Focus on the FieldA Day of Workshops to Advance Practice through Collaboration

presents

Islamic Microfinance: Recent Experience and Future Challenges

Facilitator: Sasha Muench, Mercy Corps - Monterey Institute of International Studies

Presenters: Aamir Rehman, Harvard UniversityPaul Robinson, FINCARobert Wieland, WOCCU

October 23, 2007 Washington, DC

Objectives of the Session

1. Increase participant understanding of Islamic financial tenets and variations

2. Identify areas of interest in this topic among participants

3. Illustrate lessons learned in providing Islamic microfinance effectively

4. Discuss key questions regarding expansion of Islamic microfinance

5. Summarize what we know and what we need to learn

Possible Breakout Groups

1.  Products What elements of traditional MF products are impacted

by Sharia? How might they be addressed? What are the implications for profitability?

What are the implications for savings products? Who are key actors to involve in the product design

process? What questions must be asked of potential clients?

2.  Back-office What are the implications of compliant (i.e. non-interest

bearing and/or profit sharing) products on MIS? What are the implications of sharia lending on financial

forecasting, risk calculations, loan-loss assessment? Accounting / auditing - how do you account for profit? What additional staff training is required?

Possible Breakout Groups

3.  Governance & Management What questions are raised by Sharia regarding traditional

MF institutional governance and ownership structures? What are the implications on an MFI obtaining financing

from non-sharia lenders?

4.  Risk Management What are the implications of compliant products on an

institution's risk profile? (i.e. Mudarabah, long-term murabaha (fixed rates)) How might these be managed?

5. Legal & Regulatory Environments What do we need to know about the legal framework for

Islamic microfinance? Do national microfinance laws need to be changed to

accomodate Sharia lending and how?

Some Terms

Murabaha: Mark-up sale

Istisna: Purchase for future delivery (can include labor)

Mudaraba: Profit-sharing arrangement (investor – manager relationship)

Musharaka: Equity sharing agreement (both have equity stake)

Ijarah: Leasing

Takaful: Insurance equivalent (mutual insurance)

Tawarruk: Reverse murabaha (cash financing)

Salam: Future purchase (opposite of Istisna) – ex: crops

WOCCU & Islamic Microfinance in Afghanistan

Experiences from ARIES & MISFA

Robert Wieland, for Curtis Slover, World Council of Credit Unions.

October 23, 2007 Washington, DC

WOCCU’s Credit Union Development Projects in Afghanistan

• 2004 – 2005 WOCCU helped to establish two area-based open bond credit unions in the north of Afghanistan: Balkh and Jawzjan. Those two credit unions have grown and become institutionally self-sufficient over the intervening period to the present.

• More recently, WOCCU has established another five Investment Finance Cooperatives (IFCs) in the East and South of the Country. All of these institutions are being re-jigged to accommodate Islamic injunctions against “Riba”, offering “murabaha” loans and share returns on deposits.

Indicators Members of Investment and Finance Cooperatives

Unit of Measure Number

Data D

isaggregation

Regions North EastGrandTotalProvinces Balkh Jawzjan Aqcha Samangan Baghlan Nangarhar

Total by Province 2,634 2,612 313 1,027 830 814 8,230

Gender

Male 2,267 2,070 305 961 756 737 7,096

Female 367 542 8 66 74 77

1,134

Indicators Cumulative Value of Loans Disbursed

Unit of Measure Loan Principal (USD)

Data D

isaggregation

Regions North EastGrand Total

Provinces Balkh Jawzjan Aqcha Samangan Baghlan Nangarhar

Total by Province 1,652,420 1,782,100 57,630 317,080 235,060 297,930 4,342,220

Gender

Male 1,452,040 1,466,435 57,430 305,980 223,100 287,830 3,792,815

Female 200,380 315,665 200

11,100

11,960 10,100

549,405

Size

< $200 18,580 142,620 1720

17,530

4,500 7,150

192,100

$201-$500 841,040 725,680 54,910 291,150 227,560 176,780 2,317,120

$501-$1000 792,800 718,700 1000 8,400

3,000 114,000

1,637,900

$1001-$7000   195,100         195,100

Ter

m

< 1 Year 1,652,420 1,782,100 57,630 317,080 235,060 297,930 4,342,220

Sector

Ag & Ag related Enterprises 477,405 499,300 33420 149,890

83,500

6,700 1,250,215

Non-Ag Manufacturing 76,461 142,250 660

7,600

- 17,100 244,071

Service 352,173 366,550 7460

9,500

8,700 68,490

812,873

Trade 746,381 774,000 16090 150,090 142,860 205,640 2,035,061

Performance Indicators

Indicator Unit of Measure BIFC JIFC Aqcha IFC BaIFC SIFC NIFC

Clients per staff member Number 352 435 78 119 147 136

Overall operating expense ratio Percentage 13% 12% 37% 43% 27% 45%

Overall operating self-sufficiency Percentage 102% 132% 11% 37% 43% 26%

Yield on portfolio Percentage 12% 12% 5% 14% 13% 11%

Portfolio at risk (> 30 days) Percentage 8% 5% 0% 0 8% 8%

Cumulative repayment rate Percentage 94% 99% 100% 119% 101 93%

Cumulative value of loans written off (USD) $23,730 0 0 0 0 $233

Cumulative # of loans written off Number 130 0 0 0 0 1

 As of June 2007

As of July 2007

As of August 2007

As of September 2007

INCOME        

Non-Financial Income        

Extra-Ordinary Income/Membership Fee 850.00 1,166.00 1,498.00 1,970.00

Income for Future Periods-Project support 9,470.00 14,414.00 16,381.00 18,739.00

Total Non-Financial Income 10,320.00 15,580.00 17,879.00 20,709.00

         

Financial Income 0.00 0.00 - 0.00

Admin Charges on Financial Services 44,780.00 62,609.00 77,205.00 93,102.00

Loan Fee Income (Murabaha) 2,764.00 3,210.00 4,674.00 6,632.00

Total Financial Income 47,544.00 65,819.00 81,879.00 99,734.00

         

TOTAL INCOME 57,864.00 81,399.00 99,758.00 120,443.00

 As of June 2007

As of July 2007

Asof August 2007

As of September 2007

FINANCIAL COSTS        

Dividend Costs- Time Deposits 247.00 329.00 406.00 461.00

Dividend Costs-Savings Deposits 1,157.00 1,577.00 2,059.00 2,574.00

Dividend Costs-Subordinated Debt 10,546.00 14,162.00 17,868.00 21,761.00

Dividend Costs-Share Capital 0.00 0.00 - 4,862.00

Admin Charges on Borrowings 0.00 0.00 - 0.00

Total Financial Costs 11,950.00 16,068.00 20,333.00 29,658.00

 As of June 2007

As of July 2007 As of August 2007

As of September 2007

Operational Expenses        

Salaries and benefits 17,772.00 23,868.00 30,854.00 36,356.00

Administrative Costs 4,274.00 6,442.00 7,405.00 8,271.00

Depreciation/Amortization 2,412.00 3,153.00 4,129.00 5,152.00

Governance 4,852.00 4,901.00 5,055.00 5,204.00

Marketing 0.00 0.00 - 0.00

Provision for Losses 8,235.00 8,235.00 8,484.00 13,423.00

Dollar Valuation Adjustment 7.00 11.00 22.00 52.00

Office Leasing & Utilities 6,551.00 8,971.00 11,216.00 13,452.00

Total Operational Costs 44,103.00 55,581.00 67,165.00 81,910.00

Total Costs 56,053.00 71,649.00 87,498.00 111,568.00

         

NET INCOME 1,811.00 9,750.00 12,260.00 8,875.00