Islamic Participatory Microfinance by BoK ? II (Abu Halima)

The Abu-Halima Greenhouses Project of IRADA, designed in 2011, uses a composite model of intervention that combines several “smart” factors and is designed to address several critical social issues including lack of food security, unemployment and poverty. It aims to open new economic opportunities for young university graduates with formal education in agriculture. The project in its current phase, targets economic empowerment of 125 educated unemployed graduates and their families. The project involves setting up 25 productive units of greenhouses with annual capacity production of 1200 tons of off-season vegetables using latest technology in the industry and professional expertise using the partnership-based mode.

The business plan of the project is rooted in the economic peculiarities of the local maket for vegetables, which witnesses a major spurt in the vegetable prices because of adverse weather conditions. The setting up of greenhouses would enable the micro-entrepreneurs to grow high-value vegetables all through the year generating income for them, while smoothening the supply of vegetables (hot charliston pepper, sweet charliston pepper, tomato, cucumber, yellow pepper, red pepper) in the Khartoum market. The greenhouses can now grow tomatos that usually witnessed a many-fold price rise during Summer, and other high-value vegetables during Winter.

The Model (Restricted Mudaraba Partnership)

Unlike the regular micro-credit products, or even the commercial mudaraba products, the partnerhsip between the bank and the micro-entrpreneurs extends well beyond that between a creditor and debtor or that between a rabb-al-maal (fund provider) and mudarib (fund manager). The bank assumes responsibility for provision of financial as well as a range of non-financial services to the micro-entrpreneur in the form of technical, marketing and business development services. The latter involves direct investment in creation of assets for supply of electricity, water as well as for vegetable cooling, storage and other services.

A beneficiary of this project must come from low income strata of the Sudanese society and the income of the household should not exceed two times the minimum wage of USD 207 per month according to the law of Central Bank of Sudan. The beneficiaries are organized into jointly liable groups of households (headed by graduates, preferably in agriculture) in the form of a cooperative society registered according to the Sudanese Cooperative Law. These groups enter into the restricted mudaraba partnership contract with BoK.

The micro-entrepreneurs receive the required technical training from experts, managerial and marketing support from the bank and are eventually organized into a co-operative which allows them to benefit from common facilities while retaining their right to do business activities.

Other stakeholders and partners in the project include (i) Ministry of Finance, which has made a social contribution of 6.5 percent of capital (ii) the State Ministry of Agriculture, which helps get fertilizers and assists in technical capacity building; (ii) the Ministry of Social Affairs, which nominates the beneficiaries through its Graduate Fund; and (iii) Sanaa food hypermart and Home centre – a major Supermarket Chain -  which has committed to off-take the vegetables.  A technical Turkish firm, specializing in the technical aspects of greenhouse projects is a significant contributor to the success of the project.

Financing Method

The financing product is structured using the mudaraba mode with profit and loss features. Losses would be absorbed by the bank while profits would be shared in the ratio of 40 percent for the micro-entrpreneur and 60 percent for the bank. Profit distribution would take place twice in a year. The “restricted” mudaraba involves total financing to the tune of SDG 15 million (USD 4.50 million), which accounts for about 6 percent of the total portfolio of IRADA. It involves financing of working capital to purchase the 25 greenhouses, supporting infrastructure, technical feasibility, technical capacity building, agricultural inputs and living allowances. The overall finance cap for each household is USD 32K

As stated above, the Ministry of Finance has contributed 6.5% of mudaraba capital as a social contribution with a view to lower the costs borne by the beneficiaries.

IRADA’s product package includes the services of an administrative coordinator, and an agricultural expert to supervise the production process and technical matters, ensure quality control and provide training. Such costs are included with the direct cost of the product.

IRADA would retain control of the venture for 5 years, essentially to ensure its profitable operation. During this implementation preiod of 5 years, the graduate micro-entrprenuers would be trained to manage the ventures. IRADA would cede control of the project assets to the Cooperative as a gift or sale at a nominal price after 5 years. Depreciation of assets is calculated at 20 percent per year over 5 years.

The only collateral that the bank would be seeking for this financing is a personal guarantee against mismanagement and lack of commitment. There are no financial or physical collaterals required. However, the households, through the cooperative society, are required to submit a blank bank check (without definite amount) as a security for default and infringement. The title of the assets is in the name of BoK as the rab-al-mal during the finance term, thereby, mitigating the asset-related risks. BoK, being the provider of the funds(rab al mal), has an insurance contract with the Islamic Insurance Company to cover the assets against any loss.

The retuns on investment to IRADA would come in the form of 60 percent of profits made on the sale of 1200 ton of high value vegetables and fruits annually. This is expected to generate an ROA of 18 percent and IRR of 22 percent for the bank. Returns to the microentrepreneurs would come in the form of balance profit share, estimated at SDG 2100 per family plus an additional living allowance of SDG 300 to 600 per family during the implementation period. The returns are expected to significantly increase to SDF 7000 per family after this period as IRADA would withdraw and the microentrepreneur would receive full profit share.

A unique feature of the design of this microfinance model is the provision for living allowances during the implementation period of 5 years. This makes enormous sense as the mudaraba profits may display volatility while the basic needs of the microentrepreneurs must be taken care of on a priority basis.

Overall, the following legal documents come into existence in order to complete the processes (i) finance request application (ii) household joint liability document (iii) commitment by the head of the cooperative society and representative of the beneficiaries (iv) legal documents and articles of association documents for the cooperative society of beneficiaries (v) documents evidencing opening an account for the cooperative society and finally, (v) the mudarabah contract.

Arrows denote specific activities as follows:

1. 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

Non-financing services

Another unique feature is the magnitude and variety is the provision of a multitude of non-financing intervention/ services to the microentrepreneurs. These may be listed as under:

• preparation of detailed feasibility study of the project;
• assistance to source Turkish firm to construct greenhouses and related infrastructure;
• assistance to hire Turkish consultant(s) to provide technical support throughout project lifetime;
• pre-production support in the form of seeds, fertilizers, pesticides, machineries, electric and water sources;
• at production support in the form of living expenses allowance, operational expenses, harvest expenses, technical support;
• after production support in the form of cooling storage and grading room;
• assistance to source large customers such as DAL and Home Centre to purchase produce;
• assistance to to manage the project accounts;
• formation and registration of Cooperative of farmers; and
• Transfer of ownership to the Cooperative upon its readiness to manage the business.

Risk Management

An agri-based project like Abuhalima faces several risk factors, many of whom may lead to crop failure and consequently to failure of the project. The success of the project hinges on mitigating these risks to acceptable minimum. Below we list down some major risk factors identified by BoK and the various measures contemplated to address them.

• Inability to sell produce: Contractual agreement with major customer(s) is in place to purchase products at market price.
• Crop failure due to disease: Program has provided the microentrepreneurs with fertilizers and ensured that they have the capacity to use appropriate amounts.
• Crop failure due to heat: Greenhouses have automatic temperature control.
• Crop failure due to lack of humidity: Greenhouses have automatic humidity control.
• Crop failure due to lack of water: Drip Irrigation system is developed to provide water. Well is constructed to provide sufficient water.
• Electricity blackouts: Program has provided generators that run on diesel to function as backup electricity.
• Unmet consumption needs leading to a lack of commitment: Families are provided SDG 300 to SDG 600 as living allowance every month all through the five-year implementation period.
• Lack of commitment by beneficiaries: BoK has retained an option to remove a given beneficiary and replace them with another. Beneficiaries have to sign into work and their performance is monitored. Bank has the prerogative to distribute a larger proportion of profits based on performance and commitment.
• Conflict during distribution of profits due to different yields- Profits of the microentrepreneurs and bank is based on the total production of all the greenhouses and not on an individual greenhouse basis.

Challenges

Notwithstanding the apparent success of the model, several challenges remain. These may be briefly summarized below. The first set of challenges related to the beneficiaries. First and foremost, the project assumes that the beneficiaries come with the qualities and characteristics of a micro-entrepreneurs, especially when it relates to the agriculture sector. This is a strong assumption. Many of the beneficiary-entreprenuers may turn out to be deficient in terms of their abilities, notwithstanding the training and capacity building inputs provided to them. Behavioral traits, such as, indolence, apathy, negligence, impatience are hard to get rid of. To get over their deficiencies, several farming tasks are outsourced and the cost is charged to the beneficiaries according to mudaraba rules. Further, lack of financial acumen on the part of the beneficiaries is likely to come in the way of having a proper understanding of the mudaraba contract and its implications in terms of rights and obligations of the parties. The second set of challenges are institutional. Compared to traditional banking and microfinance products, micro-mudaraba is a new financing methodology that requires developing much of the procedures and mechanisms de novo. At the same time, these are like to be more complex, especially when these involve multitude partners. The third set of challenges come from a lack of an enabling environment, such as, weak mudaraba laws. A major challenge may be in the nature of political interventions that send a wrong signal about the nature of product being non-commercial. Macro-economic developments, such as, high inflation rates may also play havoc with financial estimates.

In my next blog, I will discuss IRADA’s salam-based agricultural finance project for production of high-value cash crops – alfalfa, moringa and jetropha – to economically empower the poor farmers in sha Allah.

Mohammed Obaidullah | October 09, 2014