Agricultural Finance Review Enhancing food security with Islamic microfinance: insights from some recent experiments Mohammed Obaidullah, Article information: To cite this document: Mohammed Obaidullah, (2015) “Enhancing food security with Islamic microfinance: insights from some recent experiments”, Agricultural Finance Review, Vol. 75 Issue: 2, pp.142-168, https:// doi.org/10.1108/AFR-11-2014-0033 Permanent link to this document: https://doi.org/10.1108/AFR-11-2014-0033 Downloaded on: 03 October 2017, At: 00:46 (PT) References: this document contains references to 23 other documents. To copy this document: [email protected] The fulltext of this document has been downloaded 801 times since 2015* Users who downloaded this article also downloaded: (2013),”Challenges and solutions in Islamic microfinance”, Humanomics, Vol. 29 Iss 4 pp. 293-306 https://doi.org/10.1108/H-06-2012-0013 (2015),”Financial inclusion of the poor: from microcredit to Islamic microfinancial services”, Humanomics, Vol. 31 Iss 3 pp. 354-371
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Downloaded by SAUDI DIGITAL LIBRARY (SDL) At 00:46 03 October 2017 (PT) *Related content and download information correct at time of download. Downloaded by SAUDI DIGITAL LIBRARY (SDL) At 00:46 03 October 2017 (PT) Enhancing food security with Islamic microfinance: insights from some recent experiments Mohammed Obaidullah Islamic Development Bank, Islamic Research and Training Institute, Jeddah, Saudi Arabia and Faculty of Muamalat and Administration, Islamic Sciences University Malaysia, Kuala Lumpur, Malaysia Abstract Purpose – Islamic microfinance institutions (IsMFIs) have used diverse models and tools, as they seek to provide financial and non-financial support to the farming communities. A majortity of IsMFIs focus on provision of micro-credit to farmers alone as a means to enhance food security, following an approach similar to that of the conventional microfinance institutions. Others adopt a “finance-plus” approach and provide support in a multitude of areas other than finance, such as, technology, production, marketing, business development, capacity building, and thus, ultimately steering the project to success. The purpose of this paper is to examine the models and tools of Islamic agricultural finance for the rural poor that display major variations and draw lessons from a policy perspective. Design/methodology/approach – The study undertakes a comprehensive review of the principles, modes and models of Islamic agricultural finance targeted at small-holder farmers. It uses a case study method to review several winning initiatives by IsMFIs across the globe. It highlights the various risks and challenges confronting the projects and how the same are sought to be mitigated. Findings – Islamic agricultural finance for the rural poor involves a range of modes, mechanisms and institutional structures. Credit-based and sharing-based modes work well under specific conditions and there is no one-size-fits-all solution for financing the rural poor. Case studies of successful initiatives reveal that composite models involving the integration of philanthropy-based, not-for-profit as well as for-profit components may provide ideal solutions. Additional factors critical for success include provision of safety nets, involvement of community, non-financial support in a multitude of areas other than finance, such as, technology, procurement, production, marketing, business development and institutional capacity building. Originality/value – The paper addresses a fundamental issue in financing the poor farmers in Muslim societies – whether to opt for a credit-based approach that would ensure greater outreach or to go for a holistic intervention involving financing of the entire value chain. The findings are based on personal interaction of the author with professionals directly involved in the projects. Keywords Food security, Agriculture finance, Islamic microfinance, Livestock finance Paper type Case study 1. Introduction Agriculture plays a major role in enhancing food security and employment opportunities in several countries with large Muslim population, such as, Indonesia, Pakistan and Sudan[1]. It is a significant contributor to the gross domestic products (GDPs) in these countries. In Indonesia, it accounts for over 15 percent of GDP with around 40 percent of the working population employed in this sector[2]. In Pakistan, the corresponding figures are 21 and 45 percent, respectively[3]. In Sudan as well, it is estimated that the sector contributes 35-40 percent of the GDP. Yet, there has been a growing incidence of the farming community in these and other countries seeking alternative sources of livelihood triggering concerns about food security. Key factors Agricultural Finance Review Vol. 75 No. 2, 2015 pp. 142-168 ©Emerald Group Publishing Limited 0002-1466 DOI 10.1108/AFR-11-2014-0033 Received 5 November 2014 Revised 28 December 2014 26 February 2015 Accepted 19 March 2015 The current issue and full text archive of this journal is available on Emerald Insight at: www.emeraldinsight.com/0002-1466.htm 142 AFR 75,2 Downloaded by SAUDI DIGITAL LIBRARY (SDL) At 00:46 03 October 2017 (PT) contributing to this in Indonesia include, among others, declining soil fertility, high input prices, limited capital, human resources with low and limited skills, fluctuating crop prices and above all, continuously declining terms of trade (Mintarti, 2013). In Sudan, the problems are further accentuated due to natural calamities in the form of droughts and civil strife. In Pakistan too, the story is similar. Land access is increasingly becoming a key constraint for many farmers forcing them to seek migration to urban areas in search of alternative sources of livelihood. Studies also show that these countries are characterized by large and increasing number of small farm holdings[4]. An IFPRI (2005) study estimates that Indonesia has about 17.2 million small farms accounting for 88 percent of all farms, while Pakistan has about 3.8 million small farms that constitute 58 percent of all farms. The numbers are also steadily increasing along with a decline in average size of holdings. For example, the average size of holding in Indonesia declined from 1.1 hectare to 0.9 hectare over 1973-1993, the same for Pakistan declined from 5.3 hectares in 1971-1973 to 3.1 hectares in 2000, during which time the number of small farms more than tripled. Sudan presents an interesting contrast with the government owning large tracts of agricultural land[5]. Agricultural holding size varies according to the region and system of production. For example, in central Sudan the government has proactively encouraged mechanized and large-scale farming. The rest of the country has private small-scale farming where the size of holding has continuously declined due to fragmentation because of the operation of the Islamic law of inheritance[6]. Small-scale farmers are the “economically active” poor who witness grave food insecurity and abject poverty. Agriculture is highly dependent on the local conditions: availability of and access to good land, soil, water, climate and market. Further, crops vary widely in terms of duration, perishability, and seasonality. Therefore, provision of microfinance requires different products, diverse and tailor-made approaches. Recent best practices in conventional microfinance advocate “local” interventions based on a value chain approach[7]. A major challenge confronting such microfinance is related to the belief systems of the farmers. Conventional microfinance involves interest-based savings and loans to farmers, which is against the tenets of Islam, the predominant religion in the countries under focus. A study by Karim et al. (2008) undertaken for CGAP based on a survey of the poor in Muslim societies concludes that Islamic microfinance, that is in compliance with the religious tenets “has the potential to combine the Islamic social principle of caring for the less fortunate with microfinance’s power to provide financial access to the poor. Unlocking this potential could be the key to providing financial access to millions of Muslim poor who currently reject microfinance products that do not comply with Islamic law.” Islamic microfinance, therefore, is seen as a solution to the challenge of self-exclusion. Several Islamic microfinance experiments have been undertaken in recent times in predominantly Muslim countries. These poverty alleviation initiatives by the Islamic microfinance institutions (IsMFIs) in the rural areas have sought to counter food insecurity and generate livelihoods by focussing on the agricultural and livestock sectors. IsMFIs have used diverse models and tools of Islamic microfinance, as they seek to provide financial and non-financial support to the farming communities. A majority of IsMFIs focus on provision of micro-credit alone to the farmers, following an approach similar to that of the conventional microfinance institutions. Wadud (2013) for example, argues that policies, which extend microcredit and ensure fair, timely and low-cost delivery of microcredit to marginal and small farmers, could lead to reduction of agricultural farm inefficiency and hence, lead to improvement of performance of 143 Islamic microfinance Downloaded by SAUDI DIGITAL LIBRARY (SDL) At 00:46 03 October 2017 (PT) farms. This could enhance farm output and welfare, help reduce poverty and improve food security. Of course, the IsMFIs that offer microcredit must additionally ensure that the credit product(s) offered by them are based on Shariah-compliant modes, such as, murabaha, bai muajjal and bai salam[8]. Other IsMFIs prefer a more comprehensive and challenging approach. These IsMFIs believe that they must play the role of an anchor and a facilitator in a process of transformation, and in the economic and social empowerment of the farming communities. They prefer to adopt a “project” approach and provide support in a multitude of areas other than finance, such as, technology, production, marketing, business development, capacity building, and thus, ultimately steering the project to success. The aim of this paper is to introduce the reader to the basic principles of Islamic microfinance as applied to the agricultural and rural sector. It seeks to highlight the diversity in Islamic agricultural and rural financing modes and models and to underline their potential reach and richness. The objectives include, among others, a comprehensive micro-level analysis of selected experiments in agricultural microfinance in diverse scenarios. The study uses a case analysis method to present the alternative approaches and composite models and seeks to draw lessons therefrom so that the good practices may be replicated elsewhere and bad practices, if any, may be avoided. In the following section, we undertake a general discussion of the principles and modes of Islamic agricultural finance as undertaken in a majority of case studies. The following three sections present a few successful composite models of intervention. Section 3 presents a case study of economic and social empowerment of farmers by Dompet Dhuafa Republika (DDR), a leading non-government organization in Indonesia. Section 4 presents a case study on an award-winning agri-finance product portfolio by Wasil, a pioneering non-government organization in Pakistan. Section 5 presents case studies of three unique projects of the microfinance unit (IRADA) of the Bank of Khartoum (BoK) in Sudan. Section 6 summarizes the key lessons and concludes. 2. Islamic framework for agricultural finance The Islamic framework for agricultural finance seeks compliance with several fundamental Shariah norms. The two most important and relevant norms are: prohibition of riba and prohibition of excessive gharar[9]. The first essentially rules out any financial or non-financial gains for the lender offering credit-based products. The second rules out excessive risk, uncertainty, undue complexity and conditionality in the financial products. Islamic finance literature identifies several modes for provision of agricultural finance that conform to the above. While some of these modes are sale or lease-based and create debt obligations on the part of the farmer, others are sharingbased and create partnerships between the farmer and the financial institution. 2.1 Bai muajjal-murabaha (credit-cost plus sale) Bai muajjal is a sale where payment of price is deferred to a future date. Often it includes features of a murabaha, which implies a sale on a cost-plus basis. As a microcredit product, bai muajjal-murabaha is the most popular product among IsMFI accounting for over two-third of the total Islamic microfinance portfolio (El-Zoghbi and Tarazi, 2013). The mechanism may be described as follows. Farmer A needs to purchase farm equipment or livestock X. He approaches the IsMFI. Now, the IsMFI buys X from the vendor/supplier at price P. Next, IsMFI sells X to A at a marked-up price, say P+M, where Mis the agreed profit or mark-up taken by IsMFI. The payment 144 AFR 75,2 Downloaded by SAUDI DIGITAL LIBRARY (SDL) At 00:46 03 October 2017 (PT) of price P+M is deferred to a future date and is made in full or in parts. This Islamic credit product comes very close to the conventional interest-based credit, which perhaps explains its popularity with the IsMFIs. Yet, there is a clear line of distinction between the two. The quantum of debt created under the former is the price of the underlying commodity that is fixed at the time of contracting and that remains at this level even if the maturity of the product is extended subsequently. In conventional credit products, however, the quantum of debt increases, compounded at the interest rate as maturity increases (as in case of loan restructuring). Bai-Istijrar is a variant of the bai-murabaha and takes place when the buyer purchases different quantities of a given commodity from a single seller over a period of time. Istijrar permits greater flexibility in the matter of fixation of price, which may now be deferred to a future date (and not at the time of contracting as in bai-murabaha) and may indeed be based on a normal price or average price in a volatile market. This mode, thus, offers a natural way to reduce price risk. Though ideal for rural finance where farmers often buy their raw materials and inputs in small quantities from the same IsMFI over extended periods, istijrar has not been used extensively to date[10]. Several studies (Obaidullah, 2008b) and (Obaidullah and Shirazi, 2014) have documented the case of the Rural Development Scheme (RDS) of the Islami Bank Bangladesh that replicates the Grameen model[11] but uses bai muajjal (replacing Grameen interest-bearing loan) as its primary mode of meeting the financing needs of the farmers and the rural poor. The case studies highlight some possible issues of Shariah non-compliance. For instance, in bai muajjal finance, one would expect the amount of financing to vary, given that the wide range of commodities being financed, have different prices. RDS on the contrary, provides a uniform financing amount, similar to the basic loan of Grameen. This involves practical impossibilities, since many commodities are not perfectly divisible and be the subject of exchange in fractional units[12]. Further, bai muajjal may not be suitable for financing all kinds of income-generating farming activities, such as, growing vegetables, fishing and other agri-based activities. While bai muajjal can be used to finance the purchase of saplings, fertilizer, fishing nets and so on, in practice, the farmers would need funding not just for the physical asset(s) involved, but also to finance the working capital requirement. Bai muajjal, thus, provides a partial solution only. Another issue with RDS use of bai muajjal arises out of the Shariah requirement of settlement of each of the two sale transactions sequentially in a single bai muajjal. In a scenario where farmers need to buy their raw materials and inputs in small quantities repeatedly, meeting the above Shariah requirement in bai muajjal may involve substantial non-financial costs. As mentioned above, the use of bai istijrar in such cases is possible and desirable too, as it can reduce such transaction costs. However, its potential remains largely untapped. 2.2 Ijara (leasing) Ijara in simple terms implies leasing or hiring of a physical asset. It is also a popular and flexible product in which the IsMFI owns a physical asset (e.g. land, farm equipment) and leases the same to the farmer. The farmer in need of the asset receives the benefits associated with its ownership against payment of predetermined rentals. In ijara, the risks associated with ownership of the asset remain with the IsMFI and the asset reverts to the IsMFI at the end of the ijara period. Ijara is, therefore, similar to conventional operational lease (though there are finer points of distinction including use of penalties and interest in some scenarios). Ijara works well in a scenario where the 145 Islamic microfinance Downloaded by SAUDI DIGITAL LIBRARY (SDL) At 00:46 03 October 2017 (PT) IsMFI is organized as a farmers’ cooperative or an organization that primarily serves the farmers. Pure financial intermediaries prefer a lease ending with ownership of the asset by the lessee-farmer. In such an arrangement, the cash flows are structured in a way that cover the cost of the asset and provide for a fair return on the same to the IsMFI. The IsMFI after recovering its cost and fair return may simply donate the asset or sell the asset at a nominal price to the farmer. 2.3 Bai-salam (deferred delivery) Bai-salam is essentially a forward agreement where delivery occurs at a future date in exchange for spot payment of price. Unlike earlier mechanisms of bai muajjal and ijara, salam or salaf was originally designed as a pre-cultivation financing mechanismfor small farmers. Under a salam agreement, a farmer in need of short-term funds sells its output in advance to the IsMFI on a deferred delivery basis. It receives full price of the farm output on the spot that serves its pre-cultivation financing needs. At a pre-agreed future date, it delivers the output to the IsMFI. The IsMFI then sells the output in the market at the prevailing price. Since the spot price that the IsMFI pays is pegged lower than the expected future price, the transaction should result in a profit for the IsMFI. Thus, under salam the farmers would receive the price of their produce in advance at the beginning of agricultural season against an obligation to deliver a defined quantity of the produce to the buyer after a definite time period in future (after harvest). The sale price received in advance is available to the farmer as a means of financing all farming related needs. Another advantage is that the farmers do not have to sell their produce at a time when the market has an oversupply due to harvest, thus depressing the prices and bringing down the realized income of farmers. While the mechanism provides for much needed financing, it is subject to abuse by unscrupulous intermediaries and traders who seek to take advantage of low bargaining power of the poverty-ridden farmers and execute salam at unrealistically low prices. To counter this, mutuality-based models of microfinance have been suggested. Farmers’ cooperative organizations can dramatically enhance the bargaining power of farmers and replace intermediaries. In a salam-based framework, these cooperatives would provide funds in the form of advance price and would take delivery of the produce after harvest as above. The cooperative would also create appropriate warehousing facilities for storage of the produce and market the same in a manner that avoids depressed prices resulting in increased income for the members. The Jeddah-based Islamic Development Bankmay be credited with pioneering this model successfully. The model involves creating cooperatives (mudarabas) of farmers, and placing funds with them for salam financing to member farmers as well as providing other non-financial services relating to warehousing, processing, packaging and marketing services in a few of its member countries, such as, Guinea and Palestine[13]. Another problem with classical salam for the financier arises out of its exposure to price risk or market risk. A financier who is not an astute player in the market for the concerned commodity and does not fully understand the economics of pricing in this market may be confronted with adverse prices and consequent losses when it seeks to sell the produce upon delivery by the farmer(s). This problem may be taken care of in several ways. First, a back-to-back salam under which the IsMFI enters into a parallel salam with a market vendor (say, a miller) and locks a forward price mitigates their price risk. Once the farmer delivers the output to the IsMFI, the same in turn is delivered to the vendor. The difference between the two advance prices is pre-determined profit for the IsMFI. Second, a variant of bai salamcalled value-based salamis specifically designed to mitigate price risk. This may be explained with the following example. 146 AFR 75,2 Downloaded by SAUDI DIGITAL LIBRARY (SDL) At 00:46 03 October 2017 (PT) In a classical salam, the quantity of object of sale (agricultural produce) and the price per unit of the object of sale are pre-determined at the time of contracting. If Q amount of paddy is sold on forward basis at price P on salam basis, then the financier (buyer) would pay the value of transaction PQ to the farmer (seller) at the time of contracting (before commencement of farming). After a defined and known time period (harvest time), the farmer would deliver Q amount of paddy to the financier. The financier in turn, would find a way to dispose of Q amount of paddy in the market at the prevailing market price P*. If market price increases during the financing period, P* would be higher than P. In other words, P*Q would be higher than PQ and the financier would have positive profits (P*Q−PQ). If however (and this is quite likely given the abundant supply of produce during harvesting season) the prevailing market price is depressed and P* is lower than P, the financier would end up with losses. The value of P*Q−PQ would be negative. This market risk or price risk is mitigated in case of a value-based salam. In the latter type of salam, the MFI would pay an amount (say V) to the farmers’ cooperative at the time of the contract against an obligation of the farmer to repay in physical quantities of its produce whose value at the time of delivery at a future date (after harvest) is pre-determined (say V*). In other words, the farmer would deliver V*/P1 quantity of paddy to the MFI if the future price at the time of delivery is P1 and V*/P2 quantity of paddy if the future price is P2 and V*/P* quantity of paddy if the future price is P*. This settlement value (V*) may indeed be pegged higher than the original value (V) received in advance by the farmer resulting in a known profit (V*−V) to the financier. While this form of contracting is not well known, Obaidullah and Saleem (2011) presents a case study involving its application in Sri Lanka. The case study documents the case of Muslim Aid (MA) Sri Lanka seeking to take care of the safety needs of the poor farmers, to build a sustainable source of funds for them as a cooperative organization and to free them from exploitation by trader-middlemen by intervention through the market mechanism. MA also sought to create a win-win situation for the trader-middlemen by forming a partnership with them. MA used a multi-stage model for provision of finance and other inputs to the farmers. The first stage involves a creative variant of the classical bai-salam or “deferred delivery” transaction. Under this mechanism, a farmer was provided funds in advance against a forward sale of his produce at the time of harvest. The funds were used by the farmer to finance purchase of the necessary inputs to start paddy cultivation. Unlike bank financings, no collateral was required from the farmer. Instead, a farmer needed to obtain a set of recommendations from the local mosque and community leaders who acted as guarantors. The second stage began at harvest time once the agricultural produce was delivered to MA. It involved a partnership between MA and local miller(s) to take possession of the harvested paddy from the farmers, process it and sell the final product at the market with the profit being shared between MA and the miller(s) on the basis of a mudharabah partnership. It was expected that the profit share of MA would cover the administration cost of the financing. In order to ensure that the over-all model was a not-for-profit one and that it was also sustainable one, any surplus of profit share over administrative cost was to be used to create a Revolving Fund for the farmers (see Figure 1). Farmers enjoying incremental income were also expected to make zakah contributions to this Fund and therefore, adding to its size and ability to provide financing to greater numbers. This was the third stage of the model[14]. The modes discussed above, involve credit and may be used by an IsMFI as Shariah-compliant modes of extending micro-credit to farmers. A major problem 147 Islamic microfinance Downloaded by SAUDI DIGITAL LIBRARY (SDL) At 00:46 03 October 2017 (PT) associated with such modes relates to the possibility of willful default by clients. Unlike conventional microfinance where defaults may result in additional interest payments and/or rescheduling of loan, and where prepayment may result in rebates, Islamic modes do not admit the possibility of any payment in excess of the original amount of debt. Islamic scholars generally permit the IsMFI to impose a penalty on the defaulting client to act as a deterrent against willful default, but such penalty must be donated to a charity. It cannot be treated as an earned income for the IsMFI as this would tantamount to riba. Such income is indeed reported in the financial statement of IsMFIs as “non-halal” or impermissible income that must be donated. 2.4 Mudaraba-musharaka (trustee partnership-joint venture) IsMFI may also consider various partnership based modes or equity-based modes for financing poor farmers. Two classical modes commonly discussed in this context are mudaraba and musharaka. We also discuss a novel concept of declining musharaka leading to complete ownership of asset or project by the farmer. These equity-based products are unique to Islamic rural finance and in some sense, account for its superiority over its conventional counterpart on grounds of ethics and efficiency. Arguably, because of their uniqueness, they are also less commonplace. A mudaraba also known as trustee-partnership is a mode of finance through which the IsMFI provides capital finance for a specific agri-venture initiated by the farmer. The IsMFI, called rabb-al-mal is the owner of the capital and the farmer, called mudarib, is responsible for the management of the agri-venture. Profit is shared according to a pre-agreed ratio. Losses if any are entirely absorbed by the capital provider – the IsMFI. Mudaraba may be of two types – restricted or unrestricted. In a restricted mudaraba (mudaraba al-muqayyada), the IsMFI may specify a particular business in which investments may be undertaken. Mudaraba may also be an unrestricted one (mudaraba al-mutlaqa); in which case the mudarib may invest the capital provided in any venture (s)he deems fit. A musharaka or a joint venture involves a partnership in which both the IsMFI and the farmer contribute to entrepreneurship and capital. It is an agreement whereby the farmer and the IsMFI agree to combine financial resources to undertake a venture, and agree to manage the venture according to the terms of the agreement. Profits are shared between the IsMFI and the farmer in the pre-agreed ratio. Losses are shared strictly in proportion to their respective capital contributions. A variant of musharaka that has traditionally been used in Muslim societies for agriculture is muzara’a or output sharing. This mode allows the owners of inputs for Salam (Value-Based) Mudaraba Money to farmers as price in advance Repayment in paddy plus zakah Process paddy and sell in market at profit Recover admin cost + profit + capital 5 Months 5 Months Profit Figure 1. Overview of MA model 148 AFR 75,2 Downloaded by SAUDI DIGITAL LIBRARY (SDL) At 00:46 03 October 2017 (PT) agriculture, e.g. land and labor to come together and undertake cultivation. The output post-harvest is shared between the land owner and the laborer (landless farmer) as per a pre-agreed ratio. Another variant known as musaqa is a contract between the owner of an orchard (of fruits or vegetables) and a farmer who can irrigate and look after the orchard. The output of the orchard is shared between the parties as per a pre-agreed ratio. An interesting project (supported by the Islamic Development Bank) to help poor olive farmers in Palestine involves use of a composite model. The IsMFI is involved in each step of the olive value chain. First, it facilitates a muzara’a agreement between the landowners and the poor farmers. It provides salam financing for olive seeds and fertilizers. The olive harvest collected by IsMFI is sold to olive oil mills for a profit. The uniqueness of this model as compared to conventional model is as follows. In the event of loss due to crop failure: the landowners would lose potential income under profit-sharing; the farmers would have to pay back (cash or in kind) to the IsMFI no more than the advance payment and the IsMFI would lose potential profit from sale of olives to oil mills. Under the conventional model, however, a different set of outcomes would be in place in case of crop failure. The farmers would have to pay rentals due to landowners; principal loan due to MFI; and interest due to MFI. In short the poor farmers would have to bear the entire downside risk with agriculture. Another variant of musharaka called diminishing musharaka has great potential for the IsMFI as a financing product. While a classical musharaka aims to involve the IsMFI as a permanent partner in the venture, in a declining musharaka, the IsMFI’s share in the equity is diminished each year through partial return of capital. The IsMFI receives periodic profits based on its reduced equity share that remains invested during the period. The share of the farmer in the capital steadily increases over time, ultimately resulting in complete ownership of the venture. Agency problems with partnership-based modes in Islamic finance are cited as the key reason behind preference of mainstream Islamic financial institutions (IsFIs) for debt-based products. The problems – for example, when the mudarib or the trusteemanager may act in a manner that is not in the best interests of the capital-providers – become particularly acute in informal and rural settings. A few other problems that are usually cited with partnership-based modes as compared to sale and lease based modes are as follows: One, partnership-based mechanisms require long-term involvement by the microfinance institutions in the form of technical/ business assistance, which raises the cost of implementation. Two, the uncertainty about profits is a major drawback of such modes. Although microfinance programs have information on local market behavior, weekly profits fluctuate. Fluctuating profits make it extremely difficult for institutions to predict their cash flows. Farmers can make the job doubly difficult by not keeping accurate accounts. Three, the partnership-based modes are difficult to understand for IsMFI officers and borrowers alike. Even in the hypothetical situation that profits were known, the borrower has to repay a different amount each period (and the officer has to collect a different amount each period). This lack of simplicity relative to equal repayment installments is a source of confusion for borrower-farmers and IsMFI officials. Unlike profit-sharing mechanisms, bai muajjal does not require the farmer to maintain written records that are often unavailable at the rural enterprise level or if available, the farmer may be unwilling to share them. While IsMFIs may use some or all of the above for-profit modes in the interest of sustainability, their mission driven approach of helping the rural poor requires provision of a mix of financial and non-financial services that include handholding and 149 Islamic microfinance Downloaded by SAUDI DIGITAL LIBRARY (SDL) At 00:46 03 October 2017 (PT) other forms of support to farmers. The overall objective is benevolence-driven and often strictly not-for-profit. Indeed, Islamic economics and finance provide a range of benevolence-driven, philanthropy-based and not-for-profit mechanisms as well, whose importance can be hardly overemphasized, especially when seeking to address the financing needs of the poor farmers. 2.5 Qard al-hasan (interest-free loan) Qard hasan literally means a beautiful loan. It is a loan granted by the lender without expectation of any return on the principal. Islam provides very strong incentives for lenders to meet the financial requirements of the needy by providing loans without expecting any gain in return from them. Any such return expected or demanded by the lender is forbidden riba. It is pertinent to note several things here. First, the lender is permitted to recover the actual cost it incurs in the process from the beneficiary or the borrower. However, the amount charged to borrower must not be more than the actual cost of operation. Thus charging the borrower based on notional or estimated cost of operation is ruled out. Two, Islam exhorts a borrower to be generous when (s)he repays. (S)he is allowed and indeed, encouraged to return more than (s)he originally borrowed from the lender. The excess is viewed as a gift (heba) from the borrower and is permissible as long as it is not demanded (stipulated in the contract) by the lender. A Muslim is also encouraged to avoid debt. (S)he should strive to get out of debt if (s)he is already trapped in it. (S)he must make all efforts to repay the loan as early as possible. At the same time, Islam encourages a lender to give extension in time or waive part of the loan, should the borrower be forced to default. It completely rules out any penalty for default that is unintentional. However, in case of willful default or delinquencies, a penalty may be imposed as a deterrent. Such penalty, once collected, must be donated to charity and cannot form part of the income of the lender. At an institutional level, one finds that this mode forms the basis of over 6,000 Qard al-Hasan Funds (QHFs) dotted across Iran, which provide microfinance primarily to the rural poor[15]. The QHFs raise funds using the qard al-hasan mode from their depositors; and lend onwards also using the same mode. Another interesting application of this mode on the lending side only (funds are raised through charity) is the Akhuwat model in Pakistan[16]. 2.6 Sadaqa, zakat and waqf (charities and endowments) The broad term for charity and philanthropy in Islam is sadaqa. Sadaqa is in the nature of free donation without any strings attached. When compulsorily mandated on an eligible Muslim, sadaqa is called zakat. When sadaqa results in flow of benefits that are expected to be stable and permanent (such as, through endowment of a physical property), it is called sadaqa jariya or waqf. Zakat is an institution of philanthropy mandated by faith. It may also be seen as a compulsory levy on every believing and practicing high-net-worth Muslim. From a macroeconomic perspective, zakat is a source of recurring annual flow of funds. Since Islamic law restricts the allocation of zakat funds to eligible beneciaries alone, that primarily include the poor and the needy, zakat is potentially a major tool of poverty alleviation. It is more in the nature of a safety net to take care of the basic necessities of life of poor farmers who cannot afford them. Additionally, zakat funds can be used in a variety of ways for the farmers; for skill enhancement, provision of start-up capital, or pay off the debt of the over-indebted farmers as long as the beneficiaries suffer from abject poverty. 150 AFR 75,2 Downloaded by SAUDI DIGITAL LIBRARY (SDL) At 00:46 03 October 2017 (PT) Waqf, which essentially implies the irreversible endowment of an asset of value (e.g. real estate, cash) by a donor with a stipulation that the returns generated through investment of the asset or the benefits flowing out of the asset are used for specified purposes. Thus waqf, by definition, provides for a sustainable source of funds/ benefits that may be targeted at the poor farmers. To sum up, Islamic finance provides a fairly broad range of modes and mechanisms that may be used for provision of financial and non-financial services and support to the poor farmers. Often some or all of these charity-based, not-for-profit and for-profit mechanisms are combined in models to provide holistic solutions to the problems of the poor farmers, alleviate their poverty and help them enhance food security. In the next three sections, we discuss some composite models of intervention that are recent and deemed highly successful by observers. 3. Farmers’ empowerment program (Indonesia) DDR is a pioneer in using Islamic philanthropic funds, such as, zakat, sadaqa and cash waqf for alleviating poverty. The program for economic and social empowerment of farmers by this leading non-government organization[17] in Indonesia seeks to provide a solution to the multiple problems of limited land, declining soil fertility, high input prices, limited capital, low and limited farming skills, unremunerative and fluctuating crop prices. It has embarked on an organic farmers’ empowerment program called Pemberdayaan Pertanian Sehat (P3S) that adopts a holistic approach involving adjustment of cropping patterns and change in farmers’ attitude and preferences from conventional farming to a semi-organic cultivation system. The intervention involves gradual and continuous assistance, guidance and introduction to production facilities that are safe, locally made and affordable, to biotech and low-chemicals system through integrated and environment-friendly farming. The semi-organic cultivation system reduces farmers’ permanent dependency on chemical agricultural inputs that are expensive. With the user-friendly green agricultural technology, farmers can reduce production costs while obtaining higher prices for the organic produce. The organic farmers empowerment program (P3S) involves provision of farmland on ijara (lease) and of capital for semi-organic farming with a view to bringing about significant increase in farmers’ earnings. The empowerment process also involves strengthening of farmers’ capacity as human resources and helping them get organized as formal communities, called combined farmers groups (gapoktan). The intervention ends when the combined farmers groups have developed the capacity to manage the formal organization independently, putting in place partnerships with other stakeholders to support the organization’s existence, and improved their bargaining position in the market. Farmers’ eligibility for P3S program is based on several criteria, e.g. income and ownership, business potential and the farmers’ potential as human resources. The main target group are poor farmers meeting the following criteria. The farmers’ family head earns ⩽ two USD per day in rural areas, or ⩽three USD per day in sub urban areas. The other criteria relate to condition of their house and ownership of assets. Approval from local neighborhood based on the defined criteria is needed to confirm a poor family’s eligibility for the program. The business potential criteria include: the development potential, which reflects the ability to expand the business in scale and scope, related to the raw materials availability, production capacity, market potency and employment rate; the potential to create derivative businesses that allows more employments and economic benefits for other beneficiaries; and the potential for local 151 Islamic microfinance Downloaded by SAUDI DIGITAL LIBRARY (SDL) At 00:46 03 October 2017 (PT) resources utilization. Besides the above, a farmer must be of minimum productive age of 18 years or is married, with maximum age of 60 years; should have the vision for developing business; should be able to work; and should not be enlisted as participant of any other similar program. 3.1 Components of the program[18] The empowerment program involves several stages. Stage 1 involves promoting awareness or recognition of potential and the environment followed by building comprehension that organization in the center-stage of this process must be started with the community’s initiative through continuous strengthening of the organization. The programs then aims to prepare a cadre of local farmers who would take over the task of mentoring after the program ends; to provide technical support, associated to the technical aspects of the production process, which includes the introduction and implementation of organic farming technology and semi-organic farming, adaptation of technology, development of pre-and post-harvest processes as well as access to information. It seeks to assist the farmers in fulfilling their needs, both individually and in groups, in a sustainable livelihood system. The overall objective is to maintain a balance in the interests of all the stakeholders by enhancing the bargaining power of farmers through their own cooperation-based institution. The process of forming farmers’ organization involves the following stages. First, individual farmers in groups of eight to ten form small groups. Next, several groups are organized into a secondary group called a combined farmers’ group called gapoktan[19]. Finally, several gapoktans are combined to form the farmers’ cooperative. Since a major problem for farmers is the lack of land ownership, one of the components of the P3S program is the provision of leased land to farmers. Once farmers groups are formed, the next stage is the leasing of land to each farmer at an average land area of 25,000 m2 for each farmer or 2.5 hectares (six acres) for each group. Farmers get lease land for one year with the rental fee of Rp 4,000.000 (USD 150) per hectare per annum. In addition to the land lease package, farmers also receive a package in the form of processing costs of land, direct costs of labor for one growing season. Farmers are expected to use the organic agricultural inputs (saprotan) and working capital funds of the enterprise. Labor fees are directly paid for the overall processes of land production and harvest. Assistance is also provided in the form of fertilizer, compost, plant pesticides, seeds, etc. The program through research has developed its own organic agricultural input (saprotan) in the form of bio pesticide that is local-based, affordable and environment friendly. A major component of the empowerment program is institutional capacity-building. Assistance for the strengthening of the institutional groups of farmers and farmer groups (gapoktan) involves the following. Enhancing the capacity of farmers is done through various forms of training in semi-organic agriculture as also in organizational and financial management of farm groups and gapoktan administrators, establishment of the gapoktan forum, as well as periodic monitoring and linking up to other stakeholders and the market. For instance, during the process of cultivation of rice, the tutoring process, both regular and irregular meetings, is done through visits to the homes of the farmers. Tutoring is done through regular meetings of the Group once a week. The process of transfer of appropriate technology and organic rice cultivation is delivered through group meetings. An example of the move towards self-sufficiency is a consensus made among farmers that each farmer must save up to 40 percent of their harvest, which would initially be used to pay land lease for the following year. 152 AFR 75,2 Downloaded by SAUDI DIGITAL LIBRARY (SDL) At 00:46 03 October 2017 (PT) 3.2 Zakat-funded programs The organic farmers empowerment program (P3S) along with other economic empowerment programs of DDR is funded with zakat. The funds dedicated to such programs average about IDR 6.3 billion per year over the five-year period (2008-2012) that hovers around 10 percent of total zakat resources available (see Table I). The low dedication is attributable to apparent Shariah objections by some scholars who emphasize on utilization of zakat for consumption alone in the short term. In the face of a growing realization, however, that an emphasis on short-term may lead to a dependency syndrome among the poor, and that the long term need of the poor is economic and social self-reliance, DDR seeks to enhance the utilization of zakat for community empowerment programs. Among the major economic programs of DDR are: the masyarakat mandiri (self-reliant communities), pertanian sehat (health/ organic farming), kampoeng ternak nusantara (livestock development), Islamic microfinance (for-profit) in addition to capacity building initiatives under Indonesia Magnificence Zakat. The economic empowerment programs follow a similar model that involves interest-free loan financing to groups from a pool created out of zakat funds. The key distinguishing factor of this model is the phased building of self-reliant communities and the creation of a community organization that would continue to provide financing to the members. The program has a clear termination and exit strategy. It withdraws from the region and the program ends as soon as the community cadres are ready to take part in maintaining program sustainability – financial and institutional. It ensures that a community-based organization is a legal entity with adequate capacity to sustain cooperation with all stakeholders. From a Shariah perspective, this ensures that the “tamleek” condition of zakat is complied with, since the poor beneficiaries ultimately become the owners of the local organization in a collective sense with transfer of assets from the program to the local organization. Thus, the fact that they are borrowers in the first instance does not appear to vitiate the “tamleek” requirement[20]. 4. Credit and lease-based finance (Pakistan) According to a survey by a group of researchers from Lahore University of Agriculture [21], there are about 5.1 million farms in Pakistan. Of this, 93 percent are small and marginal accounting for 60 percent of the total cultivated area. They also found that about 70 percent of farmers participate in the credit market; a majority from intermediaries charging exorbitant interest rates. Further, the farmers also believe that they can save up to 25 percent in costs if they purchase inputs on cash. In addition, given that farmers usually return the money after the sale of the crop, the study argues that banks should participate in agricultural sector using bai salam as the mode of No. Field program Program Funds (Rp billion) Beneficiaries 1. Organic farming 15 4.6 2,611 2. Livestock 9 6 997 3. Fisheries 52 11.1 6,175 4. For-profit microfinance 6 4.3 2,186 5. Research, in house and public training 150 5.6 5,164 Total 232 31.7 17,133 Table I. Five-year details on economic empowerment programs by DDR 153 Islamic microfinance Downloaded by SAUDI DIGITAL LIBRARY (SDL) At 00:46 03 October 2017 (PT) finance. A similar reasoning seems to underlie the design and development of salam as an agri-finance product by Wasil Foundation, a leading Islamic microfinance provider in Pakistan. Wasil Foundation, formerly known as Centre for Women Co-Operative Development (CWCD), is a not-for-profit company established in 1992. The aim of the organization is to economically empower poor communities and assist them in developing their businesses through micro credit and enterprise development programs. In 2009, Wasil Foundation (formerly CWCD) extended its operations from conventional microfinance to Islamic microfinance. Eventually, it discontinued conventional microfinance in 2010, thus becoming a purely Islamic microfinance organization. The pioneering efforts of Wasil Foundation in meeting the financing needs of different strata among the urban and rural poor has resulted in a diverse range of products in its portfolio (see Table II). Thus, Wasil has three products specifically targeted at the farming community. It believes that farmers in Pakistan are traditionally skilled but lack capital. Its first product based on bai salam is targeted at small farmers with up to five acre land holding, who need money to grow their crops and to feed their families up to the time of harvest. Under the salam agreement, Wasil makes payment of agreed price in advance to the farmer against commitment to deliver agreed quantity of produce upon harvest. It involves lower cost as compared to other alternatives and finance is provided against a collateral in the shape of guarantee from community members or a charge on available assets with the farmer, e.g. livestock. Wasil’s second product seeks to address the issue of lack of land ownership among farmers through leasing. Wasil takes agriculture land on ijara from the owners of the land in bulk and sub-leases the same to farmers for agreed period in exchange of pre-determined monthly lease rentals. In case of fruits/vegetable/flower farms the lease rental is paid in cash. In the case of wheat and rice, the lease rental is paid in kind in the form of crops. Wasil’s third product combines the concepts of ijara and salam and bases the whole return on the principles of salam, which requires settlement of debt in terms of the crops or produce. Under this agreement called Master salam, the farmer gets land on rental plus cash as working capital to cover related costs and agrees to deliver a given quantity of the crop to Wasil. A part of the repayment in terms of crop is towards rentals on ijara while another part relates to salam. After the first cycle of finance, there are two subsequent cycles of financing that are based on salam alone. After the two additional salam cycles, the contract ends. 4.1 Risk factors and their mitigation The main challenge concerning the salam transaction is the identification of the quality of the crop and the determination of the price at which it must be procured. The Government of Pakistan issues a support price for wheat at which the Food Mode Target beneficiary Zakat Destitute unable to work Qard al-hasan Poorest of the poor with ability to work Murabaha Micro level traders street hawker Small shopkeepers Salam Small farmers up to 5 acre land holding Ijara Farmers without land holding (rental land) Diminishing Musharaka Micro entrepreneur in need of assets Master Salam (Ijara + Salam) Developed by CWCD farmers in need of land plus money for cultivation Table II. Islamic finance products by Wasil 154 AFR 75,2 Downloaded by SAUDI DIGITAL LIBRARY (SDL) At 00:46 03 October 2017 (PT) Department of Government of Pakistan procures it. However, when Wasil Foundation approached these departments for the sale of crop, they refused due to the restriction levied upon them by the Government of Pakistan whereby only a farmer may sell to these departments. Thus, the only other options were the sale to the flourmills or to the open market. Furthermore, unlike the support price at which the Government purchases the crop, the flourmills and the open market rates are determined by certain market factors including the quantity of national produce. In order to determine the price, Wasil Foundation takes the data of the sale price in a specific area over the last three years. This gives a rough estimate of what the price is likely to be for the crop that is to be grown. Wasil Foundation then offers a float rate at which the purchase price is negotiated with the farmer/client. This negotiation takes place at the village level with groups of farmers who are likely to sell the crop to Wasil Foundation. At the end of this negotiation, Wasil foundation determines a final price at which it procures the crop. At times, this price may vary from area to area based on the cost of production, the expected yield, the sale price of the area in the last years and the amount of risk that the organization has to face. In June of 2010, Wasil Foundation launched its first rice salam transaction. Unlike wheat, the market rate of rice crop is entirely dependent on the quality of the crop wherein the seed of the crop is of major importance. In the case of wheat, the seed being planted does not directly affect the price, as the output crop is the same. In case of rice crops, these are categorized in accordance to the seed that is being planted by the farmer. Thus, the challenge of the quality of the crop and the proper identification of the seed is of vital importance while conducting a salam transaction on rice. For this, Wasil Foundation trained its procurement and sales department, through the agriculture department of Government of Punjab, Pakistan, on the types of rice and the identification techniques of rice. Unlike wheat, there is no support price by the Government for rice, which makes the estimation of the purchase price more complex for rice. The options open for Wasil Foundation are again, as in the case of wheat, the selling of the crop to the open market or the rice mills in the area. However, unlike wheat, when rice is harvested, it contains a high moisture content due to which the total weight of rice is increased by approximately 15-20 percent. This moisture further induces a chance for the crop to be damaged if it is not dried up in time. These issues increase the risk of holding rice at a warehouse for collection and sales purposes. Thus, unlike wheat, which may be stored for up to three months by Wasil Foundation, rice is to be sold within a maximum of one-month period due to the unavailability of the proper infrastructure to store rice. This challenge still exists while conducting a rice transaction of salam. The crux of the Master-salam product is the repayment in the form of crop rather than cash. This makes enormous sense, given that the client/farmer is not rich in cash during his crop cycles, which makes it difficult for the farmer to make the monthly repayment in cash. However, the farmer/client is rich in crop at the time of harvesting. Therefore, the product is focused on the principles of salam wherein the crop is delivered as a repayment for cash inputs, plus for the extra input of land in the form of ijara. 5. Composite partnerships with farmers (Sudan) A model that has been experimented in Sudan in the recent past adopts a composite finance-plus approach to support the farming communities.While there are elements of credit-based financing, the overall models are rooted in partnership. The underlying rationale for this approach seems to be the pivotal role that the IsFIs see for themselves 155 Islamic microfinance Downloaded by SAUDI DIGITAL LIBRARY (SDL) At 00:46 03 October 2017 (PT) in addressing various problems of the poor farmers and in enhancing food security of the region. While agriculture in Sudan faces problems similar to those in Indonesia and Pakistan, the challenges here are even greater arising out of adverse weather conditions, large tracts of drought-affected land and civil strife leading to a faltering economy riddled with unemployment. Islamic microfinance in Sudan, however, has a lot to offer in terms of its uniqueness and high success rate. The microfinance program of BoK, known as IRADA, is experimenting with new and innovative models of intervention to make inroads 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[22]. BoK was established in 2002 while its microfinance program (IRADA) was established in 2009 with the support and assistance from the Islamic Development Bank. The department was given the mandate 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 of 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.” 5.1 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 guarantor(s) brought in by the client. The portfolio covers all productive sectors (commercial, agricultural and vocational) across Sudan. 5.2 Business development services IRADA has carefully developed a network of providers of business development services 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 is 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 adequately incentivized. 156 AFR 75,2 Downloaded by SAUDI DIGITAL LIBRARY (SDL) At 00:46 03 October 2017 (PT) 5.3 Abu-Halima Greenhouses Project 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 1,200 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 market for vegetables, which witnesses a major spurt in the vegetable prices because of adverse weather conditions. The greenhouses would enable the micro-entrepreneurs to grow high-value vegetables all through the year, while smoothening the supply of vegetables in the Khartoum market. The greenhouses can now grow vegetables that usually witness many-fold price rise during summer and other high-value vegetables during winter, thus, reducing price volatility. The underlying model for the project is presented in Figure 2. The model (restricted mudaraba partnership). Unlike the regular micro-credit products, or even the commercial mudaraba products, the partnership between the bank and the micro-entrepreneurs extends well beyond that of a creditor and debtor or that of a rabb-al-maal (fund provider) and mudarib (fund manager). The bank assumes Min. of Finance IRADA – BoK Abu Halima Min. of Social Affairs Graduates Min. of Agriculture Tech Consultant Sana Hypermarket 1 2 3 5 7 6 8 9 10 4 Notes: 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 micro entrepreneurs (agriculture graduates); (4) setting up of Abu Halima greenhouses; (5) technical consultancy to micro entrepreneurs; (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 percent for five years and 100 percent after that) by micro entrepreneurs; and (10) sharing of profits (60 percent) by IRADA-BoK for five years Figure 2. The Abu Halima Project 157 Islamic microfinance Downloaded by SAUDI DIGITAL LIBRARY (SDL) At 00:46 03 October 2017 (PT) responsibility for provision of financial as well as a range of non-financial services to the micro-entrepreneur 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. They 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: Ministry of Finance, which has made a social contribution of 6.5 percent of capital; the State Ministry of Agriculture, which helps get fertilizers and assists in technical capacity building; the Ministry of Social Affairs, which nominates the beneficiaries through its Graduate Fund; and Sanaa food hypermart and home center – 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-entrepreneur 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 portfo