Islamic Microfinance Challenge: Profiling Tameer Bank, Pakistan

Winning project idea                                                                                                                                                                                                                                                         
At Tameer, we consistently hear a need for Islamic Banking products. Pakistan does not have any visible Islamic microfinance banks or institutions, so this is a critical project to move forward, albeit in a staged way to limit risk and cost and making sure that we apply new learning as we go. With the basic infrastructure in place, Tameer envisages a healthy Islamic Banking Portfolio. Eight products are expected to be launched; four on the asset side (Murabaha, Bai’ al ‘inah, Ijarah, Musharika), three on the liability front (current /checking account, Mudarba, Mudarba certificates), and one Takaful product (health microinsurance). 

A separate Islamic Banking Division will be created within Tameer to serve as the business managing unit for Islamic banking. This business unit will have dedicated front end staff both at the head office as well as in all the dedicated Islamic banking branches and Islamic business desks in the conventional branches. All back office and support services like HR, Audit, and Financial Control will be shared between the conventional and the Islamic bank. A senior level Shariah Advisor, reporting directly to the CEO, will help structure banking products that are in compliance with Shariah principles.

Innovation                                                                                                                                                                                                                                                                   
Tameer appreciates the fact that for any plan to be successful, it requires effective marketing, so we are looking at two parallel marketing tracks:

Above-the-line: Mass media campaigns will be run introducing Islamic Products. Deposit products shall be focused upon more initially with gradual introduction of the whole array of shariah complaint loans within a period of six months.

Below-the-line: Since Tameer focuses upon the un-banked population for their socio-economic empowerment, we have some experience in below-the-line marketing. So for Islamic Banking, for example, we will be conducting activities that include an Islamic Bachat event. Brochures and pamphlets will be distributed at meetings in places of congregation in densely populated areas that are not currently included in the banking sector.

Islamic Portfolio: Achieving financial sustainability with Islamic products                                                                                                                          
Islamic microfinance is meant to provide certain sections of the society with an opportunity for financial inclusion that otherwise stay out of it on religious grounds. When looked at from the overall business plan perspective, this initiative is of strategic importance to Tameer Bank; hence, we are not aiming for quick wins. Tameer views Islamic Microfinance as a journey which will take investment and patience to gain the trust of the target segments.

Below is a snapshot of the projected growth of Islamic Microfinance portfolio and the performance indicators.

With an average loan size of USD 200, the net Islamic portfolio is expected to grow many-fold: within three years of launch in 2011, we estimate growth for Islamic portfolio from USD 0.7 million in 2011 to USD 7.8 million in 2013. The growth in portfolio will be aided by deposits which could reach USD 7.76 million in 2013 – a growth rate of 558% since 2011, making the ratio of portfolio to deposit a very respectable 1.02.

On the profit and loss front, total revenue to 2013 is expected to stand at USD 1.6 million, with total net income of USD 0.86 million.

Starting from just 1,750 borrowers in 2011, Tameer plans to reach over 36,000 borrowers in 2013. Women borrowers will constitute about 29% of the Islamic portfolio on average, outmatched by the 39% of the women savers out of a total of 76,000 for the year 2013.

With operational sustainability more than 200% for 2013, and financial sustainability averaging at around 129%, the model so proposed is expected to have a healthy Return on Assets (ROA) of 9% and Return on Equity (ROE) of 62%.

Scaling up in Pakistan                                                                                                                                                                                                          
By the end of 2013 there will be one fully operational Islamic branch along with nineteen Islamic counters of Tameer at existing branches offering Islamic deposit and loan products.

Once the counters have been introduced, a hub-n-spoke structure will connect a single counter in a branch to ‘sales and community center(s)’ which will also act as marketing and selling vehicles for Tameer’s Islamic Banking portfolio.

Introducing Islamic products through counters in existing branches, instead of entire dedicated branches will help reach out to many more potential clients. The Islamic product, however, will not blend with conventional products as the former will adhere strictly to Islamic principles. Tameer plans to change the geographical locations of the counters or convert branches to Islamic branches at a later stage, depending on demand.

Concept of Syariah Microfinance

Syariah microfinance institutions or Syariah MFI are  financial institution that providing financial services to micro-enterprises and low-income communities, based on syariah or islamic economics constitution. The purpose of this such programs are :

• The poor / micro businesses can obtain financial services (savings and loan) that is suitable to develop the business and the welfare of his family.
• Rural economy can grow faster.
• Poor families as members of Islamic Microfinance Institutions (MFIs) have benefited from the excess income.   
• Supporting business opportunities / new jobs in rural areas.
• Opening the growth of an entrepreneurial spirit.
• Build a sense of solidarity among fellow citizens.
• Build a disciplined saving habits.    

Syariah Microfinance Institutions ( in bahasa its called LKMS ) consists of variousinstitutions such as BPRS (Islamic Micro Credit Banks), BMT (Baitul Mal Wat Tanmil),and Syariah Cooperative. That three institutions has close relationship and influence eachother and closely related to other Islamic institutions greater.
Here are some explanations about the BPRS, BMT and Syariah Cooperative :

•  BPRS (Bank Perkreditan Rakyat Syariah)

BPRS is a bank transaction systems using conventional means but based on Islamic principles. The form of payments to commercial banks and rural banks can be form of Limited Liability Company (the Company), Regional Corporations and Cooperatives. BPRSyariah operational mechanisms are subject to BI regulation No. 6/17/PBI/2004 . In this rule Syariah BPR efforts are: 

Raise funds from the public in the following ways:

•  Savings based wadi'ah or mudaraba principle;
• Time deposits based on the mudaraba principle;
• Other forms that use wadi'ah or mudaraba principle;

Channelling funds in the following ways:

• Buying and selling in the activity using the principles of murabahah, isthisna andsalam;
• Lease transactions grounded in the principle of Ijarah;
• Funding for results based on the principle: mudaraba, and Musharaka;
• Funding is done on the principle qadrh 

Perform transaction does not violate laws and principles of Islamic banking.

• BMT (Baitul Mal Wat Tanmil) 

Definition of BMT in language is Baitul Maal and Baitul  tanwil. Baitul Islamic financial institutions which have major activities raise and distribute funds ZISWAHIB ( zakat, infak, shadaqah, waqaf dan hibah) without seeing gains (non profit oriented ). Baitul tamwilincluding Islamic financial institutions in the informal activities and operationally accountprofits (profit oriented). The main activities baitul tamwil is to collect funds and distributeto members in return for results or system that is based mark-up/margin sharia. 

The background of the BMT establishment  is as follows:

1. People that considered not bankable (so hard to get funding, if any costly sources of funds)
2. To give an empowerment and business development through mosques andMuslim surrounding communities.

• Syariah Cooperative

Implementation of Islamic pattern based business started in 2003, as many as 26 KSP /USP-Cooperative Sharia. Then increased to 100 KSP / USP Islamic cooperative in 2004.2007 is expected to reach 3000 number of cooperative Islamic sharia units. Cooperativeenhancement continues to increase, until the end of 2010 more than 4,000 cooperatives in the community, which is scattered in all parts of Indonesia. 

Syariah Cooperative Implements some aspects in carrying out its activities in order toserve its members, as well as aspects of the balance principle, the principle of justice,principles togetherness . 

• For example in production where production in the cooperativeproduces something that can be utilized by its members or the public, the banking arrangements in this regard has been implemented principle of justice.

All banks, Islamic financial services cooperatives and Islamic financial services unitallowed to raise funds from members and the community in the form of savings deposits,time deposits in mudaraba financing, Musharaka, murabaha, salam, istisna, ijara andalqadr. In addition to the activities of financial cooperatives also allowed running thecollection and distribution of zakat, donation, and the charity to people in need and worthy.Include also waqf which is managed separately. 

The Types of Akad in Islamic Microfinance

Contract (akad) is a legal act that involves two or more parties, which perform the agreement. Islamic Doctrine emphasize that all transactions are carried out by two or more parties, should not be distorted and should be in line with the Sharia (Islamic law). Islamicfinancing agreement contracts are divided based on several criteria, they are:

1.       Based on the principle of deposit or savings (Depository)

-          A-wadi'ah
Wadi'ah represent deposits of goods or funds to another party who is not the owner for security purposes.

2.       Based on the principle of profit sharing (profit sharing)

-          Al-Musyarakah (Partnership)

Al-Musyarakah is a partnership agreement between two or more parties to a particular business in which each party contributes funds or charity with an agreement that the benefits and risks will be shared in accordance with the agreements.

-          Al- Mudharabah (Financing Trust, Investment Trust)

Al-mudaraba is a business cooperation contract between two parties where the first party (shahibul mal) provides the entire (100%) of capital, while others become managers. Mudaraba business profits are divided according to the agreement set forth in the contract, while if the loss is borne by owners of capital loss was not due to negligence of the manager. If the loss was caused by fraud or negligence of the manager, the manager should be responsible for the losses.

-          Al-muzara'ah (Harvest-Yield Profit Sharing)

Al-muzara'ah is the processing of agricultural cooperation between landowners and tenants where the landlord gives to the tenants of agricultural land to be planted and maintained in exchange for a certain portion (percentage) in harvest.Al-muzara'ah often synonymous with mukhabarah. There is little differencebetween the two as follows. Muzara'ah: the seed of the land owners, whilemukhabarah: seeds of tenants.

-          Al-Musaqah (Plantation Management Fee Based on Certain Portion of Yield)
Al-Musaqah is a simpler form of muzara'ah where the tenant is only responsible for watering and maintenance. In return the tenant has the right to a certain ratiofrom the harvest.

3.      Based on the principle of Buy-Sell (Sale and Purchase)

-          Murobahah

In Shariah economic institute an existing transactions are sale and purchase transactions / murobahah. This transaction enables the buyer to make an offerwhile the price of the Cooperative as the seller has the right to determine the initialprice. With the agreement of both parties, the goods desired by the buyer can beobtained by cash payment system / cash or credit.

4.      Based on the principle of Rent (Operational Lease and Financial Lease)

-          Ijarah

Ijarah is a transfer of rights to the goods and services for the wages paymentwithout being followed by the transfer of ownership the item itself, in other wordsijarah is taking advantage of an item with the replacement of a certain amount ofrent wages.

5.      Based on the principle of Services (Fee-Based Services)

                  This principle covers entire service non-financing which given, such as :

-          Wakalah
Wakalah means representing or submit any work or business to another person to act on behalf of people who represent the problem and specified time.

-          Kafalah

Kafalah means shifting the responsibility of someone who is guaranteed withadhering to the someone else's responsibility as a guarantor

-          Hawalah

Hawalah is the transfer of debts from people who owed to others who obliged tobear it.