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Project Feasibility Analysis of Islamic Microfinance Model

5.4 Towards an Islamic Microfinance Model

5.4.3 Project Feasibility Analysis of Islamic Microfinance Model

It is pertinent to mention that the following ‘project feasibility analysis’ of mosque- based Islamic microfinance model specifies the startup-up phase of the project. At this stage, the operating expenses are considered zero in order to keep the initial outlay at a minimum. At a later stage, however, it is recognized that the operating expenditures will increase due to the assignments of salaries to the staff (as proposed in the Business Plan, see Appendix A). Expenditures on office building and furniture are also expected to increase. The startup costs are intentionally kept at a minimum to ensure the possibility of low-cost loans in the wake of interest-free business, and to reduce the potential dependence on high interest charges.

The project feasibility analysis determines the probability of success of the project at hand. It also gives an understating of the cost structure of the project.

Table 5.17: Project Feasibility Analysis of Islamic Microfinance through Mosque

Head of account Cost Description

Initial Investment Required US$ 4,000 Reserve for Loans.

Initial Outlay 0 (Zero) Regular office and buildings are not required and a bank account will be used for operations. Office Building and

Furniture

0 (Zero) Mosque will be used for processing.

Process End Machinery handed

over to borrower by IMFI head Process End

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Total staff7 at startup 5 person Project Head (1), Imam8 of Mosque (1), Financial Experts cum regular volunteer (2), Financial Expert cum reserve volunteer (1).

Staff salaries and allowances9

0 (Zero) Services will be rendered as religious duties. Operational Expenses 0 (Zero) Operations will be performed after regular prayers

at mosque. Number of Consumption

Loans (Initial)

Tentative Subject to the collection of Zakat during the preliminary phase before the startup of actual project.

Number of Production Loans (Initial)

30 20 loans of $50 = $1,000 10 loans of $100 = $1,000.

Funds Reserve for Backup US$1,500 Reserve fund will be used for further loans after initial evaluation of the project.

Funds Reserve for Miscellaneous Expenditures

US$500 Reserve for unforeseen expenditures. Expected Time of Loan

Recovery

12 months First two months will be exempted for instalment; 10 equal instalments of monthly payments.

7 At the startup the team comprises five members i.e. The Head of IMFI, Imam (Prayer leader), two financial

experts, and a reserve financial expert. The idea behind the formation of this team is that the members must have the knowledge of microfinance operations. For example, the IMFI’s Head or financial experts would possibly be the person(s) from banking and finance sector preferably the retired person (s). The involvement of Imam is just to ensure the help in borrower’s selection which is quite difficult in microfinance business. The Imam would be given the task to assess the borrower’s moral character like integrity, piety, religiosity, etc. these elements are important to determine at first in order to ensure the repayment of the loans. Secondly, the Imam would distinguish the classification of loan whether the borrower falls in the category of ‘extremely poor or deprived’ (suitable for consumption loan) or in the category of relatively less poor (suitable for production loan).

8The Imam is a highly educated person who has normally completed an 8-years course of Daras-e-Nizami or

Fazil e Arabic that consists of about 20 different courses. The course of Daras-e-Nizami requires eight year of extensive study and equivalent to Bachelors of Theology (Honors) (AliGarh Muslim University, 2016). Daras-e-Nizami covers some 20 subjects which fall into two categories: al-uloom annaqliya (transmitted sciences) and al-uloom al-aqliya (rational sciences). Half of the curriculum includes subjects that are strictly religious in nature. The remaining subjects include medicine, mathematics, astronomy, history, philosophy, prosody, and polemics and were included in the 19th century to both equip the students for civil service jobs and to help them understand religious texts 8 (United States Institute of Peace, p. 2-3) (Pl refer to

http://108.179.255.30/~christi4/pubs/trip_report.pdf.). The appointments of Imams in Pakistan is made on monthly salary basis and they serve under the jurisdiction of the constitutional settings of the Ministry of Religious Affairs and Inter Faith Harmony (www.mora.gov.pk) and their appointments were made in accordance with Rule No. 4 (l)-Auqaf O.S.D./66 section 21 of the West Pakistan Waqf Properties Ordinance, 1961 (Ordinance XXVIII of 961). The clause II (7): B-III exclusively urged the compulsory qualification required for the post of Imam must be equivalent to Daras-e-Nizami or Sanad of Fazil-i-Arabi8 (1968, p.4).

9 The salaries and allowance are intentionally kept to a minimum during the startup phase. However, in phase

two the salaries and allowance will be paid to all staff (please see the details in the Business Plan, Appendix- A).

137 Expected Loan Loss Rate 5%

(five percent)

Probability of pre-screening errors of projects and borrower’s selection.

Interest Charges on Loans 0 (Zero) Interest free project because the interest is prohibited in Islamic Shariah.

Financial self-sufficiency (FSS)

Expected Will be attained in second phase of the project through amalgamation with Islamic banks. Operational self-sufficiency

(OSS)

Expected Will be attained with zero operational cost and low transaction cost (cost per loan = zero). The feasibility analysis of the above mentioned project reveals that the initial outlays are reduced to nearly zero because of the inclusion of the mosque in the system. In general, the project’s initial cost increases due to some huge expenditures on office buildings and furniture but this project does not require formal office buildings and furniture (based on mosque). Secondly, the operational costs are reduced by minimizing the staff salaries with the appointment of field expert volunteers (retired government officers can be hired as volunteers). The transaction costs will be reduced by involving the mosque’s Imam for borrower’s selection and project evaluation without incurring additional costs. (The detailed analysis on Mosque-based Islamic Microfinance is provided in the Business Plan; see Appendix-A).

Finally, this project addresses the following issues that have constrained conventional microfinance projects: (1) adverse selection and moral hazard; (2) exorbitant interest charges; (3) women/family empowerment; (4) double bottom line objectives; (5) high transaction costs; and (6) information asymmetry.

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5.4.3.1 Adverse Selection and Moral Hazard

The probability of adverse selection is minimized in this project due to its mechanism for the selection of borrowers. The central authority is given to the mosque’s prayer leader (Imam) who is considered a well-informed and an honest person in Islamic society. If the borrowers are selected on merit (honest and active entrepreneurs), then the issues of adverse selection and moral hazards could be resolved.

5.4.3.2 Exorbitant Interest Charges

The project is an interest-free project and does not demand extra charges on any account (processing fees and etc.) on loans. Such provisions allow the poor to work actively on their projects without getting an extra burden of interest charges. It is viewed in conventional microfinance that some MFIs charge exorbitant interest and use harsh recovery practices that exploit the poor. Such exploitation is not only ineffective in poverty alleviation but throws the poor into a deeper poverty trap. The proposed project resolves the issue of poor exploitation and provides the services to the poor.

5.4.3.3 Women Empowerment / Family Empowerment

A vast majority of conventional microfinance targets poor women as their potential customers, but Islamic Microfinance targets the head of the household as a customer to support the whole family without gender discrimination. The Islamic Shariah believes in social development, and the concept of welfare state (discussed in above sections) demands that the whole family is to be empowered rather than just focus on women. The selection

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of the household head for loans gives an advantage over women-only projects because it is highly likely that the loans to women would be used for family consumption than some economic activities. In most of the patriarchal societies in South Asia, women are not involved in household decision-making process due to male-chauvinistic approaches. It is highly probable that a woman borrower might use the loan for family consumption in case a family member is in dire need. The project resolves the issue by targeting the family head as a customer without any gender discrimination.

5.4.3.4Double Bottom Line Objectives

One of the main issues in the prevailing practice of conventional microfinance is a balance between financial sustainability and social outreach which is difficult to maintain. To achieve the target of double bottom line, efforts are made to acquire financial sustainability while serving the poorest strata of the society. The project of Islamic microfinance resolves the issue by distinguishing these two groups into poorest and borrowers. The former group can acquire loans for consumption purposes that will be funded through Islamic religious obligation (Zakat), while the latter group can borrow for the economic activities. Financial sustainability will be achieved through the profit- generating economic activities, while social outreach will be achieved through serving the poorest people.

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5.4.3.5 High Transaction Costs

The project of Islamic microfinance is a highly cost effective project in which the transaction cost is kept at a minimum (nearly zero) due to the inclusion of the mosque and the Imam. The proponents of conventional microfinance always put forward the issue of high transaction cost against the exorbitant interest charges. They charge sky-high interest rates on loans to cover the high cost per loan, thus seriously hurting the microfinance objective of serving poorest. The project has a low transaction cost because the funds are autonomously generated and IMFI does not borrow the loans on interest from other sources due to the restrictions imposed by the Islamic Shariah. The project’s low-cost loans do not require exorbitant interest charges to cover its cost; therefore, the issue of high transaction cost is resolved in this project.

5.4.3.6 Information Asymmetry

One of the main issues in existing conventional microfinance is information asymmetry which creates further complications of double-dipping (loans from multiple sources) and borrower’s indebtedness. If the scale of such issues is large, then it might shake the whole system of microfinance and the repayment crisis might occur as has happened in the past in a number of countries (see details in Chapter 3 above). Such issues are handled in this project as the borrower’s selection and monitoring are done through the sanctions provided by the prayer leader (Imam). The performance monitoring will be performed at the mosque where the borrower can be consulted at any time after prayer as the Muslims are bound to pray five-times a day in mosque.

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5.4.4 Probability of Successful Implementation of Islamic Microfinance