REVITALIZINGTHEWORLDECONOMYTHROUGHISLAMIC MICROFINANCE

FARZMETHEDOLOGY:PRACTICE AND PROVEN RESULTS

PAPERPRESENTEDONTHESUMMIT

WrittenAndPresentedBy:FARHATABBASSHAH
CEOOFFARZFOUNDATION

FARZFOUNDATION THEFIRST SHARIAHCERTIFIEDISLAMICMICROFINANCEINTSTITUTE OF PAKISTAN

REVITALIZINGTHEWORLDECONOMYTHROUGHISLAMIC MICROFINANCE

FARZMETHEDOLOGYAMODELINPRACTICE

1. BACKGROUND

To achieve financial goals in such difficult times is by no means easy business. Farz Foundation took up the task of fighting poverty when the microfinance world was facing a unique and grave sustainability crisis and the Global Economy is facing the biggest crisis of the history as well. Much to our amazement, the initial outcome is quiteencouraging. In spite of our funding constraints and lack of technical support, recoveries are 96 percent on time with zero percent PAR, while our one of a humble initiative of livestockMudarbaha,thebusinessgrowthrateismorethan24%annual. There are only 4% partners mismanaging their business. We even didnt give up on them and gave out of the routine trainings to make them capable of honorable earningandhelpalleviatepoverty. There was a time when the trickle down effect demonstrated its outcomes, while the time has come, the global economy does not seem stay alive without implementing on my humble theory of Twist Up Economy, which emphasizes to make the three billion poor our Productive Micro Partners(PMPs) to not only kick start a huge potential economic cycle but also to build a wide international customer base. Farz Methodology has been developed on the philosophy of developing micro partnership with the poor on profit and loss basis. At present it is being implemented in Pakistan and abroad. We the microfinance practitioners have done it and proved that it is possible and promising to turn the threat into an opportunity. Our goal is to empowerthepoorwithasenseofselfbelief.

2. THESECRETSOFOURSUCCESS
2.1. Weare100%ShariahCompliant 2.2. Weare80%AssetBased 2.3. Weare100%Socialperformancefocused 2.4. Weare100%commercial

2.5. Wearevigilantsupervisors/monitors 2.6. Weworkthroughthetradestructures 2.7. WescreenourClients/partnerscarefully 2.8. WecustomizedproductsandthetoolunderShariahcomplianceaccordingtotheneed ofthecustomer/partnerandthemarket. 2.9. Wearetransparent 2.10. Weprefersynergies

3. OURCOLLABORATIONS
3.1. WorldCongressofMuslimPhilanthropists 3.2. OxfordMicrofinanceInitiative 3.3. ChurchWorldServicePakistan/Afghanistan 3.4. PakQatarFamilyTakaful 3.5. ProvincialMinistryofLivestock,Pakistan 3.6. UniversityofVeterinaryandAnimalSciences 3.7. PunjabAgriculturalandMeatCorporation,Pakistan(PAMCO) 3.8. HalalResearch&DevelopmentCommittee(PAMCO)

4. OURREPLICATORS
FarzMethodologyisbeingreplicatedby 4.1. CameroonHalalMicrofinance(Cameroon,Africa) 4.2. TheNGOWorldFoundation(Pakistan)

5. OURMARKETINTELEGENCE
5.1. TheFirststudy,FarzFoundationhasconductedtoknowthepercentageofclientscomfortable
withInterestbasedLoans/Financing.100%clients(alreadygettingloansfrominterestbased MFIs)respondedtheyarenotcomfortableandthereasonwhytheyoptedforinterestbased loansjustbecausetherewasnoalternative.Whenweofferedthealternative,62%werewilling toacceptandtheremainingweresimplynotreadytobelievethereisanalternative.However the100%untappedclients/partnersarereadytoworkwithinterestfreemicrofinance.

5.2. Thesecondstudyweconductedwasrelatedtoproductivityofconventionalmicrofinanceto
alleviate poverty, results were shocking, only 4% were found positive while 96% loans were misused.

5.3. The third study we conducted was related to comparative study of asset based model v/s
cashbasedmodel.Resultswereinfavorofassetbasedmodelas96%.

5.4. The fourth study was based on correlations and sensitivity analysis and we were able to
conclude that healthy and skilled clients 99.5% remain successful, so just disbursing money/deliveringassetstothepoor,uneducated,unskilledandleavethemaloneforearning andpayingbackloansistherootcauseofthefailure.

5.5. The fifth study was focused on learning from the failure of the conventional microfinance,
and it guided us how to break the vicious cycle of the debt and ensure the economic graduationofthepoorfrommicrotoSME.

5.6. We also learned that the ultra poor must be addressed through Zakah/Charity, by providing
themproductiveassets,abetterworkingpartner(AMudaribalongwithFarz),capacitybuilding andcontinuoussupervision.

5.7. WealsocametoknowthattheFaithdrivestheclients/partnerstowardsaCreditDiscipline. 5.8. Similarlyfaithmotivatesstaffforthespiritualgainsandincentivestodomoregood. 5.9. Ahugemarketiswaitingforit. 5.10.

Ourmarketintelligenceconveyedthatwecanfillthegapandmakeadifference.

So all these studies and observations inspired us to reinvent the microfinance by adopting a pure Islamic innovative model, which must be need based, market driven and faith oriented. Wealsorealizedthattheintegratedapproachisinevitableforthesuccessofpovertyalleviation efforts, which can protect our poor partners, as well as our donors, investments and the system.

6. OURCORECOMPONENTS:
6.1. ZAKAH/CHARITY Although, to address the ultra poor Farz is implementing the ZakahandSadaqat,toupliftthemandtomakethemableforearningmoneythrough respectablemicrobusinesses,howeverFarztransfersallthesefacilitiesfromdonorto poor in form of productive assets with capacity building in the particular area and business education if needed. Farz aims just one time charity support to a targeted ultrapoorandturnhim/her/themintoaproductiveclient/partnerwithanhonorable micro business. Farz usually avoid going for business venture with the ultra poor directlybyconsideringthemapotentialforcommercialization.

 6.2. EMERGENCYSUPPORT FarzProvidesQarzeHasnaonlytoitsexistingandefficient clients/partners,atthetimeofanyemergencyatindividualorcollectivelevel.

6.3. RISKMITIGATION,SECURITYSUPPORT Farz offers Takaful (Islamic Insurance) & saving (A unique and innovative Product of Farz Foundation named Farz Committee/kamaity), Health care, where it is needed, capacity building, strong monitoringandsupervision.

6.4. SOCIALPERFORMANCE Farzprovidestheclients/partners,protection,healthand environment awareness/services, business education and also support in disasters. Socialperformanceisourmosteffectivetooltobuildthetrustbetweenourpartners andus.

6.5. INSTITUTIONALDEVELOPMENT&SHARIAHADVISORYSERVICES

Farz Foundation Offers Islamic Microfinance institutions development services and Shariahconsultancytofacilitatethesectortoexpandthepovertyalleviationefforts.

7. OURPRODUCTSINPRACTICE 7.1. FinancialProducts

7.1.1. 7.1.2. 7.1.3. 7.1.4. 7.1.5. 7.1.6. 7.1.7. MicroMudarbahainlivestock(Bhaiwali1,2,3) MicroMurabaha MicroSaving(FarzCommittee/Kamaity) MicroTakaful HalalKarobar(HalalInvestment) QarzeHasna ProductiveZakah

7.2. NonFinancialProducts 7.2.1. BusinessDevelopmenttrainingforPartners/Clients 7.2.2. Healthcareservicesforpartners/Clients/Livestock 7.2.3. Future Protection Program (Education support for the children of the partners/Clients). 7.2.4. Institutiondevelopment&Shariahadvisoryservices

PRODUCTSINPIPELINE
A. BaySalam B. DiminishingMusharkah

C. Istesna

MICROMUDHARBHA(BHAIWALI)
Bhaiwali(Partnership)inlivestockoninvestmentandservicesbasisisthelandmarkproductof Farz Foundation. It has proved to be sustainable, scalable, and highly profitable not only at investorlevelbutalsoatourmicropartnersandorganizationallevel.Unbelievablefastgrowth of the business generates high returns with a strong social impact. It also addresses food securityandinjectsaviablecontributiontotheGlobalHalalMarketwhichhasthepotentialof US$ 3 trillion. Farz Foundation has initiated a Bhaiwali pilot project of 42 to 48 months and earned break even within first 18 months, initially at a small scale. However the product has proved successful as a 4 bottom line venture. Farz is also aiming at developing the required structures and delivery mechanism from local to international markets. According to this product, Farz and the poor farmers are service providers, while the third party works as investor.

(Slide1) PRODUCT Level1

FEATURES Product Name Objective Size Age of Animal Kind Size of Investment Period Modality of partnership with poor Family BHAIWALI-1 Breeding Unit of 6 Goats for one poor Family ( 5 Female Goats + 1 Male Goat) 1 year or pregnant of 3 to 4 month Beetal PKR: 100,000/ Unit 42 to 48 Months 50%(Farmer) 25% (Investor ) and 25% of the Farz Foundation at reproduced Goats

Modality of partnership with Investor

Investor gain 50% of the net profit

The parent Animals remain as owned by the investor and the Foundation can hold them back after 42-48 months on behalf of the investor and can transfer the animals to another poor family for the same purpose with the consent of the investor.

(Slide2) Level2

FEATURES Product Name Objective Size Age of Animal Kind Size of Investment Period Modality of partnership with poor Family BHAIWALI -- 2 Qurbani Animals Production 5 Male Goats for one poor Family 6 month Beetal, Rajan Puri or Desi PKR: 100,000/ Unit 10 to 12 Months 50%(Farmer) 25% (Investor ) and 25% of the Farz Foundation at reproduced Goats

Modality of partnership with Investor

Investors gain 25% of the net profit

Farz Share

Farz Foundation gain 25% of the net profit

Mortality

30%

(Slide3)

Level3
FEATURES Product Name Objective Size Age of Animal Kind Size of Investment Period Modality of partnership with poor Family BHAIWALI -- 3 Meat Production 10 Male Goats for one poor Family 3 month Taidy PKR: 100,000/ Unit 10 to 12 Months 50%(Farmer) 25% (Investor ) and 25% of the Farz Foundation at reproduced Goats

Modality of partnership with Investor

Investor gain 25% of the net profit

Farz Share

Farz Foundation gain 25% of the net profit

Mortality

30%

Note:TheMortalityisagainanopportunityforus,afterprovidingastateoftheartriskmanagementservices.

Byprovidingproperhealthandnourishmentcare,wecouldreducemortalityratioandturnitintoprofit.
3Murabaha(Tijarat) Farzhassuccessfullydonean18monthspilotprojectandearnedvaluableexperienceandconfidenceregarding theinternalandexternalbothchallengesandthemethodstoresolveissuesandproblems.Theassetbasedmodel ofthisproductstopstheclientsfrommisusingthemicrofinancefacility.FarzFound24%profitviableforitselfand theclientalso.

MICROMURABAHA refers to a type of sale in which the buyer knows the actual cost of
goods and the margin of profit of the seller and can be used the sale of tangible goods on deferred payment basis (Bai Mujjal). The seller acquires an asset, which the buyer agrees to purchaseatsomepointinthefuture.Thesellerisentitledtoaprofit,aslongastheexactprofit marginisdisclosedinthecontract.Paymentsmaybespreadoutovertime. (Slide4) FEATURES HEADS Trade size Annual increase in trade size Rate of profit Duration of installments Exempted days Total installments Frequency of payment PKR:5,000to30,000 Inaccordancewiththebusinessperformance 24% 1year Eidholidays 22 Fortnightly FEATURES

Collateral Collateral 2

Personalguarantee Postdatedcheques

MICROSAVING(FARZCOMMITTEE/KAMAITY) FarzCommittee/KamaityisaShariah
compliant,innovativelyadoptedtraditionalsavingproductofFarzFoundation,locallyknownas committee/Kamaity. It was introduced to knit the clients with each other as well as with the foundation. This kind of method helps build the assets of the clients. This already existing system of saving was made secure by formalizing and synchronizing it with the Farz Foundationsoperations.Clientsareextremelyhappywiththisproduct. Accordingtothisproduct,clientspooltheiragreedamountofmoneyeverymonthandgiveit totheonememberofthegroupbynominatinghimorherthroughluckydraws.Luckydrawin thiscontextisapprovedbyShariah.Farzplaysitsroleasacommitteemanagerforthisproduct. Thisproducthasactuallyhelpedbuildassetsofthepeople. Slide5

PRODUCT FEATURES
Heads Committee Size Period of Committee Cycle Participants of Committee in Each Group Number of Committee Groups under One Cluster Frequency of Committee Installment Frequency of Committee Draw (lucky draw)

Features Min=PKR:100andMax=unlimited 11Month 10Members+1FarzFoundation=11 Min=1andMax=3

Fortnightly EveryMonth

MICROTAKAFUL FarzisagaintheleadingorganizationtoadoptTakaful,analternativeto
conventional insurance for the first time. Murabaha clients are covered through Islamic InsurancewiththepartnershipofPAKQatarFamilyTakfulCompany.Howeveritisstillunder reviewforLivestockastakafulforlivestockisunavailableinPakistan.ThereforeFarzwillneed to rely on conventional insurance till the time of its availability. We have no hesitation on declaring the livestock insurance segment is still a challenge. Farz offers its product development services along with a pilot to manufacture the sound features of an innovative livestockinsurance/Takafulproduct.

FEATURESOFTAKAFUL FarzFoundationextendsthisfacilitytothe100%membersofMurabahaclientsandtheirheads ofthefamilies. MEMBER HEADOFTHEFAMILY

TAKAFULFEE 115 115

TAKAFULAMOUNT 20,000 20,000

As a structured Halal Business avenue it is another trail blazing initiative by the Farz Foundation, and it has laid the foundation for not only institutionalizing livestock business but has also opened up a structured investment avenue for those institutional and individual investors looking for investment channels that provide safe, profitableandShariahCompliantmodeofinvestment. The livestock sector expected rate of return is highly competitive when compared to other sectors, and undoubtedly, with institutional entry into this sector the returns may exceed expectationsgiventhehugelivestockproductslocalandexportmarketpotential. Institutional intervention was a dire need of this sector without which it is impossible to get optimalreturns.Furthermore,withinstitutionalinterventioninthissectorwillbringforefront the strong backward and forward linkages and strengthen SME sector in due course and will provide Farz Foundation, in particular, an edge to fully exploit inherent supply management potential.

HALALINVESTMENT

(Slide7) NONFINANCIALSERVICES
BUSINESSDEVELOPMENTTRAININGFORPARTNERS/CLIENTS TRAINING # OF DAYS TARGET PEOPLE 5 Days Poorest of Poor INITIAL Who intend to do BUSINESS TRAINING 3 Days Running Business(Clients or Non-Clients) BUSINESS Clients who will graduate from Murabaha DEVELOPMENT (small) into Murabaha (Medium) and Murabaha (Medium) into Murabaha (Large) BOOK KEEPING PRODUCT QUALITY 2 Days 7 days to One Month Existing Clients Home Base Micro Entrepreneur (HBMEs)

FEE Free

Free

Free Free

HEALTHCARESERVICESFORPARTNERS/CLIENTS/LIVESTOCK ThebiggestreasonforthelowproductivityaccordingtheWHOisthepoorhealthalloverthe world.TheFarzFoundationpayskeenattentiontothisaspectandconductshealthawareness workshopsandhealthcamps. AWARENESSPROGRAM The greatest problem in the area we work is the water born diseasesandweteachthemtoboilwaterbeforedrinking.Thegeneralprincipalsofcleanliness forinstances,washinghandsbeforetakingmealsareemphasizedduringthetraining. EYECARE Farz Foundation has launched its eye care program by starting free eye care camps for poor people of the branch area. In these camps Farz Foundation provides eye checkupfacilityandprovidespectaclestothepoorhomebasedmicroentrepreneurswithout anycost. HEALTHCAREOFLIVESTOCK FarzFoundationProvides100%healthcareservicestoour partners for Livestock and also provides them medicine with the support of Livestock departmentofPunjab.

FUTURE PROTECTION PREGAME (EDUCATION SUPPORT FOR THE CHILDREN OF THE PARTNERS/CLIENTS). This program deals with educating the clients to provide education to
their children apart from picking the kids of the most vulnerable members and provide expenses for theireducation.Thisisdonetoensurethebetterfutureofthecommunity.

8. CHALLENGES
8.1. SECTORLEVELCHALLENGE As an emerging organization of an emerging sector we did not find any support to make our beginning easy. However our strong commitment, clarity of vision, well defined mission and a clear road map helped us to achieve the impossible. We were confidentfromthefirstdaythatthereisaroomforinnovationandpuritywaitingfor ustofill.FarzFoundationisoneamongthefewthataimsandhastheabilitytochange theworldeconomiccrisisintotheopportunityoflongtermsustainability.

8.2. OPERATIONSWITHOUTAPROPERINFORMATIONSYSTEM At operational level it was a challenge to work, with limited staff, a comprehensive integrated methodology but without any proper Customized Information System. HoweverFarzisstillworkingwithMSExcelalongwithmanualreportingsystem.Dueto limitedoperationswehaveaddressedthischallengebutinthelongrun,wehavetogo foracustomizedMIS.

8.3. ISLAMICINSURANCEFORLIVESTOCKISSTILLACHALLENGE Farz Foundation as the pioneer in operating with a Takaful product for our clients, which covers their life, but at livestock, although we have covered the risk of death, theftandlossduringnaturaldisastersthroughconventionalinsurance,howeveritisa temporaryarrangementandweseekIslamicinsuranceassoonaspossible.

8.4. BUILDINGTHETRUST Building the trust with the clients (already taped by conventional MFIs) as a TrustworthyMFI,wasalsoachallenge,Particularlywhenweclaim,weareoffering interestfreeservices,amajorityoftheoldandalsothenewclientsdidnotbelieve.But ourtransparentsystemandsocialperformancefocusedmethodologymakeusableto proveourtruth. 8.5. TOCHANGETHEMINDSETOFTHESTAFFHIREDFROMCONVENTIONALSECTOR Itisthehardestchallengetochangetheframeofmindofthestaffwepickfromthe conventional sector. They gave us a very tough time and ultimately we decided to prefer the new young people for our organization and build their capacity and make themthetrueandcommittedleadersofIslamicMicrofinance.

8.6. KEEPING HALAL AND HARAM TOGETHER IS ALSO A THREAT FOR THE WORLD ECONOMY It is also a big challenge not only for Farz Methodology operators but also for microfinance policy makers and stakeholders to engage conventional MFIs in Islamic Microfinancewithexistinginfrastructureandhumancapital. We believeand also have experienced that totake off with a faith based vehicleby a contradictoryoperatorisablunder.Theironylies,maybewearenottakingitseriously thatwearetryingtoprovidefoundationstoanewstructurethroughthepillarsalready falling.ThemixtureofHalalandHaramwoulddefinitelygiveasetbackinthelongrun, becausethecontradictionsnevermovetogethersmoothly.ThetargetclientsofIslamic microfinance market feels aversion with Haram and the place where Haram is being produced and stored and finally the people and the system operating it. So Farz Foundationstronglyaswellaslogicallysuggestsavoidingthiskindofrisk.
QOAT(FromMohammedKhaledsarticlepastedonCGAP)

According to the 2008 CGAP focus note on Islamic Microfinance: Although there is ample evidence of demand for Islamic microfinance products, this demand can only be met if low-income clients are convinced that the products offered are authentically Islamic. Critics of Islamic finance products suggest that the pricing of some products offered as Sharia-compliant too closely parallels (or even exceeds) the pricing of conventional products. For example, some institutions offering Murabaha, seem to disguise interest as a cost markup or administration fee.

8.7. FARZMETHODOLOGYPROVIDESRESOLVE As an Islamic Microfinance vehicle Farz Methodology provides a resolve worldwide to theorganizationsintendingtoaddresspovertythroughtherealandpureIslamicmodel accordingtotheShariahprinciples.

 OneemergingorganizationofCameroonandonefromPakistanhavestartedreplication ofFarzMethodologysuccessfully.Howeveritneedsastrongbackupatpolicylevelto facilitatetheorganizationsforsteppingintotheIslamicMicrofinanceSector. Questioning the implementation costs of adding a new model to an existing business, this is the time to redesign, refine and reinvent the systems and procedures with a groundbreaking move towards a sustainable and profitable world. We need bold decisionsandfoolproofimplementation.Luckilythemodel,wearediscussinghasthe potentialtoreturnveryhighprofitswithavisiblesocialimpact.Webelievethepeople withstrongfaithwouldprefertogivetheservicesatevenmarginalcost,becauseofthe fulfillment of their religious values. It is better to spend on developing a new infrastructurethenspendingontosaveasinkingship.

8.8. ANDNOWTHEQUESTIONOFCOST
BELIEVEMEORNOT

8.8.1. WeconductedFivestudies 8.8.2. Wedevelopedthreemajorproducts 8.8.3. Developedcustomized/generalShariahCompliantcontracts 8.8.4. Didtheirpilots(atalimitedclient/partnerlevel) 8.8.5. DesignedafullfledgedIslamicMicrofinanceMethodology 8.8.6. Developedtwooperationalandtwomonitoringmanuals 8.8.7. Providedanumberoftrainingstoourclients 8.8.8. Buildthecapacityofstaff 8.8.9. DevelopStructures 8.8.10. Andmarketedourself 8.8.11. Justin,lessthan100,000USDand37months.Wenotonlysurvivedbutearned theworldwideimageofaleadingIslamicMicrofinanceorganization.

THANKYOUVERYMUCH