Advancing Financial Inclusion and Islamic Microfinance Development in

Advancing Financial Inclusion and Islamic Microfinance Development in IDB Member Countries May 4 -5, 2016 Bogor, Indonesia Wasim A. Abdulwahab Islamic Financial Services Department 1 Islamic Financial Services Department

• • A Unique Model of South-South Cooperation Global MDB: Membership spread over 4 continents Membership Increased: 22 countries in 1975 → 57 countries in 2016 IDBG approvals sinception until 2016 (February) US$ 115 Bn. Islamic Financial Services Department

IDB Mission & Strategic Thrust “To promote comprehensive human development, with a focus on the priority areas of alleviating poverty, improving health, promoting education, improving governance and prospering the people. ” Expansion of the Islamic Financial Services Industry is one of the key strategic thrusts Islamic Financial Services Department

Strategic objectives: The Vision translates into strategic objectives that will drive the core activities of IDBG Strategic objectives Rationale INCLUSIVENESS CONNECTIVITY Become a Preferred Partner for MCs 1 Social and Economic Development A Strong Catalyst for South-South Collaboration Addresses the needs of the poorer and marginalized communities who represent a significant portion of the IDBG's stakeholders Promotes cooperation among its MCs to enhance trade, investment, knowledge, and capacity development as part of its mandate ISLAMIC FINANCE SECTOR GROWTH A Leading Reference in Islamic Finance Facilitates the development of the global Islamic Financial industry as a part of its unique mandate including Financial Inclusion 4 Islamic Financial Services Department

How to advance Islamic Microfinance Throwing money at the problem is not the solution. § Reasons • Markets not ready • Lack of consumer education about financial matters • Lack of enabled institutions • Lack Legal frameworks • Lack of Regulations • Lack of demand for any other reasons Islamic Financial Services Department

Growing Islamic Microfinance through Financial Inclusion Financial inclusion is a broad concept beyond access to finance and includes financial education and financial consumer protection. The future trends are mainly concentrated on the major areas: Increasing knowledge about financial services, Increasing access to financial services, Promoting alternative financial products and services and Enhancing consumer protection Islamic Financial Services Department

Strategy for Enhancing Financial Inclusion • Classify countries into clusters according income and stage of development and ask the following questions. • To what extent is the legal and regulatory systems are developed (Basic, Intermediate or Advanced)? • To what extent is the demand from the population for various Islamic finance product from the population? • How much political will is present? • How well developed is the country? • What are the Government’s objectives and how much is it willing to pursue them? • How well is the financial market developed? Islamic Financial Services Department

Components of an Islamic Finance Enabling Environment Islamic Banking c an fin o r ic c. M i lam e Ijarah Legal Is Liquidity Management Takaful Taxation Isla m Shariah Accounting ic I nve Fun stm ent ds Regulations Islamic Capital Market Islamic Financial Services Department

What is the Process of Creating an Enabling Environment for Financial Inclusion Developing n ecosystem for Financial Inclusion and Islamic microfinance by incorporating, or permitting, Islamic financial activity within a country or a group of countries’ financial system Preparation Assessment Gap Analysis Establish working groups Obtain political support Agree target framework model Identify other available support groups Evaluate & implement change Monitor & review Islamic Financial Services Department

Activities required for commencement of Financial Inclusion Activities Awareness building Organize stakeholder groups Understand the necessary enabling environment Preliminary studies & gap analysis Roadmap & Time table Islamic Financial Services Department

Ensuring robust Islamic financial transactions, products and services can be undertaken in a vibrant Islamic financial market place requires three major elements to be working in harmony: Sharia'a compliancy Legal enforceability Commercial Viability Islamic Financial Services Department

Technical Assistance to Islamic Finance Industry Technical Support Program Financial Sector Development Microfinance Development Program Strategic Partnerships 47 8. 8 1 T As US$ m Countries 2 IFIs MDBs. Bilaterals 12 Islamic Financial Services Department

47 8. 8 Technical Support Program Objective: To develop Islamic finance enabling environment (legal, regulatory T As US$ & supervisory framework) and institutional capacity building in Islamic finance Beneficiaries: central banks, capital market authorities, supervision agencies, public sector banks, ministries of finance, as well as Islamic Infrastructure Institutions. What have the TA Projects achieved? m Indonesia – Detailed Masterplan for developing Islamic finance architecture under implementation by the Govt. IFSB – Standard on ‘Core Principles for Islamic finance regulation’ developed. Other prudential work. IIRA – Fiduciary Rating Methodology developed. Assisting in issuing sovereign ratings of IDB MCs Tajikistan – Standalone Islamic banking law passed by the Parliament Djibouti – Preparing for issuing Islamic banking law Kyrgyzstan – Converted Eco. Bank into an Islamic bank Afghanistan – Islamic banking operations introduced in Bank Milli Afghan Nigeria – Central Bank capacity building. Two Islamic banking licenses issued. Jaiz bank established. Senegal – Provided regulatory policy advice leading to interest in Islamic finance from BCEAO Oman – Implementation Guidelines for Sukuk & Takaful 13 Islamic Financial Services Department

47 8. 8 Technical Support Program Islamic finance enabling environment T Objective: To develop (legal, regulatory & supervisory framework) and institutional capacity building in Islamic finance Beneficiaries: central banks, capital market authorities, supervision agencies, public sector banks, ministries of finance, as well as Islamic Infrastructure Institutions. As US$ Geographic diversity of projects m 9% 13% 16% 8% 14% - - 35% By Number 14% of TAs SSA MENA CIT 28% By $ Approval Amount of TAs Regional Asia 27% The Program has successfully targeted key emerging Islamic finance markets: 21 countries targeted Regional TAs to IIIs Joint projects with World Bank & IMF IDB-IMF LOU CIBAFI IDB-WB WG IIRA GCC TAs to Regional Bodies/IIIs/MDBs’ WGs 14 IFSB IICRA IIFM Islamic Financial Services Department

47 8. 8 Technical Support Program Objective: To develop Islamic finance enabling environment (legal, regulatory T & supervisory framework) and institutional capacity building in Islamic finance As Beneficiaries: central banks, capital market authorities, supervision agencies, public sector banks, ministries of finance, as well as Islamic Infrastructure Institutions. US$ Who are the Beneficiaries? Bank of Mozambique m Bank Al Magrib (Morocco) Central Bank of Libya Capital Market Authority Oman Under Secretariat of Treasury, Turkey Ministry of Finance of Oman Maldives Monetary Authority Banque Centrale des Etats de l'Afrique de l'Ouest (BCEAO) BAPPENAS Indonesia Gumhouria Bank, Libya Eco. Islamic Bank, Kyrgyz Republic Bank-e-Milli Afghan National Bank of Kyrgyz Republic National Bank of Tajikistan National Bank of Kazakhstan Ministry of Economy of Senegal Libya Development Bank Central Bank of Mauritania Central Bank of Tunisia Bank of Uganda Central Bank of Nigeria Central Bank of Djibouti Gulf Cooperation Council (GCC) 15 Islamic Financial Services Department

Structured Approach to Enhancing Financial Inclusion Poor (at the Ultra Poor Poverty Line) (below Poverty Line) • • • Zakah, Sadaqat Waqf Khairat Khumus Other collective schemes for redistribution of income Low Income Qard-al-Hassan, Zakah, Waqf Micro-Finance (Murabaha, Musharikah, Salam) • • Micro-Takaful • • • Micro-Small. Medium Enterprises (MSME) ` Islamic Financial Services Department

TA to Maldives Capital Market Development Authority to Develop Sukuk Market & Maldives Monetary Authority to Develop Regulatory Framework for Islamic Banking The TA Project Recipients: (i) Maldives Monetary Authority and (ii) Capital Market Development Authority Amount: US$ 150, 000 TA Agreement Signed: 2012 Status: Completed Scope Objective To set up legal, regulatory and supervisory framework for Islamic financial institutions in Maldives and to assist the country to launch Islamic capital market instruments starting with Sukuk - Prepare report on legal, regulatory and supervisory framework for developing Islamic finance sector - Develop Sharia governance framework - Capacity building of staff from CMDA & MMA Impact The TA helped in developing - Islamic finance enabling environment & the Sukuk market in Maldives and enhanced awareness about Sukuk Market Development - Regulations for Sukuk Issuance were drafted by Capital Market Development Authority. The Regulations came into force in 2013 - Issuance of the first corporate Sukuk by Housing Development Finance Corporation in September 2013 Financial Sector Consultant prepared detailed report on the necessary modifications needed in the legal, regulatory and supervisory framework for Islamic financial institutions Capacity Building Project dissemination workshops were conducted for the concerned stakeholders including staff of MMA and CDMA The Islamic Development Bank Group Together we build a better future Islamic Financial Services Department

TA to Oman Capital Market Authority to Develop Islamic Capital Market & Takaful The TA Project Recipient: Capital Market Authority Amount: US$ 150, 000 TA Agreement Signed: 2014 Status: Completed Scope Objective To provide consultancy services to the CMA to assist in the implementation of the newly developed Sukuk and Takaful regulations Review and assist the CMA in implementing the newly developed regulations for Sukuk and Takaful Impact TA helped in implementing the regulations related to Sukuk and Takaful and enhanced the understanding of Sukuk and Takaful for CMA staff Regulations Implementation Expert hired for 12 months to implement Sukuk and Takaful regulations by way of developing policies, procedures, guidelines for the CMA. Sukuk Issuance Oman issued its first sovereign Sukuk amounting to OMR 200 million (US$ 520 million) in October 2015. The Ijara Sukuk tenor is 5 years. Capacity Building The Islamic Development Bank Group Together we build a better future Islamic Financial Services Department

TA to Bank-e-Milli Afghanistan to Develop a Suite of Islamic Banking Products for Clients The TA Project Recipient: Bank-e-Milli Afghan (BMA) Amount: USD 130, 000 TA Agreement Signed: 2012 Status: Completed Scope Objective Support BMA’s Islamic banking operations which will contribute to IDB’s strategic objective of developing and promoting Islamic financial sector in IDB member countries - Development of Islamic finance product programs and related policies & procedures - Providing related capacity building training to BMA staff Impact TA helped in full-scale relaunch of Islamic banking services comprising sophisticated product suite, developed policies and trained staff. BMA is now better equipped to serve client needs through innovative product solutions Regulations Implementation Auto Finance (Murabaha), Home Appliance Finance (Murabaha), Real Estate Finance (Murabaha), Trade Finance LC (Murabaha), Construction Finance (Istisna & Parallel Istisna), Working Capital Financing (Musharaka) Liability Products Current accounts, Savings accounts, Term investment accounts Policy Capacity Documents Building Credit procedures, Financing policy, Operations policy, Profit distribution mechanism The Islamic Development Bank Group Together we build a better future Islamic Financial Services Department

12 Countries Microfinance Development Objective: aims to increase outreach. Program and enhance financial inclusion to reduce poverty through the development of Islamic Microfinance industry How? Several modes of intervention, both Financial and Technical, designed to address the wide ranging microfinance needs in member countries, thus avoiding the one-size-fits-all approach. On-going projects… Phase-I Ø Sudan: § Bank Al-Usra - Capacity building TA for microfinance completed successfully § Irada - Equity in MFI with Bank Al-Khartoum § Ibdaa Bank - Equity participation in MFI with Agfund Ø Senegal: § Developing the Enabling Environment - (a) MOF-Senegal (b) BCEAO - Completed § Equity Investment in MFI with Government, Local MFI and other local/international institutions Ø Indonesia: § $50 m Islamic Microfinance Fund - in collaboration with Government and local financial institutions. Steering committee formed and Financial Advisor TOR prepared Phase-II Ø Tunisia: § Equity investment in a new Islamic MFI with Zeitouna Bank Ø Pakistan Phase-III § Initial discussions held with parties desirous of starting Islamic microfinance Ø Next Group of Countries: Ø Tajikistan and Egypt: § Afghanistan, Gambia, Guinea-Conakry and Maldives § Identification of local sponsors will take place soon. 16 Islamic Financial Services Department

Together we build a better World Thank you Terima Kasi 21 Islamic Financial Services Department