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Executive Summary Description of the Business Market Analysis Insutry Analysis Marketing Plan Management Plan Business Operations Financial Plan Risk Assessment and Contingency Plan Appendices The Tajir Islamic Microfinance (TIM) program is a non
profit community development program that aims to provide Sharia compliant financial services to tradesmen belonging to the
poor segment of the society. The mission of
the TIM program is to invest in micro and small scale enterprises and thus help the entrepreneurs with working capital.
The organization that takes up the TIM program would thus provide a valuable service to its clients, to the community at large
as well as create a new source of revenue, a part of which would help sustain the program. The program has been proposed to cater to that segment
of the populace who are in frequent need of finances for working capital and are unable to procure the same at decent terms.
The lack of formal sector services for provision of finance and the exploitive policies of the informal sector leave many
an entrepreneur without sufficient financial resources, the TIM program will address this problem for a limited segment of
population, confined to a particular geographical location. The initial budget for the project is Rs 45 000. The
successful completion of the pilot project and subsequent improvements in lending methodology will guarantee safety of the
funds and thus enable investments by shareholders. The marketing plan is to promote the program as a social investment venture
which conforms to the norms of Islam, thus attracting regional investors. The marketing plan for clients is based on popular
demand for such a service. The program aims to achieve sustainability within a few years, with an established investor and
client base in the region. As many community level programs of a similar nature
have met with little or no success due to inefficient management of resources, we seek to implement various management techniques
that would ensure that the program meets its objectives, thus guaranteeing safe returns to its investors and satisfying the
need for a finance provider on the social level. Any willing society can undertake the TIM program
and thus provide their target people with decent finance options that are non-exploitive and in complete compliance with Islamic
guidelines for business and finance. The overriding concern of development
policy makers in most developing countries has been to find ways and means to finance the poor and reduce the burden upon
them. A basic study of the system brought to the fore the fact that the banking system was not able to internalize lending
to the poor as a viable activity but only as a social obligation something that
had to be done because the authorities wanted it so. This was translated into the banking language of the day: Loans to the
poor were part of social sector lending and not commercial lending; the poor were not borrowers, they were beneficiaries;
poor beneficiaries did not avail of loans, they availed of assistance. The language of the time resulted
in an attitude of carefully disguised cynicism towards the poor. The attitude was that
the poor are not bankable, that they can never be bankable, that commercial principles
cannot be applied in lending to the poor, that what the poor require are not loans
but charity. Once this mindset hardened it became more and more difficult for commercial
bankers to accept that lending to the poor could be a viable activity. It is significant
to note that the system had to wait for decades before the concept of microfinance emerged and had begun to be accepted as
a possibility. Microfinance provided the paradigm
by introducing a range of financial services for poor who are traditionally considered non bankable, mainly because they lack
the guarantees that can protect a financial institution against a loss risk. Microfinance was a revolution in the sense that
this tool gave a chance to people who were denied the access to the financial market, it opened new perspectives and empowered
people, who could finally carry out their own projects and ideas with their own resources, and thus escape assistance, subsidies
and dependence. Microfinance experiences around
the world have now proved that the poor demand a wide range of financial services, are willing to bear the expenses related
to them and are absolutely bankable. Microfinance has reduced the incidence of poverty through increase in income, enabled
the poor to build assets and thereby reduce their vulnerability. It has enabled households that have access to it to spend
more on education than non-client households. Families participating in the microfinance programs have reported better school
attendance and lower drop out rates. It has empowered women by enhancing their contribution to household income, increasing
the value of their assets and generally by giving them better control over decisions that affect their lives. It has contributed
to a reduced dependency on informal money lenders and other non-institutional sources. In many areas it has reduced child
mortality, improved maternal health and the ability of the poor to combat disease
through better nutrition, housing and health - especially among women and children. It has
facilitated significant research into the provision of financial services for the poor and helped in building “capacity”
at the SHG level. Finally it has offered space for different stakeholders to innovate, learn and replicate. This report is
about another such innovation that meets the demand of Muslim populations specifically, and others generally. The Islamic
microfinance program, once put into place, will be a unique venture in its own right and will have a major effect on the developmental
concerns of policy makers who have always looked for a finance model that integrates development and profits. Islamic Economics is the economic system propounded
by the Quran and Hadis, the authentic sources of Islamic Tradition. Islamic Economics is starkingly different from mainstream
economics in one important way- the stance on interest. While mainstream economics banks on interest, Islamic economics slams
it as unethical and prohibits Muslims from dealing in interest. Islamic economics has equitable distribution of wealth as
its chief aim. The main arguments here are that Islam does not allow
gain from a financial activity unless the financial capital is also exposed to the risk of potential loss; and that interest
reinforces the tendency for wealth to accumulate in the hands of a few, thereby diminishing man's concern for his fellow man. At the social level, the exploitive nature of interest
can be mostly seen in the poor and very poor sectors of our society. The situation has lead prospective entrepreneurs to refrain
from pursuing production activities as the cost of failure is too high. Those who do try fall to the moneylender trap. Microfinance
addressed this problem by providing collateral free loans on the financial aspect and by helping with business consultancy
on the technical production aspect, it fills in the absence of development banks. But although microfinance does provide improved
access to credit, it also does so at a reasonably high cost. The Islamic conception of abolishment of fixed
interest rates does not mean that no remuneration is paid on capital. Profit-making is acceptable in Islamic society as long
as these profits are not unrestricted or driven by the activities of a monopoly. Islam deems profit, rather than interest,
to be closer to its sense of morality and equity because earning profits inherently involves sharing risks and rewards. Profit-making
addresses the Islamic ideals of social justice because both the entrepreneur and the lender bear the risk of the investment.
An argument can thus be made for financiers to play a more active role in project management of these micro entrepreneurs. Existing Muslim Funds in India operate through cooperative
credit societies and welfare societies are all non-profit institutions and have started either out of the need to rescue people
from the ruthless moneylenders or out of a concern for the economically backward and downtrodden. The application of the microfinance
paradigm to Islamic Finance principles can easily bring about the much needed revitalization of the promising but dormant
industry. The similarities in the principles of the two make microfinance and Islamic finance easier to integrate, thus promising
to give life to the new hybrid reality of Islamic microfinance. Working capital for business is a basic need for the
micro and small scale entrepreneurs. All those who desire such finance should have access to reasonably priced finance products
offered with terms that are not unfair. We further envision delivering these products in a manner that will produce a profit
that is sufficient to help sustain the program. The Objectives of the program are: To establish Islamic microfinance as a competitive
finance providing option and develop a range of products and deliver a high quality of service. In a future perspective, the key words will be: • Inclusion • Tailoring of financial products on needs and
religious belief • Diversification of the financial services offered
• Attention to the social outcomes of the financial
activity • Separation of competencies and specialization
• Effectiveness – Given the high values
on which this program is based, it should not just be taken as another way to attract new clients. The program should be taken
seriously. With more than 25% of the Indian poor living in urban
regions, the market for urban microfinance is huge. Further, the urban population is expected to increase from the present
30% to 50% of the total population by 2030. With such rapid urbanization trends, the poor in the cities will soon outnumber
those in the rural areas. Till date, the microfinance industry has largely neglected the urban poor. We validate our sense of market demand by our own observation
and experience. An analysis of the market competitors reveals that the reach of informal money lenders is immense, but our
services will be much more accepted than theirs as we offer non exploitive terms. The Jamaat Islami societies working nearby
operate on a pure lender approach. In the microfinance arena, many foreign aided NGOs have started operations on a local level,
but much remains to be done, the prospects therefore are huge. In such a scenario, spreading to virgin markets would
reduce whatever little competition there is and it would also expand the reach of microfinance and direct it more effectively
towards poverty alleviation. Urban entrepreneurs face higher initial investment
costs and seed money requirements. Real estate costs are also much higher in urban areas, making self-employment a less lucrative
option. As a result, many of the urban poor prefer the steady income offered by wage labor rather than taking on the burden
and extra responsibilities of self employment. Urban Microfinance faces problems of its own. The moral
hazard and adverse selection problems are magnified in an urban setting as the pressures of making a living in a competitive
environment take their toll on urban dwellers. In many cases, most prospective borrowers do not fall into the category of
poor but seek additional prospects that microfinance offers as the desire and need to move up the lifestyle ladder is constant.
The established norms of group based microfinance, which has proved to be a major success and indeed a technique that has
empowered microfinance to obtain the reach that it has, have dimmer implementation prospects in the urban setting as peer
pressure and social collateral concepts are not promising in an environment where there are no strict defining characteristics
of a group. With volatile populations and a high possibility of fraudulent transactions, the social risks involved are very
high. Nevertheless, the urban industry offers its advantages
in that there is a lot of economic activity in the region, and prospects of employment are many. Additionally, there are large
pockets of urban poor living in relatively small geographical areas, thus facilitating otherwise demanding and expensive transactions.
In such a scenario, any model that reduces the cost of capital and the cost of transaction is apt. The social risks need to
be dealt with to exploit the promising urban microfinance market. One of the main challenges to urban microfinance
is the more transient nature of the urban poor population. This is a problem in group-lending models in which, essentially,
friendship and community membership substitute collateral, while knowledge of the community substitutes for a formal credit
rating system. Women in a self-help or Grameen-model group in a small rural village have probably known each other
for years, sharing a culture and community. They may spend much of their days together as they are homemakers or employed
out of their homes. Since group members share liability to the bank or the MFI and have to, in some way, pay for group members
who default on their loans, the entire group suffers if one member does not repay. Since urban communities tend to have a
more transient population than rural villages have, there is usually less homogeneity of culture in urban communities. Because
of this feature, the urban population may also exhibit less of a feeling of community. In such a setting, friendship and community
membership are not sufficient substitutes for collateral, as group members probably have less loyalty to the group. Even when
there is a strong feeling of community, many urban women do not work only out of their homes, but they instead might work
as maids or factory workers thus preventing them from having the same degree of knowledge of their friends and community members
as most rural women do. The group-lending model is clearly less appropriate
in the urban market than it is in the rural market. Given the characteristics of the population—its transient nature
and the greater likelihood of women having employment that is not based out of their homes—the need for individual lending
may arise very quickly in urban markets. Traditionally, the problem with individual lending is that there is no way to judge
the borrower’s risk. The urban poor are also different from the rural
poor in their financial needs. There are more salaried employees amongst the urban poor than the rural poor. Traditionally,
micro-credit has been for businesses purposes for the self-employed. This excludes the poor who are salaried and might still
need a supplement to their meager income to make housing repairs, send children to school, or even to get vocational training.
More flexible loan products are needed. This would require a serious restructuring of financial products and marketing strategies
for many MFIs. Microfinance institutions use various Credit Lending
Models throughout the world. Some of the models are listed below. This is where the target community forms an 'association'
through which various microfinance activities are initiated. Such activities may include savings. Associations or groups can
be composed of youth, or women; they can form around religious or cultural issues and can create support structures for micro-enterprises
and other work-based issues. 2.Community Banking : The Community Banking model essentially treats the
whole community as one unit, and establishes semi-formal or formal institutions through which microfinance is dispensed. Such
institutions are usually formed by extensive help from NGOs and other organizations, who also train the community members
in various financial activities of the community bank. These institutions may have savings components and other income-generating
projects included in their structure. In many cases, community banks are also part of larger community development programmes
which use finance as an inducement for action. A co-operative is an autonomous association of persons
united voluntarily to meet their common economic, social, and cultural needs and aspirations through a jointly-owned and democratically-controlled
enterprise. Some cooperatives include member-financing and savings activities in their mandate. A credit union is a unique member-driven, self-help
financial institution. It is organized by and comprised of members of a particular group or organization, who agree to save
their money together and to make loans to each other at reasonable rates of interest. The members are people of some common bond: working
for the same employer; belonging to the same church, labor union, social fraternity, etc.; or living/working in the same community.
A credit union's membership is open to all who belong to the group, regardless of race, religion, color or creed. A credit union is a democratic, not-for-profit financial cooperative. Each is owned and governed by its
members, with members having a vote in the election of directors and committee representatives. 5.Grameen : The Grameen model emerged from the poor-focussed grassroots
institution, Grameen Bank, started by Prof. Mohammed Yunus in The Group Model's basic philosophy lies in the fact
that shortcomings and weaknesses at the individual level are overcome by the collective responsibility and security afforded
by the formation of a group of such individuals.
The collective coming together of individual members is used for a number of purposes: educating and awareness building,
collective bargaining power, peer pressure etc. This is a straight forward credit lending model where
micro loans are given directly to the borrower. It does not include the formation of groups, or generating peer pressures
to ensure repayment. The individual model is, in many cases, a part of a larger 'credit plus' programme, where other socio-economic
services such as skill development, education, and other outreach services are provided. Intermediary model of credit lending position is a
'go-between' organization between the lenders and borrowers. The intermediary plays a critical role of generating credit awareness
and education among the borrowers including starting savings programmes. These activities are geared towards raising the 'credit
worthiness' of the borrowers to a level sufficient enough to make them attractive to the lenders. The links developed by the
intermediaries could cover funding, programme links, training and education, and research. Such activities can take place
at various levels from international and national to regional, local and individual levels. Intermediaries could be individual
lenders, NGOs, micro-credit programmes, and commercial banks. Lenders could be government agencies, commercial banks or international
donors. NGOs have emerged as a key player in the field of micro-credit.
They have played the role of intermediary in various dimensions. NGOs have been active in starting and participating in micro-credit
programmes. This includes creating awareness of the importance of micro-credit within the community, as well as various national
and international donor agencies. They have developed resources and tools for communities and micro-credit organizations to
monitor progress and identify good practices. They have also created opportunities to learn about the principles and practice
of micro-credit. This includes publications, workshops and seminars, and training programmes. Peer pressure uses moral and other linkages between
borrowers and project participants to ensure participation and repayment in micro-credit programmes. Peers could be other
members in a borrowers group (where, unless the initial borrowers in a group repay, the other members do not receive loans.
Hence pressure is put on the initial members to repay; community leaders; NGOs themselves and their field officers; and banks.
The 'pressure' applied can be in the form of frequent visits to the defaulter, community meetings where they are identified
and requested to comply etc. The prevailing vision of the 'informal sector' is one
of survival, low productivity and very little value added. But this has been changing, as more and more importance is placed
on small and medium enterprises (SMEs) - for generating employment, for increasing income and providing services which are
lacking. Policies have generally focussed on direct interventions
in the form of supporting systems such as training, technical advice, management principles etc.; and indirect interventions
in the form of an enabling policy and market environment. A key component that is always incorporated as
a sort of common denominator has been finance, specifically micro-credit - in different forms and for different uses. micro-credit
has been provided to SMEs directly, or as a part of a larger enterprise development programme, along with other inputs. Short Term Marketing objective : To secure 15 during
the first year of operation. Long Term Marketing objective : To secure 150 clients
by the third year of operation. Initially, we market for clients and as we grow in
size, we present our model as one in which savings can be deposited and thenceforth we will pursue aggressive marketing tactics
for procuring investors. Refinement of our services and introduction of attractive products like takaful would greatly enhance
the acceptance of our products. We will use Jamaat Islami volunteers for their domain
expertise in the local finance, and use Tabligh Jamaat volunteers for contacts and expanding
geographical reach. Our
sales strategy chiefly relies on word of mouth and customer satisfaction to promote business. Free publicity has the potential
to boost any business. This is even more important when we deal with defined and confined localities. We
will invite people into our place of business by piggybacking onto events that take place in the target locality, workshops
or other programs in which we get a public outreach and thus become known. Our
Performance milestones are measured as the number of clients and investors we attract in a year. Each area of operation is given considerable autonomy
for managing its own operations. While there is central accountability on a number of issues, including personnel and meeting
programmatic expectations, each of the areas does its own hiring, training and other jobs directly related to its business.
develop into a conglomeration of distributed societies,
such that each one remains decentralised. The decentralised structure is also encouraged in the islamic scheme of things.
specialization and core competency we have developed contacts with the following 4 providers Marketing Finances Technicalities The enabling legislation that allows for the kind of
operations the TIM program advocates is the Andhra Pradesh Mutually Aided Cooperative Societies Act 1995. The MACS established under this law can define their
own bye laws by which they can set regulations on the appropriation and use of funds. Hence it is best suited to the microfinance
program. Additionally, declaration of Islamic finance principles as bye laws will enable transparency. Additionally MACS supports
sukuks and other shariah financial instruments. The MACS structure is also important in an Islamic
perspective as the collective organization or Jamaat is an important concept in Islamic societies. Islamic society is a society
with a purpose. As one studies this purpose, and the nature of individual-society relationship in islam, one is impressed
by the harmony of interests and unity of spirits. It is an expression of the individuals' cooperative attitude. At the operational
level, this enables us to utilize variety of perception as other people raise points that an individual may not have considered. Staff training will occur in the context of formal
professional development plans. Professional development plans are developed in areas of identified needs and areas related
to professional goals for the future. In the first few years, it will be the responsibility of the Chief Officer to have areas
of performance needing improvement identified and strategies for addressing them in place and followed. Likewise, each consultant
should have the benefit of an experienced supervisor/mentor responsible for working with them to identify some professional
goals and supporting their efforts to achieve them. We plan to play a complementary role to existing islamic
financial organizations thus avoid playing the adversary role within the 'infant' islamic finance industry in Chief Executive Officer : The CEO will be responsible for ensuring that the training needs of his staff are addressed. Training in
areas that are unique to this program should be provided by the CEO himself. Operations/Loan Processing Manager : will be responsible
for the basic accounting and reporting processes, including general ledger, management reporting and analysis, cash management,
accounts payable, payroll, and the coordination of financial audits and compliance reviews Processors : A professional processor can handle upto
10 loans monthly. With 10-15 hours of work per week. Initially, loan processing will be performed by the operations manager,
additional hiring will take place on demand. The business operations consist of planning operations
and implementation operations at the field level. A continuous improvement policy would involve regular evaluation of the
process. The operations life cycle for each individual product would thus be : a. Create the plan, b. Implement the plan, and c, Review, evaluate and upgrade the plan The plan is to identify target groups that can make
use of the product, and counsel them on islamic microfinance and the prospects it offers them. After evaluating prospective
clients, a few will be shortlisted and repayment structures would be drawn out for these clients keeping in view their cash
flows. The program will be made possible through continuous monitoring of risks involved and developing appropriate strategies. In order to achieve impact maximization with available
funds. it is necessary to reach maximum people in the best way. For this we ensure that the projects we chose to finance are
suitable and inline with the marketable activity of their respective locations. We lend to traders and we offer the following services
: Short term working capital loans – musharaka,
mudaraba, murabaha, qarzhasana Medium term investments – musharaka Equipment finance – ijara Initial product line includes musharaka only. The other
products will be made available as soon as we gain an understanding of the implications they would have on the TIM program
itself and the clients. Musharaka has been selected as our chief focus as it involves no technicality, and is plain easy to
understand and implement. It is also in line with the principle of equity, and is the financing tool for an ideal and equitable
society. We make investments to help our clients grow their
business. Loans will be confined to productive purposes. We thus offer an immensely needed service by making interest free loans available, without which the possibility of
being caught in exploitive debt trap would multiply, invariably landing traders in many economic problems. Additionally,
by providing an Islamic service, we cater to the thousands of Muslims, who abhor dealing in interest. Careful analysis of
the client's business and relationship banking based information sharing allows us to make intelligent decisions on client
selection. We ensure repayment by designing convenient repayment structures and keeping flexibility under Relationship Banking
scheme. We use an islamic variant of the group lending scheme, we lend to people who are regular in their prayers, and we
take honesty guarantees from his masjid mates. We thus use a masjid based geographical division and masjid based group lending.
regional administration though will be the responsibility of a regional manager. a sugarcane juice seller a seasonal shoe dealer a fruit dealer crockery sellers cloth sellers Papad sellers On the investment side, we build presentations on islamic
platforms and our appeal for investments is of the nature of sadaqa, only it is a working sadaqa, which we use wisely, so
that it serves maximum people, we thus work on maximizing and optimizing sadaqa output, while the capital still remains and
is not something that perishes. We implement a system in which each sub-activity is
progressive, thus contributing to the achievement of our aim- the establishment of the islamic finance. In order to reach our clients, we have devised a masjid
wise approach, in which we approach the imams of the masjid and get to know his regular musallis. They form our core group
for the region in regards to guaranteeing a person's honesty and integrity. They form the core group in the social collateral
scheme that we have devised. The Process then continues through the following steps. MASJID COMMITTEES CUSTOMER Based on our first experience, we design suitable return
schemes for our protocol, inshallah. INVESTORS: For the forms, see Appendix A The implementation phase leads us into following general
guiding principles that underlie best practice microfinance: l Covering costs. To become sustainable, we must cover the costs of lending. If micro-lending costs are not
covered, the institution’s capital will be depleted and continued access of micro-enterprises to financial services
and even the existence of the microfinance institution will be in jeopardy. l Achieving a certain scale. Successful microfinance institutions have reached a certain scale, as measured by the number of active loans. This number depends on the country
setting, lending methodology used, and loan sizes and terms offered. l Avoiding subsidies. Micro-entrepreneurs do not require subsidies or grants but they do need rapid and continued access to financial services. Besides, micro-lenders cannot
afford to subsidize their borrowers. Subsidies send a signal to borrowers that the government or donor funds are a form of
charity, which discourages borrowers from repaying. l Promoting outreach and demand-driven service delivery. Successful microfinance institutions increase access
to financial services for growing numbers of low-income clients, offering
them quick and simple savings and loan services. Loans are often short term, and new loans are based on timely repayments.
Loans are based on borrowers’ cash flow and character rather than their assets and documents. l Maintaining a clear focus. It takes time and commitment
to build a sustainable microfinance program. Thus mixing the delivery of microfinance services with, for example, the provision
of social services is inadvisable because it sends conflicting signals to clients and program staff. At the same time, capacity
building of the borrowers is an essential step without which the goals of the organization cannot be met. Thus micro-credit should be supported by other needed services of the poor. l Lending limits increase with each loan cycle. This
coupled with the desire to improve the islamic financial system in the area provides motivation for repayment. In a
future perspective, savings and other services would be an added incentive for the clients to adhere to terms agreed upon
and hence be on good terms in order to build a lasting and beneficial relationship with our society. l Arrears prevention is of crucial importance. Prevention is far more effective than therapy. On principle,
no arrears are accepted: a payment one day late is a late payment and recorded as such. The delinquent borrower is to be contacted
immediately. Monthly charges on late payments above the usual profit margin (penalties) are common in the world of microfinance,
but may not be acceptable in Islamic microfinance. Legal action is only to be taken later, say after a period of 1-3 months.
Before legal action is taken, the feasibility of loan rescheduling may be examined, though this is full of moral hazard. Adequate
loan terms and conditions prevent arrears: starting with small loans; setting initial loans and installments at a size that
uses the existing potential of repayment; increasing repeat loans in size depending on repayment performance; short loan periods;
monthly or weekly installments, combined savings and installment collection service; timely disbursement. There are lot of advantages of targeting and working
exclusively with the poor because a mixed group program involves priority analysis at the level of the field officers. The motivation for them to work with the non-poor will be so strong. Working with very
poor people will become a drain of the resources and a temptation to focusing on the non-poor will always exist. Systematic monitoring and evaluation of the program
help in making program more pragmatic. As we complete loan cycles, we aim to to grow the number of borrowers especially among the talented poor, those who can grow our investments. The
programs' prime focus now shifts on the technical and managerial training, research activities, and consultation services,
with a special focus on technology and the technical developments that might be helpful for the enterprises development and
growth. Sometimes the need is to train them on how to market their products and services, how to package it, how to expand
the market prospects, and create a product that suits the needs of consumers in the local market. As
we gain an experience in handling existing businesses, we come to know of industry practices and possible ventures to support
at startup so that we can recommend to the fuqara to take up these initiatives, we thus support masakin at the first level
of operation and fuqara at the second level of operation. Thus we ensure that we as muslims are building an islamic society
in matters related to finance and business. During the initial phase, there is a pronounced tendency to invest
in known and tested products. With increasing competence and member confidence, there will be an increasing demand for more
innovative opportunities. One example is savings. Saving is a psychological
input of the poor. And again it is very much necessary or an integral part of the whole area of micro-credit operation. Life
insurance for members and possibly their family members greatly contributes to social security. It also serves as loan
protection when a borrower dies. These and other improvement measures will help sustain interest in the program and will go
a long way in demonstrating the robustness of the islamic system in terms of growth and development. As a continuous improvement measure, we take up studies
of unsuccessful ventures and find potential causes for possible failure of our
program and proceed to design our process based on the improvement inputs and guidelines that are gained on a legal/financial/other
perspective. The following seven parameters will be used to measure
loan size and hence assess depth of outreach. i. Term
to Maturity (measured in months) T= 12 * (Annual avg no of loans outstanding
/ no of loans disbursed in the year) ii. Amount Disbursed A= Amount disbursed in the year / no of loans
disbursed in the year iii. Average Balance Av=Amt outstanding at year end / no of loans
outstanding at year end iv. Time between installments F= Avg term to maturity / avg no of installments v. Number of
installments N= Avg term to maturity / avg frequency of
installment vi. Amount per installment Am= Avg amt disbursed / avg no of installments vii. Rupee-year R= Avg annual rupees outstanding / no of loans
disbursed in the year Impact of the TIM program is expected at several levels:
The financial plan shows the expected operating revenue
and expenses, cash-flow patterns, application of non-operating funds, and sensitivity to variations in projected levels of
revenue and staffing. Most expenses are fixed. Initial salary levels and
occupancy costs are known and the extent of increase over the next two years is fairly certain. The high proportion of known
costs is helpful, in that expenses are stable and not subject to significant variation over the start-up period. However,
the high proportion of fixed costs can also be problematic, in terms of cash flow, and in the event that service hours and
revenue targets are not maintained. A significant threat to the financial viability of the start-up effort is a shortfall
in service hours and revenues. challenges: sustainability + expanding outreach Summary of Three-Year Pro-Forma Operating Statement: IN thousand rupees Year1 Year2 Year3 Revenue 600 3 000 18 000 Personnel Costs 1 500 3 000 4 000 Non Personnel costs 1 500 2 000 4 000 Total Expense 3 000 5 000 8 000 Excess of Revenue over Expense - 2 400 - 2 000 10 000 Sources Amount Uses Amount Large Investors 150 000 Large loans 10 * 15 000 Small Investors 300 000 Small loans 60 * 5 000 Personal Savings 75 000 R&D - NGO contribution 8 000 Transaction Costs - Initial capital :
Personal savings Rs 35 000
Other 'test' investors Rs 10 000
total : Rs 45 000 loans to existing businesses : Rs 3000 to Rs 4500
/ Rs 45 000
= 15 to 10 clients Repayments till end of season, end of quarter, end
of year Minimal average expected return : 3% at year (Assuming just one cycle for the year) Year 2 draws additional investors 15 investors with Rs 5000 each, makes Rs 75 000 Scale up level of operation in terms of cash, businesses
and reach Base : Rs 25 000 rs 2500 to rs 4000
/ Rs 100 000
= 40 to 25 clients With healthy business practice, average expected return : 3% At year end :
Rs 103 000 (assuming one cycle this year) With increase in number of investors, we can expand
capital base with inputs from regional investors, sadaqa investors, etc Year 3 Base : rs
75 000 investors: rs 5000 * 15 ; Rs 10 000 * 15 ; Rs 15 000
* 10 = Rs 450 000 start using some funds for 2 cycles average expected return : 4% Client Side : rs 2500 to rs 5000
/ 450 000
= 180 to 90 clients at year end : 468 000 TARGET base : rs 150 000 investors : 25 * 5000
25 * 10 000
25 * 15 000
25 * 20 000 100 investors pool Rs 12 50 000 funds : Rs 14 00 000 Client Side : micro and small scale - Rs 2500 to Rs 5000 / 700 000 = 280 to 140 clients medium scale clients - Rs 10 000 / 700 000
= 70 clients <startup
capital> A bigger level would be 500 investors at rs 10 000 Scaling investments up to rs 50 00 000 This enables us to reach 1000 clients at rs 5000 At 6% we look at a profit of 3 00 000 with each investor
getting profits of 600. We orient a small part of the investment gain to R&D,
studies, web-page development etc As our system grows older, we invest assets of our
base into self improvement, and developing other facilitates. that tunes to about 100 000. Note that this is the only method by which we counter
the riba industry in this arena, we provide consultancy to those who wish for a qarz hasana and those who appeal for zakah. we may partner with sister organizations to pool resources and expertise, capital injection only after satisfactory performance as a local financial intermediary. Looking Beyond, we envisage our target area as developing
a parallel riba free economy. We thus present a a successful model for further implementation and will share concepts with
NGOS by arranging workshops on methods followed. While implementing the Islamic microfinance program,
a key problem is that profit-and-loss sharing tends to attract entrepreneurs with dimmer prospects, who are looking to share
losses in the event of failure. Entrepreneurs with the best prospects are more likely to seek out fixed-interest financing
to maximize the returns on their presumed success. This adverse selection problem saddles our venture with bad risks. The business of a financial institution is to manage
financial risks, which include credit risks, liquidity risks, interest rate risks,
foreign exchange risks and investment portfolio risks. Most microfinance institutions put most of their resources into developing
a methodology that reduces individual credit risks and maintaining quality portfolios. Microfinance institutions that use
savings deposits as a source of loan funds must have sufficient cash to fund loans and withdrawals from savings. Financial risk management requires a sophisticated treasury function which manages liquidity risk, and
investment portfolio risk. As MFIs face more choices in funding sources and more product differentiation among loan assets,
it becomes increasingly important to manage these risks well. Credit risk, the most frequently addressed risk for
MFIs, is the risk to earnings or capital due to borrowers’ late and non-payment
of loan obligations. Credit risk encompasses both the loss of income resulting from the MFI’s inability to collect anticipated
interest earnings as well as the loss of principle resulting from loan defaults. Credit risk includes both transaction risk
and portfolio risk. Transaction risk refers to the risk within individual
loans. MFIs mitigate transaction risk through borrower screening techniques, underwriting criteria, and quality procedures
for loan disbursement, monitoring, and collection. Portfolio risk refers to the risk inherent in the composition
of the overall loan portfolio. Policies on diversification, maximum loan size, types of loans, and loan structures lessen
portfolio risk. Management must continuously review the entire portfolio
to assess the nature of the portfolio’s delinquency, looking for geographic trends and concentrations by sector, product
and branch. By monitoring the overall delinquency in the portfolio, management can assure that the MFI has adequate reserves
to cover potential loan losses. MFIs have developed very effective lending methodologies
that reduce the credit risk associated with lending to micro-enterprises,
including group lending, cross- guarantees, stepped lending, and peer monitoring. Other
key issues that affect MFIs’ credit risk include portfolio diversification,
issuing larger individual loans, and limiting exposure to certain sectors (e.g. agricultural or seasonal loans). Each type of lending has a different risk profile and requires unique loan structures and underwriting
guidelines. Effective approaches to managing credit risk in MFIs
include : Well-designed borrower screening, careful loan structuring, close monitoring, clear collection procedures, and active
oversight by senior management. Delinquency is understood and addressed promptly to avoid its rapid spread and potential for
significant loss. Good portfolio reporting that accurately reflects the
status and monthly trends in delinquency, including a portfolio-at-risk aging schedule and separate reports by loan product. A routine process for comparing concentrations of credit risk with the adequacy of
loan loss reserves and detecting patterns by loan product and by branch should be initiated. Simple products and standardized procedures, products
and processes structured to reduce credit risk, transparency in credit operations through regular reporting, strict organizational
control over loan transactions, operating systems designed for maximum performance, maximum geographical proximity to borrower,
limited information processing and decision making, minimization of accounting and administrative procedures, and frequent
repayments of small amounts are some steps that greatly reduce risk. Liquidity risk is the possibility of negative effects
on the interests of owners, customers and other stakeholders of the financial institution resulting from the inability to
meet current cash obligations in a timely and cost-efficient manner. Liquidity risk usually arises from management’s
inability to adequately anticipate and plan for changes in funding sources and cash needs.
Efficient liquidity management requires maintaining sufficient cash reserves on hand to meet client withdrawals, disburse
loans and fund unexpected cash shortages, while also investing as many funds as possible to maximize earnings. A lender must be able to honor all cash payment commitments
as they fall due and meet customer requests for new loans and savings withdrawals. These commitments can be met by drawing
on cash holdings, by using current cash flows, by borrowing cash, or by converting liquid assets into cash. Some principles of liquidity management that MFIs use
include: Maintaining detailed estimates of projected cash inflows
and outflows for the next few weeks or months so that net cash requirements
can be identified. Using branch procedures to limit unexpected increases
in cash needs. For example, some MFIs, put limits on the amount of withdrawals
that customers can make from savings in an effort to increase the MFI’s ability to better manage its liquidity. Maintaining investment accounts that can be easily
liquidated into cash, or lines of credit with local banks to meet unexpected
needs. Anticipating the potential cash requirements of new product introductions or seasonal variations in deposits or withdrawals.
Liquidity management has a short-term focus. Often, liquidity projections are extended up to a year with diminishing detail
on the far end of the timeline. Liquidity risk and credit risk interact. For example,
a loan that is not repaid when due represents a credit risk and a loss of liquidity. A significant increase in delinquency,
for instance in the event of natural disaster, suddenly reduces the cash inflow
from loan repayments and may increase cash outflows for new loans. This squeezes cash reserves and increases liquidity risk.
Conversely, liquidity management can be especially important in MFIs where a client’s propensity to repay is influenced
by her future access to loans. Rumors that an MFI might not be able to extend credit immediately upon repayment because it
has run out of cash could cause borrowers to default in an effort to protect against their own impending cash shortage. For some MFIs,
a significant percentage of the institution’s assets are in cash and investments rather than in loans. The investment
portfolio represents the source of funds for reserves, for operating expenses, for future loans or for other productive investments.
Investment portfolio risk refers mainly to longer-term investment decisions rather than short term liquidity or cash management
decisions. The investment portfolio must balance credit risks
(for investments), income goals and timing to meet medium to long term liquidity needs.
An aggressive approach to portfolio management maximizes investment income by
investing in higher risk securities. A more conservative approach emphasizes
safer investments and lower returns. To reduce investment portfolio risk, treasury managers
stagger investment maturities to ensure that the MFI has the long-term funds needed for growth and expansion. In addition,
they consider the credit, inflation, and currency risks that might threaten the value of the principal investment. Short-term
investments, for example, carry less risk of losing value due to inflation Most financial institutions have policies establishing
parameters for acceptable investments within the investment portfolio, and they
range from very conservative to more aggressive for a portion of the investment portfolio. These policies set limits on the
range of permitted investments as well as on the degree of acceptable concentration for each type of investment. Operational risk arises from human or computer error
within daily product delivery and services. It transcends all divisions and products
of a financial institution. This risk includes the potential that inadequate technology
and information systems, operational problems, insufficient human resources,
or breaches of integrity will result in unexpected losses. This risk is a function of internal controls, information systems,
employee integrity, and operating processes. Transaction risk exists in all products and services.
It is a risk that arises on a daily basis in the MFI as transactions are processed. Transaction risk is particularly high for MFIs that
handle a high volume of small transactions daily. When traditional banks make loans, the staff person responsible is usually
a highly trained professional and there is a very high level of cross-checking. Since MFIs make many small, short-term loans,
this same degree of cross-checking is not cost effective, so there are more opportunities for error and fraud. The loan portfolio usually accounts for the bulk of
the MFI’s assets and is thus the main source of operational risk. As more MFIs offer
additional financial products, including savings and insurance, the operational risks
multiply and should be carefully analyzed as MFIs expand those activities. Common Operational Risks in MFIs: The MIS does not correctly reflect loan tracking, information disbursed, payments received, current status of outstanding balances.
Lack of effectiveness and insecurity of the portfolio management system where the external environment is not safe or the software does not have internal safety features like backups, inaccurate MIS and untimely
reports. Inconsistent implementation of the loan administration.
Lack of portfolio related fraud controls, like no client
visits to verify loan balances Loan tracking information is not adequate, for instance,
no aging of portfolio outstanding, inadequate credit histories. For MFIs, key steps to reduce transaction risk include:
Simple, standardized and consistent procedures for
cash transactions throughout the MFI. Effective ex-ante internal controls
that are incorporated into daily procedures to reduce the chance of human error and fraud at the branch level. For instance,
dual signatures, separate lines of reporting for cash and program trans- actions. Strong ex-post internal audit controls to
test and verify the accuracy of information and adherence to policies and procedures. These internal controls help ensure that management reporting information is providing the most accurate information,
and reduces the occurrence of problems. Using computer systems and minimizing the number of
times data has to be manually entered reduces the chance and frequency of
human error. Until recently, fraud risk has been one of the least
addressed risks in microfinance to date. Also referred to as integrity risk, fraud
risk is the risk of loss of earnings or capital as a result of intentional deception by
an employee or client. The most common type of fraud in an MFI is the direct theft
of funds by loan officers or other branch staff. Other forms of fraudulent activities
include the creation of misleading financial statements, bribes, kickbacks, and phantom
loans. Effective internal controls play a key role in protecting
against fraud at the branch level, since line staff handle large amounts of client
and MFI funds. While fraud risks exist in all financial institutions, if left
uncontrolled, they inevitably increase as fraudulent behaviors tend to be learned and shared
by employees. Internal controls should include ex-ante controls that are incorporated within the methodology and design or
procedures (prior to operation), as well as ex-post controls that verify that policies and procedures are respected (after
operations). Two principles are paramount: i) the
use of preventive measures to reduce fraud, and ii) the importance
of client visits to verify branch information, as described below Preventive measures to reduce fraud. Fraud prevention
should be built into the design of operational policies and procedures and
then tested and checked by thorough internal audits. The use of client
visits to reduce fraud. Experience has shown that while a small number of staff are often inclined to be dishonest, most avoid
unethical behavior if their internal sense of right and wrong is reinforced by suitable external controls and sanctions. The
best way to discover fraud is for someone other than the loan officer to visit the client to verify account balances. This
person should have a sound understanding of the lending process and know how fraud can occur. To reduce its exposure to fraud risk, the following
mechanisms can be put in place: 1. Introduce an education campaign to encourage clients
to speak out against corrupt staff and group leaders. 2. Standardize all loan policies and procedures so
that the staff cannot make any decision outside the regulations. 3. Emphasize management training to increase managers'
capacity and to introduce strict supervision processes. 4. Establish an inspection unit that performs random
operational checks. 5. Enforce the following human resource policies: • fire staff involved in fraud immediately • make loan products available to staff • pay staff well relative to other available
job opportunities in the area • rotate staff regularly within a branch Strategic risks include internal risks like those from
adverse business decisions or improper implementation of those decisions, poor leadership,
or ineffective governance and oversight, as well as external risks, such as changes in the business or competitive environment.
This section focuses on three critical strategic risks: Governance Risk, Business Environment Risk, and Regulatory
and Legal Compliance Risk. One of the most understated and underestimated risks
within any organization is the risk associated with inadequate governance or a
poor governance structure. Direction and accountability come from the board of
directors, who increasingly include representatives of various stakeholders in the MFI like investors, borrowers, and institutional partners. The social mission of MFIs
attracts many high profile bankers and business people to serve on their boards. Unfortunately,
these directors are often reluctant to apply the same commercial tools
that led to their success when dealing with MFIs. As MFIs face the challenges of management
succession and the need to recruit managers that can balance social
and commercial objectives, the role of directors becomes more important to ensure
the institution’s continuity and focus. To protect against the risks associated with poor governance
structure, MFIs should ensure that their boards comprise the right
mix of individuals who collectively represent the technical and personal skills and backgrounds needed by the institution. Most MFIs name executive officers and
some create special commit- tees to fulfill specific roles on the board. In addition,
the institutional by-laws should be clear and well written, and accessible to all board
members. Microfinance institutions are particularly vulnerable
to governance risks resulting from their institutional structure and ownership. One
of the strongest links to effective governance is ownership. Board members with a financial stake in the institution tend
to have stronger incentives to closely oversee operations. However, many MFIs operate as non-governmental organizations whose
board members have no financial stake in the institution. Even many transformed commercial MFIs are primarily owned by the former non-governmental organization (NGO) and therefore the majority of their
board members are not real owners. In addition, many board members of commercial institutions
represent public development agencies and tend to think more like donors than
traditional investors. Microfinance institutions that operate as credit unions face a different type of governance issue –
their boards comprise client members, most of which are net borrowers whose focus could be more on reducing lending rates than
on the institution’s wellbeing Effective governance requires clear lines of authority
for the board and management. The board should have a clear understanding of its mandate, including its duties of care, loyalty
and obedience. MFIs can demonstrate short-term financial success without
effective governance, but effective governance is needed to see the institution through difficulties that are bound to arise
over the long-term. It is the board’s responsibility to oversee senior management and hold them accountable for strategic
decisions. If board members fail to fulfill their duties effectively, the MFI risks financial loss as a result of poor decision
making or inadequate strategic planning. To govern and provide good oversight of the institution,
board members must have the right information and review it frequently and
on a timely basis. The MFI must clearly communicate performance expectations and lines
of accountability. The MFI should manage different business activities separately
with independent performance indicators and management reports. At a minimum, boards of microfinance institutions should track
the information contained in these reports. Reputation risk refers to the risk to earnings or capital
arising from negative public opinion, which may affect an MFI’s ability to
sell products and services or its access to capital or cash funds. Reputations are much easier to lose than to rebuild, and
should be valued as an intangible asset for any organization. Most successful MFIs cultivate their reputations carefully
with specific audiences, such as with customers, their funders and investors,
and regulators or officials. A comprehensive risk management approach and good management information reporting helps an MFI
speak the “language” of financial institutions and can strengthen an MFI’s reputation with regulators or
sources of funding. Compliance risk arises out of violations of or non-conformance
with laws, rules, regulations, prescribed practices, or ethical standards,
which vary from country to country. The costs of non conformance to norms, rules,
regulations or laws range from fines and lawsuits to the voiding of contracts,
loss of reputation or business opportunities, or shut-down by the regulatory authorities.
Many non-government organizations that provide microfinance are choosing
to transform into regulated entities, which exposes them to regulatory and compliance
risks. Even those microfinance NGOs that are not transforming are increasingly
subjected to external regulations. The pursuit of growth to improve financial viability
can also lead to a mission drift, thus resulting in a loss of focus on serving low-income
clients. The pressure to expand the loan portfolio and maintain low delinquency can
encourage loan officers to select wealthier clients with larger loan requests. MFIs use several risk management strategies
when faced with rapid growth: Careful attention to staff recruitment and training.
The MFI can reduce operational risk by carefully growing staff and ensuring that employees’ interests are aligned with
those of the goals of the organization. Control growth to allow time to develop internal systems
and prepare staff for changes resulting from the expansion. Carefully monitor
loan growth and portfolio quality to better understand growth and to not let
growth mask increases in delinquency. Good communication from senior managers to reinforce
the MFI’s culture and commitment to quality service and integrity. These
efforts should motivate new employees, as well as existing employees who are being
asked to do more New product risk is the potential loss that can result
from a product that fails or causes unintended harm to the MFI. Experimenting with
new product innovations increases susceptibility to this risk and identifying and managing this risk becomes increasingly
important in such a scenario. MFIs should be careful of not allocating all the unit costs associated with the new product,
thereby distorting income projections. The new product risk can be reduced by the use of a
pilot test to identify and better understand risks involved in new market entry and product development before launching the
product on a wide-scale. A risk management matrix helps the risk managers assign
ratings to different risks and prioritize those areas that need additional attention. For each risk, the matrix assigns a
rating of four different factors: (1) The quantity or severity of the risk, based on
the potential severity and prob- ability of occurrence (e.g. Low, Moderate, or High);
(2) The quality of existing risk management, or how
well management currently measures, controls, and monitors the risk (e.g. Strong,
Acceptable, Weak); (3) The aggregate risk profile for that risk, combining
the first two measures (e.g. High, Moderate, Low); and (4) The trend or direction of that risk (e.g. Stable,
Increasing, or Decreasing).
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