International Conference on Islamic Microfinance

Organized By :

CENTER OF ISLAMIC BANKING & ECNOMICS

Held At:

ISLAMIC MICROFINANCE IN DIFFERENT COUNTRIES Need to serve the ultra-poor

Fadlullah Wilmot Country Director Islamic Relief Pakistan

DESIGNING PROGRAMS FOR THE ULTRA POOR

Conventional MF fails to reach the ultra poor

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

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

 School-aged children working manual labour jobs instead of attending classes;  Severe malnutrition (i.e., access to only one meal per day);  High incidence of physical handicap;  Own few productive assets;  Frequent migration, transient lifestyles in search of work;  Landless, or own less than 1 acre of cultivable land (including homestead);  Poverty is inter-generational;  Highly vulnerable to natural disasters and health catastrophes

Without help for the poor there is no Islam

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

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

 They pray but refuse to give even the smallest help to others,.  Allah wishes human life to be elevated, happy, based on pure motives and

characterized by mutual compassion, brotherhood and purity of hearts and behaviour.

Pakistan the lowest-performing South Asian country in reducing poverty

Average annual rate of poverty reduction (% ) Bangladesh 0 -2 -4 -6 India Nepal Pakistan Sri Lanka

Weaknesses of Conventional Micro-finance

Loans used for consumption  Assumption that the poor can be good entrepreneurs given access to credit Asymmetric Information Problems Economic Viability of MFIs Charging Fixed Interest Rates Higher Interest Rates and focus on short term loans  Low Rate of Return on Investment High Dropout Rate and Non-Graduation from Poverty Debt Trap Non-Conforming to Religious Beliefs Credit Rationing

Poverty eradication scheme of Islam

Poverty eradication scheme of Islam Preventive measures Control of ownership Prevention of malpractice Corrective measures

Positive measures

Income growth Functional distribution of income Equal opportunity

Compulsory transfer: Zakat Recommended transfer : Charity Government responsibility

Islamic Financial Modes

Participatory Mechanism Profit and Loss Sharing Mudarabah Musharakah Musaqat Muzar'ah Direct investment Murabaha Jo'alah Non Profit and Loss Sharing Qard al Hasanah Bai'mua'jjal Bai'salam Ijara wa iqtina

Different countries and different regions different approaches

Indonesia Yogyakarta profit sharing with the ultra poor Aceh group system with women entrepreneurs

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

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


Microfinance discourse [poorest of the poor as landless, non agriculture, women] The hard core poor/ ultra poor [microfinance left outs, and throw outs. Not only poorer than the poor but differently so]

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What about heterogeneity among the poorest?

Male labour force participation (% of 15-60 years old) Female labour force participation (% of 15-60 years old) Child labour (% of 10-14 years old) Primarily involved in day labour (% of labour force) Hours worked per day (mean) Cash wage received per day (mean in Taka) Received in kind payment (% of day labourer) Owns cultivable land (% of HHs) Leased in cultivable land (% of HHs) Owns livestock (% of HHs) Own at least one non-agriculture enterprise (% of HHs) Net annual revenue from the enterprises (mean in Taka) Receive remittance from within country (% of HHs) Remittance received in 12 months (mean in taka) Poorest Decile 91 15 12 61 6.45 65 6 27 22 67 18 25,059 16 3,959 2nd poorest decile 89 10 10 52 6.49 75 3 32 22 70 21 28,653 17 6,101 t-value

Work 1.83* harder, especially women 3.40***

0.79 4.20***

Earn 0.32less 6.10*** 2.38*** Weak 2.37** base asset 0.02 1.05 1.96**
1.69* 0.53 1.36

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What about heterogeneity among the poorest? Poorest

Participant of social safety net programme (% of HHs) Receive informal charity in cash (% of HHs) Receive informal charity in kind (% of HHs) Total amount received in informal charity (mean taka) 24 16 28 1,642

2nd decile 21 14 22 2,455

t-value 1.57
Informal safety nets as important as formal ones

1.03 2.77***poorest lose out The even in informal safety 2.95*** nets

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Education and housing situation of the ultra-poor What about heterogeneity among the poorest?Poorest
Education Enrolment rate of 6-15 years old boys (%) Enrolment rate of 6-15 years old girls (%) Housing Amount of homestead land owned (mean in decimal) House wall is made of tin/brick (% HHs) Value of the house living in (mean in Taka) Owns any kind of toilet (% of HHs) Have electricity connection (% of HHs) 55 65 6.15 28 21,276 70 14 2nd decile 66 71 7.23 38 28,380 81 23 t-value 4.24*** 2.24** 2.14** 4.63*** 5.90*** 5.45*** 4.68***
The education opportunity divide

The living environment divide

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Is there a spatial heterogeneity?

Poorest districts Male labour force participation (% of 15-60 years old) Female labour force participation (% of 15-60 years old) Child labour (% of 10-14 years old) Primarily involved in day labour (% of labour force) Hours worked per day (mean) Cash wage received per day (mean in Taka) Owns cultivable land (% of HHs) Leased in cultivable land (% of HHs) Owns livestock (% of HHs) Own at least one non-agriculture enterprise (% of HHs) Net annual revenue from the enterprises (mean in Taka) Receive remittance from within country (% of HHs) Amount of remittance received in 12 months 88 13 13 59 6.63 64 30 22 69 16 25,449 18 3,498 Moderate poor districts 91 Vulnerable labour

market engagement
11 7 51 6.39 66 32 27 77 28

Weak asset base

24,646 18 4,988

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The poorest are heterogeneous

 The bottom 10% are much worse off  The poorest living in the poorest areas are particularly vulnerable.

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Graduation
 Mainstream poverty alleviation interventions by and large leave out the
poorest

 Safety net interventions are not designed to help the poorest graduate  Design Safety nets as stimulus package: interventions combining and

sequencing safety nets and poverty alleviation instruments for graduation outcomes for a large majority of the poorest:

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Graduation Framework

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BRAC two-step model

1. In 1985 BRAC realised its microfinance programmes were unlikely to meet the needs of the ultra poor. 2. Food donations provided a breathing space for the poorest these would not remove chronic poverty. 3. Attempt to combine food relief with skills training program, to create a basis for enhanced household income in the future. 4. Regular compulsory savings of a few cents during the period of their food relief to build up a lump sum for investment. 5. Training on poultry and vegetable production for female VGF cardholders was given and they were able to access microcredit 6. At the end of the 24-month programme the ultra poor were eligible for microcredit

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

Results mixed
1. About 80% of the IGVGD beneficiaries joined BRACs regular microfinance programme 2. But only 70% continued beyond three years i.e. over 40% of the IGVGD beneficiaries fail to start the process of graduation. 3. Those who dropped had fragile socio-demographic structures the female headed households who do not having a working adult male in the household and/or suffer from chronic illness, etc

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Need to look at
 Tackling the social and attitudinal constraints which reproduces a nonenabling environment for the ultra poor.

 Asset transfer  Dealing with local elites

Islamic MFIs
Social Development Program


behavioral, ethical, and social aspects in light of Islamic teachings

Targeting the family through women

  

Spouse co-signs the contract dealing with women more efficient and convenient Women disseminate knowledge to children

Dealing with Arrears/Default



Less aggressive and use Islamic teachings to recover loans

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Problems facing Islamic MFIs

1. Dilution


in the Application of Islamic Modes of Financing

Main mode- murabahah or bai-muajjal. It is difficult to go out with the clients and buy the goods/assets from faraway markets IMFIs delegates someone else (and inspects later)

Alternative is to use Profit-sharing modes Problem is the moral hazard problem--No book-keeping and difficult to monitor

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Conclusion
There are strong economic reasons for establishing Islamic alternatives to poverty-focused micro financing. Traditional institutions of waqf, zakat, and qard hassan are important means of financing IMFIs

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Thank You

CENTER OF ISLAMIC BANKING & ECNOMICS Head Office: 192- Ahmad Block, New Garden Town , Lahore, Pakistan Ph: +92-42-35913096-8, 35858990, 38407850 Fax: +92 -42-35913056 E-mail : info@alhudacibe.com Web: http://www.alhudacibe.com