REVITALIZING THE WORLD ECONOMY THROUGH ISLAMIC MICRO FINANCE
FARZ METHEDOLOGY: PRACTICE AND PROVEN RESULTS
PAPER PRESENTED ON THE SUMMIT
Written And Presented By : FARHAT ABBAS SHAH
CEO OF FARZ FOUNDATION
FARZ FOUNDATION THE FIRST SHARIAH CERTIFIED ISLAMIC MICROFINANCE INTSTITUTE OF PAKISTAN
REVITALIZING THE WORLD ECONOMY THROUGH ISLAMIC MICRO FINANCE
“FARZ METHEDOLOGY” A MODEL IN PRACTICE
1. BACK GROUND
To achieve financial goals in such difficult times is by no means easy business. Farz Foundation took up the task of fighting poverty when the microfinance world was facing a unique and grave sustainability crisis and the Global Economy is facing the biggest crisis of the history as well. Much to our amazement, the initial outcome is quite encouraging. In spite of our funding constraints and lack of technical support, recoveries are 96 percent on time with zero percent PAR, while our one of a humble initiative of “livestock Mudarbaha”, the business growth rate is more than 24% annual. There are only 4% partners mismanaging their business. We even didn’t give up on them and gave “out of the routine trainings” to make them capable of honorable earning and help alleviate poverty. There was a time when the trickle down effect demonstrated its outcomes, while the time has come, the global economy does not seem stay alive without implementing on my humble theory of “Twist Up Economy”, which emphasizes to make the three billion poor our Productive Micro Partners(PMPs) to not only kick start a huge potential economic cycle but also to build a wide international customer base. Farz Methodology has been developed on the philosophy of developing micro partnership with the poor on profit and loss basis. At present it is being implemented in Pakistan and abroad. We the microfinance practitioners have done it and proved that it is possible and promising to turn the threat into an opportunity. Our goal is to “empower” the poor with a sense of self belief.
2. THE SECRETS OF OUR SUCCESS
2.1. We are 100% Shariah Compliant 2.2. We are 80% Asset Based 2.3. We are 100% Social performance focused 2.4. We are 100% commercial
2.5. We are vigilant supervisors/monitors 2.6. We work through the trade structures 2.7. We screen our Clients/partners carefully 2.8. We customized products and the tool under Shariah compliance according to the need of the customer/partner and the market. 2.9. We are transparent 2.10. We prefer synergies
3. OUR COLLABORATIONS
3.1. World Congress of Muslim Philanthropists 3.2. Oxford Microfinance Initiative 3.3. Church World Service Pakistan/Afghanistan 3.4. Pak Qatar Family Takaful 3.5. Provincial Ministry of Livestock, Pakistan 3.6. University of Veterinary and Animal Sciences 3.7. Punjab Agricultural and Meat Corporation, Pakistan (PAMCO) 3.8. Halal Research & Development Committee (PAMCO)
4. OUR REPLICATORS
Farz Methodology is being replicated by 4.1. Cameroon Halal Microfinance (Cameroon, Africa) 4.2. The NGO World Foundation ( Pakistan)
5. OUR MARKET INTELEGENCE
5.1. The First study, Farz Foundation has conducted to know the percentage of clients comfortable
with Interest based Loans / Financing. 100% clients (already getting loans from interest based MFIs) responded they are not comfortable and the reason why they opted for interest based loans just because there was no alternative. When we offered the alternative, 62% were willing to accept and the remaining were simply not ready to believe there is an alternative. How ever the 100% untapped clients/partners are ready to work with interest free microfinance.
5.2. The second study we conducted was related to “productivity of conventional microfinance” to
alleviate poverty, results were shocking, only 4% were found positive while 96% loans were misused.
5.3. The third study we conducted was related to “comparative study” of asset based model v/s
cash based model. Results were in favor of asset based model as 96%.
5.4. The fourth study was based on correlations and sensitivity analysis and we were able to
conclude that healthy and skilled clients 99.5% remain successful, so just disbursing money/delivering assets to the poor, uneducated, unskilled and leave them alone for earning and paying back loans is the root cause of the failure.
5.5. The fifth study was focused on “learning from the failure of the conventional microfinance”,
and it guided us how to break the vicious cycle of the debt and ensure the economic graduation of the poor from micro to SME.
5.6. We also learned that the ultra poor must be addressed through Zakah/Charity, by providing
them productive assets, a better working partner (A Mudarib along with Farz), capacity building and continuous supervision.
5.7. We also came to know that the “Faith” drives the clients/partners towards a Credit Discipline. 5.8. Similarly faith motivates staff for the spiritual gains and incentives to do more good. 5.9. A huge market is waiting for it. 5.10.
Our market intelligence conveyed that we can fill the gap and make a difference.
So all these studies and observations inspired us to reinvent the microfinance by adopting a pure Islamic innovative model, which must be need based, market driven and faith oriented. We also realized that the integrated approach is inevitable for the success of poverty alleviation efforts, which can protect our poor partners, as well as our donors, investments and the system.
6. OUR CORE COMPONENTS:
6.1. ZAKAH/ CHARITY Although, to address the ultra poor Farz is implementing the Zakah and Sadaqat, to uplift them and to make them able for earning money through respectable micro businesses, however Farz transfers all these facilities from donor to poor in form of productive assets with capacity building in the particular area and business education if needed. Farz aims just one time charity support to a targeted ultra poor and turn him/her/them into a productive client/partner with an honorable micro business. Farz usually avoid going for business venture with the ultra poor directly by considering them a potential for commercialization.
6.2. EMERGENCY SUPPORT Farz Provides Qarz e Hasna only to its existing and efficient clients/partners, at the time of any emergency at individual or collective level.
6.3. RISK MITIGATION, SECURITY SUPPORT Farz offers Takaful (Islamic Insurance) & saving (A unique and innovative Product of Farz Foundation named Farz Committee/kamaity), Health care, where it is needed, capacity building, strong monitoring and supervision.
6.4. SOCIAL PERFORMANCE Farz provides the clients/ partners, protection, health and environment awareness/services, business education and also support in disasters. Social performance is our most effective tool to build the trust between our partners and us.
6.5. INSTITUTIONAL DEVELOPMENT & SHARIAH ADVISORY SERVICES
Farz Foundation Offers Islamic Microfinance institutions development services and Shariah consultancy to facilitate the sector to expand the poverty alleviation efforts.
7. OUR PRODUCTS IN PRACTICE 7.1. Financial Products
7.1.1. 7.1.2. 7.1.3. 7.1.4. 7.1.5. 7.1.6. 7.1.7. Micro Mudarbaha in livestock (Bhaiwali 1, 2, 3) Micro Murabaha Micro Saving (Farz Committee/Kamaity) Micro Takaful Halal Karobar (Halal Investment) Qarz‐e‐Hasna Productive Zakah
7.2. Non‐Financial Products 7.2.1. Business Development training for Partners/Clients 7.2.2. Health care services for partners/Clients/Livestock 7.2.3. Future Protection Program (Education support for the children of the partners/Clients). 7.2.4. Institution development & Shariah advisory services
PRODUCTS IN PIPELINE
A. Bay Salam B. Diminishing Musharkah
MICRO MUDHARBHA (BHAIWALI)
Bhaiwali (Partnership) in livestock on investment and services basis is the landmark product of Farz Foundation. It has proved to be sustainable, scalable, and highly profitable not only at investor level but also at our micro partners and organizational level. Unbelievable fast growth of the business generates high returns with a strong social impact. It also addresses food security and injects a viable contribution to the Global Halal Market which has the potential of US$ 3 trillion. Farz Foundation has initiated a Bhaiwali pilot project of 42 to 48 months and earned break even within first 18 months, initially at a small scale. However the product has proved successful as a 4 bottom line venture. Farz is also aiming at developing the required structures and delivery mechanism from local to international markets. According to this product, Farz and the poor farmers are service providers, while the third party works as investor.
(Slide 1) PRODUCT‐ Level 1
FEATURES Product Name Objective Size Age of Animal Kind Size of Investment Period Modality of partnership with poor Family BHAIWALI-1 Breeding Unit of 6 Goats for one poor Family ( 5 Female Goats + 1 Male Goat) 1 year or pregnant of 3 to 4 month Beetal PKR: 100,000/ Unit 42 to 48 Months 50%(Farmer) 25% (Investor ) and 25% of the Farz Foundation at reproduced Goats
Modality of partnership with Investor
Investor gain 50% of the net profit
The parent Animals remain as owned by the investor and the Foundation can hold them back after 42-48 months on behalf of the investor and can transfer the animals to another poor family for the same purpose with the consent of the investor.
(Slide2) Level 2
FEATURES Product Name Objective Size Age of Animal Kind Size of Investment Period Modality of partnership with poor Family BHAIWALI -- 2 Qurbani Animals Production 5 Male Goats for one poor Family 6 month Beetal, Rajan Puri or Desi PKR: 100,000/ Unit 10 to 12 Months 50%(Farmer) 25% (Investor ) and 25% of the Farz Foundation at reproduced Goats
Modality of partnership with Investor
Investor’s gain 25% of the net profit
Farz Foundation gain 25% of the net profit
FEATURES Product Name Objective Size Age of Animal Kind Size of Investment Period Modality of partnership with poor Family BHAIWALI -- 3 Meat Production 10 Male Goats for one poor Family 3 month Taidy PKR: 100,000/ Unit 10 to 12 Months 50%(Farmer) 25% (Investor ) and 25% of the Farz Foundation at reproduced Goats
Modality of partnership with Investor
Investor gain 25% of the net profit
Farz Foundation gain 25% of the net profit
Note: The Mortality is again an opportunity for us, after providing a state of the art risk management services.
By providing proper health and nourishment care, we could reduce mortality ratio and turn it into profit.
3‐Murabaha (Tijarat ) Farz has successfully done an 18 months pilot project and earned valuable experience and confidence regarding the internal and external both challenges and the methods to resolve issues and problems. The asset based model of this product stops the clients from misusing the microfinance facility. Farz Found 24% profit viable for itself and the client also.
MICRO‐MURABAHA refers to a type of sale in which the buyer knows the actual cost of
goods and the margin of profit of the seller and can be used the sale of tangible goods on deferred payment basis (Bai Mujjal). The seller acquires an asset, which the buyer agrees to purchase at some point in the future. The seller is entitled to a profit, as long as the exact profit margin is disclosed in the contract. Payments may be spread out over time. (Slide 4) FEATURES HEADS Trade size Annual increase in trade size Rate of profit Duration of installments Exempted days Total installments Frequency of payment PKR: 5,000 to 30,000 In accordance with the business performance 24% 1 year Eid holidays 22 Fortnightly FEATURES
Collateral Collateral 2
Personal guarantee Post dated cheques
MICRO‐SAVING (FARZ COMMITTEE/KAMAITY) Farz Committee/Kamaity is a Shariah
compliant, innovatively adopted traditional saving product of Farz Foundation, locally known as committee/Kamaity. It was introduced to knit the clients with each other as well as with the foundation. This kind of method helps build the assets of the clients. This already existing system of saving was made secure by formalizing and synchronizing it with the Farz Foundation’s operations. Clients are extremely happy with this product. According to this product, clients pool their agreed amount of money every month and give it to the one member of the group by nominating him or her through lucky draws. Lucky draw in this context is approved by Shariah. Farz plays its role as a committee manager for this product. This product has actually helped build assets of the people. Slide 5
Heads Committee Size Period of Committee Cycle Participants of Committee in Each Group Number of Committee Groups under One Cluster Frequency of Committee Installment Frequency of Committee Draw (lucky draw)
Features Min= PKR:100 and Max=unlimited 11 Month 10 Members + 1 Farz Foundation=11 Min=1 and Max=3
Fortnightly Every Month
MICRO TAKAFUL Farz is again the leading organization to adopt Takaful, an alternative to
conventional insurance for the first time. Murabaha clients are covered through Islamic Insurance with the partnership of PAK Qatar Family Takful Company. However it is still under review for Livestock as takaful for livestock is unavailable in Pakistan. Therefore Farz will need to rely on conventional insurance till the time of its availability. We have no hesitation on declaring the livestock insurance segment is still a challenge. Farz offers its product development services along with a pilot to manufacture the sound features of an innovative livestock insurance/ Takaful product.
FEATURES OF TAKAFUL Farz Foundation extends this facility to the 100% members of Murabaha clients and their heads of the families. MEMBER HEAD OF THE FAMILY
TAKAFUL FEE 115 115
TAKAFUL AMOUNT 20,000 20,000
As a structured Halal Business avenue it is another trail blazing initiative by the Farz Foundation, and it has laid the foundation for not only institutionalizing livestock business but has also opened up a structured investment avenue for those institutional and individual investors looking for investment channels that provide safe, profitable and Shariah Compliant mode of investment. The livestock sector expected rate of return is highly competitive when compared to other sectors, and undoubtedly, with institutional entry into this sector the returns may exceed expectations given the huge livestock products local and export market potential. Institutional intervention was a dire need of this sector without which it is impossible to get optimal returns. Furthermore, with institutional intervention in this sector will bring forefront the strong backward and forward linkages and strengthen SME sector in due course and will provide Farz Foundation, in particular, an edge to fully exploit inherent supply management potential.
(Slide 7) NON‐FINANCIAL SERVICES
BUSINESS DEVELOPMENT TRAINING FOR PARTNERS/CLIENTS TRAINING # OF DAYS TARGET PEOPLE 5 Days Poorest of Poor INITIAL Who intend to do BUSINESS TRAINING 3 Days Running Business(Clients or Non-Clients) BUSINESS Clients who will graduate from Murabaha DEVELOPMENT (small) into Murabaha (Medium) and Murabaha (Medium) into Murabaha (Large) BOOK KEEPING PRODUCT QUALITY 2 Days 7 days to One Month Existing Clients Home Base Micro Entrepreneur (HBMEs)
HEALTH CARE SERVICES FOR PARTNERS/CLIENTS/LIVESTOCK The biggest reason for the low productivity according the WHO is the poor health all over the world. The Farz Foundation pays keen attention to this aspect and conducts health awareness workshops and health camps. AWARENESS PROGRAM The greatest problem in the area we work is the water born diseases and we teach them to boil water before drinking. The general principals of cleanliness for instances, washing hands before taking meals are emphasized during the training. EYE CARE Farz Foundation has launched its eye care program by starting free eye care camps for poor people of the branch area. In these camps Farz Foundation provides eye checkup facility and provide spectacles to the poor home based micro entrepreneurs without any cost. HEALTH CARE OF LIVESTOCK Farz Foundation Provides 100% health care services to our partner’s for Livestock and also provides them medicine with the support of Livestock department of Punjab.
FUTURE PROTECTION PREGAME (EDUCATION SUPPORT FOR THE CHILDREN OF THE PARTNERS/CLIENTS). This program deals with educating the clients to provide education to
their children apart from picking the kids of the most vulnerable members and provide expenses for their education. This is done to ensure the better future of the community.
8.1. SECTOR LEVEL CHALLENGE As an emerging organization of an emerging sector we did not find any support to make our beginning easy. However our strong commitment, clarity of vision, well defined mission and a clear road map helped us to achieve the impossible. We were confident from the first day that there is a room for innovation and purity waiting for us to fill. Farz Foundation is one among the few that aims and has the ability to change the world economic crisis into the opportunity of long term sustainability.
8.2. OPERATIONS WITHOUT A PROPER INFORMATION SYSTEM At operational level it was a challenge to work, with limited staff, a comprehensive integrated methodology but without any proper Customized Information System. However Farz is still working with MS Excel along with manual reporting system. Due to limited operations we have addressed this challenge but in the long run, we have to go for a customized MIS.
8.3. ISLAMIC INSURANCE FOR LIVESTOCK IS STILL A CHALLENGE Farz Foundation as the pioneer in operating with a Takaful product for our clients, which covers their life, but at livestock, although we have covered the risk of death, theft and loss during natural disasters through conventional insurance, however it is a temporary arrangement and we seek Islamic insurance as soon as possible.
8.4. BUILDING THE TRUST Building the trust with the clients (already taped by conventional MFIs) as a Trustworthy MFI, was also a challenge, Particularly when we claim, we are offering interest free services, a majority of the old and also the new clients did not believe. But our transparent system and social performance focused methodology make us able to prove our truth. 8.5. TO CHANGE THE MINDSET OF THE STAFF HIRED FROM CONVENTIONAL SECTOR It is the hardest challenge to change the frame of mind of the staff we pick from the conventional sector. They gave us a very tough time and ultimately we decided to prefer the new young people for our organization and build their capacity and make them the true and committed leaders of Islamic Microfinance.
8.6. KEEPING HALAL AND HARAM TOGETHER IS ALSO A THREAT FOR THE WORLD ECONOMY It is also a big challenge not only for Farz Methodology operators but also for microfinance policy makers and stakeholders to engage conventional MFIs in Islamic Microfinance with existing infrastructure and human capital. We believe and also have experienced that to take off with a faith based vehicle by a contradictory operator is a blunder. The irony lies, may be we are not taking it seriously that we are trying to provide foundations to a new structure through the pillars already falling. The mixture of Halal and Haram would definitely give a set back in the long run, because the contradictions never move together smoothly. The target clients of Islamic microfinance market feels aversion with Haram and the place where Haram is being produced and stored and finally the people and the system operating it. So Farz Foundation strongly as well as logically suggests avoiding this kind of risk.
QOAT ( From Mohammed Khaled’s article pasted on CGAP)
According to the 2008 CGAP focus note on Islamic Microfinance: “Although there is ample evidence of demand for Islamic microfinance products, this demand can only be met if low-income clients are convinced that the products offered are authentically Islamic. Critics of Islamic finance products suggest that the pricing of some products offered as Sharia-compliant too closely parallels (or even exceeds) the pricing of conventional products. For example, some institutions offering Murabaha, seem to disguise interest as a cost markup or administration fee.”
8.7. FARZ METHODOLOGY PROVIDES RESOLVE As an Islamic Microfinance vehicle Farz Methodology provides a resolve worldwide to the organizations intending to address poverty through the real and pure Islamic model according to the Shariah principles.
One emerging organization of Cameroon and one from Pakistan have started replication of Farz Methodology successfully. However it needs a strong back up at policy level to facilitate the organizations for stepping into the Islamic Microfinance Sector. Questioning the implementation costs of adding a new model to an existing business, this is the time to redesign, refine and reinvent the systems and procedures with a ground‐breaking move towards a sustainable and profitable world. We need bold decisions and fool proof implementation. Luckily the model, we are discussing has the potential to return very high profits with a visible social impact. We believe the people with strong faith would prefer to give the services at even marginal cost, because of the fulfillment of their religious values. It is better to spend on developing a new infrastructure then spending on to save a “sinking ship”.
8.8. AND NOW THE QUESTION OF COST …
BELIEVE ME OR NOT
8.8.1. We conducted Five studies 8.8.2. We developed three major products 8.8.3. Developed customized/general Shariah Compliant contracts 8.8.4. Did their pilots (at a limited client/partner level) 8.8.5. Designed a full fledged Islamic Microfinance Methodology 8.8.6. Developed two operational and two monitoring manuals 8.8.7. Provided a number of trainings to our clients 8.8.8. Build the capacity of staff 8.8.9. Develop Structures 8.8.10. And marketed our self 8.8.11. Just in, less than 100,000 USD and 37months. We not only survived but earned the world wide image of a leading Islamic Microfinance organization.
THANK YOU VERY MUCH