FAST FINANCE

As Brent crude falls below the $50/bbl, pressure rises on many oil exporters to finance rising budget deficits to preserve their investments saved up during years with higher prices. Saudi Arabia, in particular, is likely to be active in bond issuance and its SR 15bn ($4bn) issuance in July was reportedly a test issuance of a program that could expand to SR 100 billion ($27 billion) through the end of 2015. This would allow the government to tap the ample liquidity held in the banking system, where lending is limited by conservative bankers and tight regulations. Issuing at least half of the debt through sukuk would help develop an Islamic yield curve and also give Islamic banks a way to maintain their competitive position with conventional banks.

Silk Road Sukuk

“One Belt, One Road”(OBOR) initiative- the combination of a land-based Silk Road Economic Belt and a sea-based 21st Century Maritime Silk Road- is a development strategy initiated by Chinese President Xi Jinping. It refers to the New Silk Road Economic Belt, which will link China with Europe through central and western Asia, and the 21st century Maritime Silk Road, connecting China with Southeast Asia, Africa and Europe. Funding for this initiative will be carried out mainly through China’s own Silk Road Fund and the newly established Asian Infrastructure Investment Bank (AIIB).

Theoretically, the asset-based nature of sukuk makes it ideal to be used as an infrastructure financing tool to build highway networks, ports and other big projects involving tangible assets. The Asian Development Bank (ADB) estimated in 2009 that the region needed $750 billion worth of infrastructure financing annually through 2020. The China-led AIIB is collaborating with Jeddah-based Islamic Development Bank (IDB) to appraise the appropriateness of Islamic financing as tool to fund different projects. China’s eagerness to jump on the sukuk financing bandwagon affirms the prominence sukuk has gained from investors across developing countries and multilateral lenders to help finance various infrastructure projects. Moreover, sukuk financing gives China the access to a large capital pool in the Middle East and Southeast Asia.

Having said this, sukuk have yet not been able to take-off with the swiftness anticipated by its proponents particularly for long-duration projects which most infrastructure projects would be. There have certainly been some tricky tax & regulatory challenges hampering the issuances of sukuk especially outside the core MENASEA markets. Lack of standardization which constrains sukuk issuance by requiring lengthy review of each deal and deprives the markets of an organized structure to facilitate secondary trading and liquidity is one of the major issues.

Secondly, a dearth of larger sukuk with long term tenors has also led to a clustering of deals around the 5 year tenor point limiting issuer diversity that is critical to secondary market development. Another factor that the AIIB would have to be mindful for are taxation arrangement as the underlying assets in a sukuk may be entailed to multiple transfers. Thus, sukuk could be subject to a multiple taxation glitch, possibly increasing the total financing costs of the infrastructure projects.

This may explain the reports that Hong Kong is a favored domicile for the sukuk program since it is part of China and also has tax laws that assure neutrality for sukuk. The tax laws in the countries where the sukuk assets are located may need to be modified to provide the same level playing field but at least issuance out of Hong Kong will limit some tax issues.

The likelihood of sukuk being used as a key funding vehicle for China’s OBOR initiative is inherently dependent on the innovation and variety of instruments that Sukuk issuers can offer to AIIB. It remains to be seen if sukuk issuers can overcome technical, legal and political challenges to formulate large scale project financing deals for longer-tenors.

Is Microfinance the silver bullet for poverty alleviation? An Interview with BRAC International                            

Multilateral development banks and organisations all over the world look to the contribution of non-governmental financial institutions such as BRAC Bank and Grameen Bank when they seek examples of financial intervention towards development goals such as poverty alleviation and economic inclusion. Yet, the mainstream financial services industry have largely yet to adopt their practices and remain skeptical about the potential for serving these unbanked segments through micro-finance. What’s more interesting is the opportunity for Islamic micro financial services, given that a fourth of females stay away from such services due to religious and social considerations (more below).

We speak to Mr. Rumee Ali, Treasurer & Member of Board of Directors of BRAC International (Official name: Stichting Brac International N.V.) a foundation which was formed by BRACs founders in 2009 with an objective to engage in charitable purposes and social welfare activities in any country of the world strictly on non profit basis. Founded in 1972, BRAC is the largest non-governmental development organization in the world. All of BRAC International’s development entities operate under the umbrella of BRAC International.

Finance Forward (FF): How does BRAC International see its differentiation from other non-profit organizations with microfinance and related operations and what is the current vision relating to its international operations?

Mr. Rumee Ali (RA): BRAC’s holistic and unique approach to economic inclusivity through poverty alleviation makes microfinance one of the tools. As Sir Fazle Hasan Abed [Founder and Chairman of BRAC], said “We always thought nationally, worked locally and looked for inspiration globally. We were inspired by Paola Freire’s work on pedagogy of the oppressed….It is wonderful to have a thinker who was thinking about the poor people and how they can become actors in history and not just passive recipients of other people’s aid. He made us realize that poor people are human beings and can do things for themselves, and it’s our duty to empower them so that they can analyze their own situation, see how exploitation works in society, and see what they need to escape exploitative processes”.

A part of BRAC’s strategy is to roll out other programs that will synthesize with its microfinance program to lift people out of the poverty trap. BRAC as an institution is one of the very few ‘south based’ development NGOs which is taking its rich and diverse multicultural and multinational experience to these countries. This places BRAC in a stronger position to customize the solutions to fit the local needs. Its approach to future has always been to respond to where its capabilities and its strategic strengths will best help local challenges.

FF: How successful have your programs been at working together to help move people along the chain from ultra-poor to poor but self-sufficient and then out of poverty where they can create jobs for others?

RA: There is both anecdotal and research based evidence that support the view that MF has helped poverty alleviation but it must be emphasized that BRAC does not believe that MF is the ‘silver bullet’ for fighting poverty. As I mentioned before, BRAC believes in a holistic approach towards successfully and sustainably removing poverty. This includes giving disenfranchised people access to health and education in addition to access to finance that MF provides. BRAC’s ultra-poor program, known as ‘targeting the ultra-poor’ (TUP) has been particularly successful through its multidimensional approach including asset transfers programs in helping the ultra-poor.

FF: How do the social enterprises like BRAC Dairy interact with financial programs (microfinance, small enterprise programs and empowerment & livelihood for adolescents) and how does it generate a better impact for the end-clients?

RA: There is no direct connection between BRAC’s social enterprises (SE) and its microfinance (MF) program. However, historically the SEs were set up in response to need that may have originated from MF intervention. That is why they were initially known as PSUs or ‘Program Support Units’. Dairy was one such PSU that was set up to create market access for farmers who financed their livestock (cow) purchase with MF and needed fair price for their produce.

FF: The 2013 Annual Report speaks about opportunities at BRAC-owned Nanda Investment & Finance to offer deposit products to consumers and to raise debt internationally. Have these been undertaken?

RA: While BRAC MF does offer deposit products in Bangladesh, it had to disinvest its holding in Nanda due to the decision by the Sri Lankan central bank to consolidate the non-bank financial industry. In the process they introduced minimum capital and asset requirements. BRAC requested a moratorium which was not accepted by the central bank. Diluting [BRAC’s ownership] to stay on could seriously risk BRAC’s mission based objectives, therefore disinvestment was the only viable alternative.

FF: It seems like there is a sequence of different programs offered, including those targeted at subsistence for the ultra-poor, move towards offering the assets, graduating them to microfinance and ultimately finding overlap with programs designed for SMEs both within BRAC International and at BRAC Bank.

RA: There is no such thing as a ‘perfect world’, so to answer your question, overlaps can and do happen, particularly in the part of the spectrum where ‘micro’ ends and ‘small’ enterprise financing starts. This, however, does not in any way take away from the purpose and aim of both BRAC MF or BRAC Bank’s SME financing to strengthen financial inclusivity.

FF: How much financing (bank or otherwise) is available to BRAC’s social enterprises to expand their operating footprint?

RA: There is no limitation on availability of finance for BRAC’s social enterprises for expansion provided the planned investment is viable, sustainable and in sync with BRAC’s mission based objectives.

FF: BRAC focuses a lot on measuring the impact of the offerings quantitatively using robust empirical study methodologies?  Could you give an example of a situation where that has measurably improved a financial product offered by BRAC?

RA: BRAC’s targeting the ultra-poor program (TUP) is a case in point when we talk of the evolution of a financial product following strict monitoring and research. In 1985, BRAC had introduced a program that went by the name income generation for vulnerable group development (IGVGD) program. The IGVGD had received favorable evaluations but it was seen that at least 30 per cent of IGVGD participants do not progress to microfinance programs and these are usually from the poorest and most vulnerable households.

BRAC realized there was a large population that was being missed out. One of the initial research studies was done jointly by BRAC and Grameen. Out of the 498 ultra-poor people eligible to join a BRAC or Grameen group, 43 per cent declined. One of the most significant reasons was they were fearful of programs that were based on borrowing. A quarter of the women stayed away for religious or social considerations. The result of these intensive studies led to the birth of BRAC’s TUP program, launched in 2002.

TUP involves a 24-month immersion program starting by devising ways to build self-esteem since it was dealing with people with no social capital and no standing in the community. There were various significant research studies that were carried before and during introducing TUP, which helped BRAC understand and tackle the missing links, and eventually helped shape the program into a more comprehensive, and a more targeted program package.

To assess the “Impact of Credit on the Sustainability of SME Borrowers of BRAC Bank” we conducted a study on 525 sample borrowers in 2010. We assessed effects of the treatment (financing as an intervention) on the treated (repeat borrowers of the bank) compared to first time or dropout borrowers. The study found that financing intervention of the bank brought positive changes in the lives of continuing borrowers. At the same time, that study revealed some concern areas like

• female full-time employment didn’t grow at the same level as that of males
• defaulters’ socio-economic crisis in all sustainability measurement indices requires fine tuning credit administration and monitoring
• the wife’s involvement in decision making generates better a result than when the husband makes decisions independently.

Having learned from that quantitative study, the “Prothoma Rin” which is meant for women entrepreneurs was redesigned and further developed.

FF: Has there been any development of Shariah compliant microfinance products and has there been significant interest from BRAC’s customers for these types of products?

RA: BRAC does not offer nor does it have any plans to offer Shariah based products in Bangladesh.