IsDB Microfinance Experience

1. IsDB Microfinance Experience

2. THE ISLAMIC VISION OF DEVELOPMENT Comprehensive Human Development Maqasid Al-Shariah Security & Basic Needs Capacity Building Knowledge Honour Nafs (Self) Property Nutrition & health Higher Education Protection Governance Science &Technology Deen (Religion) Aqal (Knowledge) Nasl (Posterity) Education Moral Education Values Justice Research & Development Sports Environmental preservation Capacity Building Maal (Wealth) Islamic Financial Services Industry Institutional Management of Wealth Fiduciary Duty Means to an end Transparency

3. Significant resources potential for Islamic Microfinance Industry • More than 300 Islamic Financial Institutions • In over 65 countries • Managing assets of approximately US$ 1.0 trillion in Shariah compatible manner • More than 15% annual growth • Worldwide recognition

4. Need for an Islamic Microfinance Development Strategy • Over 3 billion people living on less than two dollars a day • Over 2/3 of world refugees are Muslims • Lowest Five among IDB member countries account for over half a billion (528 million) of the world’s poor (with incomes below $2 a day) • Lowest Ten account for over 600 million of the world’s poor • Among 500 million micro-entrepreneurs: currently Less than10%, i.e. 50 million, can access credit… • The informal sector represents over 60% of the active population of most developing countries • Over 7,000 Micro-Finance Institutions (MFIs) have difficulties to access the capital markets

5. IDB’s µFinance Current Strategy • Poverty alleviation thru provision of suitable and sustainable access to financing. • Capacity building • Nurturing entrepreneurship support at grass roots level • Introduction of Islamic financing modes

6. Main Features of IDB’s Current µFinance Scheme • Country eligibility:Low Income and LDMCs • Mode of Financing: Loan – Service fee 0.75 to 2.5% • Tenor: 25 to 30 years with 7 t0 10 grace period • µproject investment: US$ 5,000 per project • Maturity: 3-5 years • Beneficiaries contribution: 10-20% of project cost

7. IDB LDMC loan at 0.75% for 30 yrs incl 10 yrs grace Government External auditors loan US$ at max. 2.5% pa Central Bank US$ account in commercial local bank Financial Intermediary/NGO 20-22% pa (local currency) Max 5 yrs incl 2 yrs grace 24-30% pa (local currency) Repayment Revolving fund + 65% of markup 35% of markup (operational cost of NGOs) Micro-entrepreneurs (in local currency) Key: Physical transfer money Reporting to/instructing

8. IDB µFinance OperationsIDB µFinanceACHIEVEMENTS AND IMPACT

9. Balance of The Poor’s Professional skills The poor request to start his assistancewith a: • Promotional Social Safety Interventions Package: • Literacy & Awareness, Counseling • Vocational training & Skills upgrading,, career guidance, Management, • Entrepreneurship&Business linkages promotion (Subcontracting, Franchising and Clusters and collaborative production networks), • Community Development Basic skills, • Other Poverty alleviation interventions such as Grants to education, house extension SKILLS POVERTY LINE

10. Balance of The Poor’s Professional skills The poor request mobilizingPackage of Business Development Services Counseling, Training Experiences Networking access to markets Counseling, Training Experiences Networking access to markets SKILLS POVERTY LINE

11. Balance of The Poor’s Professional skills The poor request mobilizingPackage of Business Development Services Counseling, Training Experiences Networking access to markets Business Incubators Services SKILLS POVERTY LINE

12. Balance of The Poor’s Professional skills The poor request mobilizingPackage of Business Development Services Upgrading services for BDSIs and MFIs Counseling, Training Experiences Networking access to markets Business Incubators Services SKILLS POVERTY LINE

13. Balance of The Poor’s Professional skills The poor request mobilizingPackage of Business Development Services Upgrading services for BDSIs and MFIs Designing innovative BDS & appropriate technologies Adapted to the Poor’ needs Counseling, Training Experiences Networking access to markets Business Incubators Services SKILLS POVERTY LINE

14. Balance of Poor Self-Sufficiency VISION / STRATEGY / APPROACH The poor request mobilizingPackage of appropriate Financial Services ECONOMIC POVERTY LINE Continuing on Skills Upgrading assistance

15. Balance of Poor Self-Sufficiency VISION / STRATEGY / APPROACH The poor request mobilizingPackage of appropriate Financial Services Capital loans Consumer loans Micro-Grant Micro-Savings Education loans Micro-Pensions Micro-Housing loans Micro-Insurance ECONOMIC POVERTY LINE

16. To Rebuild livelihoods Replace lost assets Overcome social isolation Gain productive skills Graduate to economic self-sufficiency Helps groups: high-risk In immediate Conflicts and Post conflicts environments In severely disadvantaged rural areas In intervention situation for the chronically destitute Role of Micro-grants in IDB Microfinance Operations

17. FROMIDBµFINANCEEXPERIENCE Microfinance Projects Design and implementation mechanism • IDB may adapt Ready-to-Use Microfinance Frame work Package approach adopted CGAP consortium of donors. • More IDB involvement in early phase of Projects/Programs formulation • Investment in long-term programs in support of a few policy objectives rather than in short-term stand-alone projects

18. IFS DEVELOPMENT PROGRAM : THE WAY FORWARD Awqaf Sadaqa Zakat IDB Pov. All. Fund Corporate Donations Comprehensive Human Development IFS Development Fund Other IFS Others Community A Community B Community C Individual 1 Individual 2 Individual 3 Individual 1 Individual 2 Individual 3 Individual 1 Individual 2 Individual 3 M I c r o f I n a n c e

19. Asset Building, Risk Mitigating Products • Voluntary savings • Health and life insurance Lessons to be learnt from IDB experience Special Services & treatment • Respect, connection with pertinent stakeholders • Rapid response, and access to services Flexible financing Products Promotional Social Safety Net Interventions • Information, Counseling • Training, skills upgrading • Marketing Assistance • Technology devmt, transfer • Business linkages • Small initial loan sizes • Larger loans over time • Longer terms WA WA ZA Understanding the Poor Rights & Needs Variety of Products ZWA ZWA ZWA • Housing loans • Education loans • Life cycle products No Collateral • Group guarantee WA Waqf applicable ZA Zakat applicable ZWA Zakat &Waqf applic

20. Lessons to be learnt from IDB experience • Making Economic Policies & Growth Pro-poor • Re-distributive policies (targeting the poor) • Providing Social Safety Nets to poor & marginalized groups • Addressing Social barriers & issues facing women in economic development

21. Lessons to be learnt from IDB experience • Making Economic Policies & Growth Pro-poor • Targeted programmes and projects to enable the poor to benefit from economic growth through : • Labour intensive projects, • Telecommunications, electricity, roads, infrastructure, • Food security projects, post-conflict/reconstruction projects, • Environment sustainability and renewable energy, micro-credit, cross-cutting projects, etc. Continued

22. “Zakat & Waqf Microfinance” efficiency Income of USD10 million Waqf @ 5% return, would provide average loansof $100 to 5000 Poor .90,000 benefeciarieswould be covered if 90% of the Waqf used in microfinancing. Appropriate risk management Mechanism should be established to protect the Waqf from decay. Zakat, Takaful Funds may be the alternative,

23. Lessons to be learnt from IDB experience • Promote Islamic Microfinance Houses (IMH) • Objectives: to complement the Comprehensive Human Development model by providing access to integrated Islamic Microfinance financial services to the poor in our member countries • The Microfinance Houses Development Programme would initially entail a pilot project in 5 member countries for creating and/or strengthening existing Microfinance institutions. Continued

24. Lessons to be learnt from IDB experience • The IMH would also undertake other interventions which would strengthen the livelihood of the poor, such as; • Investments in public infrastructure, including roads, communications and education which provide a foundation for self-employment activities. • Community-level investments in commercial or productive infrastructure (such as market centers or small-scale irrigation infrastructure) to facilitate business activity. Continued

25. Lessons to be learnt from IDB experience

26. Rural (esp. agricultural) finance Services like microinsurance, leasing, and remittances Social performance measurement Defining the lower limits of viable microfinance and Employing other interventions, including grants Replicable strategies for unlocking country-level capital markets for microfinance Role of donors relative to international equity and loan funds Cost-effective and sustainable ways to combine non-financial development services with financial services

27. ISLAMIC FINANCIAL SECTOR DEVELOPMENT AND QWICK WINS MICROFINANCE INITIATIVES • IDB POVERTY ALLEVIATION FUND • THE ISLAMIC MICROFINANCE DEVELOPMENT FRAMEWORK

28. Model of an Ideal Islamic Bank • A Universal Bank covering • Commercial Banking • Investment Banking • Advisory Services • Custodial Services • Asset Management • Zakat Management • Awqaf Development • Microfinance • This bank should be a vehicle for equitable distribution of wealth.

29. IDB’s Role in Islamic Financial Sector Development Previous Initiatives Equity investments in IFIs Establishment of eight infrastructure institutions Research, training and technical assistance Development of financial products/funds (UIF, IBP) and Awqaf sector • Recent Initiatives • “Ten-Year Framework for Developing the IFSI”, Joint Initiative • Establishment of a Policy Dialogue Working Group • IFSI Development Technical support proposal • IFSI Development Program

30. Macro Perspective: Policy & Regulatory Framework • Provide Supportive Legal, regulatory and tax framework • Ensure Macroeconomic Stability • Keep Inflation in Check • Curb Speculative Forces in Financial Markets • Integrate Awqaf and Zakah in National Policy • Support Civil Society Efforts

31. Macro Perspective: Policy & Regulatory Framework Resolves the Unresolved Issues in Banking Sector Regulation and Supervision that Affect Microfinance • Should there be Prudential Regulation for Non-deposit-taking MFIs? • Should Non-registered Entities be Prohibited from Lending? • How should Islamic MF be Separated from Conventional MF in a Dual System?

32. Meso Perspectives: Infrastructure, Networks, Technical Service Providers • Transparency and Information: High-quality auditors and rating agencies, credit bureaus, reliable information software - scarcely available to Islamic MFIs • Existing MF-specific Agencies expand scope to include Islamic MF; or Existing Agencies for Mainstream IFIs to absorb MF services • Proactive role of Donors in Development of Islamic MF Rating • Basic financial infrastructure, Range of services required to reduce transaction costs, increase outreach, build skills, and foster transparency • Payment Systems: Only large Islamic FIs have access to electronic payment systems 3. MFIs working for the poor may work through the larger Islamic FIs by forging alliances with them

33. Micro Perspectives: Islamic Microfinance Providers Diverse Organizational Structures: • Informal MF Providers, • Member-Based Organizations, • Non-Government Organizations, • Formal Financial Institutions, • Commercial Banks Diversity should be given due recognition in regulation Need to Develop an Integrated Structure

34. Micro Perspectives: Islamic Microfinance Providers Shariah Compliance Shariah Boards Fiqhi Issues Divergent Perceptions Confidence of Users Collective Resolution of Shariah Issues

35. RECOMMENDATIONS Concerted Efforts by ALL Stakeholders to Make Finance Work in Muslim Communities through Islamic Finance Efficient Management of Community Assets, Combine Social and Economic Agenda Effectively, Cooperatives-NGOs Recognize MF with Distinct Risk-Returns, Undertake Direct and Indirect Financing, Linkage with Grass-root NGOs, Facilitate Capital Market Participation of MFIs Islamic Financial Institutions Preserve and Develop Community Assets, Undertake TA, Transform the Destitute into “Bankable” Clients Awqaf & Zakah Funds Government Agencies Create Supportive Policy and Regulatory Environment for IMFIs

36. THANK YOU