A Study into the “Non-Formal & Voluntary Banking Services” of SIBL
Chapter-Four: Main Study
Non-Formal Banking Services
Family Empowerment Micro-Credit and Micro Enterprise Social
Financing Line of Islamic View To Local Islamic Banks and
Alleviation of Poverty
Micro-credit and Micro-enterprise refers to programs that are poverty focused
and that provide financial and business services to very poor persons for
generation of self-employment and income. Credit is a powerful instrument to
fight poverty. The role of micro-credit in reducing poverty is now well
recognized all over the world. It is no longer the subject matter of micro-credit
practitioners alone. Governments, donors, development agencies, banks,
universities, consultants, philanthropists and others have increasing interest in
it.
4.0 Setting of the Problems and Objectives
The family is a basic foundation of human society. The foundation of a
family is laid through marriage and the relationship between husband
and wife is viewed in Islam as that of a garment and its weaver; it is a
civil contract, imparting mutual rights and duties. The management of
Micro-Credit and Micro Enterprise Social Financing Schemes can alter
this traditional role of the family.
Credit Transfer Power: Credit can transfer power to powerless and
help alleviation of poverty: It can reinforce power of the powerful and
help in concentration and inequitable distribution of income and thus
aggravating the poverty. Seen from this prospective, it can empower a
family or disintegrate it. So the management of Micro-Credit and Micro
Enterprise Financing have profound impact on Micro economic
sociology of the family involving the individual in the family,
organization and activity within the family and the relationship among
family member consisting mainly of husband, wife and children as well
as Macro-economic sociology of the family involving interchange and
transactions between the family and society in which it operates.
Because family are linked together with other social structure in
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extended family, neighborhood, villages, communities, kinship groups.
The family performs a vital part of the function essential to the
individual and group life.
Despite the fact the corporation replaces the family in the production of
mass consumption goods and services in the industrial society, the
family still perform a member of important economic functions. The
many farms that were operated as family enterprises, new enterprises
in business and industries often began as family enterprise. Often
capital came to be drawn from family holdings and business expanded
by family financing. Most of the small and medium-scale business and
industries in the developing countries have been family enterprises.
Apart from this, family is one of the major consumer units in any
society. One way to create new markets is by changing the habit of the
consumers through efficient marketing method: installment of buying
and selling is an important aspect of family economy inter-change.
Similarly, rotating family savings schemes can be used in diverse
family economy interchange activities. In Bangladesh, there are at least
15 million families living below poverty line. They can hardly enter into
market.
4.1 The Frontiers of Family Empowerment Credit Programs Through
Islamic Non-formal Banking
Generally speaking, the family empowerment credit programs come under
Non-formal Banking. Non-Formal Banking deals with informal finance in non-
corporate sector. The popular view of informal sector activities is that they are
primarily those of petty traders, street hawkers, and shoeshine boys and
confined to employment on the periphery of the main urban areas. On the
contrary, informal activities are the way of doing things, characterized by: (1)
ease of entry; (2) reliance of indigenous resources; (3) family ownerships of
enterprises; (4) small scale of operation; (5) labor intensive and adapted
technology; (6) skills acquired outside the formal school system; and (7)
unregulated and competitive markets.
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One important characteristic of the formal sector is its relationships to the
government. Economic activities formally and officially recognized. They
obtained the direct benefit of access to credit, foreign exchange concessions,
work permit and a formidable list of benefits that reduce the cost of capital in
relation to that of labor. Partly because of its privileged access to resources,
the formal sector is characterized by large enterprise sophisticated
technology, high wage rates, high average profits and foreign ownership.
The informal sector on the other hand , is often ignored and in some respects
helped and in some harassed by the authorities. Enterprises and individuals
within it operate have no access to the formal credit institutions. The evidence
suggests that the bulk of employment in the informal sector is economically
efficient and profit making, though small scale. As indicated earlier these non-
corporate sector which covers small scale producers and enterprise traders,
small farmers and low income and middle groups of people account for 30-
70% of the labor force in some developing countries.
It is to be recognized that the top income groups to the working poor would
result in new types of labor-intensive investments in both urban and rural
areas. This should not only generate demand for the products of the non-
formal sector but also encourage innovations in labor-intensive techniques in
this sector. This is where Islamic Bank must make a conscious and planned
intervention. The difference of wealth and income between urban and rural
area draws migrants towards the urban concentrations, not the spread of
wealth.
It is to be mentioned here that a small farmer or a small entrepreneur having
no access to institutionalized source of credit establishes semi-permanent
relations with suppliers and buyers, frequently at the expense of his profit and
become hesitant to innovate, particularly in agriculture, for, he cannot take the
chance of failure. These characteristics behavioral response are not inherent
in the informal sector, they are adaptive responses to low income.
In this context it becomes imperative for the Islamic Banks to work in the non-
corporate sector. There are number of approaches which have been tried
elsewhere can be adopted or adapted by Islamic Banks. Let me say a few
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words about Group Lending Schemes and Rotating saving and credit
Associations.
Group Lending Schemes:
Group lending is one of the most popular forms of informal finance. The funds
for group leading schemes can come from a commercial bank, a government
development Bank or private institutions. The role of the group varies. The
idea is that by joining together, small borrowers can reduce the costs of
borrowing and improve their access to credit. The two most common means
of providing group accountability are (a) Joint and several liability and (b)
limited liability.
Rotating savings and credit Associations:
Rotating saving and credit associations (ROSCAs) are a popular form of
informal finance. They have various aliases: tanda in Mexico, pasanaku in
Bolivia, san in the Dominican republic, syndicate in Belize, gamaiyah in Egypt,
isusu in Nigereia, susu in Ghana, tontine in Niger, hagad in Somalia, zitique in
Mozambique, arisan in Indonesia, paluwagan in the Philippine, shit in India
and Srilanka, pia huey in Thailand, hui in China, kye in Korea and ko in
Japan.
ROSCAs intermediate in the most basic way. A small number of individuals,
typically six to forty, form a group and select a leader who periodically collects
a given amount ( a share) from each member. The money collected (the fund)
is then given in rotation to each member of the group. In some countries, such
as India and Cameroon, ROSCAs have evolved into formal banks. Three
types of ROSCAs are found in many countries, In common ROSCAs, the
leader receives no special consideration (other than possibly getting the first
fund).
4.2 Family Empowerment Social Financing Programs of Social Islami
Bank Limited.: An Analytical and comparative Review
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To the best knowledge, SIBL is the only Bank in Bangladesh, Perhaps in the
world which started with the very phase, “ Targeting Poverty”, which starting
its objects in Memorandum and Articles of Association for achieving a goal of
participatory economy for a caring society. Clearly, this bank intends to
implement Micro Credit and Micro Enterprise program much beyond the
scope of market economics as indicated earlier.
SIBL is indeed a concept of 21st century participatory three Sector Banking
model in one: in the formal corporate sector, it would work as an Islamic
participatory Commercial Bank with human face approach to credit and
banking on the basis of profit and loss sharing; it is a Non-formal Banking with
the poor in non-corporate sector dealing with informal finance and credit
package that empowers and humanizes real poor family and create local
income opportunities and discourage internal migration; it is a Development
Bank intended to monetize the third voluntary sector, committed basically to
financing development and management of Waqf and Mosque properties as
well as Non Muslim Trust properties. In the process, this Bank intends to
empower and humanize the family as a basic unit of the society.
Experience indicates that successful family empowerment credit program or
group lending schemes, under Non-formal Banking of SIBL works well with
groups that are homogeneous and jointly liable for defaults. The practice of
denying credit to all group members in case of default is found to be most
effective and least costly way of enforcing joint liability. Group lending
arrangements without collateral are less subjective to the dangers of portfolio
concentration because Bank is diversifying lending by serving a varied
clientele in different areas under its family empowerment credit arrangements.
Bank also is ensuring joint liability of wife and husband in cse of lending to
family or groups of families. It humanizes family and discourages internal
immigration. Any attempt to decompose family through various credit and
financing schemes in its ultimate analysis bound to generate the forces of
disintegration of families, internal migration, child delinquency, social
alienation and social conflict. Any credit program which does not manage its
socio-economic consequences cannot alleviate poverty. Besides Bank has
already introduced Rotating Family Savings and Credit Net and Group
installment credit scheme for any group of individual? In the light of this
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experience, SIBL is also in the process of developing program to assist
Agriculture co-operative in providing tailor-made credit package to achieve
their objectives in rural settings.
In case of Non-formal banking operation, it is the bank which goes to the
clients, organize and motivate them into viable income generating household,
family or groups. In an effort to achieve the corporate objectives of SIBL, it
has under its Non-formal Banking sector, started implementing (a)
Environmental friendly business program with small traders of Tokai (mainly
street children of distressed parents) with recovery rate of 100%, (b) Real life
Tokai Non-formal school of management, (c) empowerment and humanizing
family credit program involving modest investment with beneficiaries around
12,000 in various parts of Bangladesh in a modest scale. A serious beginning
has been made. More than 40% of investment partners of SIBL are from Non-
formal sector indicating its commitment to reach the poor family at the grass
root level.
4.3 Family Empowerment Social Credit: A Comparative Review
It is apparent from the operations of SIBL that it works on a fundamentally
different approach and socio-economic philosophy compared to other major
Banking. Financial and Non-Banking Financial Institutions (NBFIs) i.e.
Grameen Bank and Non-government Organization (NGO) operating in
Bangladesh for alleviation of rural and urban poverty. While Grameen Bank in
Bangladesh intends to empower the women, as opposed to man (as over
95% of its clients are women) and most of the other NGOs intend to empower
the poor, as opposed to rich, they are heavily dependent on foreign loans,
aids and grants and work on high interest rate basis on implicit assumptions
of social class conflict, whilst the SIBL intends to empower the family as a
basic social unit and generate its own internal resources through re-
empowering, institutionalizing the various Islamic obligatory and voluntary
tools of redistribution of income, humanizing formal and non-formal sector as
well as monetizing the voluntary sector of the economy. SIBL intends to
involve both man women, rich and poor in poverty alleviation programs
and to work on participatory basis on the implicit assumptions of social
class harmony. Clearly, it implements its programs with economic and social
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transparency without dependent on foreign aid or grants. In fact, a real value
added of this bank lies in its power of new thinking for socio-economic well
being of people at the grass-root level, strengthening family values and the
moral foundation of the society.
“By teaching the women to be „independent‟ and „defiant‟ with their husbands,
voluntary organizations are presumed to be undermining the family. Religious
groups argued that the NGOs work with women was a form of cultural
intersection imposed through western immaterialist and secular values. When
people‟s identity and culture are threatened, they often react by going back to
their roots”.
At this stage social investment and social charity and welfare need to be
clearly distinguished. There is confusion between Islamic Social Investment
and Islamic Charity. What Islamic Bank should do is social investment with
built-in provision for social subsidy. While the phrase “Social “social welfare”
has been overused or misused in most cases, the concept of Social
investment is not properly understood in popular discussion. The social
investment in a project refers to a process of investment which should enable
is target group or its beneficiaries to develop the sustaining capacity even
after withdrawal of the support by the sponsoring agency. The grant in aid
element in such investment or credit package needs to be consciously
designed so that sustainability and accountability remain transparent. The
absences of such criteria are generally found in the most social charity and
welfare.
The experience suggests that social welfare projects sponsored by most of
the NGOs in Bangladesh and elsewhere in Muslim countries tend to create a
built-in dependency. Once the support of the NGOs are withdrawn or the flow
of aid stops for one reasons or another, this project cease to exist or make its
beneficiary worse off in the sense that discontinuation of support push them
back beyond their original level of living. Here adjustment process is painful
and tends to generate social stress, tension, alienation and protest. Eventually
this vulnerable groups turns into a class of alienated people, most likely to
commit social crime in both rural and urban setting.
At this stage, a comparative review of SIBL approach and approaches of
other Non-banking financial institutions and NGOs as outlined in Table-I for
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social investment will be useful and suggestive. The following table will show
that ongoing micro credit and micro enterprise programs of SIBL is indeed
fundamentally different and deeply rooted in shariah compared to Non-
Banking financial institutions and other NGOs approaches, operating in
Bangladesh.
Table-4.0: Comparison between SIBL approach and NBFIs approach
Sl. No SIBL Approach NBFIs and NGOs Approach
1 Micro-credit for empowering Micro credit for decomposing and
family: ensuring joint liability of eventual disintegration of the
wife and husband in case of family.
lending to family or groups of For example: Grameen Bank‟s
families without collateral credit empowers women as
opposed to man (i.e. over 98% of
its clients are women)
2 No ceiling and floor: Micro credit Main criterion for membership in
covers hard core poor also many NGOs disbursing loans is a
(street children in the urban ceiling on land holdings of no
slump and is tailor make) more than half an acre and on less
real in practice and a floor level of
income
3 Credit linked to culture as Credit is interest based, not in
rooted in Islamic values conformity with shariah
provisioning for perpetual social
capital accumulation
4 Credit provisioning on a nominal Interest rate is 25% to 35% for the
profit or non-profit basis (i.e. flat poor. In many cases defaulters are
rate 08% and public health forced to sell their meager assets
credit @ 5% per annum. or to go to local money lenders
At present formal Banking who could charge up to 120 %
expected profit/return rate interest
varies from 14.5% to 18%
5 In the event of loss there is a There is no such provision of
provision for sharing the loss sharing of loss rather there are
and schemes to upscale their reports of ruthless force to
operations defaulters
6 Providing deposit savings and This facility is limited in scope and
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investment services and coverage
schemes to upscale their
operations
7 Assisting Micro credit/enterprise Working on the household and
with provision for credit access does not provide credit access to
to the formal Banking of SIBL, formal Banking
thereby allowing the poor to
cross the frontiers of Non-formal
Banking
8 Credit based on depositors fund 75-100% based on external grant
and no external grants/loan
9 Recovery of loan about 97% Recovery reported to be 95-97%
confirmed by external audit
10 Financial accountability subject They are not subject to such
to scrutiny by statutory external control
auditors and central Bank
4.4 Micro-credit line of Social Islami Bank Ltd.: Selected issues and
Problems
Currently SIBL is investing a maximum amount of TK. 25000/-
equivalent to US$ 500 per family without collateral security under Micro
Credit programs as permissible by the central bank of the country. This
amount is considered insufficient for the purpose of crossing the border
of poverty line. The credit ceiling should be raised to at least US$
1000/- per family. The maximum amount of TK.2.5 Lac equivalent to
US$ 5000 is allowed for investment per micro enterprise borrower
under existing Banking Law. This ceiling of investment for Islamic Ban
in other countries will of course vary depending on the stage of the
development of the country, is per capital income and other related
socio economic indicators.
While the NGOs lend maximum amount of TK. 5000/- only equivalent
to US$ 100 per person. With this meager amount none would
overcome the boundary of poverty. Hence all their clients tend to movie
in the same circle. In Bangladesh there is at least 15 million poor
families which can be covered under micro credit program in phases.
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In this context, the following five operational issues of SIBL can provide
insights for strategic alliances and business net working among IDB
and Islamic Banks:
a) There is fund constraint for desired expansion of the program in
consideration of the fact that central bank of Bangladesh allows
commercial bank to invest a very small part of the total deposit
in this area
b) The cost of fund invested in current micro credit program is
relatively high not only due to supervision cost but also
utilization of depositors money which affects SIBL‟s rate of profit
to depositors
c) SIBL has not yet received any grant or concessional fund for
financing its current micro credit projects
d) SIBL has flexibility in managing the fund, if received. The bank
can make direct investment in micro credit and micro enterprise;
it can supervise investment through NGOs or it can undertake
such projects on co-financing basis or any other basis mutually
agreed
4.5 FAMILY EMPOWERMENT MICRO ENTERPRISE PROGRAM
SOCIAL ISLAMI BANK LIMITED is a three sector joint venture shariah based
bank integrating Formal, Non-formal and Voluntary sector Banking. Become
operational on 22nd November, 1995 besides, Formal banking aiming at
achieving the corporate objective of the Bank the family empowerment micro
enterprise program is operated through Non-formal sector Banking.
Family Empowerment Micro-Enterprise program is introduced to enhance the
socio-economic condition of the potential entrepreneur, small and medium
Businessmen, successful Micro-Credit graduate into Micro-Enterprise
program through income generating activities.
4.5.0 Objectives:
To promote and to develop Micro and small enterprise to generate
employment on a self-sustainable basis
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To create savings habit and to provide investment resources to the
potential entrepreneur to increase their business who have no access
to the formal banking
To provide necessary investment to new entrepreneurs who want to be
self-employment
To enroll the successful Micro credit graduate into Micro enterprise
program
4.5.1 Target Group:
New entrepreneurs or existing small businessmen having no collateral
and those who cannot expand their business due to shortage of capital
Ongoing small businessmen having ownership/possession of
firm/farm/shop or any other holdings
Micro-credit graduate, who are interested to expand their business
4.5.2 Ceiling of Investment:
Collateral security is not required for investment ceiling upto TK.
50,000/-. However guarantee of two solvent persons are required
Collateral security to be obtained for investment ceiling above TK.
50,000/= up to TK.2, 50,000/=.
4.5.3 Procedure of Investment
Each selected client have to open a mudaraba savings accoung (MSD
A/C) or Al-Wadiah Current Deposit Account (AWCD A/C) with SIBL
Each client-businessman should obtain trade license from the
concerned authority
Each Businessman/Entrepreneur having experience of at least one
year will be given preference to avail of the investment facilities
The equity ratio of all the entrepreneurs is usually 80:20. The
entrepreneurs having equity ratio 60:40 will be given preference
The clients who have performed their Micro-credit investment
satisfactorily, will be given preference to promote their business in
Micro Enterprise program provided they are in a position to fulfill the
criteria of this program
Every selected client/entrepreneur interested to avail these
investments may apply in Bank‟s prescribed form
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The payment of the investment will be made directly to the suppliers of
the goods by account payee cheque/payment order against invoices (
in name of the bank) showing the goods supplied
4.5.5 Profit and other Charges:
Rate of Profit: 11% per annum (approximate)
Risk Fund: 1% per annum on the net investment
4.5.5 Security:
Under this program, collateral securities in the form of Mortgage against
properties and or 3rd party personal guarantee are needed.
In case of investment up to TK.50,000/- goods (raw materials/finished
goods/machineries) will be treated as security
In case of Investment exceeding TK. 50,000/- collateral security in the
form of equitable Mortgage shall be obtained as Bank rule
In all cases clients must sign bank charges documents i.e. promissory
note etc.
4.5.6 Purpose of Investment:
Client will have the liberty to choose the purpose relating to small and medium
Enterprise either from the following projects or any other suitable projects
under Family Empowerment Micro Enterprise Program objectives:
Agricultural Projects
Poultry & live stock projects
Fishery projects
Processing & manufacturing projects
Transport & communication projects
Trading projects
Different types of small trading projects
Shop keeping projects
Medicine shop keepers projects
Sewing machine projects
Readymade garments projects
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4.5.7 Recovery of Investment:
Generally the repayment of the investment shall be made on monthly
installment basis. However, in special cases, repayment shall start depending
on the nature of investment subject to recommendation of the branch given
specific reasons.
Table-4.1: Family Empowerment Micro-Enterprise Statistics
Family Empowerment Micro-Enterprise
Particulars Year(amount in crore)
2006 2007 2008 2009 2010
Amount of investment 25.244 23.43 21.62 15.52 11.13
Amount Due 22.91 20.88 18.12 7.05 5.63
Amount Outstanding 3.46 2.78 4.41 7.25 0.502
Amount Recovered 21.784 20.65 17.21 8.27 10.628
Rate of Recovered 86% 88% 80% 53% 95%
From the above table no 4.1, we can see that the amount of investment has
been reduced significantly but the outstanding amount is very less. The
recovery rate and amount is significantly high, in the year 2009 the recovery
rate is low but in 2010 it is very much appreciable. SIBL has reduced the
Micro-enterprise investment amount.
Graph- 4.0: Family Empowerment Micro-Credit Program (amount of
investment in crore)
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SIBL, which started its journey with the inauguration of Micro-Credit program
in 1995 with three sector banking. From the above table it is seen that the
amount of investment in Micro-credit program has been reduced gradually. In
the year 2006 the amount of investment was 22.80 crore taka but in the year
2010 the amount came at 17.78 crore taka. This means that the investment
amount in Micro-credit program reduced over the year significantly due to the
Bank‟s investment diversification to the formal banking sector like corporate
banking.
Graph- 4.1: Family Empowerment Micro-Credit Program (amount of
outstanding in crore)
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From the table-4.1, it is seen that the outstanding amount in Micro-credit
program is very much lower over the years. In 2006 it was 4.66 crore and in
2010 it is 0.6883 crore taka and this indicate the intention of very good
repayment tendency.
Graph-4.2: Family Empowerment Micro-Credit Program (rate of
recovered)
The recovery rate of Micro-credit investment is very much satisfactory
over the years.
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Graph-4.3: Investment amount in family empowerment micro-enterprise
program
The above graph shows the reducing trends of investment in Micro-enterprise
over the years. In 2006 it was 25.244 crore taka but in the year 2010 it is
11.13 crore taka only.
Graph-4.4: Outstanding amount in Family Empowerment Micro-
Enterprise Program
In Micro-enterprise investment the outstanding amount is very much lower, in
2006 the outstanding amount was only 3.46 crore and in 2010 it was only
0.502 crpre taka. And this indicates that the poor class clients are very much
concerned for their repayment.
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Graph-4.5: Rate of Recovery of Family Empowerment Micro Enterprise
Program Investment
From the graph 4.5, it is seen that the recovery rate in Micro-enterprise
program investment is very much higher than any other investment like SME
and corporate investment. In 2006 the recovery rate was 86% but in 2009 it
was only 53 % due to the lack of the Bank‟s recovery initiative and
management initiative too. In this type of investment the recovery rate is
always high because this investment amount is less and the clients are poor
but honest and sincere to make repayment.
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