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Islamic Microfinancing
     Rural Islamic Credit Card – A Shariah Compliant
      Rural Micro Financing & Payment Instrument




    By Lokesh Gupta
    Head, Business & Technology Consulting

    By

    RM Applications Sdn. Bhd.
    No.69-1 Medan Setia 1
    Bukit Damansara
    50490 Kuala Lumpur
    Tel: +603-20932677
    Fax: +603-20932607
    Website : www.rma.com.my
    Email : lokesh@rma.com.my
© 2012 RM Applications Sdn. Bhd. (The information contained herein is subject to change without notice)
Presentation Path




                         1-. Conventional Credit Card Overview

                         2-. Islamic Credit Card Definition & Evolution

                         3-. Modus Operandi of Islamic Credit Cards

                         4-. Islamic Credit Cards Contract

                         5-. Islamic Credit Card Features

                         6-. Challenges & the Way Ahead




Strictly Confidential               wwww.rma.com.my                       © 2012 RM Applications Sdn. Bhd.   2
Financial Service in Rural Areas



      Microfinance: Financial
       services for poor and low-                     FINANCIAL SECTOR
       income people
                                               RURAL FINANCE
      Rural finance: Financial
       services used in rural
       areas by people of all             AGRICULTURAL
                                          FINANCE              MICROFINANCE
       income levels
      Agricultural finance:
       Financing of agriculture-
       related activities



     Financial services for the Farmers: Financial services for the
     Agriculture Segment specially tailored to their needs

Strictly Confidential               wwww.rma.com.my                    © 2012 RM Applications Sdn. Bhd.   3
Current Scenario



       Agriculture Industry is amongst the high priority industry in Malaysia.
       Malaysia is recognized worldwide as a global producer of palm oil,
            rubber, cocoa, pepper etc.
       Despite various initiatives from Govt. the challenges faced by farmers
            are:
               •    Lack of access to the range of financial service they need
               •    Available Financial services are
                         Costly or Rigid
                         Not well-suited to seasonal or longer-term agricultural activities
                         Not easily Accessible
                         Various constraints to meet the eligibility criteria

Strictly Confidential                         wwww.rma.com.my                    © 2012 RM Applications Sdn. Bhd.   4
Financing Need of Agriculture Sector


 Financing Duration              Short Term , Medium Term and Long Term

                                 Working capital to service machinery, equipment and to
 Purpose                          buy fertilizers, seeds, pesticides and to meet other
                                  Incidental expenses etc.
 Revolving Financing             Financing facilities with unlimited retail purchases, easy
 Facility                         cash withdrawals via ATM

 Repayment Schedule              Flexible schedule based on the production cycle of Crop

                                 Variable demand, uneven cash flow, lag between
 Seasonality                      financing disbursal and repayments

                                 Insurance to cover losses due to variable rainfall, pests
  Risks Coverage                  and diseases, price fluctuations etc.

                                 Farmers lack in collateral and the preference is for
  Collateral Free                 collateral free financing

                                 Restructuring/Rescheduling of financing term in the
  Finance Restructuring           event of natural calamity
Strictly Confidential               wwww.rma.com.my                     © 2012 RM Applications Sdn. Bhd.   5
Proposed Financial Product



                    Shariah                          No Restriction
                  Compliance                         on Withdrawal
                                                      & Purchases




  Convenience &
    Practical                                                Flexible
    Payment                                                Rescheduling
     Services




            Collateral &
                                                      Takaful
           Interest Free
                                                     Coverage
             Financing

Strictly Confidential              wwww.rma.com.my     © 2012 RM Applications Sdn. Bhd.   6
Proposed Shariah Contracts in Rural Islamic Card



    Bai Salam (Between Pesawah & Bank)
    Al Wadiah (Internal to Bank for Fund Management)
    Hiwalah (Between Bank & Supplier)
    Musawamah or Parallel Salam or Murabaha
     (Between Bank & Merchant)
    Ijarah (Between Bank & Brand Owners :
     Transaction based payment to Communication
     Network – VISA / Master Card to facilitate
     transaction process)

Strictly Confidential              wwww.rma.com.my            © 2012 RM Applications Sdn. Bhd.   7
Bai Salam Contract



         Known as Future Delivery Financing of Forward Sale
         Practiced in the agriculture sector since before the life of the Prophet
         Salam is a cash sale contract executed for the purchase of goods
          promised for future delivery


                             1. Farmer Sells Crops to Bank on forward basis


                                2. Pre agreed price is paid to the farmer

                             3. Farmer deliver Crops to Bank on the agreed
                                              delivery date

                                                               4. Bank Sells crops in the
                 Farmer                                             market at Profit


                                                                                Market
Strictly Confidential                 wwww.rma.com.my                            © 2012 RM Applications Sdn. Bhd.   8
Rural Islamic Credit Card Life Cycle




             Card Issuance to         Usage of Card for        Settlement
                 Farmers                Purchasing




                                    Farmer Use the        Farmer Use the
                                    Card to withdraw      Card to withdraw
             Card Issued by              funds or              funds or
            Bank upon signing         purchase at           purchase at
              of Bai Salam          Merchant outlet       Merchant outlet
                Contract               to meet his           to meet his
                                     farming needs         farming needs


Strictly Confidential               wwww.rma.com.my            © 2012 RM Applications Sdn. Bhd.   9
Rural Islamic Credit Card Issuance Overview

                           1. Submission of Application Form along with
                                    the necessary documents


                              2. Bank will offer Purchase Price based on
                               credit worthiness evaluation, crop quality,
                                            delivery date etc.

                                  3. Acceptance of Letter of Offer


    7. Card along with                                                       4. Signing of Bai Salam Contract
    ATM PIN is mailed                                                        based on letter of offer between
       to the Farmer                                                               farmer and the Bank
                                6. Tagging of
                             agreed purchase
                            price as maximum
                              limit to the card
                                                                                       Bai Salam
                                                               5. Disburses the        Contract
                                                               agreed purchase
                                                                 price into the
                                                               Farmer’s Wadiah
                                                  Al-Wadiah         Account
                                                   Account
Strictly Confidential                   wwww.rma.com.my                              © 2012 RM Applications Sdn. Bhd.   10
Rural Islamic Credit Card Usage for Purchasing



                                 2. Online transaction request to Bank to debit
                                              the Purchase amount


                                    4. Online confirmation on the transaction
                                    status based on the availability of funds

                                 6. Bank will do the settlement with Merchant
                                           under ‘Hiwalah’contract

 1. Use of Card to
                                                                                  3. Bank will check the availability
  buy agriculture         5. Delivery of
                                                                                     of funds and do online debit
 Supplies at POS         Supplies to the
                          Farmer upon
                        successful debit




                                                       Extra Financing Based                      Al-Wadiah
                                                         on Qardh Hassan                           Account
Strictly Confidential                      wwww.rma.com.my                              © 2012 RM Applications Sdn. Bhd.   11
Settlement for Rural Islamic Credit Card



                            1. Farmer Deliver crops to the Bank on Pre-
                                       agreed delivery date


                                2. Bank will Settle the Qardh Hassan
                             Financing and other Outstanding Payment
                               and get into new contract with Farmer


                                                           3. Bank identifies
                                                           the merchant and
                                                          sell the crop based         4. Bank receives
                                                            on Musawamah              the Selling price,
                                                                                     which is higher then
                                                                                     the Purchase Price




Strictly Confidential                   wwww.rma.com.my                         © 2012 RM Applications Sdn. Bhd.   12
Advantages to Farmers



    Tailored Islamic financing product with assured availability of funds at
     any time
    A structured financing option for farmers
    There is no interest burden on farmers as it is considered haram (not
     permissible) in Islam.
    The farmer’s full season credit requirements will be taken care via the
     rural Islamic credit card.
    Flexible repayment schedule based on the harvesting cycle to lessen
     the burden of debt.
    Bonus Point in usage of card
    Ease in buying of supplies via cash (ATM withdrawals) and Merchant
     Terminals (online payment).
    Coverage of risk through Takaful

Strictly Confidential             wwww.rma.com.my          © 2012 RM Applications Sdn. Bhd.   13
Advantages to Bank



    Banks can leverage on the existing infrastructure (branches/IT
     infrastructure/ATM’s/merchant terminals) with minimal additional
     investment in offering Rural Islamic Credit Card
    Huge potential as agriculture sector is not been fully explored by
     commercial banks in Malaysia
    Move towards cashless transactions.
    Underlying asset in Bai Salam contract assures the better recovery of
     debts
    Crop insurance would further minimize the chances and extend of
     default.
    Banks can cross sell other products and services to farmers
    Bank can also get into Parallel Salam to minimize the risk.



Strictly Confidential                wwww.rma.com.my        © 2012 RM Applications Sdn. Bhd.   14
Key Challenges


    Awareness program to educate farmers on the usage of electronic forms
     of payment
    Establishment of virtual branches in villages to facilitate easy withdrawal
     of cash at the farmer’s convenience
    Strict monitoring on end use of funds
    Arrangement with Courier Service Provider/Post Office for accepting
     credit card applications, collection of repayment etc.
    Lowering of costs is an important step towards increasing the usage of
     the rural Islamic credit card and Bank might have to opt for Co-Branding
     strategy.
    Strong Initiatives from the Government may be necessary to promote
     the rural Islamic credit card. This may be in the form of subsidies to
     banks to allow for waivers or rescheduling of credit in the event farmers
     have suffered production and/or income losses

Strictly Confidential            wwww.rma.com.my             © 2012 RM Applications Sdn. Bhd.   15
Summary


    Agriculture/Rural Financing is currently under serviced and
     Banks need to explore an innovative way of financing
    The key feature to stress upon is the Collateral Free &
     Interest Free Financing
    ‘Rural Islamic Credit Card’ could be a product to target
     ‘Agriculture Finance’ segment, which is currently under
     serviced
    There is also a need for Takaful (Islamic Insurance) for
     crops to mitigate risk of crop loss due to natural calamity
     have been suggested to protect the interest of banks.
    The proposed product is a concept and inputs are
     welcomed from the readers.

Strictly Confidential     wwww.rma.com.my        © 2012 RM Applications Sdn. Bhd.   16
Thank You
                        lokesh@rma.com.my




Strictly Confidential       wwww.rma.com.my   © 2012 RM Applications Sdn. Bhd.   17
Disclaimer :

               The materials presented in the slides are provided voluntarily. The
               information is made available in good faith and is derived from sources
               believed to be reliable and accurate at the time of release.

               The user of the slide is responsible for making his or her own decision
               about the accuracy, reliability and correctness of information found. We
               do not accept liability for any loss or damage incurred by reliance on
               the information provided.




Strictly Confidential                   wwww.rma.com.my                   © 2012 RM Applications Sdn. Bhd.

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Rural islamic credit card (a shariah compliant rural micro financing & payment instrument)

  • 1. Islamic Microfinancing Rural Islamic Credit Card – A Shariah Compliant Rural Micro Financing & Payment Instrument By Lokesh Gupta Head, Business & Technology Consulting By RM Applications Sdn. Bhd. No.69-1 Medan Setia 1 Bukit Damansara 50490 Kuala Lumpur Tel: +603-20932677 Fax: +603-20932607 Website : www.rma.com.my Email : lokesh@rma.com.my © 2012 RM Applications Sdn. Bhd. (The information contained herein is subject to change without notice)
  • 2. Presentation Path 1-. Conventional Credit Card Overview 2-. Islamic Credit Card Definition & Evolution 3-. Modus Operandi of Islamic Credit Cards 4-. Islamic Credit Cards Contract 5-. Islamic Credit Card Features 6-. Challenges & the Way Ahead Strictly Confidential wwww.rma.com.my © 2012 RM Applications Sdn. Bhd. 2
  • 3. Financial Service in Rural Areas  Microfinance: Financial services for poor and low- FINANCIAL SECTOR income people RURAL FINANCE  Rural finance: Financial services used in rural areas by people of all AGRICULTURAL FINANCE MICROFINANCE income levels  Agricultural finance: Financing of agriculture- related activities Financial services for the Farmers: Financial services for the Agriculture Segment specially tailored to their needs Strictly Confidential wwww.rma.com.my © 2012 RM Applications Sdn. Bhd. 3
  • 4. Current Scenario  Agriculture Industry is amongst the high priority industry in Malaysia.  Malaysia is recognized worldwide as a global producer of palm oil, rubber, cocoa, pepper etc.  Despite various initiatives from Govt. the challenges faced by farmers are: • Lack of access to the range of financial service they need • Available Financial services are  Costly or Rigid  Not well-suited to seasonal or longer-term agricultural activities  Not easily Accessible  Various constraints to meet the eligibility criteria Strictly Confidential wwww.rma.com.my © 2012 RM Applications Sdn. Bhd. 4
  • 5. Financing Need of Agriculture Sector Financing Duration  Short Term , Medium Term and Long Term  Working capital to service machinery, equipment and to Purpose buy fertilizers, seeds, pesticides and to meet other Incidental expenses etc. Revolving Financing  Financing facilities with unlimited retail purchases, easy Facility cash withdrawals via ATM Repayment Schedule  Flexible schedule based on the production cycle of Crop  Variable demand, uneven cash flow, lag between Seasonality financing disbursal and repayments  Insurance to cover losses due to variable rainfall, pests Risks Coverage and diseases, price fluctuations etc.  Farmers lack in collateral and the preference is for Collateral Free collateral free financing  Restructuring/Rescheduling of financing term in the Finance Restructuring event of natural calamity Strictly Confidential wwww.rma.com.my © 2012 RM Applications Sdn. Bhd. 5
  • 6. Proposed Financial Product Shariah No Restriction Compliance on Withdrawal & Purchases Convenience & Practical Flexible Payment Rescheduling Services Collateral & Takaful Interest Free Coverage Financing Strictly Confidential wwww.rma.com.my © 2012 RM Applications Sdn. Bhd. 6
  • 7. Proposed Shariah Contracts in Rural Islamic Card  Bai Salam (Between Pesawah & Bank)  Al Wadiah (Internal to Bank for Fund Management)  Hiwalah (Between Bank & Supplier)  Musawamah or Parallel Salam or Murabaha (Between Bank & Merchant)  Ijarah (Between Bank & Brand Owners : Transaction based payment to Communication Network – VISA / Master Card to facilitate transaction process) Strictly Confidential wwww.rma.com.my © 2012 RM Applications Sdn. Bhd. 7
  • 8. Bai Salam Contract  Known as Future Delivery Financing of Forward Sale  Practiced in the agriculture sector since before the life of the Prophet  Salam is a cash sale contract executed for the purchase of goods promised for future delivery 1. Farmer Sells Crops to Bank on forward basis 2. Pre agreed price is paid to the farmer 3. Farmer deliver Crops to Bank on the agreed delivery date 4. Bank Sells crops in the Farmer market at Profit Market Strictly Confidential wwww.rma.com.my © 2012 RM Applications Sdn. Bhd. 8
  • 9. Rural Islamic Credit Card Life Cycle Card Issuance to Usage of Card for Settlement Farmers Purchasing Farmer Use the Farmer Use the Card to withdraw Card to withdraw Card Issued by funds or funds or Bank upon signing purchase at purchase at of Bai Salam Merchant outlet Merchant outlet Contract to meet his to meet his farming needs farming needs Strictly Confidential wwww.rma.com.my © 2012 RM Applications Sdn. Bhd. 9
  • 10. Rural Islamic Credit Card Issuance Overview 1. Submission of Application Form along with the necessary documents 2. Bank will offer Purchase Price based on credit worthiness evaluation, crop quality, delivery date etc. 3. Acceptance of Letter of Offer 7. Card along with 4. Signing of Bai Salam Contract ATM PIN is mailed based on letter of offer between to the Farmer farmer and the Bank 6. Tagging of agreed purchase price as maximum limit to the card Bai Salam 5. Disburses the Contract agreed purchase price into the Farmer’s Wadiah Al-Wadiah Account Account Strictly Confidential wwww.rma.com.my © 2012 RM Applications Sdn. Bhd. 10
  • 11. Rural Islamic Credit Card Usage for Purchasing 2. Online transaction request to Bank to debit the Purchase amount 4. Online confirmation on the transaction status based on the availability of funds 6. Bank will do the settlement with Merchant under ‘Hiwalah’contract 1. Use of Card to 3. Bank will check the availability buy agriculture 5. Delivery of of funds and do online debit Supplies at POS Supplies to the Farmer upon successful debit Extra Financing Based Al-Wadiah on Qardh Hassan Account Strictly Confidential wwww.rma.com.my © 2012 RM Applications Sdn. Bhd. 11
  • 12. Settlement for Rural Islamic Credit Card 1. Farmer Deliver crops to the Bank on Pre- agreed delivery date 2. Bank will Settle the Qardh Hassan Financing and other Outstanding Payment and get into new contract with Farmer 3. Bank identifies the merchant and sell the crop based 4. Bank receives on Musawamah the Selling price, which is higher then the Purchase Price Strictly Confidential wwww.rma.com.my © 2012 RM Applications Sdn. Bhd. 12
  • 13. Advantages to Farmers  Tailored Islamic financing product with assured availability of funds at any time  A structured financing option for farmers  There is no interest burden on farmers as it is considered haram (not permissible) in Islam.  The farmer’s full season credit requirements will be taken care via the rural Islamic credit card.  Flexible repayment schedule based on the harvesting cycle to lessen the burden of debt.  Bonus Point in usage of card  Ease in buying of supplies via cash (ATM withdrawals) and Merchant Terminals (online payment).  Coverage of risk through Takaful Strictly Confidential wwww.rma.com.my © 2012 RM Applications Sdn. Bhd. 13
  • 14. Advantages to Bank  Banks can leverage on the existing infrastructure (branches/IT infrastructure/ATM’s/merchant terminals) with minimal additional investment in offering Rural Islamic Credit Card  Huge potential as agriculture sector is not been fully explored by commercial banks in Malaysia  Move towards cashless transactions.  Underlying asset in Bai Salam contract assures the better recovery of debts  Crop insurance would further minimize the chances and extend of default.  Banks can cross sell other products and services to farmers  Bank can also get into Parallel Salam to minimize the risk. Strictly Confidential wwww.rma.com.my © 2012 RM Applications Sdn. Bhd. 14
  • 15. Key Challenges  Awareness program to educate farmers on the usage of electronic forms of payment  Establishment of virtual branches in villages to facilitate easy withdrawal of cash at the farmer’s convenience  Strict monitoring on end use of funds  Arrangement with Courier Service Provider/Post Office for accepting credit card applications, collection of repayment etc.  Lowering of costs is an important step towards increasing the usage of the rural Islamic credit card and Bank might have to opt for Co-Branding strategy.  Strong Initiatives from the Government may be necessary to promote the rural Islamic credit card. This may be in the form of subsidies to banks to allow for waivers or rescheduling of credit in the event farmers have suffered production and/or income losses Strictly Confidential wwww.rma.com.my © 2012 RM Applications Sdn. Bhd. 15
  • 16. Summary  Agriculture/Rural Financing is currently under serviced and Banks need to explore an innovative way of financing  The key feature to stress upon is the Collateral Free & Interest Free Financing  ‘Rural Islamic Credit Card’ could be a product to target ‘Agriculture Finance’ segment, which is currently under serviced  There is also a need for Takaful (Islamic Insurance) for crops to mitigate risk of crop loss due to natural calamity have been suggested to protect the interest of banks.  The proposed product is a concept and inputs are welcomed from the readers. Strictly Confidential wwww.rma.com.my © 2012 RM Applications Sdn. Bhd. 16
  • 17. Thank You lokesh@rma.com.my Strictly Confidential wwww.rma.com.my © 2012 RM Applications Sdn. Bhd. 17
  • 18. Disclaimer : The materials presented in the slides are provided voluntarily. The information is made available in good faith and is derived from sources believed to be reliable and accurate at the time of release. The user of the slide is responsible for making his or her own decision about the accuracy, reliability and correctness of information found. We do not accept liability for any loss or damage incurred by reliance on the information provided. Strictly Confidential wwww.rma.com.my © 2012 RM Applications Sdn. Bhd.