ENHANCING FOOD SECURITY WITH
ISLAMIC MICROFINANCE
Insights from Some Recent Experiments
4th Global Islamic Microfinance Forum
1st November 2014
Islamic Social Finance Report
How can Zakat and Waqf be integrated with Microfinance to enhance Food
Security?
1.
Dompet Dhuafa Indonesia
2.
Wasil, Pakistan
3.
Abu Halima, IRADA, Sudan
4.
Wad Balal, IRADA, Sudan
5.
Strategic Food Reserve (IRADA), Sudan
6.
Summing Up
2
1
Dompet Dhuafa Republika
Community Empowerment Model for Farmers (P3S)
The Problem
 Limited land
 Declining soil fertility
 High input prices
 Limited capital
 Human resources with low and limited
skills
 Fluctuating crop prices
 Continuously declining terms of trade
3
1
Dompet Dhuafa Republika
Community Empowerment Model for Farmers (P3S)
The Program
 Introduction to integrated and
environment-friendly farming
 Holistic approach involving adjustment of
cropping patterns
 Change in farmers’ attitude and preference
from conventional farming to green
farming system
 Gradual assistance, guidance for
production facilities that are safe, locally
made and affordable
4
1
Dompet Dhuafa Republika
Community Empowerment Model for Farmers (P3S)
The Program
 Finance: funded by zakat; lease of land &
loans to cover working capital for one
growing season
 Technical guidance to and capacity building
of farmers
 Agricultural production facilities (saprotan)
to produce bio pesticide that is local-based,
affordable, and environment friendly
 Marketing support
5
1
Dompet Dhuafa Republika
Community Empowerment Model for Farmers (P3S)
The Empowerment Process also involves:
 Helping farmers get organized as formal
communities - combined farmers groups
(gapoktan)
 Exit when gapoktan have developed the
capacity to manage the formal
organizations independently
 With partnerships with other
stakeholders in place
 Improved bargaining power towards
market structure
 Savings of produce through the FGs
6
1
Dompet Dhuafa Republika
Community Empowerment Model for Farmers (P3S)
Preparation
Socialization
Group Formation
Business
Financing
Organization
Formation
(GAPOKTAN)
Assisting
Monitoring &
Evaluation
Exit Strategy
7
2
Wasil
More value through better products
The Problem
 93 per cent of 5.1 mil farms are small and
marginal accounting for 60 per cent of the total
cultivated area
 About 70 percent of farmers participate in the
credit market; source funds from middlemen
 Farmers believe that they can save up to 25
percent in costs if they purchase inputs on cash
 Farmers usually return the money after the sale
of the crop
 Farmers are traditionally skilled but lack capital
8
2
Wasil
More value through better products
The Program: Salam Financing
 Finance for small farmers who need money to
grow their crops and to feed their families up
to the time of harvest
 Payment of agreed price in advance against
commitment to deliver agreed quantity of
produce
 Lower cost compared to other alternatives
 Collateral in the shape of guarantee from
community members or charge on whatever
available assets available with the farmer, e.g.
livestock.
9
2
Wasil
More value through better products
The Program: Ijara Financing
 Wasil takes agriculture land on ijara from the
owner of the land
 Wasil sub-leases it to a farmer for agreed period
of time
 In case of fruit/vegetable/flower farms, the
farmer pays monthly rental to Wasil Foundation
as agreed at the time of the contract
 In the case of wheat or rice, the farmer pays in
the form of crop to Wasil Foundation as preagreed.
10
2
Wasil
More value through better products
The Program: Master Ijara Financing
 Combines the concepts of Ijara and Salam
and bases the whole return on the principles
of salam
 Farmer gets land on rental as well as cash to
grow the crop and agrees to deliver a given
quantity of the crop to Wasil
 The subsequent cycles of financing are based
on salam alone.
 After two additional salam cycles the contract
comes to an end.
11
3
IRADA Microfinance
Financing the value chain
The Problem
 Dwindling agricultural production
 Reduced livestock production and
productivity
 Adverse effect of climate change
 Conflicts created over the use of scarce
natural resources, land access
 Economic factors that affect the
livelihoods of the various groups
 Need for institutional strengthening
12
3
IRADA Microfinance
Financing the value chain
A Partnership to create and nurture partnerships
 Provide financing to farmers who need
productive assets for developing income
generating activities or overcome shortterm cash needs to smoothen
consumption
 Assist clients procure the required
physical assets, while developing bank’s
own capacity for sourcing the common
assets
 Undertake investments to support the
funded micro projects, e.g. retail centers,
warehouses, purchase collection centers
and others.
13
3
IRADA Microfinance
Financing the value chain
A Partnership to create and nurture partnerships
 Safety net to clients till the project starts
generating adequate returns
 Use of zakat for the indebted
 Murabaha financing at modest 15
percent
 Declining Mudharaba ending with
ownership of project by beneficiaries in a
finite time period
 Extensive business development services
14
3
Abu Halima, IRADA
Financing the value chain
Financing Green Houses
1
Min. of Finance
10
IRADA - BoK
3
2
Min. of Social Affairs
9
Graduates
4
5
6
Tech Consultant
Abu Halima
Sana Hypermarket
Min. of Agriculture
7
8
1. Financial partnership between Ministry of
Finance and BoK
2. Nomination of agriculture graduates for
the project by Ministry of Social Affairs
3. Mudaraba agreement between IRADA
(BoK) and the microentrepreneurs
(agriculture graduates)
4. Setting up of Abu Halima greenhouses
5. Technical consultancy to
microentrepreneurs
6. Technical consultancy to greenhouse
establishment and operation
7. Provision of fertilizers and other services
by Ministry of Agriculture
8. Sale of vegetables output to Sana
Hypermarket and others
9. Sharing of profits (40% for 5 years and
100% after that) by microentrepreneurs
10. Sharing of profits (60%) by IRADA-BoK
for 5 years
15
Wad Balal, IRADA
Financing the value chain
Financing Cattle Fattening
1
IRADA - BoK
Wad Balal Company
8
2
3
Wad Balal
Association
Fattening Facility
4
5
Farmers
6
Tech Consultant (WBC)
7
OVERSEAS MARKET
4
1. Diminishing Musharaka Agreement
between BoK and Wad Balal Company
(WBC) to create Fattening Facility
2. Bok helps farmers form Wad Balal
Association (WBA)
3. Murabaha agreement between BoK and
farmers represented by WBA to finance
purchase of calves
4. Ijara agreement between Musharaka and
WBA to use Facility in lieu of payment of
rentals
5. Use of fattening facility by farmers to
make the calves grow
6. Technical consultancy and training by
WBC
Delivery of cattle by farmers to WBC
7. Sale of cattle by WBC in overseas
markets
16
5
IRADA Microfinance
Ensuring Food Sovereignty
Financing the Building of Strategic Food Reserve
 To efficiently purchase goods from farmers for
sale to the Government of Sudan’s strategic
food reserve
 To replace the middleman and to give farmers a
better price for their produce based on official
advance purchase rates determined by the
Ministry of Agriculture
 To ensure that the farmers incomes will
increase and more farmers will be motivated to
produce for livelihood instead of only for
subsistence
17
5
IRADA Microfinance
Ensuring Food Sovereignty
Financing the Building of Strategic Food Reserve
 In collaboration with Ministry of Agriculture,
Ministry of Social Welfare, Zakah Chambers,
World Food program
 Salam financing with a tenor of max 8 months
 Target beneficiaries: 73,000 smallholders under
878 Farmers Association in 7 states (23,677
through direct contract, and 48,396 through
Mudaraba with other commercial bank)
 Technical feasibility study and linking the
farmers with other partners (Bank of
Khartoum)
18
5
IRADA Microfinance
Ensuring Food Sovereignty
Financing the Building of Strategic Food Reserve
 Technical assistance for product quality (Min. of
Agriculture extension service)
 Food for farmers during the planting period (World
Food Program)
 Grouping the farmers to associations (Farmers Union,
IRADA)
 Coordination and monitoring of partners activities
(IRADA)
 Building the capacity of farmers group in
management and follow up (Min of Agriculture
extension, IRADA)
 Link farmers to local, regional, and global market
(IRADA)
19
6
Summary
Insights from Case Studies
How can Islamic MF enhance food security?
 Is salam financing the best we can offer in the field of agriculture for
greater outreach?
 Partnership-based agri-finance may require large upstream investments;
perhaps placing them in a distinct category of social impact investment
and not in that of microfinance (USD12K for Abu Halima)
 Can the upstream investments be taken care of in full or in part through
awqaf?
 Impact of zakat on wilful default need to be studied
 Search for new solutions must continue
20
Thank you
Send your feedback to:
Dr. Mohammed Obaidullah
YTI Chair Professor, Universiti Sains Islam Malaysia
Senior Economist, Islamic Research and Training Institute
Islamic Development Bank Group, Saudi Arabia
E-mail: mobaidullah@isdb.org | m_obaidullah@usim.edu.my