Transcript Participatory Micro Finance and Interest – Free System

Introductory Slides on
Participatory
Micro Finance
in India
Prepared for BASIX India Group
17th October 2012
Participatory Micro Finance
1. Background
2. Introduction
3. Financial Products
4. Market Conditions
5. Road Ahead
1. Background
1.1 Finance for Economic Growth
1.2 Unjust Credit Disbursement
1.3 Micro Finance in India
1.4 Financial Exclusion of Poor
1.5 Need of Financial Inclusion
1.1 Finance for Economic Growth
• No individual, community or economy can attain
desired economic growth if not allowed to access
affordable source of finance.
• Compared to the corporate sector, the farmers and
micro enterprises in the unorganized sector have
no source of equity funds to share the associated
financial risks in their economic activities; rather
burdened through higher interest rates on debts.
• India needs to develop sources of micro equity
funds to allow the farmers, household workers, and
micro enterprises compete with others active
players in this globalized monopolistic market.
1.2 Unjust Credit Disbursement - I
1.2 Unjust Credit Disbursement - II
1.3 Micro Finance in India
• After observing the success of Micro Finance in
Bangladesh, the Indian Government introduced
Micro Finance system in India
• In India Micro Finance has been framed as a tool to
attain financial inclusion.
• Initially Micro Finance Institutions (MFIs) in India
emerged with Government support; later on it grew
through interest based lending from Banks.
• After 2010 when banks stopped lending to MFIs,
few players are looking for alternative source of
funding to attain sustainable growth.
• Indian MFIs have yet to develop micro equity funds
to promote livelihood activities.
1.4 Financial Exclusion of poor
• NSSO data reveals that 51.4 per cent farmer
households (45.9 millions out of 89.3 millions) in
India do not access credit, either from institutional
or non-institutional sources.
• Indian Council for Research on International
Economic Relations suggests that only 12 per cent
of unorganized retailers have access to institutional
credit; and 37 per cent felt the need for better
access to commercial bank credit.
• Sachar Committee Report reveals that only 10%
Muslims access formal banking services and they
get just 4.7 percent credits extended by banks
against 7.4 percent share in individual deposits.
1.5 Need of financial inclusion
• To improve financial inclusion, the demand side efforts
including improving human and physical resource
endowments, enhancing productivity, mitigating risk
and strengthening market linkages been undertaken;
but so far financial inclusion of India’s second largest
community (whose religious ethos conflicts to that of
interest based banking system in India) been ignored.
• The High Level Committee for financial Sector
Reforms constituted by the Planning Commission of
India has duly recommended that ‘’measures be taken
to permit the delivery of interest-free finance on a
larger scale, including through the banking system.
This is in consonance with the objectives of inclusion
and growth through innovation.’’
2. Introduction
2.1 Definition of Participatory Micro
Finance
2.2 Fundamentals of Participatory
Micro Finance
2.3 Practical Applicability of PMF
2.4 How different from Conventional
Micro Finances?
2.5 Advantages of PMF over
Conventional Micro Finance
2.1 Definition of Participatory Micro
Finance (PMF)
• Participatory Micro Finance (PMF) is a process
wherein the financier instead of lending small
amount on interest to someone; actually involves
in customer’s business through trade practices; or
by sharing associated business risks or by leasing
out high value assets to the customers.
• Unlike interest based lending return on investment
is not fixed; but depends on profit in the business.
• Since Participatory Micro Finance adheres to the
principles of Islam, it may be used as alternative to
Islamic Micro finance in countries like India,
Turkey, Japan, Nepal and China etc.
2.2 Fundamentals of Participatory Micro
Finance
• Participatory Micro Finance is based on teachings of
the Holy Quran, the books of Hadiths and Islamic
Jurisprudence etc.
• Riba (Interest) of any kind is strictly prohibited.
• Financing upon business activities which may harm
the human and financial resources of any economy
(like alcohol, pork, gambling, porn, non tangible
assets, interest rate SWAP etc.) are not allowed .
• It promotes sharing of business risks instead of
shifting the associated business risks upon others.
• It prohibits participation in business with uncertain
risks or trading based upon pure speculations.
• It disallows signing conditional business contacts.
2.3 Practical Applicability of PMF
• Applicability of Participatory Micro Finance are
tested and recognized as ultra modern financial
products for Micro and Small Enterprises (MSEs).
• Musharaka and Mudaraba may help MSEs to get
micro equity funds compared to higher cost debts.
• Istisna and Ijara may serve MSEs get material and
Assets needed for processing / manufacturing.
• Bai Salam may help farmers get required funds to
sow crops as fair prices for harvest.
• Murabaha allows small retail get business stocks.
• Micro Housing Finance and Asset finance can be
provided through Diminishing Musharaka.
2.4 How different from
Conventional Micro Finances?
Business Parameters
Participatory
Micro Finance
Conventional
Micro Finance
Money as Capital Resource
Declined
Accepted
Money as tradable Asset
Declined
Accepted
Equity Financing
Promoted
Restricted
Lending money on Interest
Restricted
Promoted
Conditional Business Contracts
Not allowed
Allowed
Forward Sale
Allowed
Disallowed
Partnership with customer
Allowed
Not Allowed
Leasing of Tangible Assets
Encouraged
Discouraged
Fixed Return on investment
Not allowed
Assured
2.5 Advantages of PMF over
Conventional Micro Finance
• PMF helps achieving financial inclusion of specific
customers seeking finance without interest.
• PMF directly accelerates livelihood activities.
• One Murabaha assures at least 2 value additions.
• PMF helps farmers avail interest free funds with
assured fair prices for their harvest / produces.
• PMF helps micro and small enterprises get equities
to share business risks instead of debt burdens.
• PMF helps counter economic problems like inflation,
fiscal deficit and recession etc.
• PMF can help banks and financial institutions from
financial crisis like sub prime mortgage crisis.
3. Financial Products
• (Equity Finance)
• (Trust Finance)
• (Cost – Plus Finance)
• (Lease Finance)
• (Manufacturing Finance)
• (Forward Sale)
• (Benevolent Loan)
• (Diminishing Partnership)
• (Islamic Insurance)
3.1 Musharaka
(Equity Finance)
• Equity Finance (Musharaka) is a mechanism
wherein group of persons pull their resource and
convert them into equities for running any business
to shares the profit and loss (if any) at mutually
consented ratios among the subscribers.
• Musharaka is used to raise equities for venture
capitals, facilitating cooperatives, farmer producer
companies, processing industry and exports etc.
• Musharaka facilitates Micro and Small Enterprises
by allowing them to share business risks among
equity holders who may in return own the
enterprises and get profit in return of bearing risks.
Structure of Equity Finance
Investor
A
Investor
B
Investor
C
Pull required resources and convert them into
equities (shares) of any joint venture enterprise
to collectively own the shares; and accordingly
bear the associated business risks.
Joint
Venture
Enterprise
Share subscribers of Joint Venture Enterprise
mutually distribute earned profit / loss (if
any) on pre agreed ratios as reward for
sharing associated business risks.
3.2 Mudarabah
(Trust Finance)
• Trust Finance is a mode of finance wherein the
Financier having faiths on any person / party
extends funds allowing the party to manage that
fund for execution of any business activity with a
condition that all financial risks shall be borne by
the financier; but profit shall be shared among both
the parties on mutually agreed ratios.
• Mudaraba promotes business relationship among
skilled but poor entrepreneurs and such capital
owners who are unable to manage the business.
• This may be used to promote micro and small
enterprises through partnership.
Structure of Trust Finance
Administer the funds to control the
Enterprise
Provides capital on
faith for any business
Entrepreneur /
Fund Manager
Financier /
Capital Provider
Receives profit in return of managerial
efforts
Business
Enterprise
Receives profit in return of sharing
business risks
3.3 Murabaha
(Cost – Plus Finance)
• Cost Plus Finance (Murabaha) is a mechanism
where the financier instead of lending money to the
needy, converts him into a customer; buys required
goods for him; adds a mark up profit over the
actual costs (in consent with the buyer) and sells to
the client with deferring the receipt of payments for
a specific period of time.
• Since under Murabaha, one financial transaction
needs at least two real time sales transactions, it
allows the economy register more value additions
in trade activities compared to registered growth in
the financial sector, thus uplift economic growth.
Structure of Cost – Plus Finance
• Supplier /
Vendor
instantly
collects full
Payment
against
supply of
goods /
assets on
demand from
banks / MFIs
Suppliers /
Vendors
Banks / MFIs
• Purchase goods /
assets from Vendors /
Suppliers
• Adds Mark up Profits
over purchased goods
/ assets
• Sell goods / assets to
the client / customer
on credit terms
• Receives
goods /
assets from
Banks /
MFIs on
credit terms
• Makes
payment for
goods /
assets in set
installments
Client /
Customer
3.4 Ijara
(Lease Finance)
• Lease Finance (Ijara) is a mechanism where the
financier buys any tangible asset or equipment and
leases out that to any customer (on rental basis) for
a specific period of time (with provision to own that
after paying the title / ownership fees at the end).
• Ijara allows the poor enterprises to acquire and use
high value assets like premises, vehicles, tools and
machineries etc. without high capital expenditure to
purchase the required asset at once through interest
bearing loans; rather manages it by paying regular
monthly rents in installments for using the assets.
• It also safeguards the financiers with value of
tangible assets against high valued financial risks.
Structure of Lease Finance
• Receives full
payment for
tangible asset from
the bank /
financier against
order.
• Delivers the
tangible asset
along with the title
to the financier /
bank against
payment.
Manufacturer
Financier /
Bank
• Purchases the
asset from the
manufacturer
• Leases out the
asset to the
customer.
• Receives total
lease amount in
installments .
• May transfers the
title of the asset
after completion of
lease agreement if
sought by the
customer.
• Receives the asset
from the bank on
terms of lease
agreement.
• Uses the asset and
pays rent to the
financier as par
lease agreement.
• After successful
completion of
lease agreement
may get the title of
the asset by paying
the title fees to the
financier.
Customer /
Ultimate User
3.5 Istisna
(Manufacturing Finance)
• Istisna (Manufacturing Finance) is a process where
payments are made in stages to facilitate step wise
progress in the Manufacturing / processing /
construction works.
• Istisna enables any construction company get
finance to construct slaps / sections of a building by
availing finances in installments for each slap.
• Istisna also helps manufacturers to avail finance for
manufacturing / processing cost for any large order
for goods supposed to supply in stages.
• Istisna helps use of limited funds to develop higher
value goods/assets in different stages / contracts.
Structure of Progressive Finance
Make payment to the Builder / Manufacture in advance for
development / process any item with specified terms
Finance
company /
Bank
Delivers specified units after
manufacturing / developing as per
specification to the bank / finance
company.
Receives payments in advance
from the banks or finance
company to manufacture / develop
specified unit / s on specific terms.
Builder /
Manufacturer
/ Processing
Units
Receives manufactured goods / developed units / assets
from the manufacturer or builder against payment.
3.6 Bai Salam
(Forward Sale)
• Under Forward Sale (Bai Salam) after negotiating
price of a commodity the buyer makes the payment
in advance for set quality and quantity to be
delivered by the supplier on any future date.
• With known purchase cost in advance through Bai
Salam the traders plans their future business flows.
• Advance sale helps the farmers to get interest free
funds for meeting financial need at one hand and
mitigating the risk of uncertain harvest prices.
• The Government may help farmers by paying them
in advance for purchases of their harvests; keep
those commodities in cold storages / godowns; to
regulate supply and prices of essential commodities.
Structure of Forward Sale
• Makes full payment in
advance for purchase of
specified quality and
quantity of commodity on
specified price for supply
on future set date.
• Receives specified quality
and
quantity
of
commodity on specified
date from the farmer /
supplier.
Financier / Buyer
Farmer / Supplier
• Negotiates price of specified
commodity with the financier /
buyers and duly Signs an agreement
before receiving full payment in
advance; and is bound to deliver
the commodity (with specified
quality and quantity) on set future
date.
• On specified date (as per forward
sale agreement with the buyer /
financier) makes the delivery of the
specified quality and quantity of
commodity to the buyer / financier.
3.7 Qard E Hasna
(Benevolent Loan)
• Qard E Hasna (Benevolent Loan) is the scheme
under which the customer can get credit in cash to
meet activity based household financial needs like
educational, medical or marital etc.
• Under Qard E Hasna, the financer lends money to
the borrower without interest.
• Under Qard E Hasna only actual cost of operation
along with principal amount is allowed to recover
from the beneficiary.
• Qard E Hasan cannot be linked up with profitability
of the borrowers livelihood.
• Borrower can make pre payment and can also
delay the payment if genuinely need more time.
Structure of Benevolent Loan
Extends
finance
without motive to earn
profit / reward in this
life, but to have
reward in the life
hereafter.
Bank / Lender
Receives exactly the
same amount financed
to the customer
May also collect receivable
service charges from the
beneficiaries to run the
institution without profit.
Seek interest free
finance from the bank
or lender to meet out
personal
non
commercial
(Household) needs
Customer /
Beneficiary
Returns back the same
amount without any
interest or penalty to
the bank or lender by
paying in installments
on specified period of
time.
May pay set service
charges to enable the
financial institution meet
its actual operational
expenses.
3.8 Diminishing Musharaka
(Diminishing Partnership)
• Diminishing Musharaka is a Participatory Business
which starts with collective investment on any asset /
project by two or more parties; but ends with
complete conversion of ownership for one party who
purchases the shares of other/s in that particular
asset / project during a time frame. Whole process
needs three different set of contracts defining –
• Collective Investment in any asset or project between two
or more parties
• Terms of Diminishing Participation among partners
• Contracts defining terms of Lease or selling of the
undivided share of one or more partners in the asset /
project to the other partner.
Structure of Diminishing Partnership
The bank / financier and
the customer enters into
joint ownership agreement
before buying any asset in
partnership.
Bank / Financier lease out
his share in the asset to
other partner on rent
against use of his share in
the asset.
The
customer
buys
remaining shares of the
bank
/
financier
to
completely own the asset
and to diminish banks /
financier share in the asset.
Bank /
Financier
Bank /
Financier
Bank /
Financier
Customer
Customer
Customer
Stage 1
Stage 2
Stage 3
3.9 Takaful
(Islamic Insurance)
• Takaful is a Shariah compliant insurance system
where members of any group duly come together
to share associated business risks of group
members by subscribing Takaful fund.
• Group members duly subscribe premiums of
Takaful Funds to compensate the losses, if incur in
business of any members of that group.
• The members agree to invest the Takaful fund with
condition to share the profit / loss realized through
investing the funds in legal and ethical businesses.
• Insurance company manages the funds and
assures insurance subscribers to compensate
business losses if any.
Structure of Islamic Insurance
• Creates
Takaful
Funds with own
initiatives
and
seed capital.
• Invites the Takaful
Subscribers
• Administer
the
Takaful Funds
• Entitled to invest
the Takaful fund
into
ethically
permissible trade /
industry.
• Insures
the
subscribers
against any loss /
damages .
Insurance Company
Takaful Fund
• Created
by
Insurance
Company
• Used to protect
the subscribers
• May be invested
into
ethically
permissible
businesses
• Small Takaful fund
may further be
insured
through
larger
Takaful
Funds.
• Subscribes
premium of the
Takaful funds
• Receives
compensation in
case of losses
from Takaful funds
• Receives
profit
from
Insurance
company in case
of profit earned
after
investing
Takaful funds into
profitable
businesses.
Takaful
Subscribers
4. Market Conditions
4.1 Demand forces yet to envisage
4.2 Regulatory hurdles for PMF
4.3 Infrastructural deficit for PMF
4.4 Taxation Problems for PMF
4.5 Shortage of Equity Funds
4.6 Accounting and IT software
4.7 Education & Training of staff
4.1 Demand forces yet to envisage
• Participatory Micro Finance is new concept for
Indian market and is yet not be recognized by all.
• Since Participatory Micro Finance is not offered by
any big bank / financial institution in India; and
people are mostly unaware about it, we have yet to
envisage demand forces for PMF.
• Under constraint regulatory conditions few small
financial institutions with limited resources offer
PMF at local levels, which are not known to all
people, so real demand forces are yet to envisage.
• No genuine envision for Participatory Micro
Finance demand forces is done by any reputed
financial institution / research institute.
4.2 Regulatory hurdles for PMF
• The Reserve Bank of India (RBI) as regulator for
Banks and NBFCs in India has yet not considered
provisioning grounds for Participatory Finance.
• Banks and NBFCs registered as MFI with RBI are
not allowed to raise equity / funds with provision to
invest in business on risk sharing basis.
• RBI not allows banks / MFIs to participate in trade
of commodities and tangible assets.
• Takaful is not recognized as Insurance Product by
Insurance Regulatory and Development Authority
(IRDA) in India.
• Double stamp duty on Ijara transactions adds cost
of assets thus hurdles Ijara growth.
4.3 Infrastructural deficit for PMF
• Since demand forces for PMF is not envisaged so
far, there is no significant effort to create required
infrastructure for Participatory Micro Finance.
• No source for equity funds is available to meet
requirement of MFIs to promote PMF in India.
• No institutional network to promote cooperation and
coordination among financial institutions dealing
with Participatory Micro Finance products in India.
• There is no institutional effort to develop required
market linkages to promote Participatory Micro
Finance businesses in India.
• Limited infrastructure facilities in rural areas hurdles
experimenting PMF in potential rural areas in India.
4.4 Taxation Problems for PMF
• Unless PMF is considered as a viable business the
issue of taxation will hurdle experimental efforts.
• Like Ijara, there is also taxation problems for other
PRTF products like Murabaha, Bai Salam and
Istisna etc. where bank or MFI need to buy and sell
commodities.
• The taxes imposed on commodities bought by
Bank or MFI for sale through Murabaha, Ijara or
Bai Salam increases the net cost of commodities,
thus make it challenging to compete with other
sellers in the open market because majority of
sellers in the unorganized market avoids collecting
and paying taxes on their sale.
4.5 Shortage of Equity Funds
• No Bank or MFI in India are allowed to raise equity
funds which is basic source for PMF, so banks and
MFIs find it difficult to start PMF.
• In absence of Equity Funds, banks / MFIs cannot
afford to finance businesses on principles of
Participatory Finance.
• There is no provision to create mutual funds by
Banks / MFIs for their specific needs.
• There is no regulator to raise funds for Takaful
(Islamic Finance) which may have otherwise
boosted Participatory Micro Finance in India.
• The provision to pay stamp duty and registration
fees for mutual funds also hurdles equity for PMF.
4.6 Accounting and IT software
• There is no ready to use accounting package for
Participatory Micro Finance which hurdles even the
experiment of PMF products.
• There is no ready to use IT software suitably
meeting the requirements of PMF business.
• Without Accounting and IT software banks / MFIs
hesitate to experiment PMF business on pilot basis.
• There is also no institution to lead development of
required Accounting software and information
technology required for PMF.
• Besides Accounting and IT software, PMF business
need database of Business directory to develop
required backward and forward market linkages.
4.7 Education & Training of staff
• So far in India major to educate pupils in Islamic
Banking and Finance, few institutions have initiated
new courses as part of financial management.
• So far the courses on Islamic banking and Finance
has not touched the Micro Finance Sector.
• The concept of Participatory Micro Finance and its
scope in Indian unorganized sector is yet to realize
by the academicians and industry players.
• There is no stuff of Qualified and expert teacher
and trainers in Indian market to provide education
and training on PMF.
• No textbook on Participatory Micro Finance is
available in India for reference by industry players.
5. Road Ahead
5.1 Create Public Awareness
5.2 Establish Business Models
5.3 Create Funds for PMF
5.4 Forward Linkage of Takaful Fund
5.5 Develop Financial Infrastructure
5.6 Road Ahead
5.7 Thank You
5.1 Create Public Awareness
Public awareness on Participatory Finance through –
1. Setting up practical business models
2. Benefitting the target customers
3. Publishing Articles and Blogs
4. Publishing Analytical Reports
5. Public addresses in mosques
6. Addressing the Panchayat Meetings
7. Interaction with Social Workers & NGOs
8. Distribution of Handbills and Pamphlets
9. Arrangement of Seminars and workshops
10.Holding Interactive discussion sessions
11.Telecasting Live TV shows
12.Educational and training Sessions
5.2 Establish Business Models
• Most important means to promote Participatory Micro
Finance in India could be establishment of working Business
models in potential markets.
• BASIX India group has already done pilot at Parbhani
district of Maharshtra and is now aiming to scale up that pilot
project in Mewat District of Haryana.
• Businessmen, farmers and artisans seeking Participatory
Finance should be grouped at local levels according to
nature of business relation among themselves.
• Different small size companies may be established with
object to serve the target client with economies of scale in
local region and develop market linkages at larger scale.
• Success of Working Business models in different sectors
would self prove its worth and inspire others.
• Farmers Producers Company may be handy working model.
5.3 Create Funds for PMF
• Since there is no existing source of Participatory Finance,
members associated with business groups established to
promote Participatory Finance need to create pool of equity
funds and risk mitigating Takaful funds.
• For any society registered under Multi State Cooperative
Societies Act. 2002, it is possible to develop series of liability
side products depending on nature and objective of
deploying the deposit and funds.
• Such deposits and funds could be used to promote
participatory finance among the members of business group
by mode of Musharaka, Mudaraba, Murabaha, Ijara, istisna,
Bai Salam and Takaful etc. to allow mutual help the
members.
• Hopefully success of pilot project led by BASIX India Group
may draw attention of potential investors towards PMF.
5.4 Forward Linkage of Takaful
Fund
• On pilot basis members of any cooperative dealing in Milk
production or poultry etc. may be motivated to form a group
for pooling out Takaful Fund to subscribe associated
business risk of members of particular business group.
• The Premium of Takaful Fund may be lesser compared to
other insurance products if no interest / bonus is planned.
So, it would not be very difficult to mobilize group members.
• Takaful funds would work as hedge to protect the members
of the group by compensating the business losses if
occurred for any member.
• Small Takaful funds at local levels should further be linked to
large scale Takaful funds at regional, national and
international levels to ensure reinsurance of the Takaful
Funds and provide economies of scale for Takaful Funds.
5.5 Develop Financial
Infrastructure
We have to develop following financial infrastructure for
promotion and development of Participatory Finance in India
• Text books and reference materials for study
• Education and training system for new comers
• Accounting Software
• Mechanism to provide safety nets to investors
• Online interactive database for business enterprises
• Required logistics and warehousing
• Relevant processing units
• Last end market linkages for each business module.
• Delivery channels
• Communication and interaction platforms
• System of accountability towards share holders
• Media to project expected rate of returns on new coming
project to attract fresh and potential investors
5.6 Road Ahead
• Successful implementation of BASIX’s pilot project on
Participatory Micro Finance at Parbhani has encouraged us
to scale it up in Mewat. Again the successful execution of
PMF at Mewat will bring considerable changes in –
• Livelihood of farmers benefitted through PMF
• Milk producers accompanied under PMF projects.
• Micro Entrepreneurs benefitted through equity finance
• Members of Consumer Cooperative Societies
• Members subscribing Takaful Funds
• Entrepreneurs dealing business linkages through PMF
• Owners and Managers of Cold Storages
• Business Groups established under PMF
• Workers engaged into activities run under PMF.
• Owners and Managers of processing units set under PMF
• Promoters and Investors of PMF in India
Thanks for
listening
thoughts