the branch cashiers (including daily cash counts and confirmations of receipts) and senior finance staff (monthly report monitoring, bank statement reconciliations, and at least semi-annual field visits).

IRB will use loan tracking software at head office and branch level. Internal and External audit will serve to ensure that IRB’s reports are accurate and its internal controls strong.

Strategy to grow:Geographical expansion: IRB will begin operations in Sadar Upaziall of Rangpur and gradually open new branch office in other sub-districts of the same district. Ideally one branch will be opened each year to make the total number of Branches 5 in the year five. This measured growth will enable IRB to expand while maintaining strong portfolio quality. To reach its goal of 10,800 clients, IRB will operate up to 5 separate branches in five years of operation.

i. Growth projection:

Groups and clients Year 1 Year 2 Year 3 Year 4 Year 5Number of branch offices 1 2 3 4 5

Number of Groups 50 100 180 250 360

Number of Active clients 1,500 3,000 5,400 7,500 10,800

Women client % 100% 100% 100% 100% 100%Investment and portfolio Number of Investment 1,000 2,500 5,070 7,050 10,150

Number of Bi-Murabaha 1,000 2,500 5,000 6,800 9,600

Number of Bi-Salam 0 0 50 225 500

Diminishing Musaraka 0 0 20 25 50

Portfolio Amount ( GBP) £ 90,000.00 £ 240,250.00 £ 405,600.00 £ 709,000.00 £ 930,200.00

Bi-Murabaha £ 90,000.00 £ 240,250.00 £ 391,600.00 £ 675,000.00 £ 865,200.00

Bi-Salam £ 6,000.00 £ 22,000.00 £ 40,000.00

Diminishing Musaraka £ 8,000.00 £ 12,000.00 £ 25,000.00

Operating Revenue £ 10,246 £ 37,845 £ 74,227 £ 125,451 £ 176,286

Operating cost £ 38,500 £ 47,420 £ 57,748 £ 84,154 £ 110,758

Client Retention Rate :Due to selection and training costs, clients do not become profitable for an institution until their second or third investment cycle. As a result, IRB will strive to provide demand driven

services that are client friendly. Nevertheless, in order to develop conservative estimates, IRB has used an 90% retention rate in its calculations.

Portfolio Quality: IRB will track portfolio quality through three main indicators according to the following targets:

a. Arrears Rate – target 2.5% or lessb. Portfolio at Risk Rate ( PAR 30 days) – target 4% or less c. Loan Loss Rate – 1.5% or less

IRB considers that a certain portion of bad loans will not be recovered therefore a rough assumption of 1.5% of total loan portfolio will be written off.

Funding:Although IRB has set targets for becoming profitable in three years time, the institution will need significant capital funding and some operating subsidies in its early years in order to reach this goal.

IRB will begin its Institutional microfinance operation with expected funding from the DFID-PPA. This funding allowed IRB to establish and equip a head office and branch office, train staff and begin murabaha investment (loan disbursements). IRB expects a separate fund of GBP 51,348 as operational grants- for staff salaries, training and running costs.

IRB estimates for its investment fund (loan revolving fund) to be mobilized as follows: In GBP Year 1 Year 2 Year 3 Year 4 Year 5 Total Grants DFID PPA 77,600 100,000 Grants from Islamic Banks- CSR 22,400

IR Middle East Fund 50,000 50,000 noriba web site fund 5,000 8,000 10,000 20,000 43,000 100,000 55,000 8,000 10,000 20,000 193,000 Qard Al Hasana funding IR Middle East Fund 100,000 100,000 IDB 100,000 100000Islamic Banks from CSR Fund 50,000 50,000 50,000 150,000 150,000 150,000 50,000 350,000 Commercial source Clients savings 6,000 12,500 20,000 30,700 40,000 109,200 Bi-Moajjal from Islamic Banks 100,000 100,000 100,000 300,000 Operating surplus 181 7,929 17,407 25,517 6,000 112,500 20,181 138629 157,407 434,717 Total 106,000 167,500 178,181 298,629 227,407 977,717Cumulative funding 106,000 273,500 451,681 750,129 977,717 977,717

Operations

i. Operational Structure, legal status, ownership and governance: IRB will register with JSC (Joint Stock Company) Bangladesh as a local entity under the society registration Act, 1860 as “Islamic Relief Bangladesh” to begin its operation independently from Islamic Relief current legal status as an INGO. At the beginning of the registration process IRB will seek legal aspects of governance structure, company’s identity and ownership of the company which will allow IRB to obtain MRA license to operate its Islamic Microfinance programme in Bangladesh

Legal Status:In year 1 ( 2014-2015), IRB will register as a local company with Joint stock company which will provides a clear legal status, transparent ownership and governance structure. These features are especially important for obtaining a MRA license to operate microfinance programme in Bangladesh. IRB will apply for its business license to MRA in year 1, subject to MRA guidelines or timing to apply for a licence.

Governance:

The Governing body will generally pursue and carry out the objective of the organization and will be responsible for the management administration of the organization. The Governing body will consist of at least 15 members. There will be an Executive committee with 5-7 members who will also be the members of Governing body. The executive committee will be assigned for regular operations of the organization, monitoring institutional performance, developing operational strategies and managing CEO. The executive committee generally meets quarterly while the Governing body meeting will be once a year.

Staffing:i. The general organigram of IRB is as follows:

Executive Committee

CEO

CO/LO

Internal Audit

Finance ManagerOperation Manager MIS

BMs

Service Staff Cashier

Accounts Department

Governing Body

Growth and Composition of Staffing RequirementsStaffing: IRB’s staff requirements will be as per following chart. During the years following, IR will increase staff and build capacity in its Head Office unit and expand into new branches gradually.Designation Year 1 Year 2 Year 3 Year 4 Year 5CEO 1 1 1 1 1Accounts officer/FM 1 1 1 1 1Operations manager 1 1 1 1MIS Officer 1 1 1 1 1Branch Manager 1 1 2 2 3Loan officer/ supervisor 3 6 9 12 14

Cashier 1 2 3 4 5Support staff 1 2 3 4 5 Total staffing 9 15 21 26 31

Branch offices will serve as administrative and financial support centers for loan staff as well as for conducting client training and meetings. Head Office will focus on supporting branch operations – providing assistance, monitoring, representation, and planning services.

Systems and Policies IRB developed systems and policies to support Islamic Microfinance programme previously in CAP project. In the 1st phase of PPA PROVED project IRB’s microfinance manual was reviewed and endorsed by Central Shariah Board for Islamic Banks of Bangladesh. IRB will take IRWB’s Finance and accounting and administrative policies which will be adjusting on demand for the services.

i. Systems:

Management Information System (MIS): IRB will use loan tracking and Management Information System as a strong portfolio management tool in the industry and through time will cop up with new technologies responding to the needs of Microfinance programs.

Financial (accounting) software: IRB will use quick book or/ customised software which is in built with loan software

Administration/Management/Monitoring: IRB will develop and adapt systems to the needs of a separate Microfinance operation.

ii. Policies:

At the beginning of Islamic Microfinance operations, IRB will use IRWB’s policy and procedures those serve as training manuals for new staff. A series of manuals outline all policies, procedures, reporting requirements, and internal controls.

Through time and in the course of operation IRB amends and incorporates new policies for an efficient and effective program implementation.

iii. Policies to be developed:

Personnel (hiring, firing, benefits and incentives, performance review, responsibilities, etc.)

Administrative (filing, equipment use and maintenance, cash handling, etc.) Product delivery (recruitment, client training, disbursement, monitoring, etc.) Accounting (charts of accounts, write off and reserve policy, presentation of financial

statements, etc.) Training Manuals (training plans and modules for staff)

These policies will be updated on an as needed basis in the years following.

Human Resource Development Strategy Recognizing the importance of training to the achievement of IRB’s strategic objective staff training will be an important on-going exercise for the institution. A general staff training plan will be developed for each position and each staff member will have a training plan developed that meets his/her needs. Both managers and staff members will be responsible for meeting individual training goals and promotions will not be considered until minimum training requirements have been met. Training will be provided by internal staff, IRB’s technical staff (when necessary). Special emphasis will be placed on building internal capacity for training within IRB so that external training will be less necessary in the future.

General training requirements for staff are as follows:

a. Community Organizer/ Loan officer’s Training Credit staff are trained through a combination of class room sessions and hands-on training. Occasional workshops will also be organized on a periodic basis to review topics and add new information/techniques. The initial training and refresher sessions focus on the following topics:

Islamic Microfinance Principles and Methodology Group training, lending and monitoring mechanism Communication and interpersonal relationship Monitoring and Supervision Business analysis Delinquency Management and Portfolio Report development and use

b. Finance Staff Training

All cashiers and financial management staff will learn to translate their financial/accounting background to the microfinance system through orientation on the IRB’s accounting and Management Information System and formal sessions on accounting/financial management for microfinance. In order that they understand the loan delivery process, they will also attend new Community Organizer’s/ Loan officer’s training. Finally, to improve management/accounting skills, select higher level staff may attend managerial training (see below). Some of the formal training sessions that finance staff will attend include:

Islamic finance Principles and Methodology Branch Office Record Keeping Accounting and Basic Financial Management Financial Projections

c. Management TrainingManagement training will take place through a number of methods. Formal sessions on job responsibilities, roles and technical areas of supervision will be accompanied with extensive time (working directly with branch and other department staff. In addition, formal sessions on the below topics (in addition to the Community Organizer/Loan Officer training sessions) will be organized periodically to supplement/add skills in other areas relevant for their job. Finally, internal mentoring programs will be established to allow new branch managers to learn from their colleagues.

Formal training sessions:

Accounting and Basic Financial Management General Management and Administration Islamic MF Products and methodology Growth Management, Internal Controls Business and strategic planning Financial Projections (different tools) Management Information Systems

In addition, IRB will organize periodic special training opportunities for staff on product development, institutional development, monitoring and evaluation, etc. These training opportunities will be held in Dhaka or when appropriate at international training institutes.

Risk and assumption Risk is an integral part of Microfinance business. When MFIs issue loans, there is a risk of borrower default. Any institution that conducts cash transactions or makes investments risks the loss of those funds, microfinance institutions (MFIs) face risks that they must manage efficiently and effectively to be successful. If the MFI does not manage its risks well, it will likely fail to meet its social and financial objectives. When poorly managed risks begin to result in financial losses, donors, investors, tend to lose confidence in the organization and funds begin to dry up. When funds dry up, an MFI quickly goes out of business. However Islamic Relief Bangladesh considers the following risk

Potential Risk level of risk Measure to mitigate risk

Governence- Governing body composition, IRW’s stand on selecting governing body members from IRW which may create problem in operation of the program

Low Strictictly comply Registration policy and procedure and let IRW understand without complying country’s policy IRB can not operate its IMF program in Bangladesh.

MRA License may not be obtained

High Register as A MFI with JSC timely. Prepare all required documents and submit to MRA in time. All requirements of MRA will try to be fulfilled so that no problen arises to get the license.

Capitalization risk: If IRB does not ensure projected loan capital, the sustainablilty would be at risk

Medium IRB will prepare an action plan and make all effort to ensure proper funding in time.

Credit risk: Default risk, loan delinquncy etc

Low Staff training, strong planning, close monitoring and supervision, compulsory savings, loan size control etc.

Shariah compliant: Maintain Islamic shariah is a challenge

Low Regular Shariah audit, strong monitoring mechanism

Political unrest: Unstable political situation may hamper to reach its objective in the time frame

Low Contingent plan to minimize risk and smoth operation.

As an I-MF IRB consider the all potential risk like other MFIs encountered and prepare plan so that IRB can cope up with these risks and operate its MF program.

Efficiency and productivity

Year 1 Year 2 Year 3 Year 4 Year 5

Yield on Portfolio (annualized) 22.0% 22.5% 22.6% 22.2% 21.6%

Operational self-sufficiency 25% 76% 117% 130% 139%

Financial Self Sufficiency 25% 63% 100% 107% 111%

Borrowers per Credit Agent 333 417 563 588 725

Portfolio per Loan Officer in GBP 30,000 40,042 45,067 59,083 64,300

Portfolio at Risk 0.5% 1% 2% 3% 4%

% of arrears loan 0.3% 0.5% 1% 2% 2.5%

Financial Projection (In GBP)

Balance Sheet Yr 1 Yr 2 Yr 3 Yr 4 Yr 5

ASSETS *

Cash in Bank and Cash in Hand 11,496 36,826 12,692 32,274 49,445

Net Portfolio Outstanding 88,920 236,646 397,488 691,275 902,294

Short-term Inv. & other curr ass 0 0 40,000 40,000 40,000

Accounts receivable ( Murabaha mark up & Fee)

10,670 28,398 47,699 82,953 108,275

Net Fixed Assets 6,650 14,376 15,875 15,490 26,121

TOTAL ASSETS 117,736 316,246 513,754 861,992 1,126,135

LIABILITIES *

Savings deposits 6,000 18,500 38,500 69,200 109,200

Qard Al Hasana Loan 150,000 300,000 350,000

Bai-Mujjal loan 100000 100000 200000 300,000

Accounts payable ( Savings profit and financial cost of fund and operational exp)

1067 14350 14375 28730 40,144

Short time liability (Murabaha mark up) 10670.4 28397.52 47698.56 82953 108,275

no.riba find 0 5000 13000 23000 43000

TOTAL LIABILITIES 17,737 166,248 363,574 703,883 950,619

EQUITY *

Accum. Donated equity, prev. periods 0 129,514 201,347 201,347 201,347

Donated equity, current period 129,514 71,833

Accumulated net surplus -29,515 -51,349 -51,167 -43,238 -25,831

TOTAL EQUITY 99,999 149,998 150,180 158,109 175,516

TOTAL LIABILITIES AND EQUITY 117,736 316,246 513,754 861,992 1,126,135

Total Financial Income 10,246 37,845 74,227 125,451 176,286Total Financial Costs 180 9,735 10,710 21,231 32,352Gross Financial Margin 10,066 28,110 63,517 104,220 143,934 Provision for loan losses 1,080 2,524 5,588 12,137 15,769Net Financial Margin 8,986 25,586 57,929 92,083 128,165Program Operating Exp 38,500 47,420 57,748 84,154 110,758Net income from operations -29,514 -21,834 181 7,929 17,407Grant Income 29,514 21,833 0 0 0Excess of Income over Expenses 0 -1 181 7,929 17,407

Annex A

Acronyms

IGA : Income Generating Activities

CAP : Community Action Project

CSR : Corporate Social Responsibility

CO : Community Organizer

IICO : International Islamic Charitable Organization

JSC : joint Stock Company

SAFOLLO : Strengthening Peoples’ Actions for Food and Livelihood Security

SHG : Self Help Group

NGO : Non Government Organization

MFI : Micro Finance Institution

LGI : Local Government Institutions

LO : Loan Officer

MRA : Micro-credit Regulatory Authority

I-MFI : Islamic Micro Finance Institutions

I-MF : Islamic Micro Finance

IRB : Islamic Relief Bangladesh

IRW : Islamic Relief worldwide

MIS : Management Information System

BDT : Bangladeshi Taka (currency)