rural islamic credit card (a shariah compliant rural micro financing & payment instrument)
DESCRIPTION
Rural Islamic Credit Card is conceptualized to extend financing to farmers in a convenient and cheap manner but in compliance with the Shariah. This is to help farmers in overcoming the financial difficulties to meet their working capital needs. The objective is to leverage on Islamic Banking Principles to provide financing in convenient and interest free manner to establish a just and balanced social order free from exploitation. A salient feature of this proposed product is to provide Shariah compliant financing to farmers to purchase high quality crop inputs with the amount being repaid through the sale of the crop on harvest. But it must be noted here that this proposed product has not obtained approval from the authorities. Readers are invited to give their views on this product.TRANSCRIPT
© 2012 RM Applications Sdn. Bhd. (The information contained herein is subject to change without notice)
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 : [email protected]
Strictly Confidential wwww.rma.com.my © 2012 RM Applications Sdn. Bhd. 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. 3
Financial Service in Rural Areas
Microfinance: Financial
services for poor and low-
income people
Rural finance: Financial
services used in rural
areas by people of all
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
FINANCIAL SECTOR
MICROFINANCE
RURAL FINANCE
AGRICULTURAL
FINANCE
Strictly Confidential wwww.rma.com.my © 2012 RM Applications Sdn. Bhd. 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. 5
Financing Need of Agriculture Sector
Short Term , Medium Term and Long Term Financing Duration
Working capital to service machinery, equipment and to
buy fertilizers, seeds, pesticides and to meet other
Incidental expenses etc.
Purpose
Financing facilities with unlimited retail purchases, easy
cash withdrawals via ATM
Revolving Financing
Facility
Flexible schedule based on the production cycle of Crop Repayment Schedule
Variable demand, uneven cash flow, lag between
financing disbursal and repayments Seasonality
Insurance to cover losses due to variable rainfall, pests
and diseases, price fluctuations etc. Risks Coverage
Farmers lack in collateral and the preference is for
collateral free financing Collateral Free
Restructuring/Rescheduling of financing term in the
event of natural calamity Finance Restructuring
Strictly Confidential wwww.rma.com.my © 2012 RM Applications Sdn. Bhd. 6
Proposed Financial Product
Shariah Compliance
No Restriction on Withdrawal & Purchases
Flexible Rescheduling
Takaful Coverage
Convenience & Practical Payment Services
Collateral & Interest Free
Financing
Strictly Confidential wwww.rma.com.my © 2012 RM Applications Sdn. Bhd. 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. 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
Market
4. Bank Sells crops in the
market at Profit Farmer
Strictly Confidential wwww.rma.com.my © 2012 RM Applications Sdn. Bhd. 9
Rural Islamic Credit Card Life Cycle
Card Issuance to
Farmers Usage of Card for
Purchasing Settlement
Card Issued by
Bank upon signing
of Bai Salam
Contract
Farmer Use the
Card to withdraw
funds or
purchase at
Merchant outlet
to meet his
farming needs
Farmer Use the
Card to withdraw
funds or
purchase at
Merchant outlet
to meet his
farming needs
Strictly Confidential wwww.rma.com.my © 2012 RM Applications Sdn. Bhd. 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
Bai Salam
Contract
4. Signing of Bai Salam Contract
based on letter of offer between
farmer and the Bank
Al-Wadiah
Account
5. Disburses the
agreed purchase
price into the
Farmer’s Wadiah
Account
6. Tagging of
agreed purchase
price as maximum
limit to the card
7. Card along with
ATM PIN is mailed
to the Farmer
Strictly Confidential wwww.rma.com.my © 2012 RM Applications Sdn. Bhd. 11
Rural Islamic Credit Card Usage for Purchasing
1. Use of Card to
buy agriculture
Supplies at POS
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
Al-Wadiah
Account
3. Bank will check the availability
of funds and do online debit 5. Delivery of
Supplies to the
Farmer upon
successful debit
Extra Financing Based
on Qardh Hassan
Strictly Confidential wwww.rma.com.my © 2012 RM Applications Sdn. Bhd. 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
on Musawamah
4. Bank receives
the Selling price,
which is higher then
the Purchase Price
Strictly Confidential wwww.rma.com.my © 2012 RM Applications Sdn. Bhd. 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. 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. 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. 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. 17
Thank You [email protected]
Strictly Confidential wwww.rma.com.my © 2012 RM Applications Sdn. Bhd.
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.