Islamic Financial Services Department Advancing Financial Inclusion and Islamic Microfinance Development in IDB Member Countries May 4-5, 2016 Bogor, Indonesia Wasim A. Abdulwahab Islamic Financial Services Department 1

A Unique Model of South-South Cooperation Global MDB: Membership spread over 4 continents Membership Increased: 22 countries in 1975 → 57 countries in 2016 IDBG approvals since inception until 2016 (February) US$ 115 Bn.

Islamic Financial Services Department IDB Mission & Strategic Thrust “To promote comprehensive human development, with a focus on the priority areas of alleviating poverty, improving health, promoting education, improving governance and prospering the people.” Expansion of the Islamic Financial Services Industry is one of the key strategic thrusts

Islamic Financial Services Department CONNECTIVITY A Strong Catalyst for South-South Collaboration ISLAMIC FINANCE SECTOR GROWTH A Leading Reference in Islamic FinanceINCLUSIVENESS Become a Preferred Partner for MCs 1 Social and Economic Development Strategic objectives: The Vision translates into strategic objectives that will drive the core activities of IDBG Addresses the needs of the poorer and marginalized communities who represent a significant portion of the IDBG's stakeholders Promotes cooperation among its MCs to enhance trade, investment, knowledge, and capacity development as part of its mandate Facilitates the development of the global Islamic Financial industry as a part of its unique mandate including Financial Inclusion Strategic objectives Rationale 4

Islamic Financial Services Department How to advance Islamic Microfinance Throwing money at the problem is not the solution.  Reasons Markets not ready Lack of consumer education about financial matters Lack of enabled institutions Lack Legal frameworks Lack of Regulations Lack of demand for any other reasons

Islamic Financial Services Department Growing Islamic Microfinance through Financial Inclusion Financial inclusion is a broad concept beyond access to finance and includes financial education and financial consumer protection. The future trends are mainly concentrated on the major areas: Increasing knowledge about financial services, Increasing access to financial services, Promoting alternative financial products and services and Enhancing consumer protection

Islamic Financial Services Department Strategy for Enhancing Financial Inclusion Classify countries into clusters according income and stage of development and ask the following questions. To what extent is the legal and regulatory systems are developed (Basic, Intermediate or Advanced)? To what extent is the demand from the population for various Islamic finance product from the population? How much political will is present? How well developed is the country? What are the Government’s objectives and how much is it willing to pursue them? How well is the financial market developed?

Islamic Financial Services Department Components of an Islamic Finance Enabling EnvironmentLegalLegal RegulationsRegulations ShariahShariah TaxationTaxation AccountingAccounting Liquidity Management Islamic Banking Islamic Capital Market Takaful Ijarah Islamic Microfinance Islamic Investment Funds

Islamic Financial Services Department Developing n ecosystem for Financial Inclusion and Islamic microfinance by incorporating, or permitting, Islamic financial activity within a country or a group of countries’ financial system PreparationAssessmentGap Analysis Agree target framework model Obtain political support Establish working groups Identify other available support groups Evaluate & implement change Monitor & review What is the Process of Creating an Enabling Environment for Financial Inclusion

Islamic Financial Services Department Activities required for commencement of Financial Inclusion Activities Awareness building Organize stakeholder groups Understand the necessary enabling environment Preliminary studies & gap analysis Roadmap & Time table

Islamic Financial Services Department Ensuring robust Islamic financial transactions, products and services can be undertaken in a vibrant Islamic financial market place requires three major elements to be working in harmony: Legal enforceability CommercialViability Sharia'acompliancy

Islamic Financial Services Department Technical Assistance to Islamic Finance Industry Financial Sector Development Technical Support Program Microfinance Development Program Strategic Partnerships 12

Islamic Financial Services Department Objective: To develop Islamic finance enabling environment (legal, regulatory & supervisory framework) and institutional capacity building in Islamic finance Technical Support Program Beneficiaries: central banks, capital market authorities, supervision agencies, public sector banks, ministries of finance, as well as Islamic Infrastructure Institutions. What have the TA Projects achieved? Tajikistan – Standalone Islamic banking law passed by the Parliament Djibouti – Preparing for issuing Islamic banking law Indonesia – Detailed Masterplan for developing Islamic finance architecture under implementation by the Govt. Kyrgyzstan – Converted EcoBank into an Islamic bank Afghanistan – Islamic banking operations introduced in Bank Milli Afghan Nigeria – Central Bank capacity building. Two Islamic banking licenses issued. Jaiz bank established. IFSB – Standard on ‘Core Principles for Islamic finance regulation’ developed. Other prudential work. IIRA – Fiduciary Rating Methodology developed. Assisting in issuing sovereign ratings of IDB MCs Senegal – Provided regulatory policy advice leading to interest in Islamic finance from BCEAO Oman – Implementation Guidelines for Sukuk & Takaful 13

Islamic Financial Services Department -The Program has successfully targeted key emerging Islamic finance markets: 21 countries targeted -Regional TAs to IIIs -Joint projects with World Bank & IMF Objective: To develop Islamic finance enabling environment (legal, regulatory & supervisory framework) and institutional capacity building in Islamic finance Technical Support Program Beneficiaries: central banks, capital market authorities, supervision agencies, public sector banks, ministries of finance, as well as Islamic Infrastructure Institutions. TAs to Regional Bodies/IIIs/MDBs’ WGs CIBAFI IFSBIICRAIIFM IIRA GCC IDB-WB WG IDB-IMF LOU Geographic diversity of projects 14

Islamic Financial Services Department Objective: To develop Islamic finance enabling environment (legal, regulatory & supervisory framework) and institutional capacity building in Islamic finance Technical Support Program Beneficiaries: central banks, capital market authorities, supervision agencies, public sector banks, ministries of finance, as well as Islamic Infrastructure Institutions. Who are the Beneficiaries? Bank Al Magrib (Morocco) National Bank of Kyrgyz Republic Ministry of Economy of Senegal Bank of Uganda Central Bank of Nigeria Central Bank of Djibouti Libya Development Bank National Bank of Tajikistan National Bank of Kazakhstan Central Bank of Mauritania Gulf Cooperation Council (GCC) EcoIslamic Bank, Kyrgyz Republic Bank-e-Milli Afghan Gumhouria Bank, Libya BAPPENAS Indonesia Central Bank of Libya Under Secretariat of Treasury, Turkey Central Bank of Tunisia Maldives Monetary Authority Capital Market Authority Oman Banque Centrale des Etats de l'Afrique de l'Ouest (BCEAO) Ministry of Finance of Oman Bank of Mozambique 15

Islamic Financial Services Department Structured Approach to Enhancing Financial Inclusion Ultra Poor (below Poverty Line) Poor (at the Poverty Line) Low Income Zakah, Sadaqat Waqf Khairat Khumus Other collective schemes for redistribution of income Qard-al-Hassan, Zakah, Waqf Micro-Finance (Murabaha, Musharikah, Salam) Micro-Takaful Micro-Small- Medium Enterprises (MSME) `

Islamic Financial Services Department Recipients: (i) Maldives Monetary Authority and (ii) Capital Market Development Authority Amount: US$ 150,000 TA Agreement Signed:2012 Status: Completed The TA Project To set up legal, regulatory and supervisory framework for Islamic financial institutions in Maldives and to assist the country to launch Islamic capital market instruments starting with Sukuk Objective - Prepare report on legal, regulatory and supervisory framework for developing Islamic finance sector - Develop Sharia governance framework - Capacity building of staff from CMDA & MMA Scope The Islamic Development Bank Group The TA helped in developing - Islamic finance enabling environment & the Sukuk market in Maldives and enhanced awareness about Sukuk Impact - Regulations for Sukuk Issuance were drafted by Capital Market Development Authority. The Regulations came into force in Issuance of the first corporate Sukuk by Housing Development Finance Corporation in September 2013 Consultant prepared detailed report on the necessary modifications needed in the legal, regulatory and supervisory framework for Islamic financial institutions Project dissemination workshops were conducted for the concerned stakeholders including staff of MMA and CDMA Together we build a better future Sukuk Market Development Capacity Building Financial Sector TA to Maldives Capital Market Development Authority to Develop Sukuk Market & Maldives Monetary Authority to Develop Regulatory Framework for Islamic Banking

Islamic Financial Services Department Recipient: Capital Market Authority Amount: US$ 150,000 TA Agreement Signed:2014 Status: Completed The TA Project To provide consultancy services to the CMA to assist in the implementation of the newly developed Sukuk and Takaful regulations Objective Review and assist the CMA in implementing the newly developed regulations for Sukuk and Takaful Scope The Islamic Development Bank Group TA helped in implementing the regulations related to Sukuk and Takaful and enhanced the understanding of Sukuk and Takaful for CMA staff Impact Expert hired for 12 months to implement Sukuk and Takaful regulations by way of developing policies, procedures, guidelines for the CMA. Together we build a better future Regulations Implementation Capacity Building TA to Oman Capital Market Authority to Develop Islamic Capital Market & Takaful Oman issued its first sovereign Sukuk amounting to OMR 200 million (US$ 520 million) in October The Ijara Sukuk tenor is 5 years. Sukuk Issuance

Islamic Financial Services Department Recipient: Bank-e-Milli Afghan (BMA) Amount: USD 130,000 TA Agreement Signed:2012 Status: Completed The TA Project Support BMA’s Islamic banking operations which will contribute to IDB’s strategic objective of developing and promoting Islamic financial sector in IDB member countries Objective - Development of Islamic finance product programs and related policies & procedures - Providing related capacity building training to BMA staff Scope The Islamic Development Bank Group TA helped in full-scale relaunch of Islamic banking services comprising sophisticated product suite, developed policies and trained staff. BMA is now better equipped to serve client needs through innovative product solutions Impact Auto Finance (Murabaha), Home Appliance Finance (Murabaha), Real Estate Finance (Murabaha), Trade Finance LC (Murabaha), Construction Finance (Istisna & Parallel Istisna), Working Capital Financing (Musharaka) Together we build a better future Regulations Implementation Capacity Building TA to Bank-e-Milli Afghanistan to Develop a Suite of Islamic Banking Products for Clients Current accounts, Savings accounts, Term investment accounts Liability Products Credit procedures, Financing policy, Operations policy, Profit distribution mechanism Policy Documents

Islamic Financial Services Department Microfinance Development Program On-going projects… Objective: aims to increase outreach and enhance financial inclusion to reduce poverty through the development of Islamic Microfinance industry How? Several modes of intervention, both Financial and Technical, designed to address the wide ranging microfinance needs in member countries, thus avoiding the one-size-fits-all approach.  Sudan:  Bank Al-Usra - Capacity building TA for microfinance completed successfully  Irada - Equity in MFI with Bank Al-Khartoum  Ibdaa Bank - Equity participation in MFI with Agfund  Senegal:  Developing the Enabling Environment - (a) MOF-Senegal (b) BCEAO - Completed  Equity Investment in MFI with Government, Local MFI and other local/international institutions  Indonesia:  $50m Islamic Microfinance Fund - in collaboration with Government and local financial institutions. Steering committee formed and Financial Advisor TOR prepared  Tunisia:  Equity investment in a new Islamic MFI with Zeitouna Bank  Pakistan  Initial discussions held with parties desirous of starting Islamic microfinance  Tajikistan and Egypt:  Identification of local sponsors will take place soon. Phase-I Phase-II Phase-III  Next Group of Countries:  Afghanistan, Gambia, Guinea-Conakry and Maldives 16

Islamic Financial Services Department 21 Thank you Terima Kasi Together we build a better World