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2nd IMFN Round Table Conference
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2nd IMFN Round Table Conference
Produced by: Islamic Microfinance Network
Author: Moaz Ahmed
©2018 Islamic Microfinance Network
Content of this publication maybe freely quoted or re-printed, but acknowledgement is requested, together with a copy of the publication containing the quotation or reprint.
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2nd IMFN Round Table Conference
About IMFN:
We aim to bring forth Islamic microfinance and Shariah compliant financial tools as a mechanism to eradicate poverty. Therefore, IMFN serves as a platform for Islamic microfinance practitioners to jointly work for strengthening of the industry.
As the hub of Islamic Microfinance, we work towards increasing both the demand and supply forces of the industry; create awareness about the utility of the existing products, discuss the scope and potential of market growth, promote innovation, increase outreach and provide industry information.
IMFN is a non-profit organization registered under the Trust Act of 1882.
Dr. Amjad Saqid
Chairman IMFN
Ms. Mariam Shakir
Chief Operating Officer
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2nd IMFN Round Table Conference
Introduction:
The second IMFN Round Table Conference was held on 21st June, 2018, at University of Central Punjab,
Lahore. The conference consisted of two agenda items: Standardization of Indicators of Islamic
Microfinance and Product Innovation and Development. The main objective was to share the findings of
the:
1. First IMFN RTC
2. Conference Side Event
Round Table Conference (RTC), was held on July 24th, 2017, it initiated the talks to standardize the
participants agreed that it was necessary that standardized industry indicators are identified in order to
differentiate between the Shariah-Compliant Microfinance and the Conventional Microfinance methods.
By identifying a list of performance indicators it will provide same grounds for comparative study for both
the conventional and Shariah-Compliant Microfinance Funding.
Conference Side Event, the conference side event, was conducted and the findings were used to identify
the industry indicators and by doing so, it intended to engage all the practitioners, as well as the academia
personal to achieve it.
On the basis of the findings a Draft List of Indicators was developed, which is presented below:
Calculation/Formula
Indicator Category
Indicator Profit Generating Model Charity Based Model
1. Financing Structure
Debt Capacity Ratio Debt/Income Debt/(Grant + Charity)
2. Financial
Performance Indicators
Operational Self Sufficiency
Income from MF Activities/(Expenses +
Provision)
(Income from MF Activities + Grant Income)/(Expenses + Provision)
Financial Self Sufficiency Income from MF
Activities/(Expenses + Provision+ Inflation)
(Income from MF Activities + Grant Income)/(Expenses + Provision +
Inflation)
3. Productivity
Indicators
Productivity/Loan Officer Loan/Loan Officer Loan/Loan Officer
Productivity/Staff Loan/Staff Loan/Staff
Productivity/Procurement Officer
Procurements/Procurement Officer
Procurements/Procurement Officer
4. Outreach Indicator
Outreach
Number of Enterprises * Weight
Number of Enterprises * Weight
(Weight to be assigned for: Lending, Trade Based, Partnership based approaches, lowest to highest respectively)
5. Revenue Indicator
Yield on Gross Portfolio Income from MF lending/Portfolio
Voluntary Charity/Portfolio
Return on Inventory Profit on Sale of
Inventory/Cost of Goods Sold
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2nd IMFN Round Table Conference
6. Products &
Clients
Partnership Based Number of Outstanding
Partnerships
Asset Based Number of Owned Financing Assets
7. Products &
Services
Voluntary Charity Voluntary Charity Collected from Beneficiaries
Market Linkages Number of Clients linked to
Open Market
8. Client
Protection
Disclosure of Price
Market based Pricing OR Negotiated Pricing
Disclosure of Cost & Profit
Profit Rate Calculation *
Flat Rate - Murabaha, Musawama etc
0% Profit - Qarz Hasan
Declining Profit - Diminishing Musharaka
Market Based - Salam, Istisna
* Profit Calculation for Market Based products should be based on the negotiated pricing rather than on the end profit. The profit should also factor in the Risk & Cost for Storage.
Other Potential
Indicators
(Not discussed
in Focus Group) Profit Recognition in
Market Based Products
Profit for Market Based products should be accured
on average of past performance. This should be factored in the OSS &
FSS Calculations
9. Pricing
Indicator
Product Based Costing Product Type Pricing Indicator Should include:
Product Based Costing
Market Based Products e.g; Salam, Istisna
Profit = Price at Delivery of Goods - Cost of Goods Delivered
Cost of Goods Delivered = Negotiated Price + Overhead Costs
Trade Based Products e.g; Murabaha, Musawama
Profit = Sale Price - Cost of Goods Sold
Cost of Goods Sold = Purchase Price + Cost of Purchase
Partnership Based Products e.g; Musharaka, Mudaraba
Profit = Revenue Share - Investment during Period
Investment During Period =
Financial Investment + Overhead Costs
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2nd IMFN Round Table Conference
Opening Note:
The opening note was presented by Dr. Amjad Saqib,
Chairman IMFN & Executive Director Akhuwat, setting
the tone of the conference with his heart-rending words.
He said that in addition to the need of standardizing
performance indicators for Islamic Microfinance,
collective efforts need to be put in place for the sector’s
growth. Despite the appreciable performance by the
sector in the past few years, supportive legal and
regulatory set-up, and unbelievable recovery rates,
Pakistan is still far behind the world as far as
microfinance is concerned. Countries including
Bangladesh that have lesser population than Pakistan, have a higher number of active borrowers.
Therefore, Islamic microfinance institutions should work on their outreach, diversify their
product portfolio, and penetrate into rural markets where demand exists. Dr. Saqib concluded
by saying that the growth of the sector is indispensable and all stakeholders should get our heads
up and work for it. It is a big challenge but with collaboration, it can be overcome.
Chief Guest Note:
Our Chief Guest, Dr. Athar Azim Khan, the Director of School of Accounting and Finance at
University of Central Punjab, welcomed and thanked the participants for their participation. He
focused on the potential role of the academia in the growth of Islamic Microfinance Industry. He
emphasized that one of the important ways that universities and academia can and should
contribute to this is Research. For instance, in the process on the standardization of the
indicators, if there is any need of research work to be done, the universities can contribute a lot.
He said that it is unfortunate that we have stuck to the same list of 6-7 products, Islam has not
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2nd IMFN Round Table Conference
given us a list of products but the rules that must not be violated; hence, the sector needs to
work around these rules and innovate and develop new
products according to changing global needs. He stressed
on the significant role academia can play in this process.
Dr. Azim concluded by saying that the two type of
microfinance, conventional and Islamic, should not be
seen as completely mutually exclusive. There are a lot of
things in conventional microfinance that compliment
Islamic microfinance and help in the growth of
microfinance, so we should look into that as well.
Session 1: Standardization of Industry Indicators
The RTC was officially kick started by Mr. Yasir Tariq, Global Manager Islamic Relief Worldwide,
and our moderator for the conference. He highlighted the fact that we as practitioners of the IMF
have seen that there are two categories of indicators available globally.
1. Given by CGAP
2. Given by Mixed Market
Unfortunately, these two categories were developed keeping the conventional microfinance in
front, and rightly so because still the IMF is a small chunk of the total microfinance industry.
Following are the issues faced by IMF institutions because of these indicators:
The conventional Microfinance does not incorporate Shariah principles’ knowledge in its
indicators. Islamic Microfinance products which are Shariah based products, have their
own specification which are not catered by the conventional MF Indicators.
These Indicators don’t quantify two major concepts of Islamic MF, that are Muwakhat
(Brotherhood) and Ehsaan (Courtesy) anywhere.
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All the indicators of Conventional MF are developed on the basis of lending rather than
on trade or partnership basis, which is the sole of IMF. So, when these conventional
indicators are applied on IMF product it gives us adverse effects.
The conventional indicators don’t cater forward market profitability and market risk,
because the conventional microfinance is simple that someone lends money and charges
interest on it, but IMF is different.
And so on….
Taking the above mentioned and other issues in to context, we can feel that there is a need of
some indicators for IMF that can depict our growth correctly. Indicators that can show the
difference between Conventional and Islamic Microfinance Industries.
After this slight foreword, Mr. Yasir Tariq presented the first draft list of the “Islamic Microfinance
Indicators”, which were discussed one by one. This list included the indicators that were
completely different for Islamic Microfinance as compared to the conventional MF.
There were 9 indicator categories and their IMF Indicators. All the categories that were presented
are taken from the mixed market, but the indicators are not completely taken from the mixed
market. And the indicators were calculated in two models, i.e. Profit Generating Model and
Charity Based Model. Profit Generating Model’s formulas are designed for the profit generating
products e.g. Murabaha, Salam etc. The formulas for Charity Based Model are designed focusing
on Qard-e-Hasan.
The first category in the list is Financing Structure, its indicator for IMF is Debt Capacity Ratio, it
formula of calculation for the Profit Generating Model is simple “Debt/Income from Microfinance
Portfolio”, but for the Charity Based Model, it is different as the organizations that run on the
charity based model receive grant and charity. So for charity based model the formula will be
“Debt/Grant + Charity”. On this indicator there was a lot of discussion on the charity based model,
Dr. Athar Azim pointed out that a lot of MF Institutions take grants as a source funding, he
emphasized that we must distinguish between how much of the charity and grant is considered
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as income and how much of the charity is a part of the microfinance funds, because if it is not
distinguished the value will be extremely high. Mr. Yasir Tariq, suggested that we can only record
grant income for operations expense. Comments on this subject are welcomed.
Second category presented was Financial Performance Indicators, it has two Indicators,
Operational Self Sufficiency (OSS) and Financial Self Sufficiency (FSS). The calculation formulas
for Profit Generating Model are same as the Conventional Microfinance i.e. For OSS, “Income
from MF Activities/ (Expenses + Provision)” and for FSS, “Income from MF Activities/ (Expenses
+ Provision+ Inflation)”. However, for Charity based model, the Income from MF Activities is not
applicable as there are no products sold and no income coming from that, so the income from
MF activities is replaced by the means from which IMF Institutes get their income and that is
Voluntary Charity and Grant Income. So for the Charity based Model the formula for OSS will be,
“(Voluntary Charity + Grant Income)/ (Expenses + Provision)” and for FSS it will be, “(Voluntary
Charity + Grant Income)/ (Expenses + Provision + Inflation)”.
Before the third category, Dr. Abdul Sattar added that we must include ‘Shariah Complaince’ and
‘Shariah Audit’ in the key indicators of IMF. Secondly, he said that we must add ‘Customer
Centrality’ in the key indicators list of IMF, that will ensure the sustainability of the borrower. The
third thing he added was that we must not omit the word ‘governance’ from the IMF indicators,
as it is naturally in-built in any shariah based initiative. Mr. Yasir Tariq cleared some confusions
by declaring the working paper as the first draft which will be changed as the suggestions and
feedback keeps coming.
Coming on to the third category, that is Productivity Indicators, has three indicators,
Productivity/Loan Officer, Productivity/ Staff and Productivity/ Procurement Officer. In this
category just one thing was added that we need to add Loan/ Procurement and Sales Officer for
our sales models e.g. Murabaha etc. along with Loan/ Loan Officer and Loan/ Staff.
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The fourth category in the list is Outreach Indicator, the indicator is of course Outreach. The
normal concept of the outreach calculation is the number of borrowers, but in the IMF Indicators’
draft list, a weighted model was proposed, i.e. Number of Borrowers* Weight, the proposed
distribution of weight was Lending Models getting the lowest weight and the Musharka Models
getting the highest weight. Because if you have 10 clients of Musharka the are far bigger in
number and also in amount at times, so you get a higher value for outreach. The discussion was
open to suggestions, Dr. Athar Azim added that if we go we this weight, the depth of outreach
will be compromised, as we are not considering the amount of loan we are just concerned about
that it is distributed in a larger number of people, so it will not make a good realistic indicator
and we should consider that. It was discussed briefly and then it was decided that it will discussed
in detail in the next meeting.
The fifth category that is Revenue Indicator, has two indicators i.e. Yield on Gross Portfolio and
a new indicator added for the profit generating model, Return on Inventory. The formula for
Yield on Gross Profit in Profit Generating Model is “Income from MF lending/Portfolio” and in
Charity Based Model it is “Voluntary Charity/Portfolio”. The formula for the second indicator that
is specifically for the Profit Generating Model is “Profit on Sale of Inventory/Cost of Goods Sold”.
Mr. Ali Khan suggested that there should be an indicator Return On Assets, that was welcomed.
The sixth category is Products and Clients, in which again there are two indicators one is
Partnership Based and the other is Asset Based. The partnership based indicator is simply
calculated as the Number of Outstanding Partnerships and the Asset Based is calculated as The
Number of Owned Financing Assets. A question that was put forward for discussion in the
upcoming meetings was that whether “rented” assets should also be added with the owned
assets.
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The next category is Products and Services, which includes Voluntary Charity and Market
Linkages. Voluntary Charity is of course seen in the context of Charity Based Model; the
calculation is simply The Amount of Voluntary Charity Collected by the Beneficiaries. The second
and very important indicator which the conventional industry doesn’t work on is the Market
Linkages, IMF Industry does work on it, and creates a lot of market linkages nowadays, so we can
measure that by The number of Clients Linked to the Open Market.
As the first session concluded, the participants were requested to share their feedback with IMFN
after working on these indicators.
Dr. Amjad Saqib reiterated the need that participants must share their feedback timely. He
appreciated this effort by the IMFN team. It was decided that there will be a steering committee
formed which will meet next month to see the proceedings on this subject. The participants were
requested to share the nominees from their organizations for the committee.
Following is given the updated list of Indicators:
Calculation/Formula
Indicator Category Indicator Profit Generating Model Charity Based Model
Financing Structure Debt Capacity Ratio
Debt/Income Debt/(Grant + Charity)
Financial Performance Indicators
Operational Self Sufficiency
Income from MF Activities/(Expenses + Provision)
(Income from MF Activities + Grant Income)/ (Expenses + Provision)
Financial Self Sufficiency
Income from MF Activities/(Expenses + Provision+ Inflation)
(Income from MF Activities + Grant Income)/(Expenses + Provision +
Inflation)
Productivity Indicators
Productivity/Loan Officer Loan/Loan Officer Loan/Loan Officer
Productivity/Staff Loan/Staff Loan/Staff
Productivity/Procurement Officer Procurements/Procurement Officer
Outreach Indicator
Outreach Number of Enterprises * Weight Number of Enterprises * Weight
(Weight to be assigned for: Lending, Trade Based, Partnership based approaches, lowest to highest respectively)
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Revenue Indicator Yield on Gross Portfolio Income from MF lending/Portfolio Voluntary Charity/Portfolio
Return on Inventory Profit on Sale of Inventory/Cost of Goods
Sold
Products & Clients
Partnership Based Number of Outstanding Partnerships
Asset Based Number of Owned Financing Assets
Products & Services Voluntary Charity
Voluntary Charity Collected from Beneficiaries
Market Linkages Number of Clients linked to Open Market
Client Protection Disclosure of Price Market based Pricing OR Negotiated Pricing
Disclosure of Cost & Profit
Profit Rate Calculation * Flat Rate - Murabaha, Musawama etc
0% Profit - Qarz Hasan
Declining Profit - Diminishing Musharaka
Market Based - Salam, Istisna
* Profit Calculation for Market Based products should be based on the negotiated pricing rather than on the end profit. The profit should also factor in the Risk & Cost for Storage.
Other Potential Indicators
(Not discussed in Focus Group)
Profit Recognition in Market Based Products
Profit for Market Based products should be accured on average of past performance. This should be factored in the OSS & FSS Calculations
Pricing Indicator Product Based Costing Product Type Pricing Indicator Should include:
Market Based Products e.g; Salam, Istisna Profit = Price at Delivery of Goods -
Cost of Goods Delivered
Cost of Goods Delivered =
Negotiated Price + Overhead Costs
Trade Based Products e.g; Murabaha, Musawama
Profit = Sale Price - Cost of Goods Sold
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Session 2: Product Innovation and Development
The second session was about Product Innovation, the agenda of this session was to share some
local case studies of innovative models for IMF and to deliberate on the current challenges.
The session started with the introduction, every participant introduced himself and his company.
After the introduction, Mr. Fareed Shahid from SABCO Solutions gave a presentation on
Challenges for Energy Product Financing. The challenges included:
High degree of skepticism on quality of products being presented
Product Price perceived to be high
Given the product price, the % for sustainability is questioned
Product Availability
Limited technical knowledge results in repeated recurring costs
After the presentation, some of the participants presented
their models for IMF. The first model was presented by Aas
Foundation, The Green Energy Consumption Program, based
on Solar Products, which is being taken forward in
collaboration with SABCO Solutions. The basic idea of this
program is that there should at least one light is every house
in the areas where the Electricity does not reach. The program
is currently in operation in the areas of Cholistan, it started
with 40 households and now there are 1200 households
benefitting from it. Fundamentally, it is a Murabaha based
program where the product is sold on debit basis and the collection is done in 3-6 installments.
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Mr. Shehryar from Harness Energy, which manufactures Solar
Products, presented the Harness Energy model, the basic concept
was that they give the solar products to the MF institutions on 15%
discount. For instance, if a product is worth 1000 PKR, the Harness
Energy will provide it to a MF customer e.g. AGAHE Foundation in
850 PKR. The return policy is very lenient, if a damaged product
comes back, they just replace it without asking a lot of questions.
Mr. Mukrma Ashraf from Agahe Pakistan presented their Roshan
Gharana Model. The purpose of this product was to provide finance
to potential borrowers living in off grid / energy shortage areas to
meet their household energy needs. The finance will be provided by
Agahe Pakistan for purchase of IFC certified products bundled with
IEC certified solar fan kits. Agahe Pakistan is privileged to be the first
MFI to introduce solar home systems on a financing platform in
Rajanpur and Muzaffargarh areas.
Dr. Kashif presented the Akhuwat Musharka Model, the product
was Musharka and it was based on the fixed assets, the concept was
to identify the borrowers of Akhuwat who have went through at
least one loan cycle. After the identification the clients were asked
if they want to expand their business by buying a fixed asset. And
then 10% was contributed by the Client and 90% was contributed by
Akhuwat, and it was an 18-month contract within which two kind of
products were given, fixed repayment and flexible repayment, fixed repayment was simple that
everything was divided in 18 months, flexible repayment was for the businesses that are
seasonal, so there was flexibility in buying the products.
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The last speaker was Mr. Mumtaz Iqbal who shared the challenges
in the Kashf Foundation Murabaha Model in KPK, he said that overall
the program was a success but, it was not financially viable, he
further added that we don’t have a classically sustainable Murabaha
model in Pakistan which the Institutes can follow, the programs are
there, but most of them are in the pilot stages.
In the end Mr. Yasir Tariq again requested the participants to share their feedback and thanked
them for their presence.
Key Take Aways:
The RTC was the second of a series of six meetings on the Indicators Standardization
A steering committee will be formed which specifically look into the matter on regular
basis
The next meeting on this subject is scheduled on 19th July, 2018 (tentative)
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A Special Thank You to Our Partners Islamic Relief Worldwide
and Our Venue Partners University of Central Punjab, the RTC
would not have been a success without them.
EVENT PARTNERS VENUE PARTNERS
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VENUE PARTNERS
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List of Participants:
1. Dr. Amjad Saqib Chairman/ Trustee
2. Dr. Athar Azim Director, School of Accounting and Finance, UCP
3. Mr. Yasir Tariq Global Manager MF, Islamic Relief Worldwide
4. Mr. Muhammad Adnan Program Manager, Islamic Relief Pakistan
5. Mr. Jasim Sheikh Microfinance Performance Systems Lead, Islamic Relief Pakistan
6. Mr. Zaheer Iqbal MF Finance Officer, Islamic Relief Pakistan
7. Mr. Ali Khan Partner, A. F. Ferguson
8. Mr. Abdul Qadir Muhammad Senior Consultant, A. F. Ferguson
9. Mr. Ali Qamar Partner, Ernst & Young
10. Dr. Kashif Malik Associate Professor, LUMS
11. Dr. Abdul Sattar Abbasi Director Center of Islamic Finance, CIIT
12. Mr. Mumtaz Iqbal Kashf Foundation
13. Mr. Khalil ur Rehman Research Officer, Al-Huda CIBE
14. Mr. Mian Babur Hamid Director, Al-Khidmat Foundation
15. Mr. Ahmed Qadeer Program Manager, Al-Khidmat Foundation
16. Mr. Barak Ullah CEO, AGAHE Pakistan
17. Mr. Mukrma Ashraf Communication Officer, AGAHE Pakistan
18. Mr. Tahir Latif Executive Director, NEYMAT Trust
19. Mr. Imran Mumtaz Representative, Islah Trust
20. Mr. Mustafa Shahid DAMAN
21. Mr. Arshad Mahmood Program Manager, Akhuwat
22. Mr. Mujahid Hussain CEO, Aas Foundation
23. Mr. Fareed Shahid CEO, SABCO Solutions
24. Mr. Muhammad Shehryar Founder, Harness Energy
25. Ms. Mariam Shakir COO, IMFN
26. Mr. Khawaja Meeran Public Relations Associate, IMFN
27. Mr. Moaz Ahmed Operations Associate, IMFN
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