Global monetary policy continues to be a driving force in global equity markets as well as for commodity prices that are important for emerging markets across the MENASEA region. Since last week’s issue where we mentioned an increasing likelihood that the European Central Bank would add more stimulus in December, the US Federal Reserve has expressed continued confidence in the US economy’s growth and a reduction in risk related to global markets (read: China). Both factors the Fed is looking at point to higher chance (market based measures have risen to show a 50% probability) that it will raise the US Fed Funds Rate target in December althoughincreased ECB quantitative easing, the effect of which is discussed below, could increase the risk of both occurring simultaneously.
Bank of Khartoum microfinance unit leverages zakat in Islamic microfinance
The following is an exclusive interview with Fadi Salim Al Faqih Chief Executive Officer Bank of Khartoum about the bank’s IRADA Islamic microfinance program. Fadi joined BOK in 2006 as Chief Operating Officer and in 2008 was appointed as CEO spearheading BOK’s business development, restructuring and transformation to become the leading Islamic financial services group in the Sudan. Under his leadership, BOK has enhanced and developed its service offer full range of products and services for Corporate Banking, Retail Banking, SME, Microfinance, Treasury and Investment banking across multiple channels in Sudan.
Finance Forward (FF): Could you please explain, in general, the microfinance program you offer and how it was developed and the partners you are working with to develop it?
Fadi Al Faqih (BOK): IRADA is specialized company for Islamic microfinance; it is a private joint-stock company which is owned by Bank of Khartoum and the Islamic Development Bank. IRADA aims to provide increasing numbers of entrepreneurial low income people in Sudan with the means, through disbursement of micro credits, to undertake and expand income generating activities and create sustainable livelihoods and employment.
IRADA strategic dimensions are based on the balance between Social and Economic Dimensions of Trade. IRADA is keen to make partnerships with development organizations or microfinance institutions (MFIs) in Sudan to eradicate poverty through collective efforts with additional partners including international organizations and the private sector.
BOK started its Islamic Microfinance program in 2009 and has become the leader in Islamic microfinance due to projects that we have implemented. We managed the largest and 1st of its kind fund for Islamic microfinance, the Al Aman Fund. It was created by a consortium of banks and Zakat organizations with a total fund value of SDG
200 million ($33 million) where participating banks contributed SDG 150 million and zakat organizations contributed the remaining SDG 50 million.
This was the first time ever that zakat was contributed in a fund to help fight poverty instead of just giving money to under privileged people. Islamic microfinance is helping people to move above the poverty level and we are very proud to share that many of our beneficiaries who were taking zakat in previous year are now giving zakat due to our successful implementation of projects.
Our work has been recognized with many prestigious awards and most importantly from EFICA (the Ethical Finance Innovation Challenge Award). Organized by Thomson Reuters and ADIB, we were selected in 2014 from a field of more than 200 entries from across the globe. The award recognized our Wad Bilad Project.
We were also a top 3 finalist of the “Islamic Microfinance Challenge – Beyond Murabaha,” organized by CGAP and World Bank in 2014. We have also been recognized as a Center of Excellence and conducted many trainings on how in to implement Islamic microfinance products and services with organizations from Egypt, Maldives, KSA, Tunisia, Kyrgyzstan, Morocco and others. Some of these have included UNIDO Bahrain, the World Food Programme in Sudan, Silatech and a microfinance institute in Uganda.
FF: How widespread can models like the mudaraba financing product around community-based asset (like a greenhouse) be used to develop the local economy? Is it limited to agrarian situations where you developed it?
BOK: IRADA considers all customers as partners, where it uses the Islamic finance models such as Mudarabah, Musharaka and Salam. Mudarabah is a contract where the parties cooperate in a profitable project with a financial contribution to the customer who has to manage the project capital and the profits will be distributed according to the proportions in an agreed contract.
The experience of IRADA in Mudarabah is primarily with agricultural projects such as Abu Halima green houses. The project was developed to target 125 families where each family head is an agriculture graduate. The finance focuses on two lines: infrastructure and operational costs. Other entities were engaged in the project in capacity building for production and management along with the assistance of an agriculture consultant working on the project.
This type of projects helps to increase production and to reduce of unemployment. The Mudaraba methodology is widespread through many transactions not limited to greenhouses. Extending it to cover relations between different social entities working in the field of Microfinance can be more effective in developing local communities especially when these entities are created from the same area or region. It has the ability to finance the locals as it is near to them and know them which will facilitate easy collection of installments.
IRADA is planning to maximize utilization of variable Islamic models especially Mudarabah in other sectors other than agriculture.
FF: How much do low-income consumers of microfinance products have the capacity to understand and manage the risks that come with profit-sharing products versus those with fixed payments?
BOK: Low-income consumers are one of two types: the first is the well acquainted with his project and he already has the capacity to understand how to manage his risks, for those they can easily be financed depending on their previous experience. The second is the low-income consumers who newly started their products where they should be coached by the Business Officers and closely followed in different stages of their product. Moreover, training for managing and mitigating their risk should be advisable to be conducted.
IRADA facilitates the beneficiaries engaging in income generating activities through the provision of credit and skill based training; we already have a partnership with UNIDO in entrepreneurship empowerment program to enable and strengthen skills of the beneficiaries to establish and manage their projects. Follow-up of the projects is crucial since IRADA is sharing the profit and loss in Musharaka/Mudarabah projects. IRADA continues providing technical supports to ensure continuity and profitability of the projects to achieve the goal of sustainable development.
FF: What is the role of deposit products to help microfinance clients save and manage their finances?
BOK: Deposit products for microfinance clients are considered beneficial as an indicator for the success of the business and good utilization of funds that leads to cover the payments, the cost of living and to create the ability to generate funds to be kept as deposit. It is also an indicator for clients to save and manage their finances by using personal planner to cover his payables and maintain a deposit.
IRADA has the license from Central Bank to receive deposits from microfinance clients; as IRADA has already set up a financial MIS system to facilitate deposits and transfers. Each microfinance client will have a saving account that will allow him to deposit his savings. The client is allowed to deposit a portion of finance amount in his saving account upon disbursing the finance. Clients will have a sufficient training to help them to increase their savings and to build a saving culture among the beneficiaries.
FF: Does BOK or IRADA offer any microtakaful products to protect customers and their families in case of extreme weather, disability or death?
BOK: Yes, IRADA has a relation with a number of Insurance Companies and protect the customers from the mentioned risks in addition to delinquency risk as well. This protection is made with the lowest premium in the marketthrough unique agreements.
FF: How does the Bank of Khartoum’s IRADA microfinance unit connect with the other bank offerings and has there been the ability for microfinance clients to move out of microfinancing and into SME financing?
BOK: IRADA has no connection with other Bank offerings so far; however, it is intended to be in the near future. For the ability of moving from microfinance into SME, it is the ultimate goal of IRADA to adopt this role although it has not been reached yet. Those customers who have a good credit history and their businesses are still expanding have the chance to move for small finance.
The experience of the Moringa project and the good packaging of the product will help it to be moved to SME and to be further a product that can expand into the international market and raise the project from its local offering in Sudan to one with wider applications to microfinance and SME including those like the Abu Halima Project.
MENA region’s oil exporters face double whammy if Fed and ECB move in opposite direction
According to the Middle East and Central Asia Regional Economic Outlook released by International Monetary Fund (IMF) last week, the economic outlook for the MENAP (Middle East, North Africa, Afghanistan, and Pakistan) region remains highly dependent on geopolitics, the developments in the hydrocarbon industry and China growth. A rise in interest rates by the US Federal Reserve would have a two-pronged impact on oil exporters within the MENAP region. The forecasted growth in the MENAP region for 2015 is expected to be 2.5 percent, down from a growth of 2.7 percent last year and down by 0.5 percentage points compared with the IMF’s last predications stated in May 2015.
The major impact of the oil price decline on oil exporting governments has been on their fiscal deficits. The IMF has predicted the fiscal deficits to swell up to 13 percent of GDP in the GCC and 12 percent of the GDP in non-GCC oil exporters in 2015. Despite the drop in energy prices which would, all else equal, lower the import bill (and the fiscal impact of the subsidies provided for energy), the fiscal deficits for the oil importing countries are expected to only narrow slightly to 7.3 percent of the GDP from a peak of 9.5% of GDP in 2013. This shows the how the impact of non-oil factors is affecting the region – it’s not just oil.
The geopolitical situation across the region is impacting many of the oil importers and acting as a headwind to growth that would otherwise be supported by lower oil prices. Spillover from the civil wars raging in Syria and Libya are affecting Lebanon, Jordan, Tunisia and Egypt while continued instability and the recent earthquake in Afghanistan and Pakistan will reduce growth rates there lowering aggregate regional growth rates too.
Moving away from the oil price disruptions and the conflicts in the region, the report highlights that the growth of both oil importers and oil exporters is likely to stay affected by the slowdown in China. China’s slower growth is likely to put further pressure on certain oil exporting countries although the non-oil trade between China and the GCC specifically is minimal. A decelerating China, particularly if the growth shifts into less energy intensive sectors like consumer goods, will push down the oil prices further and aggravate the fiscal and external imbalances in the oil exporting countries specifically.
The report also raised the issue of how the MENAP regional outlook will be affected by interest rate hikes that have, since the report was released, become more likely to occur sooner rather than later. The Federal Reserve’s October minutes more clearly stated the conditions it will look for in order to raise rates at the December meeting. Although these conditions (improvement in the labor market and inflation rising towards the 2 percent rate) have not changed, the Fed’s statement indicated that they were more likely to improve enough to support a rate hike at the December meeting. In the report, the IMF concluded that “Banking systems in MENAP oil exporters are generally well positioned to withstand the effects of the oil shock, though profits could come under pressure”.
A rise in US interest rates would be challenging for oil exporters in the MENA region because, although it would reflect the strengthening economic growth in the United States, it would likely occur at the same time as the European Central Bank is expanding its quantitative easing program, as we highlighted in Finance Forward last week. Since then, a governing council member told Reuters that there was consensus for likely expansion of easing at the December meeting to counter deflationary risks in the Eurozone.
The central banks in Europe and America moving in opposite directions would lead to a return of dollar strengthening against the Euro. The strengthening dollar has led to falling commodity prices which, if repeated, would mean falling emerging market currencies already hit by commodity price-induced economic weakness. A sharply destabilizing fall in emerging market currencies could return if the dollar strengthens.
The oil exporting MENA region countries would be hit with a double-whammy. The strengthening dollar would likely be accompanied by lower oil prices while higher interest rates in the US would likely have to be matched with higher interest rates in countries whose currencies are pegged to the USD. This effectively means tightening of monetary policy even as growth slows and rate rises would be exasperated by rising rates caused by tighter liquidity and crowding out from government bond and sukuk issuance to cover high fiscal deficits. These effects would compound one another until either fiscal consolidation is completed or oil prices rise, each of which are unlikely to be occur quickly which could lead to a longer period of weaker bank profits than expected.