Sudan, Malaysia, Indonesia, Bangladesh, and Oman exchange views about how best to serve the poor sectors in their respective countries
25 February, 2012
Khartoum, Sudan (sudanow.info.sd)- A three day Forum on microfinance has been launched in Khartoum to where experts will exchange experience about implementation of the pioneering financial field in each of Sudan, Malaysia, Indonesia, Oman, and Bangladesh.
Sudan’s Center of Studies of Islam and contemporary World, in Collaboration with the Malaysia-based Global Innovation Training Center organized a form on Islamic Microfinance Forum (SUDAN), which kicked off in Khartoum on Tuesday the 21st of February and goes through the 23rd of February in Khartoum, attracting high level professionals from Sudan, Malaysia, Indonesia, Oman and Bangladesh , to compare experience in this innovative and fast growing domain of the funding system that target poor segments of the community.
Experts from Indonesia, Malaysia, Oman, Bangladesh have started comparing their experience in this domain with that of the Sudan. With the opening remarks of the director of the Islamic studies Dr Sadiq Ali and that of ustaz Abdul Mutaal Mohamed, and the blessing of the state Minister for Human Resources, Hiba Mahmoud, participants listened to remarks by Mr. Mohamed Salih Ali - Head Policy and Regulations Department, at the Bank of the Sudan, Sudan’s Central Bank.
The main papers of the day included a presentation on Malaysian experience on Islamic Micro financing, by the well known Malaysian expert in the domain, Dr. Norbaiti Binti Rahmat, the Manager Micro financing Department Bank Rakyat Malaysia who presented an interesting and stimulating lecture about the background, experience and challenges that face the micro finance in her country, with active participation from the audience..
The second paper on Indonesian experience on Islamic Micro financing, was presented by Dr. Raditya Sukmana - Department of Islamic Economics, Faculty of Economics, Airlangga University, Surabaya, Indonesia The forum will listen on Wednesday to the Bangladesh and the Sudan in the same domain as well as that of the sultanate of Oman.
Following are the major papers presented in the workshop addressed by state minister for international cooperation as well as senior officials from the Bank of the Sudan, the Central Bank:
Microfinance in Indonesia
By
Raditya Sukmana Microfinance in Indonesia
Department of Islamic Economic, Airlangga University, Surabaya Indonesia
1- Empirical study about the experience
There exists a lot of numbers with regard to the research and the articles papers with regard to the micro, small and medium enterprise in Indonesia, Many studies conclude that there are a positive relationship between the existence of Micro Small Medium Enterprises (MSMEs) and the country economic growth. It means that when MSME developed it increases the productivity and lead to the increase in overall output as represented by GDP.
Other than that, MSMEs are able to perform themselves in alleviating the poverty. Programs by government and private to the MSMEs have been able to create the poor and the needy to be independent and not rely on charity given by others the these programs, these micro enterprises in fact moved to the higher level that is small enterprises. Certainly new jobs opportunity will be created and unemployment rate will be reduced.
The role of this sector (MSMEs) performed well particularly after the monetary crisis Research done by central bank of Indonesia reveals that, credit distributed so SME had a minimum risk. It means that compare to large enterprise, MSME, Has a better performance. In the case of Indonesia with the population of more than 200 million, the number of MFLs contributes nearly 99% out of total companies in Indonesia. Moreover labor who works in MSMEs sector contribute more that 90% of the total labor see table 1.1
Table 1.1
Profile of MSMEs in 2010
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The paper is presented in Khartoum, Sudan 21 February 2012. Seminar in Microfinance: selected country experience
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Source: Ministry of Cooperation www.depko.go.id, retrieved February 2012
The most important figure is on the lower part on the Table 1.1 above that is the contribution of microenterprises to the GDP. For the micro enterprises, the output value contributes about 33.8% of total GDP. If micro small and medium are put together then the total share to the GDP almost reach to 60% (57.12). This shows that MSMEs are important in developing economy in Indonesia . Hence this sector has to be put in more attention by the government.
2/ soirees of funds (banks, Zakat, investors, donors, NGOs etc)
There are many sources to be used to develop the microfinance, among them are:
a. zakat, infaq and shadeqah. The disbursement of the resources can be used for consumptive and productive purposes.
While the consumptive purposes are directed to the poor and needy who do not have potential to grow the productive purposes are directed to those who have it For the later, one of the programs can be in the form of empowerment program.
b. Financing from Islamic Banks: when IMFI lacks of funds for financing, one way to solve it is via channeling from the Islamic commercial banks or form Islamic rural banks(Islamic People's Rural banks). However, IMFI prefer not to get sources of funds from banking institutions as the price is expensive.
c. Inventors: a wealthy person may also support microfinance by depositing their funds in the banks or cooperation.
d. Donors: international donors who are concerned with the microfinance are also available. Example for this is International Finance Corporation (IFC). However, normally the international donor would not lend directly to the micro enterprises. Rather, they select local consultant to be the partner as well as local bank. There are many benefit of having local partners. First is that the local partners are believed to be better grasping the condition of the local MSMEs. Second, coordination will be easier for the international donor as they only communicate with those local partners. Those are:
1. Gramene model
2. Cooperative model
3. Community banking model
4. Micro banking unit model
5. Joint Venture model
6. Empowerment program model by Government
Grameen model
This model was established by Muhammad Yunus in Bangladesh in October 1983. The feature that distance from other model is that it is a group – based and graduated which play an important role as substitution to the collateral as ways to mitigate the default and delinquency risk. In order to implement this concept, as many as 5 people need to form a group and apply for financing . the total required financing is certainly derived from the individual financing needs, In this case there is no physical collateral required for the financing as each member guarantee other's loan. While members may not have adequate skill to manage the small business, all the members have to be trained by the bank. This training will include the basic element on how to run the business as well as payment schedule management.
Once the group receives funds from garment bank, these funds them will be disbursed to the members. With regard to the repayment, it is a responsibility of all the members. It means that if a member defaulted, the entire member within the group will be affected. It means that other member may not receive. With regard to the payment schedule, it is done on the weekly basis and with a very short maturity period such as month or few months.
Cooperative model
Cooperative or Credit Union is a micro financial institution which is based on the concept of mutuality. The nature is for nonprofit financial cooperative owned and controlled by its members. It provides services such as micro saving as well as micro loans for productive purposes.
An Islamic cooperative model is called baitul maal wat tamweel (BMT). Total number of BMT in Indonesia is around two thousand serve millions of poor Indonesian Muslim. The financing portfolio covers not only murabahah and qardhul hasan but also other product such as mudharabah, musharakah, ijarah.
Community banking model
Community bank is financial institutions which are based on the concept of local bank to serve local community. It is locally owned, locally operated and focus to provide the financial needs of the businesses and families in the community.
Many of the community banks do not provide facilities that large banks offer, such as brokerage and large financing .for example: Rural Banks (conventional and Islamic) as community banks in Indonesia are not allowed to accept checking accounts. The key features of rural banks in Indonesia are simplicity, personal approach and pick up services.
Micro banking unit model
It is a model of banks which are down scaling their operation unit of (conventional and Islamic) commercial bank to meet the needs of the micro finance market in the rural area.
The banks provide various banking services to the doorstep of the rural community. For instance: micro-savings, micro-lending/micro-financing and other micro financial services, such as money transfers and micro-insurance/ micro-Takaful. The offered facilities are not only related to the financial services, such as technical know-how and marketing arrangements to the micro entrepreneurs of the area.
Example of this is Bank Rakyat Indonesia or simply BRI. It is one of the biggest and oldest banks in Indonesia. The total number of offices may reach to more than 7000 offices spread all around Indonesia. It was established in 16 December 1895 and from the inception, if has been focusing on the MSMEs. In the last annual report (2010), BRI claims itself to be the profitable micro banking institution in the world.
Venture Capital model
Venture capital is a capital which is provided to the early stage, high risk and growth startup companies. For the companies which have limited operating history and its size is very small to raise capital from the public market as el as having no capability to gen loan from bank are better off if to go to this venture capital. As an exchange for the high risk. The venture capitalist can get significant control with regard to any business decisions.
Empowerment program model by Government
There are many programs created by government to develop the MSMEs. The programs were conducted in several ministries such as ministry of coo rations, ministry of fisheries, ministry of agriculture etc. One of the program to develop the agricultural sector is called Empowerment Village Agriculture Business Program (EVABP)
4/ How are beneficiaries being selected?
For the micro enterprises, bear in mind that they rarely come to the bank or financial institution for many reason such as the lack of knowledge of the financial management, lack of collateral etc. with this kind of situation the IMFI has to take a lead by sending the account officer (AO) or supervisors to come to them and fulfilled their needs.
In many cases, AO will consult with the head of the village and request him to gather all the people within. The village in specific place whereby the AO will present its product facilities. Next the individual has to form a group of five. Groups will discuss among themselves on the business that they are going to run. Having finalized, the head of the group will consult with AO or supervisor.
Simultaneously, AO gather all the data of the individual member. Generally, the firs need that the AO has to do is to look at the existing condition of them. Things need to be known for example: the house condition, the asset ownership, the number of the family members, etc.
The details of the house condition that need to be known is the area of the house (M) the status of the ownership of the house, what are the roof, floor, wall made from. With regard to the asset own, things need to be indentified are, whether they have farm or paddy field, what are the electronic equipment that they have, the vehicle they have etc.
After those conditions are known, the other information needed to be known by the AO is whether the micro enterprise had a financial support from others to run the business. For example: from bank loan, cooperation or relatives.
Another thing which can be done by AO as part of the risk mitigation id higher than the monthly installment (if the clients finally get the financing) then it indicates that the default risk is less. Next question asked to the client is with regard to the use of the funds. If the client has got a new buyer for his or her product in which he really needs funds then be or she is eligible to be financed. If not then AO
5/ what types of collaterals available for clients?
In practice, although generally enterprise can be divided into four classifications such as micro, small, medium and large, there is another type of classification in which the MFI gives very, very small amount of funds such as around USD 30. We may call this super micro Example of the client who receives this very small amount of financing is the seller who sells limited number of products such as a few number of mangoes, banana. Papaya etc.
Collateral available for the clients can be in the form of movable physical asset such as motor vehicle, cars as well as non movable asset such as land and house. Certainly, the value of the collateral will follow the amount of fund given as financing. For example: if it is super micro then normally there is no collateral. The MFI will then require the client to give the original family card. This card is issued by government mentioning the data of the family members, the location on where they live, their latest education etc. However, there is the case in which the clients even do not have the family card. The most the MFI can do is get the copy of the client IC. There is a way in which the default risk can be mitigated by the MFI. That is to record any asset available right in front of the clients. This will creates psychological effect to the clients.
With regard to the facilities for micro enterprise which has the financing range from USD 100 to USD 500, the ideal one is for the client to provide the vehicle ownership as the collateral. However, there exist many cases that the client also does not have the vehicle to be used as collateral. In this case, what the IMFI can do is to get the original marriage letter issued by government.
For the small enterprise which has the financing range from USD 500 to USD 5000, the collateral criteria is relatively more tight than micro. The form of moveable assets such as motor vehicles, cars, or lands can be used. In this case cars and land ownership documents are kept by the IMFP during the financing period. The amount of the financing given is normally 90% of the market price of the collateral especially for those new clients. However, this is not strictly applied to all clients. For those clients who have shown to have very good track record, the amount of financing can even more that the value of the collateral. For the medium enterprises which have the financing range from USD 5000 to USD 20000, certainly the criteria for the collateral is more strict than that of small enterprise.
Other than that IMFI may request the clients to regularly save some amount of money. This can be done weekly, biweekly or monthly. The clients saving can be also treated as cash collateral for any types of enterprises. Whether super micro, small and medium. In the case whereby the clients fail to pay the installment, the IMFI may deduct the clients saving as installment payment.
6/ what types of modes of finance are being utilized?
There are modes of finance used for microfinance. For the conventional MFI, loans are normally utilized. For the IMFI, contract such as qardhul hasan, mudharabah, musyarakah, murabahah are being adopted.
Qard can also be adopted for the young people who do have zero experience in business but keen to start up the business and be the entrepreneurs. The use of this qarhul hasan contract to young people is to allow them to work hard so that they can repay back the amount financed although only the principal.
However, mudharabah can also be adapted to the young people to the young people provided that these young people have been installed to other business to allow him to get experience needed to run the business. It is a king of risk mitigation by the IMFI.
For the clients who receive Purchase Order from their customer while they need a significant amount of money to produce, then mudharabah contract can be used. This is because the profit gained by the client can easily be predicted and hence it is a one way for the IMFI to mitigate the risk.
Ijarah can be utilized when IMFI which focus in agricultural sector want to support the farmers by renting the equipment at the harvest time. While harvest time of the paddy only occur 2 or 3 times a year then it is too expensive for the farmers to own one. In order for the farmer to use that equipment, then IMFI has to buy one and rent it to farmers. Once the farmer finish his harvesting, the equipment can be rent to other farmers. Murabahah contract is normally used for the clients who are in the business of trading wheel he o she buys from the supplier and sell it to others.
The contracts offered by the IMFI are pretty much depend on the owner and the management of the IMFI. If they want to apply profit share concept as a main contract, they are able to do so. There was an IMFI in Indonesia which offer only profit sharing concept and it works.
7/ are there any types of supervisory body to issue laws/rules and regulation for microfinance/
Regulation for the microfinance depends on the types of institution which offer the facilities.
For example, if it is bank such as Bank Rakyat Indonesia (micro unit) the regulation is under the central bank of Indonesia. Similarly, for the Islamic Rural Banks which are established to serve the local community are also under regulations by Bank Indonesia.
Other than banks, cooperation is the common type of institution which the microfinance. This cooperation is regulated under the ministry of cooperation. Some of the regulation pertaining to the cooperation cover from Members Annual Meeting, capital, liquidity, budgeting, procedure for selecting the director, planning, sharing of the profit etc.
Amil zakat institution also concern on the microfinance. In Indonesia Zakat can be managed by government as well as private but all of them are regulated by National Zakat board.
8/ amounts and ceiling of microfinance provided.
With regard to the ceiling of the microfinance, it differs from one to another. Definition by Central Bank of Indonesia can be seen from table 8.1 below.
Table 8.1
Classification by Bank Indonesia (USD)
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Bank Indonesia adopts credit limit as an indicator whether the business is classified as micro, small or medium. To classify as microenterprises, the maximum credit given is USD 500 while small and medium are USD 50.000 and USD 500.000 respectively.
Research by Ascarya and sanrego (2007) propose redefinition of the particularly within the micro. As the fact shows the within the micro, particularly on the poor of the poor, they are highly unlikely to get financing close to USD 5000. Rather, they only need around USD 30 to USD 100 for their business. Hence the propose classification can be seen in table 8.2
Table 8.2
Proposed Classification based from research done by Ascarya and Sanrego (2007)
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The author also gathers another classification based on the experience of IMFI practitioners who deal with financing activities. He said that the ceiling of the micro reach to USD 500 (see table below 8.3 below) with the minimum of USD 100. However, many cases have been found that there are eligible for less than USD 100 which is called super micro. Example for this is that a trader who sells homemade cakes and distribute to a certain area by riding bicycle. For him USD 100 is too much. He only needs USD 30 to buy raw material. Other example is a very small trader who just sells few mangoes and bananas.
Table 8.3
Another classification of MSMEs
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