â€œAnd covet not that whereby Allah has made some of you excel others. Men shall have a share of that which they have earned, and women a share of that which they have earned. And ask Allah of his bounty. Surely Allah has the perfect knowledge of all thingsâ€ (4:32)
It was easy to inform the participants of this workshop that the Qurâ€™an promotes the concept of “family empowerment” by exhorting men and women to play their respective roles in seeking economic and social well-being of all members of the family. That, the Islamic way of doing microfinance and poverty alleviation should emphasize family empowerment and not the empowerment of women alone. It was much harder to explain and convince. Organized by GIZ, the German Development Agency and the Islamic Research and Training Institute, the participants of this workshop held on the shores of the Dead Sea, Amman were mostly experienced MF professionals who seemed to be resistant to the idea of replacing â€œfamilyâ€ with â€œwomenâ€. They had heard of too much of suppression and subjugation of women in Muslim societies to accept the new paradigm. The assertion that Islam attaches great importance to the â€œfamilyâ€ as the basis of building a humane society was not enough to prove the counterpoint and make the die-hard believers in â€œwomen empowermentâ€ shun their faith. As some noted, the push for women empowerment was on very strong grounds. Women as compared to men were more honest, more responsible, more loyal, more caring for family, and less resistant to change and positive social action.
What they wanted to see was hard empirical evidence to the contrary to consider a shift in the way they were doing their business. There were of course anecdotal examples, a few media reports of increased social tensions and divorce rates leading to disintegration of families. There were apparently due to the economic empowerment drive for women initiated by Grameen and BRAC like experiments. But these could be easily dismissed as propaganda stuff. There seemed to be little in terms of what may be termed as hard research evidence. Finance literature had very little in terms of sociological outcomes of microfinance. I tried to cite the evidence from one study I thought was robust enough. The study by this renowned sociologist alarmingly showed evidence that women empowerment programs in many cases had led to enhanced distress for the very women the programs sought to help. It documented cases of misuse of funds by husbands, often due to lack of business acumen with women clients. The study found that â€œsmall increases in access to income may be at the cost of heavier workloads for women, increased stress and their health; without substitute care for small children, the elderly and disabled, and provision of services to reduce domestic work many programs reported adverse effects (Linda Mayoux, 2002)
Though the believers were not going to renounce their faith so easily, there was more support forthcoming. This time, it was from a sister, the CEO of the well-known Centre for Women Co-Operative Development (CWCD) that fought for women empowerment as a Non-Governmental Organization since 1992. Sr Farida in her presentation asserted that the â€œfocus on women in microfinance has not achieved the objective of women empowerment in Pakistan but ironically has resulted in further exploitation of women as 90% loan taken by women has been utilized by men.â€ She also cited this as a major motivation factor underlying the transformation of CWCD as a conventional microfinance provider to Wasil Foundation, which is now a key player in the Islamic microfinance sector in Pakistan.
The transformation began in 2008-09 when Wasil Foundation (CWCD) extended its operations from conventional microfinance to Islamic microfinance and eventually discontinued conventional microfinance in 2010, thus becoming a purely Islamic microfinance organization.
What other factors motivated Wasil to move into Islamic microfinance? According to Sr Farida, the weaknesses of conventional microfinance in addressing the challenge of poverty led it to experiment with Islamic products. She was of the view that:
- The basic concept of â€œpoorest of poorâ€ is wrong. There can be no segregation of different classes of the poverty stricken people;
- Off the shelf packages donâ€™t serve the cause and that solutions need to be customized to needs of the poor;
- Life insurance is mostly taken as a backup by the MFI for securing the amount lent to the clients and it benefits very small number of clients;
- Saving benefits the organization and not the client. The client cannot get back his/her money if his loan is outstanding. Profit accrued to him/her is not given if his/her installment is deducted from saving;
- Loan utilization is mostly not for the purpose stated; and
- Over-indebtedness pushes the poor towards poverty.
Needless to say, the above contradict many of the widely held notions in conventional microfinance. The management also asserts that while practicing different Islamic financial products it came to the conclusion that Islamic financial products have highly desirable objectives built into them, such as, client protection, sustainability, diversity, societal development; involving provision of business development services with a focus on value chain and leading to job creation.
Product Development at Wasil
Wasil Foundation has successfully introduced five products based on murabahah, salam, istisna, ijarah and diminishing musharakah. It has been successful in identifying a customized financial product for each section of the society within the Islamic framework. Wasil is continuously seeking to develop the product development process in consultation with Shariah scholars with a clear objective to reduce transaction costs and reach the scale. The following table provides a comprehensive list of modes/ products suitable for a target beneficiary.
Table 1. Modes/Products and Beneficiaries at Wasil
|Zakat and sadqat||Destitute unable to work|
|Qard al-Hasan||Poorest of the poor with ability to work|
|Murabahah||Micro level traders street hawker Small shopkeepers|
|Salam||Small Farmers up to 5 acre land holding|
|Istisna||Micro manufacturers in different sectors|
|Ijarah||Farmers without land holding (Rental Land)|
|Diminishing Musharakah||Micro entrepreneur in need of assets|
|Master Salam (Ijarah + Salam)||Farmers in need of land plus money for cultivation|
Islamic microfinance model was introduced in Wasil Foundation (then known as CWCD) in 2008 when the preparation of the manuals of Islamic Microfinance was initiated through a grant from IFAD under the MIOP (Microfinance Innovation and Outreach Program). This model, unlike others that have been implemented in Pakistan by various banks and microfinance organizations was focused on the provision of Islamic products that were to be closest to the teachings of Islam as well as the common market practices in Pakistan.
During the development of the products it was identified that, products offered through the inclusion of agency agreement wherein the client would become the agent of the organization following which the organization will take possession of the goods purchased by the client and then sell the same to the client under the murabahah agreement, would pose serious risks of consumption/utilization of assets purchased by the agent before the murabahah agreement was initiated. This, according to the laws of Shariah, would therefore render the income as haram whereby the organization would have to give the income out as compulsory charity in order to make the overall income halal.
In accordance to this provision, it was decided that all purchases will be done by the organization directly for which a procurement and sales department was established in the organization. For the satisfaction of the client, the clients were told to produce quotations of the goods produced by the supplier from which the purchase was to be done. The procurement and sales department would negotiate the rates with the suppliers often obtaining discounts which were transferred to the client. Following this, a procurement officer would be physically present at the time of purchase and the risk of the goods would be taken by the organization by way of taking the goods outside the shop of the supplier, loading them on the carriage of the client and then initiating the murabaha agreement whereby the risk and rewards of the products are transferred to the client.
In 2012, due to the excessive costs of procurement of goods for murabahah, Wasil Foundation delegated the responsibility of procurement of these goods to the branch staff. This reduced the costs of travelling while also decreasing the turnaround time of the transactions of murabaha which form a major portion of the portfolio of Wasil Foundation.
In November of 2009, Wasil foundation initiated its first salam transaction wherein an advance payment was given to the client against the purchase of wheat in Nankana Sb district of Punjab. As there was no precedence of any microfinance organization in the world that had done a salam transaction, the risk foreseen in the product was extremely high as were the challenges that were faced while implementing the product.
The main challenge with regards to the salam transaction was the identification of the quality of the crop and the determination of the price at which it must be procured. The Government of Pakistan issues a support price for wheat at which it is procured by PASCO and Food Department of Government of Pakistan. However, when these departments were approached by Wasil Foundation for the sale of crop to these departments, they refused due to the restriction levied upon them by the Government of Pakistan whereby only a farmer may sell to these departments. Thus, the only other options were the sale to the flour mills or to the open market. Furthermore, unlike the support price at which the Government Departments purchase the crop, the flour mills and the open market rates are determined by certain market factors including the quantity of national produce etc.
In order to determine the price, Wasil takes the data of the sale price in a specific area over the last 03 years. This gives a rough estimate of what the price is likely to be for the crop that is to be grown. Wasil then offers a float rate at which the purchase price is negotiated with the farmer/client. This negotiation takes place at the village level with groups of farmers who are likely to sell the crop to Wasil. At the end of this negotiation, Wasil determines a final price at which the crop is procured by Wasil. At times, this price may vary from area to area on the basis of the cost of production, the expected yield, the sale price of the area in the last years and the amount of risk that the organization has to face.
In June of 2010, Wasil Foundation launched its first rice salam transaction. Unlike wheat, the market rate of rice crop is entirely dependent on the quality of the crop wherein the seed of the crop is of major importance. While in the case of wheat, the seed being planted does not directly affect the price as the output crop is the same, rice crops are categorized in accordance to the seed that is being planted by the farmer. Thus the challenge of the quality of the crop and the proper identification of the seed is of vital importance while conducting a salam transaction on rice. For this, Wasil trained its procurement and sales department, through the agriculture department of Government of Punjab, Pakistan, on the types of rice and the identification techniques of rice.
Unlike wheat, there is no support price by the Government for rice, which makes the estimation of the purchase price more complex for rice. The options open for Wasil Foundation are again, as in the case of wheat, the selling of the crop to the open market or the rice mills in the area. However, unlike wheat, when rice is harvested, it contains a high moisture content due to which the total weight of rice is increased by approximately 15 to 20 percent. This moisture further induces a chance for the crop to be damaged if it is not dried up in time. These issues increase the risk of holding rice at a warehouse for collection and sales purposes. Thus, unlike wheat which may be stored for up to 03 months by Wasil Foundation, rice is to be sold within a maximum of 01 month time period due to the unavailability of the proper infrastructure to store rice. This challenge still exists while conducting a rice transaction of salam.
In 2010, Wasil Foundation also conducted its one of a kind istisna transaction for the construction and renovation of class rooms at schools. This transaction was a tri party transaction wherein the client gave an order for construction to Wasil. Wasil hired a contractor for the construction/renovation to which the payments were made by Wasil, and the client was to pay for the construction to Wasil Foundation in the form of installments. The main challenge in this transaction was ensuring the quality of the construction while also ensuring that the requirements of the client are perfectly met by the contractor. For this purpose, Wasil arranged a meeting in which the contractor and the client were both called in the presence of the staff of Wasil. A diagram of the exact requirements of the client was prepared with the exact specifications noted. This was then signed by all the parties present being the client, the contractor and the Wasil.
Furthermore, in order to ensure that the contractor is abiding by the requirements, the client was made an agent of Wasil for overseeing the construction and reporting to Wasil in case of any discrepancy. At the end of the construction period, the client was asked to confirm if the requirements that have been noted in the requirement specification document were exactly met.
In 2011, Wasil Foundation launched its istisna product for the manufacturing industry in the urban and semi-urban areas of Punjab. The client was given an advance payment of up to 60% of the total agreed price of purchase of the manufactured goods, indicating the exact requirement through a requirement specification document. The client manufactured the goods and delivered them to Wasil which were then sold to the open market. However, due to the unavailability of a sales tax number, which cannot be obtained under the ordinance the company is currently working, these goods could not be sold to the main industries which were initially targeted by Wasil Foundation. This product was stopped due to the issues in sale of the products to the market. The challenge of acquiring a sales tax number is still under process and it has been notified to the Government of Pakistan on various levels.
In 2010, certain requirements of fruit farmers came to Wasil for the acquisition of a fruit farm. For this purpose, Wasil decided to launch an ijarah product wherein the land would be acquired by Wasil on ijarah (rental) from the landlord and an agreement would be made wherein Wasil would be permitted to further sub-rent the land. This land was then rented out to the client for a period of 11 months against which monthly rental was taken from the farmer, instead of the earlier half yearly rentals that the client had to pay.
In 2010, Wasil Foundation submitted a model of microfinance through a retail outlet for the CGAP Islamic Microfinance Challenge 2010. Even though Wasil Foundation was not able to get the $100,000 funding for the piloting of the project, it was selected in the top 5 contestants from among 140 contestants from 48 countries in the world. One of the key components that were suggested in this model was a master salam product focused on landless farmers for the acquisition of land on ijara, as stated earlier in the case of fruit farms, and the provision of cash for the growth of crop. The crux of the product was the repayment in the form of crop rather than taking cash. It was observed that the client/farmer is not rich in cash during his crop cycles which makes the monthly of deferred repayment in cash difficult for the farmer however, the farmer/client is rich in crop at the time of harvesting. Therefore, the product was focused on the principles of salam wherein the crop is taken as a resultant of cash inputs, and as an extra input land was also provided in the form of ijara, for which the repayment is also taken in the form of crop.
What are the other major challenges that Wasil is facing as it continues in its journey towards Islamic microfinance? During my conversation with Sr Farida we could identify the following major issues that need to be tackled.
Wasil has not been able to access or raise shariah-compliant funds. The scale at which Wasil is presently functioning is lower than the actual potential of the organization due to the unavailability of funds. Further, the funding line currently available with Wasil is interest based. Therefore, while the asset side of the organization as of now is completely Shariah-compliant, the liability side contains the element of interest.
Wasil would like to develop new products according to the demands being received from public (e.g. housing) and this requires financial support. However, it has not been able to locate or access any capacity building grants for developing new Islamic products. Similarly, while the crop procured by salam transaction should be insured under takaful so as to refrain from losses in case of calamities, takaful charges must be revised so as to lower the operating cost of the organization.
There are a few legal impediments in the absence of an enabling environment for Islamic microfinance products. For instance,
- Under the Companies Ordinance 1984, companies registered as NPO under Section 42 of the ordinance are not permitted to do trade. Organizations working in Islamic microfinance are usually registered under this section of the ordinance. Therefore, the true implementation of Islamic microfinance is not possible.
- Registration of sales tax number is necessary for sale of goods to suppliers in the market. Due to non-allowance of trade, Islamic MFIs are not able to obtain a sales tax number, hence hindering their sales to the market in products, such as, istisna and salam.
- Certification of quality of the wheat collected by the organization through salam transaction must be done under the government testing laboratories. Wasil has no access to these facilities because the organization has no land in its ownership.
- Verdict on VAT (Valued Added Taxes) is required if an organization wishes to process the wheat acquired through salam to make flour.
- The government agencies in Pakistan cannot legally purchase crop of salam as the law require land ownership.
- Recovery Ordinance for Islamic MFIs must be made so as to ensure credit discipline and timely delivery of crop to the organization. This would induce a confidence level in the organizations to go forth with Islamic microfinance transactions
Finally, the demand side for an Islamic MFI like Wasil has its own challenges, emanating mainly from lack of financial literacy and awareness of the true spirit and rulings of the Shariah.
- Among all modes, only not-for-profit modes, e.g. qard-al-hasan are perceived to be Islamic by customers and stakeholders. All profit generating products are perceived to be un-Islamic, even though these are clearly permissible in Shariah.
- Zakat may be legitimately used to assist the salam clients who are forced to default on their payments due to genuine factors beyond their control, e.g. monsoon failure, as against deliberate and willful defaulters. However, there is a clear lack of enthusiasm among muzakki to contribute zakat for assisting such defaulters through Wasil, as the organization is perceived to be a for-profit one.
Wasil is an interesting story. Its path of transformation has many lessons for the stakeholders of Islamic microfinance sector. Its story clearly identifies the macro level, meso level as well as micro level challenges that must be addressed for the sector to grow. There are lessons for regulators in terms of how small and minor provisions or lack of them in the legal and regulatory framework can act as major impediments for the sector. There are lessons for government-run poverty alleviation programs to consider Islamic modes and shun interest-bearing placements with MFI who are changing in response to shifting ground realities. There are lessons for policy makers as well as meso-level players to enhance financial and Shariah literacy among the poor.
Mohammed Obaidullah | April 20, 2014