ENHANCING FOOD SECURITY WITH ISLAMIC MICROFINANCE Insights from Some Recent Experiments 4 th Global Islamic Microfinance Forum 1st November 2014

Dompet Dhuafa Indonesia Islamic Social Finance Report 2 How can Zakat and Waqf be integrated with Microfinance to enhance Food Security? 1.1. Wasil, Pakistan 2. Abu Halima, IRADA, Sudan 3. Wad Balal, IRADA, Sudan 4. Strategic Food Reserve (IRADA), Sudan 5. Summing Up 6.

3 Dompet Dhuafa Republika 1 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

4 Dompet Dhuafa Republika 1 Community Empowerment Model for Farmers (P3S) The Program  Introduction to integrated and environment-friendly 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

5 Dompet Dhuafa Republika 1 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

6 Dompet Dhuafa Republika 1 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

7 Dompet Dhuafa Republika 1 Community Empowerment Model for Farmers (P3S) Socialization Group Formation Business Financing AssistingOrganization Formation (GAPOKTAN) Monitoring & Evaluation Exit Strategy Preparation

8 Wasil 2 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

9 Wasil 2 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.

10 Wasil 2 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.

11 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.

12 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 3

13 IRADA Microfinance Financing the value chain A Partnership to create and nurture partnerships 3  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 bank’s 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.

14 IRADA Microfinance Financing the value chain A Partnership to create and nurture partnerships 3  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

15 Abu Halima, IRADA Financing the value chain Financing Green Houses 3 Min. of Finance IRADA - BoK Abu Halima Min. of Social Affairs Graduates Min. of Agriculture Tech Consultant Sana Hypermarket 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

16 Wad Balal, IRADA Financing the value chain Financing Cattle Fattening 4 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 Fattening Facility Wad Balal Association Farmers Tech Consultant (WBC) OVERSEAS MARKET 8

17 IRADA Microfinance Ensuring Food Sovereignty Financing the Building of Strategic Food Reserve  To efficiently purchase goods from farmers for sale to the Government of Sudan’s 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 5

18 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) 5

19 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) 5

20 Summary Insights from Case Studies How can Islamic MF enhance food security?  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 6

Thank you Send your feedback to: Dr. Mohammed Obaidullah YTI Chair Professor, Universiti Sains Islam Malaysia Senior Economist, Islamic Research and Training Institute Islamic Development Bank Group, Saudi Arabia |