Islamic Participatory Microfinance by Bank of Khartoum

The name is now familiar among Sudan’s poor, unemployed and recent pass-outs from universities. The Irada program of Bank of Khartoum is experimenting with new and innvovative models of intervention to make a dent on chronic social problems, such as, poverty and unemployment. As part of the Sudanese economic system, it operates as a Shariah compliant bank. At the same time, it uses participatory modes within a model that is rooted in cooperation to create and share wealth in the agriculture sector, something that is not quite aligned with mainstream Islamic commercial banking with murabaha-centric portfolios. As such, it has set an example that in a way redefines “for-profit” commercial banking. Not surprisingly therefore, it was adjudged to be among the top three participants at the Global Islamic Microfinance Challenge 2014 organized by the CGAP (Consultative Group to Assist the Poor), the Islamic Development Bank, Al Baraka Banking Group, and Triple Jump, which evaluated innovative Islamic microfinance experiments with a focus on product development.

A Parnership to Create and Nurture Partnerships

In 2002, Bank of Khartoum (BoK) was registered as a private limited company and subsequently was acquired and managed by Dubai Islamic Bank, the largest Islamic Bank from United Arab Emirates by purchasing 60% of the government shares in 2005. Bank of Khartoum operates under Islamic Banking Standards and has a comprehensive suite of retail services including a network of 58 branches. Its product portfolio includes auto finance, home finance, education finance and takaful. It has embraced hi-tec banking with 137 ATMs, internet banking and mobile banking, SMS alerts, discount and supplementary cards and has the first and only call center.

BoK offers services to corporate, retail, microfinance and investment business segments; it also owns various subsidiaries in trade, exchange, brokerage, and commercial real estate. The equity of the bank as of Dec 2012 is SDG 860 Million. Headquartered in Khartoum, BoK has 1300 employees. Its major shareholders include local and regional businessmen and various institutions such as Dubai Islamic Bank (DIB), the Islamic Development Bank, Abu Dhabi Islamic Bank, Sharjah Islamic Bank and United Arab Emirates Etisalat.

The Bank of Khartoum’s Microfinance Department (IRADA) was established in 2009 with the support and assistance from the Islamic Development Bank.  The department was given the trust to implement the SDG 200 million Al-Aman fund for Microfinance. The fund was formed by a strategic partnership between the Diwan Zakah (apex body fo zakat management in Sudan) and 32 Sudanese Commercial Banks.

IRADA was set up with a vision “to alleviate poverty and hunger by realizing the potential of the poor through development of limited resources and affordable financial facilities”, and a mission “to increase the numbers of poor people involved in entrepreneurial activities through Islamic finance and expanding income generating activities, creating sustainable livelihood and employment. Its programs and activities are influenced by its strategic approach theme, which states “Today the poor are our clients, but tomorrow they will be our business partners.” Since inception, IRADA identified and focused on “economic empowerment through group finance and partnership” as its methodology of intervention.

IRADA has been partnering strategically with institutions of the public and private sectors. Partnerships include association with institutions of direct relationship with beneficiaries, insurance companies, and companies of technical expertise in fields of finance, technical support, consultation, research, marketing, project implementation and capacity building. Its main partners are: Islamic Development Bank, Graduates Employment Fund/ Disarmament, demobilization office, Widd Bilal for Rural Development Company, World Food Programme, Green Ishraqah Co., Alfanar (Turkish company), SUDIA, Ministry of Social Development, WAFAA lend for a better life; and others.

Innovative Microfinance Beyond Murabaha

Various programs and activities of IRADA are designed to:

• provide financing to those who need productive assets for developing income generating activities;
• help clients overcome short-term cash needs to smoothen consumption;
• prevent clients from borrowing from money lenders by offering them financing at a modest murabaha profit rate of 15 percent;
• inculcate savings habit and use of financial products among clients;
• 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.

Innovative Use of Zakat

In perhaps the first “documented” example of utilization of zakat for gharimeen (indebted) in an organized manner, globally speaking, a security portfolio was created through a partnership between the Diwan Zakah (apex body for zakat management in Sudan) and commercial banks. The portfolio has a capital of 200 million pounds with 25 percent contributed by the former and the balance by the banks. The portfolio provides an insurance to the program against genuine defaults by clients at the second level. At the first level, the default is covered by individual personal gurantor(s) brought in by the client. The portfolio covers all productive sectors (commercial, agricultural and vocational) across Sudan.

Business Development Services

IRADA has carefully developed a network of business development service providers on its payroll to provide a range of additional services to its clients. In many ways, these officers are key to the overall success of the program with their ability to source and procure the assets needed for the income-generating microenterprises and their role in monitoring the clients. In fact, each client is assigned a business development officer who would be responsible for ensuring that the relevant asset is delivered to client, that the supplier is paid and that the client makes timely repayment to the bank. The business development officers are also entrusted with the task of advising the clients on how their business can be more profitable. They also use their network in order to facilitate mutual exchange among their clients. The provision of business development service is adquately incentivized.

Microfinance Project I: “Smart” Murabaha

This is an early project of BoK undertaken in partnership with the Central Bank of Sudan and Diwan Zakat. Though the product, i.e. murabaha makes the project similar to mainstream Islamic finance, the model has many distinct characteristices that add value or impart “smartness” to the financing product. With the twin objectives of increasing the numbers of entrepreneurs from the low income population in Sudan through affordable Islamic microfinance and developing income generating activities in the economy, this initiative

• targets the poorest of the poor, the underprivileged, the disbled, men and women in poverty pockets across the Sudan;
• provides them financing as well as the emotional and technical support in the form of training, technical advisory and mentoring support;
• provides financial services using Islamic modes, with finance terms ranging between six months and three years, and a grace period ranging between one to six months; and
• Provides collateral-free finance backed by personal bank cheques and third-party guarantees.

The murabaha portfolio currently has approved finance limit of SDG 200.00 million with a target return on investment (ROI) for BoK at 14 percent that coincides with the realized ROI. The various additional non-financial services provided include the following:

1. The involvement of business development officers helps the clients to source the assets at a better price than expected by them.
2. Zakat guarantee is provided by Diwan Zakat

Risk factor in a murabaha portfolio is credit risk. The risk of default and delinquncy is mitigated to a considerable degree by the requirement of post-dated cheques that is further backed by personal third-party guarantee. At a national level, the availability of zakat guarantee by Diwan Zakat almost entirely mitigates credit risk. However, this is available only for genuine defaults. If clients defaulted due to negligence, the cases would be taken up by the designated authority.

In my next blog, I will discuss the Abu-Halima Greenhouses Project in sha Allah.
(I gratefully acknowledge the support of my colleagues Brothers Hasan AlShagoff and Ahmad Ompo, Senior Microfinance Specialists at the Agriculture and Rural Development Department of the Islamic Development Bank in sharing with me their insights as well as data regarding the initiative)

Mohammed Obaidullah | October 09, 2014