Participatory Micro Finance in India by SyedAhmad17


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									Introductory Slides on

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
 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
• 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?
                                  Participatory    Conventional
     Business Parameters
                                  Micro Finance    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
   A       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.
Investor                                                        Venture
   B                                                           Enterprise

                 Share subscribers of Joint Venture Enterprise
                 mutually distribute earned profit / loss (if
                 any) on pre agreed ratios as reward for
Investor         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

Entrepreneur /                   Receives profit in return of managerial
Fund Manager                                      efforts
faith for any business
 Provides capital on


  Financier /                        Receives profit in return of sharing
                                               business risks
Capital Provider
               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

                                             • Receives
• Supplier /                                   goods /
  Vendor            Banks / MFIs               assets from
  instantly                                    Banks /
  collects full                                MFIs on
  Payment         • Purchase goods /
                                               credit terms
  against           assets from Vendors /
  supply of         Suppliers                • Makes
                                               payment for
  goods /         • Adds Mark up Profits
  assets on                                    goods /
                    over purchased goods
  demand from                                  assets in set
                    / assets
  banks / MFIs                                 installments
                  • Sell goods / assets to
                    the client / customer
Suppliers /         on credit terms
                                              Client /
 Vendors                                     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            Financier /           • Receives the asset
  payment for                                      from the bank on
  tangible asset from         Bank                 terms of lease
  the bank /                                       agreement.
  financier against      • Purchases the         • Uses the asset and
  order.                   asset from the          pays rent to the
• Delivers the             manufacturer            financier as par
  tangible asset         • Leases out the          lease agreement.
  along with the title     asset to the          • After successful
  to the financier /       customer.               completion of
  bank against           • Receives total          lease agreement
  payment.                 lease amount in         may get the title of
                           installments .          the asset by paying
                         • May transfers the       the title fees to the
                           title of the asset      financier.
                           after completion of
Manufacturer               lease agreement if      Customer /
                           sought by the          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

                        Delivers specified units after
                        manufacturing / developing as per
                        specification to the bank / finance       Builder /
     Finance            company.
    company /                                                  / Processing
      Bank             Receives payments in advance
                       from the banks or finance
                       company to manufacture / develop
                       specified unit / s on specific terms.

                          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                Farmer / Supplier
  advance for purchase of
  specified quality and
  quantity of commodity on
  specified price for supply   • Negotiates price of specified
  on future set date.            commodity with the financier /
                                 buyers and duly Signs an agreement
                                 before receiving full payment in
                                 advance; and is bound to deliver
• Receives specified quality     the commodity (with specified
  and       quantity      of     quality and quantity) on set future
  commodity on specified         date.
  date from the farmer /
                               • On specified date (as per forward
                                 sale agreement with the buyer /
Financier / 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
                                                Seek interest free
     without motive to earn
                                                finance from the bank
     profit / reward in this
                                                or lender to meet out
     life, but to have
                                                personal          non
     reward in the life
                                                (Household) needs

                               Customer /       Returns back the same
   Bank / Lender               Beneficiary      amount without any
                                                interest or penalty to
                                                the bank or lender by
     Receives exactly the                       paying in installments
     same amount financed                       on specified period of
     to the customer                            time.
                                             May pay set service
May also collect receivable                  charges to enable the
service charges from the                     financial institution meet
beneficiaries to run the                     its actual operational
institution without profit.                  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      customer        buys
The bank / financier and     Bank / Financier lease out
                                                           remaining shares of the
the customer enters into     his share in the asset to
                                                           bank     /    financier    to
joint ownership agreement    other partner on rent
                                                           completely own the asset
before buying any asset in   against use of his share in
                                                           and to diminish banks /
partnership.                 the asset.
                                                           financier share in the asset.

       Bank /                        Bank /                        Bank /
      Financier                     Financier                     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                            • Subscribes
  Funds with own            Takaful Fund            premium of the
  initiatives      and                              Takaful funds
  seed capital.                                   • Receives
• Invites the Takaful                               compensation in
  Subscribers             • Created         by      case of losses
• Administer       the      Insurance               from Takaful funds
  Takaful Funds             Company               • Receives       profit
• Entitled to invest      • Used to protect         from     Insurance
  the Takaful fund          the subscribers         company in case
  into        ethically   • May be invested         of profit earned
  permissible trade /       into      ethically     after      investing
  industry.                 permissible             Takaful funds into
• Insures          the      businesses              profitable
  subscribers             • Small Takaful fund      businesses.
  against any loss /        may further be
  damages .                 insured    through
                            larger      Takaful
                            Funds.                      Takaful
Insurance Company
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
• 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
• Hopefully success of pilot project led by BASIX India Group
  may draw attention of potential investors towards PMF.
   5.4 Forward Linkage of Takaful
• 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
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

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