ENHANCING%20FOOD%20SECURITY%20WITH%20ISLAMIC%20MICROFINANCE

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ENHANCING FOOD SECURITY WITH ISLAMIC MICROFINANCE

• Insights from Some Recent Experiments

4th Global Islamic Microfinance Forum 1st
November 2014
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Islamic Social Finance Report

• How can Zakat and Waqf be integrated with
  Microfinance to enhance Food Security?

Dompet Dhuafa Indonesia
1.
Wasil, Pakistan
2.
Abu Halima, IRADA, Sudan
3.
Wad Balal, IRADA, Sudan
4.
Strategic Food Reserve (IRADA), Sudan
5.
Summing Up
6.
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Dompet Dhuafa Republika
Community Empowerment Model for Farmers (P3S)
The Problem

• Limited land
• Declining soil fertility
• High input prices
• Limited capital
• Human resources with low and limited skills
• Fluctuating crop prices
• Continuously declining terms of trade

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Dompet Dhuafa Republika
Community Empowerment Model for Farmers (P3S)
The Program

• Introduction to integrated and environment-friendl
  y farming
• Holistic approach involving adjustment of
  cropping patterns
• Change in farmers attitude and preference from
  conventional farming to green farming system
• Gradual assistance, guidance for production
  facilities that are safe, locally made ??and
  affordable

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Dompet Dhuafa Republika
Community Empowerment Model for Farmers (P3S)
The Program

• Finance funded by zakat lease of land loans
  to cover working capital for one growing season
• Technical guidance to and capacity building of
  farmers
• Agricultural production facilities (saprotan) to
  produce bio pesticide that is local-based,
  affordable, and environment friendly
• Marketing support

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Dompet Dhuafa Republika
Community Empowerment Model for Farmers (P3S)
The Empowerment Process also involves

• Helping farmers get organized as formal
  communities - combined farmers groups (gapoktan)
• Exit when gapoktan have developed the capacity to
  manage the formal organizations independently
• With partnerships with other stakeholders in
  place
• Improved bargaining power towards market
  structure
• Savings of produce through the FGs

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1
Dompet Dhuafa Republika
Community Empowerment Model for Farmers (P3S)
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Wasil
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More value through better products
The Problem

• 93 per cent of 5.1 mil farms are small and
  marginal accounting for 60 per cent of the total
  cultivated area
• About 70 percent of farmers participate in the
  credit market source funds from middlemen
• Farmers believe that they can save up to 25
  percent in costs if they purchase inputs on cash
• Farmers usually return the money after the sale
  of the crop
• Farmers are traditionally skilled but lack capital

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Wasil
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More value through better products
The Program Salam Financing

• Finance for small farmers who need money to grow
  their crops and to feed their families up to the
  time of harvest
• Payment of agreed price in advance against
  commitment to deliver agreed quantity of produce
• Lower cost compared to other alternatives
• Collateral in the shape of guarantee from
  community members or charge on whatever available
  assets available with the farmer, e.g. livestock.

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Wasil
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More value through better products
The Program Ijara Financing

• Wasil takes agriculture land on ijara from the
  owner of the land
• Wasil sub-leases it to a farmer for agreed period
  of time
• In case of fruit/vegetable/flower farms, the
  farmer pays monthly rental to Wasil Foundation as
  agreed at the time of the contract
• In the case of wheat or rice, the farmer pays in
  the form of crop to Wasil Foundation as
  pre-agreed.

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Wasil
2
More value through better products
The Program Master Ijara Financing

• Combines the concepts of Ijara and Salam and
  bases the whole return on the principles of salam
• Farmer gets land on rental as well as cash to
  grow the crop and agrees to deliver a given
  quantity of the crop to Wasil
• The subsequent cycles of financing are based on
  salam alone.
• After two additional salam cycles the contract
  comes to an end.

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3
IRADA Microfinance
Financing the value chain
The Problem

• Dwindling agricultural production
• Reduced livestock production and productivity
• Adverse effect of climate change
• Conflicts created over the use of scarce natural
  resources, land access
• Economic factors that affect the livelihoods of
  the various groups
• Need for institutional strengthening

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IRADA Microfinance
Financing the value chain
A Partnership to create and nurture partnerships

• Provide financing to farmers who need productive
  assets for developing income generating
  activities or overcome short-term cash needs to
  smoothen consumption
• Assist clients procure the required physical
  assets, while developing banks own capacity for
  sourcing the common assets
• Undertake investments to support the funded micro
  projects, e.g. retail centers, warehouses,
  purchase collection centers and others.

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IRADA Microfinance
Financing the value chain
A Partnership to create and nurture partnerships

• Safety net to clients till the project starts
  generating adequate returns
• Use of zakat for the indebted
• Murabaha financing at modest 15 percent
• Declining Mudharaba ending with ownership of
  project by beneficiaries in a finite time period
• Extensive business development services

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3
Abu Halima, IRADA
Financing the value chain
Financing Green Houses
1. Financial partnership between Ministry of
Finance and BoK 2. Nomination of agriculture
graduates for the project by Ministry of Social
Affairs 3. Mudaraba agreement between IRADA (BoK)
and the microentrepreneurs (agriculture
graduates) 4. Setting up of Abu Halima
greenhouses 5. Technical consultancy to
microentrepreneurs 6. Technical consultancy to
greenhouse establishment and operation 7.
Provision of fertilizers and other services by
Ministry of Agriculture 8. Sale of vegetables
output to Sana Hypermarket and others 9. Sharing
of profits (40 for 5 years and 100 after that)
by microentrepreneurs 10. Sharing of profits
(60) by IRADA-BoK for 5 years
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Min. of Finance
IRADA - BoK
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2
Min. of Social Affairs
Graduates
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5
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Abu Halima
Tech Consultant
Sana Hypermarket
Min. of Agriculture
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8
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Wad Balal, IRADA
Financing the value chain
Financing Cattle Fattening
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1. Diminishing Musharaka Agreement between BoK
and Wad Balal Company (WBC) to create Fattening
Facility 2. Bok helps farmers form Wad Balal
Association (WBA) 3. Murabaha agreement between
BoK and farmers represented by WBA to finance
purchase of calves 4. Ijara agreement between
Musharaka and WBA to use Facility in lieu of
payment of rentals 5. Use of fattening facility
by farmers to make the calves grow 6. Technical
consultancy and training by WBC Delivery of
cattle by farmers to WBC 7. Sale of cattle by WBC
in overseas markets
IRADA - BoK  
Wad Balal Company
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Fattening Facility
OVERSEAS MARKET
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Wad Balal Association
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Farmers
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Tech Consultant (WBC)
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IRADA Microfinance
Ensuring Food Sovereignty
Financing the Building of Strategic Food Reserve

• To efficiently purchase goods from farmers for
  sale to the Government of Sudans strategic food
  reserve
• To replace the middleman and to give farmers a
  better price for their produce based on official
  advance purchase rates determined by the Ministry
  of Agriculture
• To ensure that the farmers incomes will increase
  and more farmers will be motivated to produce for
  livelihood instead of only for subsistence

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IRADA Microfinance
Ensuring Food Sovereignty
Financing the Building of Strategic Food Reserve

• In collaboration with Ministry of Agriculture,
  Ministry of Social Welfare, Zakah Chambers, World
  Food program
• Salam financing with a tenor of max 8 months
• Target beneficiaries 73,000 smallholders under
  878 Farmers Association in 7 states (23,677
  through direct contract, and 48,396 through
  Mudaraba with other commercial bank)
• Technical feasibility study and linking the
  farmers with other partners (Bank of Khartoum)

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IRADA Microfinance
Ensuring Food Sovereignty
Financing the Building of Strategic Food Reserve

• Technical assistance for product quality (Min. of
  Agriculture extension service)
• Food for farmers during the planting period
  (World Food Program)
• Grouping the farmers to associations (Farmers
  Union, IRADA)
• Coordination and monitoring of partners
  activities (IRADA)
• Building the capacity of farmers group in
  management and follow up (Min of Agriculture
  extension, IRADA)
• Link farmers to local, regional, and global
  market (IRADA)

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Summary
How can Islamic MF enhance food security?
Insights from Case Studies

• Is salam financing the best we can offer in the
  field of agriculture for greater outreach?
• Partnership-based agri-finance may require large
  upstream investments perhaps placing them in a
  distinct category of social impact investment and
  not in that of microfinance (USD12K for Abu
  Halima)
• Can the upstream investments be taken care of in
  full or in part through awqaf?
• Impact of zakat on wilful default need to be
  studied
• Search for new solutions must continue

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Thank you