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Concept and Ideology

Rural Financing
RURAL CREDIT AND POVERTY ALLEVIATION
Many programs have been instituted to improve the conditions of the poor, partly in recognition of the failure of inequitable
growth to pull the poor up the socio-economic ladder, or simply to compensate for their disadvantaged position in society.
The provision of credit to the poor has been a leading component of many of these programs because the lack of access
to productive capital is thought to be one of the main factors preventing the poor from breaking away from the "poverty trap."
This trap, it is argued, makes it extremely difficult for the poor to overcome poverty without outside intervention. In its
simplest form, this trap can be viewed in terms of the poor person's low capacity to generate income, savings, and
investment in the economic environment that offers limited employment opportunities, which thus leaves the poor in
perpetual poverty. It is argued that providing the poor with credit can break this barrier to economic emancipation by giving
them access to resources, in particular, to-income producing or enhancing assets for the small scale farmers and
fishermen in rural areas, the small artisans, petty traders and micro-entrepreneurs in urban areas. With their Thus
allowing them to progressively increase their income, savings, and investments through self-employment and thus cross
the poverty line over time.
Most governments have allocated considerable amount of resources in the form of subsidized credit for the alleviation of
poverty, especially in rural areas. The rationale for subsidizing this credit is that the poor have limited capacity to repay
because they have limited investment opportunities and providing them with credit services entails high transaction costs.
Subsidized credit often takes the form of government-sponsored rural co-operatives, agricultural credit for the small
farmers, and specialized programs like the integrated rural development programs common in South Asia. The number of
poor who have crossed the poverty line as a result of these programs is difficult to ascertain. The undifferentiated impact
of many of these programs is often positive and significant. Studies evaluating these programs confirm that their benefits
have largely been accrued to the rural elite who have been attracted by credit subsidies and used their influence over the
administration of the credit delivery system to corner most of the credit resources at the cost of the rural poor. Even the cooperative approach to credit, which had earlier been so successfully tried in Europe and North America in reaching the
small farmers, and much later quickly and widely implemented in Asia largely through government initiatives, floundered
badly with few exceptions (Islam 1985). Even the highly acclaimed Comilla co-operative model, which attained
considerable success during its early years when it was restricted to a limited geographical coverage, on the whole failed
to reach the intended beneficiaries - the small farmers - and suffered serious repayment and viability problems when the
government replicated it nation-wide.
In the case of some other programs, the failure is not so much in reaching the target group but the low repayment rates
and the failure of the program to sustain the significant positive impact of credit through the provision of a follow-up credit
to deserving borrowers. A good example is that of India's Integrated Rural Development Program (IRDP) probably the
most massive credit program of its kind targeted exclusively at the poor.
Governments trying to provide poor farmers with access to credit often require conventional banks to earmark a certain
percentage of their outstanding loans at subsidized interest rates for the poor borrowers for whom the collateral
requirement is waived. Loan guarantees are normally provided for by the government to reduce the high risk borne by the
banks in lending to the poor.

REASONS FOR FAILURE OF EARLIER CREDIT PROGRAMS

Much of the failure of past credit programs, sponsored by governments stems from shortcomings in the
design, management, and administration of the credit delivery system. One of the most serious design flaws, for
example, was the lack of a targeting mechanism, such as realistic landholding and income ceilings, so that only
the truly poor could qualify for credit under the program. This permitted the entry of non-poor borrowers who were
attracted by the generally low interest rates charged by these programs. With their greater socio-economic and
political power, the non-poor were able to get access to credit delivered in this manner much more easily than
their poor counterpart, thus crowding out the latter. General credit programs for agriculture and rural development
often fall under this trap. In fact, some specialized credit programs for the poor (for example, the Special
Agriculture Credit Program in Bangladesh and the Differential Interest Rate Scheme of India) have also suffered
because of this weakness (McGregor 1988, pp.467-82).
In the case of many credit co-operatives that failed, a host of contributing factors acting together brought
about their demise. Often cited causes are (Huppi & Fedder 1989).
(a) Inadequate preparation of members;

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( b ) Control and domination of the co-operatives by powerful local elite, who often borrowed an
inordinate proportion of loan funds;
(c) Weak management;
(d) Top-down manner in which the co-operatives had been set up and run by the government; and
(e) Over-dependence on outside funds rather than local savings mobilization.
Programs that have attempted to tap the resources of conventional banks to provide credit to poor borrowers
through some form of arrangement with the government, often in the form of directives, have generally failed. This
is because they did not provide adequate incentives for the banks to make adequate profit from their loans to the
poor. The primary objective of conventional banks is to make a profit on their loans. But providing credit to the
poor is staff-intensive and entails high transaction costs and risks that must be covered by interest earnings from
lending and service fees. Since these programs often put a ceiling on the interest rates the banks are to charge,
the banks are unable to make sufficient profit from this program compared to what they can obtain in alternative
capital outlets. Understandably, most banks would not be willing participants in such programs and would
accordingly try to avoid it or cut down their losses or opportunity costs by minimizing their involvement.
The lack of an appropriate credit delivery mechanism that clearly specifies the procedures and
requirements for personnel and support services and provides for an effective enforcement mechanism also
contributes to the effectiveness of the credit-for-poor programs of conventional banks. For example, the
commercial banks through which the Special Agricultural Credit Program in Bangladesh channeled its loan took
the easy way out by abdicating its responsibility to implement the program, and letting the rural elite and
politicians identify and recommend borrowers. It also insisted on a collateral requirement despite the program's
directive to waive (McGregor 1988).
In addition, the bank staff assigned to implement credit-for-poor programs, compensated for the more
difficult labor associated with making these loans. Often this work is added on or mixed with their regular work
with non-poor borrowers. As a result, bank officers have little motivation and morale and prefer to concentrate on
the non-poor borrowers, who are less difficult to service. This helps to explain their poor performance in servicing
the poor borrowers.
Any credit program that experiences sustained low repayment rates will eventually become insolvent and
collapse. Repayment rates are therefore, the most important and simplest indicator of the program's viability and
sustainability, provided the interest charged is high enough to cover cost and a reasonable margin of profit. It
reflects the borrower's capacity and productivity of investment for which the loan is utilized.
It is now well documented that the poor have the capability to use credit productively using skills and
knowledge they have and that they can generate rates of return comparable with, and often exceeding, those
earned on bigger investments by the non-poor in the formal sector. Therefore, the most important factor affecting
repayment rates in a credit-for-poor program is the willingness of the borrower to repay the debt. This in turn is
affected by many factors. An important element is the incentive system built into the program that rewards the
borrowers for prompt repayment of loans. One of the most important incentives to poor borrowers is the
assurance of a follow-up loan upon repayment of an outstanding loan. This incentive is missing in many
programs and is one of the main reasons for the low repayment rates. The effect of such an incentive on
repayment is apparent when one considers that the poor, by virtue of their extremely weak and vulnerable
economic security, need credit support to be sustained long enough to allow their assets and income to become
stable. Second, very often, the credit-for-poor program is the only access to credit available to the program
participants. Even their access to the village moneylenders is very limited and credit often available only at
exorbitant rates. A poor borrower becomes even less inclined to pay if a follow-up credit facility is closed
because these poverty-oriented credit programs often do not require collateral, which the borrower would stand to
lose if he defaulted. Thus it is likely that, credit programs assuring borrowers of a subsequent loan upon
repayment of previous debt would ensure a higher repayment rate.
Even when a program is appropriately designed, it can still flounder over time if the rigor in implementing
the procedures essential to its success is relaxed.

CURRENT ACHIEVEMENTS AND CONSTRAINTS

Thirty years ago the only credit available to Bangladesh's poor came from informal sources: kin, friends,
traders, and moneylenders. The practice was extremely usurious. Today the situation has greatly changed with
large number of people having access to credit from semi-formal institutions. The early credit experiments of the
Grameen Bank, BRAC and Proshika have translated into major credit operations. The 1980s saw the Grameen
Bank and its model dominating financial flows to the poor. Although this remains the case in the 1990s, there
has been increased experimentation and innovation. The efforts are essentially in line with a banking system
based on interest.
Successes
By late 1995, the Grameen Bank and NGOs covered around 25% of the target group households, with Tk.
16,568 million (US$ 404 million) in loan outstanding (Wood & Sharif 1997, pp.373-74). Coverage varies
substantially from area to area and between social groups. Areas with poor roads, low level of economic activity
and weak NCB infrastructure have benefited little from micro-credit. NGOs and Grameen Bank have performed
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and weak NCB infrastructure have benefited little from micro-credit. NGOs and Grameen Bank have performed
much better than government credit schemes and their achievements compare very favorably with all other
anti-poverty strategies in the country. Results have been so impressive that Bangladesh has now been a center
of micro-credit ideas, although it is still a recipient of ideas of savings. Currently, most of the savings generated
by these institutions tend to take the form of "required fees" for receiving credit, only to be recycled into
Revolving Loan Funds and not generally withdrawal. These institutions have not experimented with deposit
banking, although other countries have made successful advances in this area.
Constraints
While these institutions have managed to extend micro credit services to the poor, all the major NGOs
and Grameen Bank admit that they have serious problems in reaching the hard core poor, resulting in limited
coverage. They have required a high level of subsidy to establish their programs, provided by donors. However,
with high recovery rates, increased effective lending interest rates and improved management, subsidy
dependence is dropping. A number of factors constrain the performance and outreach of NGOs and the Grameen
Bank (Ibid, p.173). These are:

The limited accessibility of the borrowers to mobilized savings;

An over-emphasis on credit (the micro-credit mono-culture);

The lack of investment opportunities for the poor people and, particularly, those with no assets;

The disadvantaged position of women, who bear the additional cost of securing access to markets and
information;

The inability of these institutions to operate in disadvantaged areas;

The absence of market demand for services provided by poor borrowers; and

Natural hazards.

SUCCESS CRITERIA FOR RURAL FINANCING SCHEMES

The success of a credit program designed to alleviate poverty would have to be evaluated in the light of the
program objectives. A successful program may incorporate a broad set of objectives in addition to credit, such
as empowerment, conscientisation, education, and skill training. The following five criteria are often used to
assess the effectiveness of credit-for-poor programs:
(i)
Extent to which the program has reached the truly poor: This can be measured both in terms of proportion
of beneficiaries who are truly poor and the number of poor borrowers reached.
(ii)
Loan recovery: This is measured by the repayment rate. Sustained high loan recovery represents the
simplest and clearest indicator of a program's success as it reflects productivity or profitability of the loan, as
well as the borrower's satisfaction and support of the program.
(iii)
Productivity of the loan: This measures the viability of the investment into which the loan was applied by
the borrower. It is normally measured in terms of returns on investment or capital-output ratio.
(iv)

Impact on borrower's income. This impact refers to the extent to which the borrower's

real income has increased as result of the credit provided.

(v)

Sustainability: It refers to the capacity of the program to become institutionalized into a

financially self-supporting program, able to cover all costs and to generate sufficient profits from its operation.
Sustainability is affected by such variables as the interest rate
charged, repayment rate, and transaction costs.
Borrower's sustainability is also a case to note in the sustainability concept. It relies upon a wider range of
financial services than micro credit. In addition to accessible savings, the poor have requirements for: current
account overdrafts to level out consumption fluctuations; lumps of capital at various stages of family life cycle;
and insurance against unpredictable demands on income (Ibid, p.378).
CONCEPT OF DEVELOPMENT AND RURAL DEVELOPMENT IN ISLAM
The concept of rural development is an integral part of the development concept. The concept of
development as used in the jargon of modern economic literature does not satisfy the characteristics as enjoined
by Islam. While Islam adheres predominance to spiritual and moral aspects as the basis for any sort of
development and success both in this world and the world hereafter, the secular concept of development
considers the material and worldly aspects alone (K. Ahmed 1992). The Islamic concept of development has
been derived from four key concepts such as Tawheed (unity), Rabubiyah (sustainer), Khalifah (representative)
and Tazkiyah (purification). These concepts together present a worldview of human life providing answers to
some key questions. These are: why man is created, how he is related to his God, what is the relationship
between man and man, and what is the status of man in this world and for that matter what changes is required
to be brought about in him. According to Khurshid Ahmad, "The Islamic concept of development is
comprehensive and includes moral, spiritual and material dimensions. Development, in Islam, is a goal and value
oriented activity, devoted to the optimization of human well being in all these dimensions. The moral and
material, the economic and social, the spiritual and physical are inseparable. It is not merely welfare in this world
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material, the economic and social, the spiritual and physical are inseparable. It is not merely welfare in this world
that is the objective, the welfare that Islam seeks extends to the life hereafter and there is no conflict between
the two" (Ibid).
The focus of the development effort and the heart of the development process in Islam is man.
Development, therefore, means development of the man and his physical and socio-cultural environment.
According to the contemporary concept it is the physical environment, natural and institutional - that provides the
real area for development activities. Islam insists that the area of operation relates to man, within and outside
him. As such human attitudes, incentives, tastes and aspirations are equally important as policy variables such
as: physical resources, capital, labor, education, skill, and organization. Thus, Islam shifts the focus of effort
from the physical environment to man in the social setting and enlarges the scope of development policy. Among
the dynamic principles of social life, Islam has particularly emphasized optimal utilization of resources and their
equitable use and distribution and promotion of all human relationships on the basis of Right and Justice. Islam
commends the value of 'Shukr' (thankfulness to God by availing of His blessings) and 'Adl' (justice) and
condemns 'Kufr' (denial of Allah's blessings) and 'Julm' (injustice).
Under the above broader conceptual framework of development, the following two verses of the Quran set
the redistributive pattern of an Islamic economic system:
"Resource should not circuit only among the wealthy of you." [59:7].
"Of your wealth have the right of the poor and the needy." [51:19].
The foregone discussion leads us to a conclusion that Islam stands for a development approach where
free and uninterrupted operation of market ensures optimum utilization of resources and encourages a
distribution pattern in which resources are circuited back from the well to do to the relatively weak. In order to do
that a number of interventions are brought into effect. For example, fiscal and monetary policies, including
commercial flow of investible funds, are to be designed in a way that resources are to be channeled to the
relatively weak and disadvantaged sections of population. Also there should be a legal and institutional set up so
that wealthy people transfer regularly the due share of the poor and the needy. In addition to voluntary transfer of
'what they have in excess of their need' (Afwa), the institution of Zakah and Ushr are the classical means of
compulsory regular transfer of income/asset from the well to do to the poor. Further the provision of Qard Hasan
(i.e., benevolent loan repayable without any return) is also an institutional obligation to make available funds to
the needy. Thus, the above principles and provisions construct the building blocks for the rural development
schemes under the Islamic banking framework.
COMCEPT OF RURAL FINANCING IN ISLAM
There is no rigid and prototype framework for rural financing in an Islamic framework. Along with the
essential precondition that the modes of financing must be interest-free, a salient feature of such a scheme
might have the following elements. It should have programs that encourage side-by-side efforts of people from all
economic strata helping and promoting growth, it should have components, independent or integrated as a wider
part of a program, directly benefiting the poor and needy. Finally, the institutional arrangement should be such
that it ensures a constant flow and transfer of resources from the well-to-do to the weak and disadvantaged. The
concept has strong relevance to the Islamic worldview of life. The transfer mechanism is built-in to the core
spiritual pursuit in Islam. That is why admonition of Zakat has immediately followed that of prayer repeatedly in
the Quran.
The above essential characteristic of a rural development scheme under the Islamic framework reminds us
of the shortcomings of the currently practiced poverty alleviation programs in our country. First, these programs
in spite of being able to reach near 25% of the poor, not the hardcore poor, with micro credits generally not
exceeding Tk. 5,000/- lack achieving regular income/asset transfer. Secondly, borrowers do not have access to
their savings. These two shortcomings jeopardize severely the borrower's sustainability. Thirdly, failure to reach
the hardcore poor has been a serious setback to the existing rural development programs, for the following
reasons: (a) fear of low recovery as they may eat up the loaned money to meet their immediate consumption
needs; and (b) that they are out of reach as management cost surpasses returns to be generated from loaned
money. Both the reasons affect lender's sustainability. Fourthly, funds currently available for rural financing are
mostly donor contributed which are an unsustainable source. An Islamic rural financing scheme with essential
features built-in to its delivery system should be free from the above deficiencies.
RURAL FINANCING UNDER ISLAMIC FRAMEWORK: SOME EXPERIENCES
Rural development initiatives under the Islamic framework in Bangladesh are of recent origin. With some
rare exceptions the initiatives in this line are a phenomena of the nineties. Even those who started earlier can
hardly be termed as rural development initiatives. Rabitat-al Alam Al-Islami is perhaps the only organization that
started its relief activities in 1977 among the Rahinga refugees and then extended its operation among the
Biharis in Dhaka and tribal people in Chittagong Hill Tracts and Rangpur. Origination of the organizations like
Islam Procher Samity, World Assembly of Muslim Youth, Islamic Education Society can be traced back to the
1970s but they did not have any credit component in their programs. Few dozens of Islamic NGOs are working
with micro investment as one of their program components from the late eighties and early nineties.
At present 62 Islamic NGOs are working in Bangladesh. They can be divided in to five categories in terms
of program type as follows:
a)

Organizations with credit only as a program component

b)

Organizations with credit plus as a program components

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c)

Organizations with relief and rehabilitation as a program component

d)

Organizations with education, culture and research as program components

e)

Organizations with preaching as a program component

Table 1 (given at the end of this chapter) shows that 10 organizations are working with the credit only approach
whereas 35 organizations are operating on credit plus principle having program components like non formal
education, health and sanitation along with micro investments. Three organizations are doing relief and
rehabilitation, four are engaged in education, cultural and research activities and two are involved in preaching.
Organizations with either the 'credit only' or 'credit plus' approach, follow the target grouping strategy in their
investment financing and apply 'Bai-Muajjal' or deferred payment as a primary financing technique.
It has been gathered from elsewhere that except for the Muslim Aid Bangladesh, Bangladesh Chasi Kallyan
Sangstha, Bangladesh Masjid Mission and Hilful Fuzul Samaj Kallyan Sangstha the rest of the 20 organizations
came into being after 1994. Within this short period of time the organizations have formed 10,820 groups
comprising 407,064 members. They have so far invested an outstanding amount of Tk. 108 million.
Compared to the conventional NGO's activities throughout Bangladesh, the Islamic NGOs have very little
presence. There are 363 conventional NGOs with 6.6 million members as of June, 1997 and cumulative loan
disbursements of Tk. 3,527.90 crores. In contrast, Islamic NGOs only represent .03% of the conventional NGO's
volume.
Evolution of Islamic NGOs in Bangladesh is a response to the urge of safeguarding the Islamic way of life in the
face of a massive penetration of interest in rural areas through the conventional NGO approach. One of the
glaring features of these initiatives are exclusively indigenous in terms of organization and source of funds which
are considered to be building blocks for any effort towards sustainability.
Islamic NGOs are yet to develop a rural development plan as perceived by Islamic economists. Very few of the
rural development or rural financing plans under the Islamic framework have been organized centering the
mosque. For the most part, these organizations have come into being as a result of spontaneous local initiatives.
To the extent information is available, none of the organizations have been able to introduce a complete and
effective package of borrower graduation. This is the case because organizations with the credit plus approach
cannot yet introduce regular asset transfers based on Zakat. Similar to the conventional NGOs, these
organizations also do not allow beneficiaries/borrowers' the access to their savings. Of course, considering the
length of the period of their operation, one cannot expect such types of achievement in such an early phase of
their evolution.
RURAL DEVELOPMENT SCHEME OF IBBL
Islami Bank Bangladesh Limited (IBBL) envisages an economic system based on equity and justice. Taking into
consideration that the majority of the population below poverty line lives in rural Bangladesh, the Bank has
devised a "Rural Development Scheme (RDS)" with a view to creating employment opportunity for them and
alleviates their poverty through income generation activities.
The IBBL through its RDS project has been implementing integrated programs for the landless poor, wage
laborers and marginal farmers aimed at meeting their basic needs and promoting their comprehensive
development. Consciousness among the poor needs to be enhanced so that they can firm ups their position in
the socio-economic structure of the country. In order to consolidate their economic base, invested money should
be used in income generating activities so the poorer section of the population can become self-reliant. RDS
works for the realization of that objective.
Goals and Objectives
The followings are the important objectives of IBBL's Rural Development Scheme:
1)
To bring the poorer population within an organizational framework by setting up certain rules and
regulations with a view to free them from the curse of poverty and make them self-reliant, thereby converting RDS
into a self-reliant sustainable program;
2)

To extend bank investment to agricultural and non-agricultural sectors in the rural areas;

3)

To invest on employment and income generation activities of the rural population;

4)

To provide self-employment for distressed people;

5)

Socio-economic development of the poor and distressed by group/center formation;

6)
To bring both male and female to provide employment under income generation activities and help them to
attain self-reliance step by step;
7)
To continue to support the self-reliance drive of the poor in their search of capital formation from savings
they make out of their increased income;
8)
To help reduce and eventually stop, through enhancement of their income, the lending on high and
exorbitant rates of interest by the village money-lenders, the advance sale of crops, land and mortgage of land by
the poor at the time when they are most in need.
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9)

To follow an approach of comprehensive development side by side with economic development; and

10)

To provide financing to develop housing in the area.

Selection of Beneficiaries
The RDS of IBBL is target group-based. Beneficiaries of the plan are thus landless, wage laborers and marginal
farmers. Selection criteria for members of the target group are as follows:
(a)

Farmers owning up to 0.50 acres of land including sharecroppers;

(b)

Persons engaged in non-agricultural activities owning up to 0.50 acres land or landless;

(c)

Permanent resident of the project area;

(d)

Borrower or defaulters of any other bank or organization will by no means be the beneficiaries of the plan;

(e)
Females belonging to the families of the serial 1 and 2 above, interested in income earning projects, but
who unable to do so due to dearth of money, may form a group and get the financial support;
(f)
Distressed people may undertake income generating schemes in non-agricultural sectors such as
cow/goat/duck/ chicken etc. for their self-employment; and
(g)
Landless to be given priority in selecting target groups whose yearly family income must be below Tk.
15,000/-.
Group Formation and Management of the Scheme
Activities of the RDS are organized in-groups. Each group consists of five members. People with the same
mentality, age and financial status who are trustful to each other are considered for group formation. Group
members should be from the same village. A person being a permanent inhabitant of the village, and owns less
than 0.50 acre of land and has annual income of his/her family not exceeding Tk. 15,000.00 is considered
eligible to be a member of a group. Not more than one member from a family can be member of a group and the
group cannot be formed with kith and kin. With these restrictions group members are free to choose their
compatriot, as they like. Group members elect their group leader and deputy group leader from among
themselves. There can be 2 to 6 groups in a para, mahalla or village forming a Centre. Group leaders and deputy
group leaders of all groups, in a meeting, elect a Centre Leader and a Deputy Centre Leader.
In order to formalize group and centre formation and the election of the group leader, deputy group leader, centre
leader and deputy centre leader, all members of the centre are required to adopt resolutions in which they agree
to abide by the rules and regulations of the group/centre. A meeting is held weekly, themselves determine the
date, time and place of which according to their convenience.
Group formation and subsequently emergence of a centre are the result of constant effort and intensive
supervision of a field supervisor. Generally a field supervisor is responsible to supervise 40 groups or 200
members. The field supervisor is recruited few a months ahead of the group formation and initiation of investment
activities. Soon after the appointment a supervisor is required to motivate people, mobilize support, conduct
base-line surveys, form groups and organize the group members. Preferably, a field supervisor should be a local
person with a minimum level of education.
All of the activities of RDS are coordinated and managed from a branch office of IBBL. A project officer is
responsible for reporting the activities to a committee headed by the bank's branch manager. The project officer
supervises the activities of the field supervisors in the entire command area of its operation. He provides
instructions and suggestion to the field supervisors in implementing new projects. While forming groups the
project officer attends the meetings. He organizes training for the group members and ensures, through the field
supervisors, the attendance of the group members in weekly meetings. He keeps a constant eye on the
investment disbursement, timely repayment of weekly installments, savings deposits, and adherence of other
rules and regulations by all group members. Investment vouchers preparation, filing of documents, and
production of monthly investment balance sheets are among the other regular activities of a project officer.
Collateral-Free Investment Financing
Investment financing under RDS program of IBBL is generally collateral-free. Extremely rigorous supervision and
mutual guarantee provided by each member of the group have become a good substitute for collateral in the
traditional sense. In spite of that, strict adherence to group rules and regulations ensures appropriate selection of
borrowers.
Of course, fish culture in ponds and the purchase of agricultural and irrigation implements require support
collateral in the form of an equitable mortgage. Moreover, each member of the group is required to provide a
personal guarantee for his group.
Investment financing starts after a three-month observation of the group members in terms of regularity in their
attendance in weekly group meetings, centre meetings, and the deposit of their personal saving. Two members
from each group selected by the group members are considered for investment financing. The rest of the group
members become eligible for financing after those members of the group that received a loan have paid their 2 or
3 repayment installments.
Investment proposals recommended by group/centre members and collected by the field supervisor are approved
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Investment proposals recommended by group/centre members and collected by the field supervisor are approved
after careful review. Ultimately, the loan is approved by the Investment Committee, which is headed by the
Bank's Branch Manager. The committee is comprised of the Branch manager, the Second Officer or Investment
Officer, and the Field Supervisor. The Investment Committee meets once in a month. Upon approval of an
investment proposal by the Investment Committee, the appropriate documentation for the types of financing
going to be extended must be completed. Banking as well as Shariah rules are required to be followed
appropriately.
The following Islamic modes of investment are applied for investment financing of the group members:

Musharaka

Murabaha

Mudaraba

Hire-purchase

Bai-Muajjal

Bai-Salam

Recovery Process
It is believed that the bank's best chance for successful recovery is dependent upon properly structuring the
installment payments. The amount and number of installments should be based on earnings from the investment
and the time interval it takes for one investment-gestation-return cycle. The following considerations are taken
into account while determining the appropriate installment payment:

For the non-agricultural sector installments may be made on a weekly/monthly/quarterly basis. Weekly
installments are preferred since the frequency of the short intervals often times lead to more successful recovery.
Usually a payment schedule requiring 45 fixed installments of principal and profit are prescribed, allowing a twoweek gestation period. This payment schedule allows for up to three missed installments, two installments are
not required during Eids and one installment may be missed in the event there is an accident.

Determination for the appropriate installment frequency in the agricultural sector depends on the cropping
cycle. In case of vegetable and green curry production, weekly installments allowing a longer gestation period is
suggested.

Generally all investments are repayable in weekly equal installments. In exceptional cases, with income
generated beyond the date of the installment payment, a timely token payment is advisable followed by payment
of the residual amount along with the next due installment.
Avenues of Investment
Other than agricultural activities, seven categories of non-agricultural activities in the rural areas are financed
under the RDS program of Islami Bank Bangladesh Limited. The categories and the types of activities financed
under each category are presented in the form of a table. These are shown at the end of this Chapter, respectively,
in tables 2 and 3.
Some Recent Field Experiences of RDS
Hamid and Rahman (2001) have recently evaluated the Rural Development Scheme of the IBBL under
the sponsorship the Islamic Bank Training and research Academy (IBTRA). For the benefit of the interested
readers, some results (relevant for the Book) are given as under.
(a) Utilisation of financial resources
For the sake of simplicity by 'financial resources' we mean only the funds (either in cash or in kind) borrowed
from the lending institutions. For examining the utilisation of funds by the borrowers, the rural activities have been
classified into, as per convention, 7 groups namely, agriculture and forestry, livestock and fisheries, processing
and manufacturing, trading, services, shop keeping and peddling. Since all funds are not utilised for productive
activities as noted, a new category has been added i.e., pure consumption (or unproductive use). The data
collected relate to 3 years i.e. 1998, 1999 and 2000. Several points can be noted from the Report referred to
here.
First, all the selected persons have not taken loans for all the years considered here. In the case of IB, although
most of them have taken loans (194) in 2000, most others have not done so in the other two years. The obvious
explanation is that the Bank started its operation only 2 or 3 years before in the study locations. In the case of
GB, all persons have taken loans in the current year. Most others, unlike IB, have also done so in the other two
years.
Second, the per capita amount of investment/loan taken varies between Tk. 3 thousand and Tk. 9 thousand in
the case of IB clients. The average amount appears to have increased over the period under review. In contrast,
in the case of GB, the per capita amount varies between Tk. 4 thousand and Tk. 13 thousand. Unlike the other
one, the amount on the average shows little variation over the years. It may imply that the GB has now reached
its limit of loan amount or it makes increase in the loan amount only marginally.
Third, in IB, of the total funds disbursed in 2000, the maximum amount (24.9%) has gone to processing and
manufacturing. In order of importance, the other heads are trading (20.5%), agriculture and forestry (17.9%),
services (12.1%), and others. In the GB the picture is not very different. Here, maximum amount of loan (36.9%)
has gone to processing and manufacturing sector, followed by services (23.3%), trading (13.8%), livestock and
fisheries (7.8%) and others. The data as published by Credit and Development Forum (CDF) shows that about 42
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fisheries (7.8%) and others. The data as published by Credit and Development Forum (CDF) shows that about 42
per cent of total funds of 369 NGOs including ASA, BRAC and Proshika was distributed in the 'small business'
sector and another 18 per cent to the 'livestock' sector up to June 1988.
Fourth, another interesting finding regarding the utilisation of the borrowed funds is that where as such sectors
as shop keeping and peddling have some importance in IB, these have very little or no importance in the GB.
Noticeably, the GB gave no amount of money to peddlers. Does it imply that the GB members have gone upward
in the activity scale too?
Fifth, an attempt was made to have some information about the use of money for pure consumption or
unproductive purpose. There was an indirect question on this issue. The actual information obtained from the
clients shows that about 11.7 per cent of the IB and 9.1 per cent of the GB funds are diverted to unproductive
uses. This should be regarded as the minimum amount; in actual practice the real amount would perhaps be
much bigger. In any case, this analysis shows that the lion share of the total micro investment/micro-credit in
Bangladesh goes to processing and manufacturing, livestock, trading and services.
Sixth, recovery performance of micro-investment/micro-credit of both these institutions is very good. Our field
records show the recovery rates of both these institutions are well above 90 per cent in the study locations.
(b) Avoiding prohibiting activities
An Islamic entrepreneur must consciously avoid prohibited activities. It may be assumed that it will be easier to
get rid of these activities if he/she works through IB. Against this background, there was an indirect question i.e.,
"Please give us just one reason (or the most important reason) for joining your Bank". This was for the IB and
GB members only. A large variety of answers were obtained against this question.
The immediate message that one gets is that the responses given by the two institutions are not similar, and in
some cases they are different, perhaps fundamentally different, from each other, For instance, of the answers
given by the respondents of the IB, one-fifth specifically relates to the thing we are looking at. They said that they
joined the IB simply because it is "Islamic", because it avoids interest (which is Haram in Islam), because it
speaks about the Quran and the Hadiths. These are actually the persons who consciously wanted to avoid
prohibited activities. Others were not conscious about the Islamic tenets as would be clear later. However, quite
expectedly, there were no such answers from the clients the GB. On the other hand, a good number of
respondents of the GB stated that they joined this institution simply because it gave more than one type of loan
simultaneously. This is a fundamental difference between the clients of IB and those of GB in so far as their main
reason for joining the institution is concerned.
Another important finding of the information as contained in the Report referred to here is that a large number of
clients of both these institutions became members with the particular aim "To improve our living conditions/To
get loan and invest it in productive activities". This implies that about one-third of the members joined their
institutions simply to gain benefit in this material world: There was no consideration for the world Hereafter.
Still another interesting point to note is that 17.5 per cent of IB members mentioned flexibility of the Islami bank
regarding the weekly payments. They opined that there was no undue pressure from the bank; it waited when
they were in real difficulty. For the GB, a large number of persons (37%) opined that they joined the bank
because the GB came first/the bank was nearer to their houses/neighbours had joined.
However, the important message that one gets from this analysis is that about one-fifth of the members of the IB
are conscious about the prohibited activities.
(c) Partnership business
Among the alternatives of interest as modes of finance, partnership business is perhaps the most critical one. It
has been found that an Islamic entrepreneur would not at least show any apathy towards this form of business.
In the structured questionnaire, there were several questions on this particular form of Islamic mode.
Unfortunately, mainly because of lack of knowledge, the answers received were very poor and not suitable for
quantitative expression.
(d) Maximisation of Profit
An Islamic entrepreneur, like any other conventional economic agent, will try to maximise profit. But a
distinguishing mark of this entrepreneur is that he/she will not strive to maximise profit under any or all
circumstances. Attaining less than maximum profit may often satisfy him/her. An indirect question was put
before the clients in order to ascertain their opinions. The data show that at least one-fifth of the respondents of
all categories of the programmes has satisfied this criterion.
(e) Characteristics of Entrepreneurship
As many as six major characteristics have been identified for the entrepreneurs. These are: He/She:
(a)

produces wholly new product

(b)

undertakes new line of business

(c)

adopts new process of production (in the case of old products)

(d)

goes for expansion of the existing business

(e)

adopts new marketing techniques

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(e)

adopts new marketing techniques

(f)

generates new employment opportunities.

It can be seen from the Report that expansion of business is the most dominating feature of entrepreneurship
development of the clients under discussion. In the IB as many as 60 per cent of the clients possessed this
feature. In order of importance other features include new line o business (16%) and wholly new product (12%).
In the GB, expansion of business accounts for about 52 per cent of the total activities. Interestingly next
dominant feature of GB clients is that 40 per cent of them have gone for new line of business. Other features are
not worth mentioning. For 'others' category, only 17 per cent fall within the category 'expansion of business'. This
is followed by 'generation of new employment'. The most dominating characteristic of this 'others' category is that
as many as 65 cent do not possess any quality of entrepreneurship development constitute only 7 per cent and
5 per cent in the IB and GB, respectively.
From the discussion of these necessary characteristics, it may be concluded that both the IB and the GB have
contributions towards the development of small entrepreneurs.
(f) Attachment for IB
A question was asked directly to the members of the IB to know whether they had any intention to leave the
bank and join (say) the GB in the future. The answers received were all negative. That means the existing RDS
members had great attachment for the IB. They were also asked to explain the reasons behind their answers. As
shown in the Report, there were many interesting and at the same time thought-provoking reasons. Of the total
200 respondents, as many as 28.4 per cent stated that the bank was nearer to their homes and that the RDS
delivered the goods (cash/investments) at their door-steps. Next important reason was negative attitude towards
the GB. They said that the GB gave undue pressure on the timely payment of the weekly instalments. They went
further and added that the said bank kept the members standing in the weekly meetings until and unless money
could be arranged and that they very often took away the members tin and other valuable assets. The sociomoral issue as the cause for staying with the IB came only as third point in order of importance. Noticeably,
about one-quarter of the members did not give any specific reason or the reasons given were either irrelevant or
did not carry any sense.
(g) Practical work experiences
The RDS members were asked to give their experiences briefly in working with the IB. Interestingly enough,
about half of the members agreed that the Bank Supervisors spoke about the Quran and the Hadiths. Many of
them categorically stated that they had learned many things about Islam. It was good that they need not go to
the Bank to collect their loans or mix with unknown male persons in unknown places. About one-fifth of the
members said that the IB was quite flexible: it did not put undue pressure for weekly instalment when the
members were in genuine difficulty. They also said that sometimes the Bank Supervisors had gone to their
residences to deliver the goods (investments). This answer constitutes about 15 per cent of the total responses.
Some mentioned about the help and assistance given by the IB at the time of their daughters' marriages.
Although in terms of percentage it is very negligible, a few argued that the IB did in fact took extra charge in
terms of 'profit', "where is then the interest-free bank?" they argued (!!!)
(h) Expectations from the IB
A question was asked about their expectations from the IB. It is shown that of the 15 answers noted, the most
important one relates to the amount of loan/investment given. They expected more loans and more than one type
of loans (like GB) simultaneously. This constitutes 27.3 per cent of the total answers. Next important one
(17.3%) was the loans for housing, sanitary latrine, and tube well for drinking water. Eleven per cent of the
members very forcefully argued that the IB must provided training facilities in tailoring, hand-works, fish-culture
and pisciculture works particularly for the women. They alleged that because of lack of training they were unable
to make economic use of the sewing machine given to them. The same number of respondents expected
financial assistance for their daughters' marriages. Contrary to normal expectation, about 6 per cent opined that
IB should give financial assistance in kind, and not in cash, and that they should not be allowed to speak lie on
this issue! There were people who wanted to learn about the Quran and the Sunnah. Although not significant,
there are other interesting expectations as given in the Report.
(i) Suggestions
The members of the RDS have given many interesting and important suggestions for the increasing the number
of clients. Perhaps very consistently, the members have suggested that the IB should increase the volume of
credit. Through experience they were of the opinion that peoples' demand for money was very high. The lending
institutions gave fell short of their demands. even the amount of loan/investment given by the IB fell short of their
demands. Even the amount of loan/investment given by the IB fell short of the amounts given by the other
institutions, particularly, GB, ASA and BRAC. Given the opportunities for proper utilisation, the bank should also
provide more than one type of loans (general loans, housing loans etc.) simultaneously. This is treated as the
most appropriate weapon for increasing the number of clients under the present clients under the present
circumstances.
Another very important suggestion given by the members was to preach more about the teachings of the
Quran and the Sunnah. The added that the Supervisors should say that the bank or the RDS was not for any
particular category of people but for every one who wanted to improve her/his living standard by avoiding
(interest). In order to compete with other conventional lending institutions, the members suggested that the rate
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of profit (many say 'interest') should be comparatively lower and that should made clear to the members by way
of simple examples. Introduction of housing loans and the loans for such things as latrine, education, tube wells
and others would definitely attract the general people to come within the umbrella of the RDS. Many members
have praised the behaviour of the RDS Supervisors: Some suggested that they should improve their activities
with more modern and appropriate tolls. Their numbers should be increased. The members have also very
consistently insisted introduction of training programme for the women on various important issues. Another notnegligible suggestion given by the members was that they should be given outright grants in terms of cash or
food during the period of natural calamities such as floods, draughts and other catastrophic events.
Table 1: Categorisation of Islamic NGOs in Terms of Program Type
OrganisationCategories by Program type

No.

Program components

Credit only:

10

1. Micro Investment for

poverty alleviation

1. Al-Amin Social Welfare.

Organisation

6. Sareka Pavilion

2. Palli Mukti Path

7. Agro Industrial Centre

3.
Janokallyan
Shangstha

Bohumukhi

8. RESCU

4. Al-Ahsan Sonchoy Samity

9. Kazipur Thana Shisu

Kallyan

5. Siam Sohojogita Society

10. SWAB

Credit Plus:

1. Muslim Aid Bangladesh

2. Bangladesh Chashi Kallyan
Samity

35

18. Provati Jomaj Kallyan

Samity

1. Micro Investment for

poverty alleviation
2. Micro enterprise

3. Bangladesh Institute of Habitat

Development

19.
Trust

Rural Development

3. Non-formal education
and vocational training.

4. Bangladesh Masjid Mission

20. Social Association for

Future Advance

4. Emergency Relief and

Rehabilitation

21. AMAN

5. Health and Sanitation.

5.
Islamic Social Development
Council
6. Jubo Academy
7. Confidence
8. Darus Salam Society
9.
Dhans i ri Bohumukhy
Samabay Samity
10.
Hilful Fujul samaj Kallyan
Samity

22. Parash Moni Samaj

Kallyan Sangstha
23. Al-Kuba Islamic Welfare
Trust
24. Hilful Fuzul
25.
Paras Mon Seba
Sangstha
26. Islami Kallyan Fund

11. Islamic Relief World Wide

Bangladesh

27. ISRAP

12.

28.
Social Development
Organisation

Islamic Aid Bangladesh

13.
Islamic Samaj Kallyan
Samity
14. Noble Education & Literary
Society

29. Ideal Social Welfare

Council
30.
Social Development
Organisation
31. Al-Falah Am Unnayan
Sangstha
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Sangstha
32. VICEO

15. Rabitat Alam al Alam Al

Islami
16. Khedmat-e-Khalk
17. Model Bangladesh

Relief & Rehabilitation:

1. Islami Bank Foundation

2. Kuwait Joint Relief Committee

Education, Culture and Research

2. Disa Bangladesh
3. Darul Yatim
4. Islamic Educattion Society

generating

2.
programmes

Educational

3.
Relief
rehabilitation.

3. Monohardi Darul Islam Trust

1. Benevolence Trustt

1. Income
programmes

1.
education.

and

Non-formal

2.

Health & sanitation.

3.

Orphanage program.

6. Al Manar Audio Centre

4.

Poverty alleviation.

7. Islamic Centre

5.

Nursery.

5.
Islamic Economics
Research Bureau

Preaching

1. Dawah program
2. Scholarship

1. World Assembly of Muslim

Youth

3. Bangladesh Institute of
Islamic Thought

2. Islam Procher Samity

3.
Translation
publication

&

4. Education & training

5. Relief & rehabilitation.

Table 2: Investment Avenues, Higher Limits and Duration

Investment
Avenues

Higher
Limit

Duration

Remarks

Crop production

Tk. 10,000/-

Highest 1 (one) year

Cr ops of 21
varieties

Fi s h cultivation in
ponds

Tk. 25,000/-

Highest 3 (three)
years

Irrigation

Tk. 5,000/-

Highest 1 (one) year

Ac c ording to
need

A gr i c ul t ur e and
irrigation
implements

Tk. 25,000/-

Highest 3 (three)
years

10% borrowers
equity

A l l non-agricultural

Tk. 10,000/-

Highest 1 (one) year

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sectors

agricultural
items payable
in
weekly
installment

Rickshaw, van and

rural transports

Tk. 5,000/-

Hi ghes t 2
years

(Two)

Hand Tube well

Tk. 3,000/-

H i g h e s t 3(Three)
years

House-building
materials

Tk. 15,000/-

H i g h e s t 3(Three)
years

P a y a b l e in
weekly
installment

Table 3: Categories and the number of activities financed under RDS

Activity types
(non-agri)

Types of activities

1. Manufacturing
and processing

Bamboo works, cane works, pottery, muri making,

snacks making, tailoring, sugarcane crushing,
mending works, tin production, rickshaw making and
mending, sweeping materials, sweet meat, furniture
making, medicine production, umbrella mending, cake
preparation,
plastic works, net making, thread
purchase, drum purchase, house mending, wool
works, wheel mending, box mending, nut processing,
kantha making, rickshaw-hood making, iron materials
making, cap making, thread works, pickle preparation,
printing works, tin purchase, radio mending, misri
making, sawing, laundry works, procurement of
machinery, candle making, sanitary works, welding,
embroidery, dry sweats making, metallic net making,
sweet cake preparation, cow-dung fuel balls, toy
making, packet making, nimki making, cosmetic
production, spectacle making, flour making, comb
making, mosquito net making ghee making, rope
making, lamp (kupi) making, chanachur making, jute
goods fabrication, shoe making, mosquito coil
making, hand fan making, quilt making, mustard oil
making, jewelery works, chun making, mat making,
chira making, saree making, etc.

(126)

2.
Service
activities:

(33)

Rickshaw, barber shop, hiring of irri pump, sale of

news papers, curt, bullock curt, mike hiring, feri boat,
livestock treatment, horse curt, buffalo curt, dentist,
boating, decorator service, baby taxi, construction
works, sewing machine, rice machine, bi-cycle
purchase, spray machine purchase, carpentry, wheat
mill, van procurement, electric iron purchase, fan
making/mending etc.

3. Trading
(82)
4. Shops
74 activities
5. Hacking:

Bamboo basket, old cloths, peanuts grocery

5 activities
6. Nursery:
10 activities

Vegetables, water melon cultivation, ginger cultivation,

brijal
cultivation, turmeric cultivation, bamboo
production, papaya production, chilli production and
onion production
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onion production
7
. Livestock
raising
13 activities

Milking cow, bullocks, cow fattening, poultry raising,

sheep raising, duck raising, buffalo rearing, bees
raising, pigeon raising etc

References
Ahmad, K . (1992). Economic Development in an Islamic Framework. London: The Islamic Foundation.
Hamid, M. A. and Rahman, S.M.H. (2001). Role of Islamic Bank in the Development of Small Entrepreneurs: An
Empirical Investigation, IBTRA, IBBL, Dhaka, Bangladesh.

Huppi, M., and G. Fedder (1989)."The Role of Groups and Credit Co-operatives in Rural Lending." World
Bank Policy, Planning, and Research Working Paper 2814, Washington, DC. Also see,.Mukhopadhyay,
S. ed. (1985). The Poor in Asia: Productivity-Raising Programs and Strategies. Kuala Lumpur: APDC.
Islam, R. ed. (1985). Strategies for Alleviating Poverty in Rural Asia. Geneva: International Labour Office.

McGregor, J. A. (1988)."Credit and Rural Poor: The Changing Policy Environment in Bangladesh." Public
Administration and Development 8(4): Also see Berger, M.(1989). "Giving Women Credit: The Strengths
and Limitations of Credit as a Tool for Alleviating Poverty." World Development 17(7).
Wood, G. D. and Sharif, I. A. (1997). "Who Needs Credit?". Poverty and Finance in Bangladesh. Dhaka:
University Press Limited.

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