- 5 months ago
A Solution to Expand Financial Inclusion can bridge the gap and provide access to financial services
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00:13:45et de l'inclusion financière, organized with the support of Directorate for Development
00:13:51Corporation and Humanitarian Affairs, INFINE, Network, and in collaboration with the Bank
00:13:59de Luxembourg and BRS, Belgium.
00:14:03Today, we are touching another interesting question, which is to review how microfinance
00:14:10can reach more beneficiaries thanks to the development of the Islamic microfinance products.
00:14:17After having worked years in Muslim countries, among which we have Afghanistan, Pakistan,
00:14:24Mali, and other West African countries, I am delighted to bring this subject to your attention.
00:14:32The global Muslim population counts for about 1.6 billion people,
00:14:38but over 70% of them do not use financial services.
00:14:47Islamic microfinance accounts for less than 0.5% of the global microfinance market,
00:14:54accordingly to the 2008 C-GAP survey.
00:14:58Islamic financing is unique and essentially different from conventional microfinance.
00:15:04The sector seeks to provide an economic empowerment tool for poor or disadvantaged people
00:15:11based on Islamic financing methods that avoid interest, which can seem impossible for us,
00:15:20traditional bankers and microbankers.
00:15:23Islamic finance has an approach that gives a value to profit, but not only for laws as well,
00:15:31but also for the global sharing.
00:15:34The specialists invited to this midi are Dr. Mohamed Krosing and Mrs. Fadwa Boudiba.
00:15:45Mrs. Boudiba is a senior investment officer for the Middle East and Africa with Triodos,
00:15:52one of the largest leading sustainable bank, at quarter in the Netherlands.
00:15:57She worked extensively for many years with INCOFIN, Belgium Investment Fund,
00:16:06as well for World Bank based in Cairo in technical assistance,
00:16:10and as well years of experience in formal banking.
00:16:15Dr. Mohamed Krosing is head of the Global Islamic Microfinance Business Unit at Islamic Relief Worldwide,
00:16:23an independent humanitarian and development organization with headquartered in Birmingham, UK.
00:16:30Dr. Krosing completes his PhD on the political economy of Islam.
00:16:36He's a development economist with over 15 years of experience of working with Islamic development and financial institutions.
00:16:44Our panelists will discuss about the development and the contribution of the Islamic microfinance to the financial inclusion.
00:16:53They will explain the main principles of the Islamic microfinance, as well as challenges it copes with today and opportunities for its expansion.
00:17:06They will also explain how the sector adapts the social performance standards and women empowerment and rural development.
00:17:17David Demullier, Mr. David Demullier, who is currently senior project manager for a French financial public institution,
00:17:24will moderate the discussion.
00:17:26He worked for three years, up to recently, for the European Investment Bank in charge of Middle East and North Africa region.
00:17:38Together with you, I'm looking forward to a fascinating discussion.
00:17:43After the presentation, there will be a question and answer session, followed by some closing remarks.
00:17:49I am now very happy to give the floor to Fadwa, Mohamed, and David.
00:17:55Enjoy the discussion. Thank you.
00:18:02Thank you very much, Olivier.
00:18:04Before starting the debate, we would like to show a short video released by C-GAP in close cooperation with Wazil Foundation based in Pakistan.
00:18:15This will give us a quick introduction to Salam.
00:18:18Salam is one of the product, Islamic product, used by Islamic microfinance institutions.
00:18:26After this video, we will also have the opportunity to describe another Islamic instrument, Moudarabha,
00:18:34Moudarabha, sorry, after and during the debate.
00:18:40We can launch the video, please.
00:18:48So in 2009, Wazil Foundation began offering farmers in Punjab Sharia-compliant financing.
00:19:04We are in Mourkunda. This is a very rich agricultural area. The client we are going to right now, his name is Khazar Hayat, he was the first ever client who ever got Salam.
00:19:20Salam is basically an advanced purchase in which we determine the price, the quantity and the quality at the very start of the contract.
00:19:35Salam encourages trading. We are engaging in trade rather than lending, rather than charitable.
00:19:41These farmers were not able to reach to the banks. They were going to middlemen. The middlemen used to provide them all inputs on credit.
00:19:49***
00:20:00Ez Vice President Trump
00:20:07His wife and kids help dry the wheat.
00:20:10His wife and kids help dry the wheat. The agreed portion goes to Wasil and any surplus
00:20:17will be sold on the open market.
00:20:19We store it in a warehouse and then sell it to flour mill. We have better negotiation
00:20:26powers to sell it in the better rate.
00:20:28He was an early adopter. He saw the good that this can bring. Actually helped him to plant
00:20:34more crop and get more yield.
00:20:37The increase in his wheat yield means that he's been able to rent more land. He also
00:20:41bought two buffalo, a plow and this new tractor and thresher.
00:20:54And all that has had a big impact at home.
00:20:56Before he had a small house over there and then after taking financing he built this house.
00:21:03Unlike Hiza and his wife, two of their sons and three daughters have been able to stay
00:21:07in school.
00:21:09Over these five years, we have seen a rapid exponential increase out of poverty of this
00:21:15one client of ours.
00:21:17We're going to Sharakpur right now. This is a Guava-rich area. We have dispersed an HR financing.
00:21:25We take a piece of land on rent and then we sub-rent it to our farmers. And the farmers
00:21:31can either pay in cash or they can pay in the form of crop.
00:21:36Mohammed Rizwan got himself into debt and ended up working two years as a day labourer to pay
00:21:41it off.
00:21:48He had the experience of picking, but he did not have any capital in order to get an output
00:21:54of his own. So we got him seven acres of land. We planted Guava in his field. He picks the
00:22:01fruit, he sells them to the open market in Lahore, in Karachi, Islamabad, all the major cities
00:22:05of Pakistan. Within a period of one year, he made a profit of 650,000 rupees, which is
00:22:12an exponential profit.
00:22:20Mohammed is now on his third cycle of financing. He's used a portion of the income he's made
00:22:26to make improvements to his parents' family home.
00:22:28Mohammed is normal.
00:22:31It's not a loss, it's a loss, but it's a loss and I'll pay it to his parents' family.
00:22:36That's his mother.
00:22:38Out of the yield of the next crop, he plans to build two more rooms on top of this for the
00:22:43other two brothers who are getting married.
00:22:45And now Mohammed is planning his own marriage.
00:22:48Mohammed is planning the lives of these people have not changed over hundreds of years.
00:22:53But alhamdulillah we have seen radical changes within one and a half years.
00:22:56their income is almost doubled.
00:22:58Wasil's latest offering is Master Salaam,
00:23:01a contract that combines the Jara and Salaam
00:23:03so that farmers can rent land and have cash in hand
00:23:06to buy fertilizer and seed.
00:23:08With this innovation, they hope to go much further
00:23:10in meeting the needs of smallholder farmers.
00:23:13We need to scale up.
00:23:15We have 50,000 clients who are ready to take financing from us.
00:23:19But unfortunately, we don't have enough funds
00:23:22to finance all of those people.
00:23:24We want this product to be in the whole of Pakistan.
00:23:28It will be a role model not only for Pakistan
00:23:31but for other countries as well.
00:23:43Mohamed, would it be possible for you
00:23:47to give us a quick overview of the instruments
00:23:50available for Islamic microfinance?
00:23:53Thank you, David.
00:23:55And, of course, thank you for Ada and Wanda Luxemburg
00:23:59to organize this beautiful event here.
00:24:01Well, this was Islamic microfinance, the movie.
00:24:04Obviously, in the movie, you've seen lots of different
00:24:09Arabic terminology being used for financing instruments
00:24:13that are probably quite familiar to you.
00:24:17However, they're not used, of course, in the conventional,
00:24:19as we call it, microfinance industry
00:24:21because these are not interest-based instruments.
00:24:25Islamic finance and the value proposition, if you like,
00:24:28of Islamic finance is that a fixed or guaranteed return is not just.
00:24:34And therefore, we need to find ways of exposing the investor
00:24:39and the entrepreneur to the risk in a fair manner.
00:24:43And therefore, traditionally, there have been a number
00:24:46of more charitable types of Islamic finance instruments,
00:24:50social Islamic finance instruments being used in the Muslim world
00:24:53for many hundreds of years.
00:24:54But more recently, the video that you've seen really was actually made
00:25:00by CGAP for the Islamic microfinance challenge in 2013,
00:25:05which the Waisal Foundation won for this innovative way
00:25:09of working with very traditional instruments and farmers.
00:25:17Now, there are really sort of, you know, three broad categories
00:25:22in Islamic finance and Islamic microfinance.
00:25:26Islamic finance and Islamic microfinance are really using the same instruments.
00:25:29We're just applying them in microfinance within the financial inclusion context.
00:25:36Well, there is the one broad group which are trade-based instruments,
00:25:40where the MFI is actually selling an asset to the client,
00:25:48or in this case, buying an asset of the client and pre-financing that.
00:25:52Then there's lease-based instruments.
00:25:55Ajarah, you heard here, which is really, really just a lease contract.
00:25:59Okay.
00:26:00It can be used for lands, can be used for machinery, et cetera, et cetera.
00:26:03And then there are profit and loss-sharing instruments,
00:26:06which are really, if you like, micro-equity types of arrangements.
00:26:09That's really, in a nutshell, what Islamic microfinance has to offer.
00:26:14Thank you, Mohamed.
00:26:15Fadwa, could you please describe briefly the mechanism of SALAM
00:26:20that we heard in this video?
00:26:22Okay.
00:26:23Thank you, David, for the question and for the invitation,
00:26:26and thank you, Ada.
00:26:27Actually, the SALAM product is really different
00:26:31than what you can see in the Islamic microfinance,
00:26:35because, as my colleague Mohamed mentioned,
00:26:40one of the products that is the most developed on the Islamic microfinance
00:26:44is the Muraba.
00:26:46So this SALAM product, it's really different because,
00:26:50how does it really work?
00:26:52It's an advance payment, sorry,
00:26:56it's an advance purchase agreement against a delivery of a crop.
00:27:01So it's totally different than the conventional microfinance.
00:27:04How does it work?
00:27:05The microfinance institution with finance
00:27:08is going to finance a microentrepreneur,
00:27:11and the microentrepreneur repay the microfinance institution against crops.
00:27:16Okay, technically, how does it work?
00:27:18How is the price defined of the crop?
00:27:23The price is predetermined way before the collection of the crop.
00:27:29So based on previous year of harvest, of agriculture and the market rate.
00:27:34So with the money, the microentrepreneurs will buy fertilizers, seeds and so on.
00:27:41Then at the time of the harvest season,
00:27:44the microfinance institution would collect the crop
00:27:47at the price that was agreed, the amount of crop,
00:27:51will store it in the warehouse and then sell it later on.
00:27:55The microentrepreneur will remain with a portion of the crop
00:27:58and actually will sell it in the market.
00:28:00So that's the way this SALAM is really different
00:28:03because we use it mostly for agriculture
00:28:06and it's a really different way from the conventional
00:28:11where you have a different relation,
00:28:13you're a borrower and a lender,
00:28:15and in this case your partnership.
00:28:17So this is what my colleague Mohamed was talking about,
00:28:22the profit and loss sharing.
00:28:24Because you were talking about agriculture,
00:28:27so you have a risk that the crop will not be delivered,
00:28:31that you have bad harvest season and so on.
00:28:34So in order to prevent from one of these risks,
00:28:37you have the TACAF, you have the insurance
00:28:39that will help and protect the microfinance institution
00:28:45and the microentrepreneurs also.
00:28:48So this is really widely used in Pakistan,
00:28:52but now the Wasil Foundation was one of the innovators in this aspect.
00:28:59So this is for SALAM.
00:29:01Thank you, thank you, Fadwa.
00:29:03Mohamed, we have another product.
00:29:05It is Murabaha.
00:29:07Could you please maybe explain briefly what is Murabaha
00:29:12and give us a nice example?
00:29:16Yeah.
00:29:17Murabaha really is almost a reverse transaction
00:29:22of what you've just seen Fadwa describe as SALAM.
00:29:25Murabaha is a cost plus sale.
00:29:28It includes the on-the-spot delivery of an asset
00:29:35and it allows for deferred payment.
00:29:38Murabaha is a sale where however the seller,
00:29:42in this case it's the MFI who is selling the asset,
00:29:45who has to however declare their profit margin to the buyer.
00:29:52Okay, so it's very clear.
00:29:54You know, you want this cow?
00:29:56Okay, I can sell it to you.
00:29:58And it will cost me $100 and I will sell it to you for $110.
00:30:03Okay?
00:30:04And I will take it.
00:30:05I will go, you know,
00:30:06we see the loan officer on his motorbike
00:30:08and he will take the cow from the market,
00:30:10throw it over his shoulder and drive it to the homestead of the farmer
00:30:13and deliver that cow and then the farmer has the opportunity to pay
00:30:18over, you know, 12 monthly installments, for example,
00:30:22the mark-up price.
00:30:24Okay?
00:30:25Now, you might say, well, actually,
00:30:27well, that's a little bit like,
00:30:28really like an interest-bearing loan.
00:30:30You know, there's $100 and $110,
00:30:36so that's a 10% interest rate.
00:30:39Well, actually, you know,
00:30:41we haven't yet sort of talked a lot about the principles of Islamic finance,
00:30:44but, of course, it is a sale.
00:30:47And, you know, we have bankers in the audience, presumably,
00:30:50and we have also accountants in the audience.
00:30:53In Islamic finance, as compared, for example,
00:30:56to the International Financial Reporting Standards,
00:30:58where we talk about substance over form,
00:31:02Islamic finance has an understanding
00:31:04that form actually is more important than substance.
00:31:07Okay?
00:31:08So, here we're really talking about a legal agreement
00:31:10that the MFI enters with the entrepreneur
00:31:13or the financer with the farmer
00:31:15about a sales transaction.
00:31:17Okay?
00:31:18And in this case, of course,
00:31:20the MFI has to actually go and purchase the asset,
00:31:25take the risk of purchasing it
00:31:27and deliver it to the entrepreneur, the farmer.
00:31:31So, there is, the risk exposure is there.
00:31:34And, of course, we're creating a debt
00:31:37by allowing the farmer to repay that asset over, you know,
00:31:42a certain period.
00:31:43But it is, the underlying transaction is a sale
00:31:47and not a debt-based loan.
00:31:50Okay?
00:31:51But that's the main interest,
00:31:52the main difference, really,
00:31:54between an interest-bearing loan
00:31:56and the Morabaha transaction,
00:31:57which is very common in Islamic microfinance,
00:32:00very common also in the Islamic banking sector,
00:32:02but 70% of all transactions that we see
00:32:06in the Islamic banking sector are Morabaha-based.
00:32:08Okay?
00:32:09You can do this with commodities and other types of assets,
00:32:12and it's a very popular instrument.
00:32:15It's also a relatively straightforward instrument
00:32:18because it, as I said,
00:32:20it does look a little bit like an inter-space transaction,
00:32:23although, as we say,
00:32:24the form here actually is trumping the substance
00:32:27from an Islamic finance perspective.
00:32:30Thank you, Mohamed.
00:32:31So, now that we have described some products,
00:32:34I think we can move to the market of Islamic microfinance.
00:32:38Microfinance is growing very quickly throughout the world.
00:32:41How can Islamic microfinance contribute to these developments, Fadwa?
00:32:47The Islamic microfinance?
00:32:48Yes.
00:32:49Okay.
00:32:50Well, if you compare to the conventional microfinance industry,
00:32:55the Islamic microfinance represent maybe less than one,
00:32:59maybe two percent.
00:33:00It's really hard to really define a figure,
00:33:06but it will be one to two percent.
00:33:09The potential is huge.
00:33:11We are talking about Islamic microfinance not only in Arab country,
00:33:15but the country where Islamic microfinance is really spread
00:33:19is Bangladesh, Sudan, Pakistan, and Indonesia.
00:33:24Those four countries themselves represent about 70 to 80 percent
00:33:29of the Islamic microfinance sector today.
00:33:32Having said that, you can see that if you are very familiar
00:33:38with the ex-Soviet Union country, Tajikistan,
00:33:41there is a new regulation on Islamic finance.
00:33:44A lot of countries start to show their interest,
00:33:47not only in Arab countries.
00:33:48Actually, if you look at the MENA region,
00:33:51you will see that in those countries,
00:33:53the Islamic microfinance is not well spread.
00:33:55Most of the conventional microfinance institutions
00:33:59will just have one product that really tackle Islamic microfinance.
00:34:05A window, you can see that in Morocco, in Tunisia,
00:34:09there are new thoughts about the change.
00:34:12Africa, you will see some institutions start really to work
00:34:15in Islamic microfinance only.
00:34:18Pakistan, obviously, but what is important to understand is
00:34:23in Islamic microfinance is what do you want to do?
00:34:28How is the market? How is the sector?
00:34:30How sensitive is the population about religious thoughts?
00:34:34We are here today to discuss about this Islamic microfinance
00:34:39because, in my view, there is a potential.
00:34:43Those people are Muslim and they are poor.
00:34:46So, we are coming up with the same typical microfinance convention
00:34:52to them with this type of product that doesn't fit their belief.
00:34:56So, in my view, they are double excluded.
00:34:58They are Muslim and they are poor.
00:35:00So, as a social investor,
00:35:03as investors that really want to make a difference,
00:35:06I think we need to go through this niche that is really untapped.
00:35:09Today, I don't know how many, it is very difficult to assess,
00:35:12but I think we can say there is a few millions of clients in Islamic microfinance,
00:35:18but the potential is way higher.
00:35:20So, it is important today to develop product, to approach this category of client,
00:35:25because with the new refugee crisis, I think the microfinance sector overall is changing,
00:35:31and it is important to approach those people with really right product.
00:35:37Thank you, Fedor.
00:35:39Mohamed, would you like maybe to add something about financial inclusion,
00:35:43contribution to financial inclusion with Islamic microfinance?
00:35:48Yeah, you know, I mean, I'd like to, you know,
00:35:52whilst I agree with her, I'd also like to disagree a little bit with her,
00:35:55because our own experience operationally is that we do work in Muslim-majority countries,
00:36:01but we also work in other regions of the world,
00:36:04and we also have actually non-Muslim clients actually coming to us
00:36:07and being interested in this different way of engaging with MFIs, okay?
00:36:13Because, you know, that's because of the client experience,
00:36:18and as a microfinance industry, we're just sort of coming out on the other side of
00:36:23maybe a bit of a dark period, okay?
00:36:25Looking at the early 2000s, really, where, you know, as an industry we had problems, okay?
00:36:32Maybe, you know, there's big discussions still about mission drift and otherwise.
00:36:37From the client experience, and we talk a lot more about client-centred microfinance nowadays,
00:36:42our own experience of talking with clients, and that's not, you know, on a religious basis,
00:36:48because we don't discriminate, you know, who we deal with on any of these kind of categories, you know?
00:36:54Just from a sheer client perspective, we have people coming in Pakistan, for example, to us and saying,
00:36:59look, you know, we want to do this because I don't like the idea of having a debt hanging over my head.
00:37:04I'd much rather like you to be an investor, okay?
00:37:07It's easy specifically when the investor is also happy to share my losses, you know,
00:37:13and much more difficult, of course, when the investor also wants a share in your profits,
00:37:16but nevertheless, it's a business model and a proposition that actually is appealing to all communities.
00:37:23If you look at, you know, statistics in Malaysia, which is one of the more developed Islamic banking markets,
00:37:30it's actually the Chinese community who's taking up Islamic banking.
00:37:35Not the Malay Muslim community, but the Chinese community, because, you know,
00:37:40the business proposition that Islamic banks offer, and also the rates,
00:37:44and that's not interest rates, but profit rates, okay, are actually more favorable,
00:37:49especially if you are interested in equity financing.
00:37:53So, there are opportunities, obviously, and, you know, I do think it's about looking at the opportunities
00:37:59that we have with unbanked people in, yes, a lot in the Muslim world, so to speak.
00:38:06You know, if you look at the World Bank FINDEX, you know, you see the graphical illustrations,
00:38:12and you see that red band going across the globe, yes, that's Sub-Saharan Africa,
00:38:17that is South Asia, that's Central Asia, you know, you have in Sub-Saharan Africa,
00:38:22you know, you have maybe adult bank ability rates of 10-15%.
00:38:27Now, when I speak to bankers, I'm saying, look, that's your, it's not the 10-15% you're looking at,
00:38:33you have to look at the 85-90% that could be your potential customers.
00:38:37It's micro-finance institutions like all of us would have to do maybe the hard work
00:38:41and get them onto, you know, onto the first rung of the ladder,
00:38:45but that's the way to look at, you know, at the opportunities.
00:38:50And therefore, you do need to offer those clients a product that they demand,
00:38:54and I think the demand is very strong.
00:38:56Also, we heard Olivier earlier on talking about, you know, experiences in other Muslim countries,
00:39:01the demand for these sort of products is definitely there.
00:39:04And it's just really about, you know, pulling into the same direction in terms of financial inclusion
00:39:10and enabling the whole industry to kind of use the whole width of models that are,
00:39:16that can be used to bring people into the formal finance sector.
00:39:21Fadoua, maybe you wanted to, yes.
00:39:23Actually, I agree with you.
00:39:25We are totally on the same page.
00:39:28Some micro-finance institutions, for instance, in Palestine,
00:39:33were launching the Murabha product and most of the clients were Christian
00:39:39because they really, as you clearly said, they preferred the idea of having an asset.
00:39:43And some micro-finance institutions that I have seen in Africa,
00:39:47they would rather do this type of project to mitigate the risk of using the loan for other purposes
00:39:53than the really business relationship, you know, purpose that they promised to.
00:39:59So, yeah, we were on the same page, yeah.
00:40:02Okay, so the products are open for other population.
00:40:05But what are the main principles that Islamic micro-finance has to follow from Islamic finance? Mohamed.
00:40:14The main principles, and of course, Islamic micro-finance is really, of course,
00:40:18if you like, a sub-sector of the Islamic finance industry,
00:40:21using the same types of ethical guidelines, if you like,
00:40:25and of course, by and large, also the main products.
00:40:28Well, the key principle really is that there is nothing as a guaranteed return.
00:40:34And that's to a large extent to do with the idea or the concept of money in Islamic economics,
00:40:40which is really just a store of value, okay?
00:40:43So you cannot charge rent, if you like, on the use of money, okay?
00:40:48Any kind of revenue or profit that can be generated has to be generated through productive economic activity, okay?
00:40:57And that also then includes a, if you like, risk exposure to both parties.
00:41:02So the idea of a guaranteed return through an interest-bearing instrument alone is a big no-no in, if you like, Islamic finance and also micro-finance.
00:41:13The other big principles also, of course, that we have to stay away from any excessive, if you like, risk or speculation, okay?
00:41:21So there shouldn't be any speculative types of investments or forward sales or, you know, short selling and the like are also not allowed in Islam.
00:41:30And, of course, the idea, as I already mentioned, that we have to really be engaged in real value creation.
00:41:38And that's because Islamic economics sees the role and the function of the economy to serve society.
00:41:46And that's the society and the societal good as a whole and not just a small number of people.
00:41:51And we are in a bank today and we believe this is a good bank, of course, you know, that also, you know, of course, works with the community at large.
00:42:01And that's really, of course, the idea of banking and, you know, and I think a lot of us now since the global financial crisis, I think we are rethinking slightly, you know, the business models that we've used.
00:42:13And this is really in a sense where the Islamic or Sharia compliant microfinancing can come in.
00:42:22And it's really a business model that, you know, is really something that's open for debate in many ways and doesn't also require you to be a Muslim to use it.
00:42:33So that's the other side of things, if you like.
00:42:36It's an ethical value proposition that doesn't actually require, you know, a particular religious, you know, adherence.
00:42:44Yes, Fado, as an investor, what do you think about the profit and loss sharing principle?
00:42:51I think Islam deem profit, they forbid interest, but you can be sustainable, you can be profitable.
00:43:00Nothing in Islam prevents you from generating income and profit as long as you do it in a sustainable way, in an ethical way, in a fair value.
00:43:12And then you are both partners, it's an equity, it's a marriage between the microfinance institution, microentrepreneur, for the success of the project.
00:43:22It's a totally different relationship, as my colleague mentioned, and that's the way it is for the microfinance sector.
00:43:32So that's why we have so many different types of projects.
00:43:35But once again here, interest is forbidden, but not profit.
00:43:39Good microfinance institution in the conventional sector, we can learn from them.
00:43:44We can build up the skills of the Islamic microfinance, a good governance, good product, good risk management, good report, good product,
00:43:54are the same principle that you can apply in an Islamic microfinance.
00:43:58So it has nothing to do, it's not for free, you have some charity, of course, some tools specific for charity,
00:44:06but Islamic microfinance institution can be sustainable and can generate growth.
00:44:11Yes, you are talking about the business model of a microfinance institution.
00:44:17What is the importance of making profit for an Islamic microfinance institution or organisation?
00:44:24Maybe Mohamed first?
00:44:26Of course, you know, I think we need to first of all admit that the Islamic microfinance industry is still very young.
00:44:32And that's very, you know, a journey that you, those ones who are slightly, you know,
00:44:40more experienced, say, in this sector.
00:44:44We remember, of course, from the 1980s when Mohamed Yunus first started promoting the idea of social collateral.
00:44:51A lot of people were very, very sceptical about lending, you know, a poor person $30, you know, high risk,
00:44:59very unlikely to, you know, ever be returned.
00:45:02But he actually persevered and he created the Grameen revolution, if you like, that has made a massive change to millions of people's lives.
00:45:12Islamic microfinance really has only, though we are building on a long and rich tradition of social finance within Islamic communities,
00:45:22but as an industry, it's really only 15 years, 20 years, perhaps, old.
00:45:27So it's a young industry that, you know, is still searching different business models.
00:45:33Same with the conventional microfinance industry.
00:45:37Of course, it is currently still donor-led, very heavily dependent on subsidies.
00:45:42But I think there are a number of different business models now emerging.
00:45:47And yesterday we were in a cooperative bank, so there is a very strong cooperative model coming particularly out of Indonesia,
00:45:54which is a very populous Muslim country and really promotes a cooperative business model,
00:46:00which is very interesting, you know, particularly from a grassroots development perspective.
00:46:04There are still a number of big players that are working through the social finance route,
00:46:09which has also, of course, you know, a strong tradition within Muslim countries.
00:46:16And also, of course, work with the donor community, development donor community.
00:46:22There are now a number of smaller players that are also, if you like, developing a for-profit model.
00:46:30And that is, I think, appealing particularly, of course, for investors.
00:46:34Because we do recognise that in order to make Islamic microfinance reach scale,
00:46:39we do need private sector involvement in a way that the conventional microfinance sector also thrived.
00:46:46And, you know, there are business models now that also will use particular equity investment opportunities
00:46:53in order to build the kind of capital base that you require to reach scale.
00:46:59So, everything is on the table at the moment.
00:47:01And I think we do learn from the conventional sector to some extent.
00:47:04We are guided by that very strong value proposition of Islamic economics.
00:47:09But in terms of business models, there are, you know, a range of different models available.
00:47:16Yes, I think that the business model is one of your cousins.
00:47:19Yeah, absolutely. And we have to learn from the good thing of the conventional, but the bad thing also.
00:47:26You know, the crisis of over-in-depthness we have faced 2010, 2008, and prior to that.
00:47:33It's a good lesson learned on what really drive and what provoke that, what were the reasons behind the over-in-depthness crisis,
00:47:43and how maybe, you know, having a product that is asset-based could prevent, you know, the micro-entrepreneurs who find themselves very over-in-depth.
00:47:54I'm just coming back from Beirut, and over there, there is no clear regulation, there is no credit bureau,
00:48:03so people are, they don't have access to historical data of any micro-entrepreneurs.
00:48:09There is still the risk remain. When you have an asset, the risk could be mitigated.
00:48:13But as you say, if we talk about the learning, let's take the example of Wassil Foundation.
00:48:18Wassil Foundation was a conventional micro-finance institution.
00:48:23And slowly, slowly, they decide to transform.
00:48:26By having a window, the window didn't work, and then the branch, and then they become the full Islamic micro-finance institution.
00:48:34So, there are lessons learned why sometimes you are not scaling up.
00:48:38Best practice in micro-finance conventional art should be applied to the Islamic, a more mature, more professional industry.
00:48:47But as you say, it's 10, 15 years, who would have invested at the beginning of the Grameen Bank? No one.
00:48:53What is this guy having for women doing those type of products? No collateral.
00:48:58So, this is where we are today at the Islamic sector.
00:49:01Maybe a little bit advanced, because we have learned from the conventional,
00:49:06but it's a young, dynamic industry that needs some lender support, funding,
00:49:13that heavily is depending on grants, but has a potential.
00:49:19And I think, when I look at the conventional micro-finance sector today,
00:49:24they can really make a difference.
00:49:26The way we do products today could be addressed for all religions,
00:49:31everyone, religious or not religious, but you just need to think outside the box.
00:49:36Okay, today we have been doing this conventional for such a long time,
00:49:40maybe it's time to see things in a different way, because people want something different.
00:49:44And the risk is growing, and it's different.
00:49:47So, I think it's important to have the reflection behind the concept of Islamic micro-finance.
00:49:53Thank you, Fadwa.
00:49:54Thank you, Ahmed, for your contribution.
00:49:56Thank you very much.
00:49:57I'm sure we all appreciated your insights.
00:50:00I think it's time now to go to the questions from the audience.
00:50:06Maybe one question for one people, one person.
00:50:11Yes, Mr.
00:50:25Thank you very much.
00:50:26Thank you very much.
00:50:27My name is Henk van Ousdaad.
00:50:28I work with the micro-insurance sector.
00:50:31My previous slide was involved with micro-finance.
00:50:35I have a question, and that is that you're talking about Hura Baha as an example of equity participation and shared risk.
00:50:45I'm not always fully understanding.
00:50:48I think there's also another type of Islamic banking, and I'm not sure whether I pronounce it at all, which is called Musharaqa.
00:50:56Musharaqa, from Muzaraqa, yes.
00:50:58And I see there much more equity participation than in Mura Baha, but maybe you can explain where my thoughts are from.
00:51:09I think it's a question for Mohammed.
00:51:11Yeah, it's just really, you know, I mean, we took the liberty today in the half an hour that we had sort of allotted for the presentation and discussion, really, to give you just a very small insight into the sector.
00:51:25But you're correct.
00:51:26When I mentioned in my answer when I kind of just provided an overview, there are really three types, if you like, of financing contracts.
00:51:35One is the trade contract, and Salam that we saw in the movie, the Mura Baha transaction that I described is a trade contract, yes.
00:51:42So there is no equity involved.
00:51:44There's no profit and loss sharing involved, okay.
00:51:46It's just a straightforward sale, okay.
00:51:48Structured in, you know, either as an agricultural sale or an asset sale, et cetera.
00:51:54Then, of course, there is the leasing element, Ijara, okay.
00:51:58And then there is, as you said, the partnership agreements, which is Musharraka, which is a full-fledged business partnership, really.
00:52:05And Mudaraba, which is a silent partnership, yeah.
00:52:07These are the really interesting contracts from an Islamic perspective, because they are really fully profit and loss sharing.
00:52:13So it's really a participatory financing arrangement.
00:52:18It's also interesting from a microfinance perspective, because when you are a partner with a microentrepreneur, of course,
00:52:25you also provide automatically the business development support side of things.
00:52:28Because the MFI has an intrinsic interest in making sure that the entrepreneur is thriving.
00:52:35Because there's no guaranteed interest and return in it.
00:52:40Only the profit that the entrepreneur is making is actually the profit for the MFI, helping the MFI towards sustainability.
00:52:48So the business development side of things is really absolutely critical in the profit and loss sharing instruments,
00:52:52which we didn't describe in great detail today.
00:52:55But we can do that on, you know, on another occasion outside, maybe over lunch, et cetera.
00:53:00Another question, yes?
00:53:02Hello, I was just wondering, in the context of Salaam, how do you manage, considering that you fixed today the price that will be paid at a later stage,
00:53:17how do you handle great price fluctuations?
00:53:20And how does the MFI, especially in the context, for example, Fossil Foundation,
00:53:25if they all have these clients going for the same type of product, agricultural product at the end,
00:53:32how do they manage their potential overexposure to the price fluctuations that they will face on the market?
00:53:40Absolutely. It's a good question.
00:53:422010 in Pakistan was the float season.
00:53:45I fully agree with you.
00:53:47So that's why they have developed the insurance for agriculture, Takaful.
00:53:54So, and the way Fossil Foundation work, they don't only work with one type of crop,
00:54:00but different type of crop to diversify the risk.
00:54:03But, of course, if there is a loss, it would be a loss for both of them.
00:54:08But they take upfront insurance, which is the Takaful, from this, as you can have in the convention.
00:54:15They can take some five dollars or something and then build an insurance company.
00:54:21This is exactly the same principle.
00:54:24But you're right.
00:54:25As much as you have on the conventional microfinance in agriculture,
00:54:29if your agriculture product is only on crops or of animals or cattle breeding and so on,
00:54:36the risk is the same.
00:54:38So it's, yeah, the way you mitigate in the conventional is more or less the same.
00:54:43It's just different type of product.
00:54:45Yes, someone else?
00:54:47Yes, maybe, yeah.
00:54:49Elena de Rosmodic from Luxembourg for finance.
00:54:53My question, I've actually got several questions, but I'll keep to two.
00:54:58It's accepted these days that smaller enterprises are part of microfinance.
00:55:05I mean, a farmer who has ten employees, a tractor and a grading shed is a commercial farmer.
00:55:12How is it that these products can be so simply put together for the microfinance industry,
00:55:18and yet we don't seem to manage to be able to scale them up for the ordinary business community?
00:55:25I mean, in Europe, it hasn't really taken off at all.
00:55:28The sukuk are all too complex, too expensive, take too long to put together, there are too many contracts.
00:55:34It all becomes suddenly very complicated.
00:55:37So that was my first question.
00:55:39And my second was, what on earth did people do before we invented these things?
00:55:44What was happening 50 years ago, 100 years ago, when businessmen wanted loans?
00:55:51Mohamed, first.
00:55:53Yeah.
00:55:54Obviously, picking the second question first, because that seems to be slightly more on my expertise.
00:56:03The Islamic microfinance industry, of course, is utilising really traditional financing instruments
00:56:09that have been in the community for hundreds of years.
00:56:12In fact, the salam that we now see is actually a product that's been around even from the time of the founding of Islam.
00:56:19Okay?
00:56:20So it's a traditional support mechanism that's particularly, you know, to farming communities.
00:56:25And they have practised it, if you like, on a community level, sort of a village banking level,
00:56:31for hundreds if not thousands of years.
00:56:34What Islamic microfinance as an industry is now trying to do is trying to take those individual cultural practices.
00:56:41Because if you look at the Muslim world, of course, it's a vast, diverse, you know, geographical region,
00:56:48you know, with different understandings about, you know, all sorts of issues.
00:56:53What the Islamic microfinance industry is trying to do, and also, of course, the Islamic banking industry is trying to do,
00:56:58is trying to standardise the way that we understand those products.
00:57:01So when, you know, Fadal is doing salam in Pakistan, and David is doing salam in Mali,
00:57:08that these are the same types of products, following the same types of frameworks and processes.
00:57:14So that's the main challenge, and we are moving towards that.
00:57:16And that's why we now talk, if you like, about an industry, rather than just sort of a set of practises.
00:57:23You know, in terms of, you know, the first question, obviously this is more of a generic question,
00:57:29if I understood you right, that's not just necessarily to do just with Islamic financing contracts.
00:57:34Of course, what Islamic finance provides here is maybe an added layer of complexity,
00:57:40because when, you know, in terms of corporate governance,
00:57:44I mean, we talk about how, you know, Islamic financial institutions have to govern themselves.
00:57:49Of course, they have to follow, if you like, a conventional corporate governance structure.
00:57:54In addition to that, of course, they also have to have what we call a Sharia governance arrangement in place
00:58:00to make sure that the products and services it's providing are also compliant with that ethical value proposition.
00:58:07So that adds another layer of complexity.
00:58:10But in terms of how the overall Islamic finance industry is developing,
00:58:14I think we're actually seeing almost a, you know, a top-down approach.
00:58:18So we now see a lot of Islamic finance happening in investment banking.
00:58:23You know, in Luxembourg, we just learned is, I think, in the top three of the world
00:58:27in terms of Islamic investment banking.
00:58:29And that's why it's very interesting, of course, for the Islamic microfinance industry to be also here today.
00:58:34And, of course, it's now trickling down to, you know, private banking and also SME financing.
00:58:42But, of course, the blueprint of contracts is the same.
00:58:47So, you know, it will be, if you like, a top-down led development in the Islamic finance industry
00:58:52that we will see that will take some time to trickle down onto, you know, the microsector.
00:58:58Maybe just to add on the second question that you have raised,
00:59:03and is one of the challenges, really, of the microfinance, Islamic microfinance industry.
00:59:08As you clearly say, to have an industry, you need to standardize.
00:59:13What makes the conventional working?
00:59:15We start to have this group lending. We move slowly.
00:59:18We see the shift in the microfinance from the group lending to individual.
00:59:22Things are standardized.
00:59:23Of course, there are different products and specificity.
00:59:27But at the end of the day, the methodology is quite the same.
00:59:30So, this is the same for the Islamic microfinance.
00:59:34You need to develop some product, raise them up, scale them up,
00:59:38and develop standardized.
00:59:40Because with the standard, you start to have a regulation.
00:59:43You have, it should be the other way one,
00:59:45should have a regulation and a developed product,
00:59:47but the reality is, even on the conventional microfinance sector developed,
00:59:51then we start to be regulated.
00:59:54It is the same with the Islamic.
00:59:56So, we try to be as professional as we can, develop as good product,
01:00:00try to standardize, and yet you have an industry.
01:00:03And then you can report standard on best practice,
01:00:06what is a best practice product on Salem, for instance,
01:00:09how is the governance, and this and that.
01:00:11This is the way the conventional works also.
01:00:15So, it's the same for the microfinance, Islamic microfinance industry.
01:00:19And as you said, this does exist for a very long time.
01:00:22It's just a matter of putting them into standards and develop best practice.
01:00:30Maybe a last question.
01:00:33Salman Jor from ADA.
01:00:35As I understood, one of the main points of the Islamic finance
01:00:39is also to avoid the use of interest rates.
01:00:43So, my question would be about the debt financing of this microfinance institution.
01:00:48So, could they still take that with interest rates, even if it's not Sharia compliant?
01:00:57Or are there any new mechanisms to avoid this interest rate?
01:01:04You mean on the liability side?
01:01:06Exactly.
01:01:07How you finance this institution?
01:01:08This is a discussion we have just even before this debate.
01:01:11It's really a trigger because normally, yeah,
01:01:15the ideal world you have an Islamic bank that could finance Islamic microfinance institution
01:01:21and then all of them are Sharia compliant based on best practice
01:01:25and the mechanisms are totally matching.
01:01:29But I have seen and I have done it in the past also,
01:01:32as a commercial investor in the microfinance sector,
01:01:38that we have to invest in Islamic microfinance institution.
01:01:42So, how do we do it?
01:01:43The importance, and I have asked some experts on this matter,
01:01:47it's really to have a contract.
01:01:49The importance is to have an Islamic contract
01:01:51between the microfinance institution and the lender.
01:01:55So, in this case, it was Mudaraba, if I remember well.
01:02:00So, that's how we have structure.
01:02:02And then by definition, all type of investment are not,
01:02:07we're not investing in something that is haram,
01:02:11which is you cannot invest in pork, alcohol or child abuse or industry.
01:02:17So, this is in line with the microfinance conventional best practice also.
01:02:22But in the contract between the lender and the institution,
01:02:25is it, there is any mention of an interest rate somehow or?
01:02:29No, it's a Mudaraba set up.
01:02:31So, there is no interest rate.
01:02:33No, no, absolutely, no.
01:02:35It's a Sharia compliance contract.
01:02:37Mudaraba being a partnership equity arrangement.
01:02:40Yes, sorry.
01:02:41Yeah.
01:02:42Yeah.
01:02:45Thank you so much.
01:02:46We can move maybe to the conclusion
01:02:48and you will have the possibility to ask some questions after,
01:02:52during the lunch break.
01:03:00Panel?
01:03:01Ah, worked.
01:03:02I think it was pretty clear in the various aspects, elements
01:03:07of Islamic microfinance.
01:03:12For me, it seems fairly obvious.
01:03:14One starts, like any financial business,
01:03:17with giving the customer a choice, really.
01:03:21Now, if he wants conventional, he can get conventional.
01:03:23If he wants Islamic, we should work on ways that offers him Islamic products.
01:03:30That was the case with conventional, developed finance.
01:03:35I spent a few years in the Middle East and it was exactly that.
01:03:40The emergence of Islamic banking sector was a response
01:03:46to what the population wanted.
01:03:50Now, a lot of innovation, because even though Islamic finance
01:03:56as concept and as methodology exists for hundreds of years,
01:04:01as you just said, it may not necessarily always have been very adapted
01:04:06to today's needs.
01:04:08So, a lot of the innovation came actually from the conventional banking sector
01:04:13and was then adapted in a certain way so that the products can be offered
01:04:18in compliance with Shari Aro.
01:04:20And fortunately, innovation wasn't pushed too far in the Islamic banking sector,
01:04:26so we didn't see the crisis hit as much as the conventional sector was hit with.
01:04:33Otherwise, there's a lot of similarities, I think, between the conventional microfinance sector
01:04:41learning from the conventional finance sector and the Islamic finance sector
01:04:47learning from the Islamic banking sector.
01:04:49I think it's a question of reaching the customer.
01:04:53It's a question of poverty alleviation and to have the right product and services in place
01:04:58so that, as I said earlier, that customer does have a choice.
01:05:03Otherwise, I think these institutions face very similar challenges.
01:05:08It's a question of good governance, it's a question of risk management,
01:05:11it's a question of adapted products.
01:05:14They can use insurance, they can use leasing products in certain ways
01:05:19to help them adapt the product range and address the risks.
01:05:25I think you said earlier, form is more important than substance.
01:05:32It made me smile a little bit, I have to say.
01:05:34But in the end, one has to be careful, I guess, that one doesn't push it too far
01:05:42in terms of product innovation.
01:05:46There is obviously the element of having Sharia boards, scholars who have a look,
01:05:52and I think it's quite important what you mentioned as well,
01:05:55is that the Muslim world is very, very diverse and widespread
01:05:59and the criteria used, or the interpretations used,
01:06:03may be different in Asia as they might be in Arabic countries.
01:06:08So, for example, I was quite interested to see that the Murabaha,
01:06:13which I remember from my days in the Middle East,
01:06:18was a bit frowned upon by some scholars.
01:06:23In this particular example, I think it's the perfect instrument
01:06:26for what is actually needed.
01:06:28As long as you don't use metal-based trading to disguise, so to speak,
01:06:33other traditional financial transactions, in fact.
01:06:39Otherwise, I think the other important...
01:06:42It is a partnership.
01:06:43I think that is important to remember.
01:06:46It is a common goal.
01:06:49The aim is to potentially make a profit,
01:06:55but make a reasonable profit, which is not lopsided.
01:06:59So, both share in it.
01:07:02On the funding side, which I picked up at the very end,
01:07:10I think there are examples.
01:07:12I mean, Islamic banks, which I mentioned at the very beginning,
01:07:17do get a lot of funding from the conventional finance sector.
01:07:21It's a question of in which form and having the right product in place.
01:07:26It's a bit like the MFIs financing their clients.
01:07:31So, here you have funders who finance the MFIs.
01:07:33It is a question of having the right structure.
01:07:36And I think there we've come a long way
01:07:38that lawyers are now specialised in this type of financial...
01:07:45I wouldn't call it engineering, but financial developments.
01:07:51I think we have rating agencies now who are very familiar with Islamic finance.
01:07:57And I think we have investors who are very happy to look at it.
01:08:02And I think that is something that maybe the traditional microfinance MIVs
01:08:07should also look at it and have it more explained to them
01:08:12that, in fact, there are a lot of similarities
01:08:16and their risk is not necessarily bigger
01:08:18than if they were just to finance conventionally.
01:08:21So, I think to conclude really,
01:08:24I mean Islamic microfinance is at sort of the confluence
01:08:28of microfinance and Islamic finance
01:08:31and it should have the potential to unlock a lot more access to poverty
01:08:36in Muslim countries, be it for Muslims or be it for non-Muslims.
01:08:41So, I think that was it from my side.
01:08:45I think that you still have a few words to say as well.
01:08:49Thank you. Thank you very much.
01:08:51Thank you again, once again.
01:08:53Thank you Mohamed and Fadoua for your strong contribution to this event.
01:08:58Gilles Frank, for your conclusion.
01:09:02La Banque de Luxembourg, to welcome us in this auditorium.
01:09:06Directorate for Development Cooperation and Humanitarian Affairs,
01:09:10Inclusive Finance Network of Luxembourg, BRS,
01:09:16who organized the microfinance lunch break yesterday in Brussels.
01:09:21It was great also.
01:09:23All those who came to listen to the conference
01:09:26as well as those who watched us during this debate.
01:09:31We are looking forward to seeing you next year in 2017
01:09:39for the next midi.
01:09:41Enjoy your lunch that will be served.
01:09:46Thank you again.
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