Microfinance or Musharaka finance in Sudan; banking on the un-bankable

By Professor Ali Abdalla Ali, Editor of Sudan Financial Times

November 15, 2007 — The writer was invited to attend the Media Advisory forum, but was unable to attend the three day coverage and attended only the opening session. However, I thought it sensible to throw out my impressions about the idea discussed for what it is worth. I will base myself on my own experience trying to find means to reach the poor and try improve their lives specially after the establishment of the Sudanese Islamic Bank (SIB). This bank was the first Islamic bank that stated clearly its position in its Memorandum of Association to assist the unbankable .There was the experiment of Faisal Islamic Bank in helping the Artisans in Omdurman, but such activity was not embodied in their Memorandum of Association as done by the SIB. At that time the the SIB was under the leadership of a very able and clear-minded Sudanese Mohamed Uthman Khalifa who had a very long experience in the local governments in Sudan. Its first successful experience was in the growing of Potatoes among North Omdurman farmers through the application of the Islamic Musharaka formula.

Prior to that there was the experiment of Sudan government and UNDP which was called the Area Development Schemes (ADS) which was started by the UNDP in some selected states in the seventies and the Area Rehabilitation Schemes(ARS) later on after the success of the ADS which was meant to assist in the rehabilitation of some places after the incidence of drought and desertification in the Western Region of Sudan and also in Malakal. I will restrict my comment on these two experiences in Sudan to show that such attempts were extremely successful in reaching the small poor producers in stead of expecting such producers to look for financing form Sudanese banks. How could one expect someone who is unbankable to seek his way to traditional banks. In this exercise it is only logical to go out to these poor producers than expect them to go to banks while they are completely unbankable.

This commentary will concentrate on these two experiments to the exclusion of many others started by creative Sudanese to assist the poor .I will comment first on the experience of SIB and my story with this wonderful Islamic formula. Second I will comment on the experience of Sudan government and UNDP in the ADS and later on the ARS in six or more Sudanese states.

The idea of experimenting with Musharaka financing formula (in other words Profit and Loss Sharing-PLS) started with a small department in the newly established SIB and a Sudanese expert in rural development became in charge .This experiment started in North Omdurman (Shihnab Village) to grow Potatoes in collaboration with about 53 farmers in the area. The PLS is an Islamic concept which means cultivating together i.e. the combination of the factors of production in a joint enterprise between the holder of the funds (in this case the bank) and the producer who want to produce a commodity by utilizing his land for example but does not have the funds for seeds , tractor, water pumps etc. Since the monies in the bank, the farmers land, the inputs and even the very human beings who are undertaking the exercise are all Allah’s own, therefore are these factors are brought into a joint venture(Musharaka) between the bank that owns the money and inputs and the owner of the land even if he does not have any resources, in order to produce a certain commodity. The responsibility of the landowner is to undertake the cultivation responsibility and manage the operation under the guidance of the bank that holds the funds and provides all the necessary inputs This is put into an agreement between the land/owner farmer and the ban on the other side. If the producer does not have funds, it is the bank that provides such fund. That mean the producer in dealing with the bank he does not borrow funds, he does not provide any guarantee or collateral or is he requested to mortgage any form of asset. So all the conditions set by the traditional banks are not required in the case of the Islamic Musharaka concept. This is where lies the fundamental difference between Islamic financing and traditional financing .It is usually governed by a Hadith where Allah says that he is the third partner in such an exercise. Therefore it is loaded with belief.

This is a simple description of the PLS where farmers or producers can find funding for their operations through PLS without having to provide guarantee or collateral or provide mortgage for the funds they needed. All that they need is an agreement between the bank and the client specifying each others responsibilities. After the harvest, the production is stored for a while and when prices improve the bank undertakes the sale of the product. From that is deducted Zakat which an Islamic tax (to purify the transaction). Then the overall cost of the agricultural operation is deducted for the bank .33% of the remaining income is given to the producer and the rest is taken by the bank. If the producer contributed a certain amount of money say by providing the cost of the seeds, then that share is given to the producer and rest goes to the bank. This is so because the bank provided the funding, the seeds , the water pump etc.etc. In this way the Shihinab experiment of 53 farmers the net to producers ranged between 1250% for the best framer and the minimum of 25 % a rate which is above the usual international rate. The farmer or producer did not have to kill himself to repay or provide collateral or even mortgage. Both partners benefited. No body was hard press to repay until committing suicide (as was the case in Garmeen Bank where a lady was harassed by other ladies to repay as quoted by Panos ‘Banking on the unbankable’ referred to above. The conditions of these farmers improved so much that they were able to change their donkeys and carts into Toyota Vans and were also able to send their kids for education abroad. The same improvement overtook those Aritsans who conducted their dealing with Faisal Islamic Bank (FIB).Some other banks also tried to open departments for financing poor women etc.

I remember I wrote about this formula in a famous Sudanese daily “Al Ayamm” in 1988.The Editor-in-Chief Mahgoub Mohamed Salih, who is a receiver of high international awards in journalism, did not believe that such a formula exist. He sent his editors to visit the place and see to what extent could farmers grow rich without having to be bankable!!.

I followed that by a very short paper title “How to reach the Small Farmer; An Islamic formula” in English, which was accepted for publication in the International Foundation For Development Alternatives ( IFDA) Dossier whose Editor used to be the well known late Egyptian Professor, Ismail Sabri Abdalla. It used to be published out of Switzerland in the nineties. It used to contain very valuable papers that used to explore new ways of improving the lives of the human kind. Since then I had so many stories with this unusual Islamic formula:

After sending the text of the paper to Switzerland, I got a reply from the person in charge of publication that he will be traveling to Africa and that he wanted to discuss with me the idea of PLS as written in the paper prior to publication. He could not believe that a producer having only land and not bankable could deal with a bank without having to have a guarantee, collateral or even mortgage. IFDA even made an

advance notice for the publication of that short paper in January/April 1990.

Prior to the publication of the paper, I got a letter from an agricultural cooperative in Sierra Leone in West Africa, in which the head of the cooperate was excited and wanted to know how the farmers could be reached through this Islamic formula .I told the man that it will be better to wait until the paper is published.

After publication, I received a very interesting letter from a Priest in Pakistan. He told me that his church owned 38 acres of land which has not been utilized. Therefore, he wanted me to contact the Sudanese Islamic Bank Manager to make it possible for the Church to develop that tract of land for the use of some Christian orphans. He added that since I did not mention in the paper that Christians are not excluded that he wanted this help. I passed the letter to the General Manager of SIB. It would not have been possible. However, many Christians in Sudan took advantage of such a formula without anyone barring them from such a practice.

Before the fall of Berlin, I was invited to a conference in the Economic University of Science, Berlin. It was mainly about planning. One Indian economist brought out the difficulty that small producers were unable to reach any form of finance in India. He went on to give examples of so many individual movements that spread in India to help the poor in having access to finance small as it might be .After the Indian Economist finished talking I asked for the floor to promote my little paper which I always used to carry with me. The minute I started by stating the title of the paper saying; Islamic Formula , the Chair person made an angry objection saying that “we do not believe in God or Islam”. I replied that does not concern me and continued the presentation. After I have finished there was not a single remark .I asked the Indian

what he thought about the formula? He said ,it is beautiful and workable my friend but it is Islamic and I am a Hindu!

In March 1993, while working as National Consultant for Private Sector Affairs with UNDP in Khartoum, I was invited to New York together with other 12 doing the same job in their countries. I met someone (an Economic Advisor) from Mexico. While chatting in one of the breaks, he asked me as to how we in Sudan are dealing with availing finance for the small farmers and producers. I was so happy because I was always ready with my short paper published in Switzerland .I gave him a copy and asked him to read it and then we discuss. He suddenly woke me up in the night saying that he cannot believe his eyes that there is ever a formula like this. When we met he mentioned that he was worried about the Mexican farmers because a number of them are selling their pieces of land to big landowners and remain paid farmers. I said that it means that he wished to avoid a revolution like the one made by Elmeliano Zapata in Mexico in the 19th Century. He agreed .I told him to try apply this formula. I also added that when I am back to Sudan I will ask the General Manager of the SIB to extend an invitation to him to the see the experiment in real life .I did but I did not follow the matter.

Earlier on I wrote a long article with title “Micro Finance and Musharaka Financing (PLS)A comparative Survey,”.It was published in El Nilein Group Magazine, Industry and Development,1997.It was in reaction to the Panos publication on, “Banking on the Unbankable’ mentioned above. I remember I sent a copy to the World Bank which was passed to Mr .Sirag Eddin who was at that time concerned with the issue of microfinance in the World Bank .I got a very nice letter describing the formula as an unusual formula and that they will be very keen to discuss the issue with me soon. I never heard from them again!!

The second worthy experience which I would like to give a brief idea about is that of the Area Development Schemes (ADS) which was a project jointly designed by the Sudan Government and the UNDP in mid seventies .Later the idea was extended to cover Area Rehabilitation Schemes (ARS) in Kadugli, Um Kadadah and Malakal.The idea started with a selection of certain areas in various states of the country with the intention of helping the small producers with finance, capacity building and a set of relations and development committees from below upwards. The financing used to be shared between the government of Sudan and the UNDP. A management of the ADS is jointly between the Sudan government and UNDP.The places selected included included El Obeid ADS, Id Al fursan ADS, Um Kadadah ,Gedarif ADS, Butana, Upper Atbara and so on. The management of the ADS was run from a unit in the Ministry of International cooperation .This unit used to coordinate all activities of the ADS in various states right from availing funding provided by both the government and UNDP to the smallest detail of providing revolving credit at the lowest level of Village Development Committees VDCs. The intention was to get to the small producers through funding their agricultural or other activities using the common spirit of the VDC from the lowest level to the highest level. In other words the whole exercise was development from below in contrast to development from above. Planning from above which was the practice in many African countries since independence was never able to improve peoples lives. The idea of ADS goes further to creating an overall environment and a workable economic organisation which include all the factors of production necessary for the development of the small producers who are usually unbankable. While conducting a survey on SSE and Home based industries in all the ADS and ARS for UNIDO between 1999 and 2000, the writer became more than convinced that the idea of ADS/ARS was supposed to continue and survive and would have really helped in improving many peoples lives by now In spite of the various advantages gained, one still is not sure as who killed this interesting idea? A separate article on the experiment of ADS/ARS will be published soon in SFT.

In any case I am much more concerned with the first experiments with Musharaka (PLS) carried out by FIB and the other in Shihinab by the SIB in their early years. It is these two experiments which were in accordance with Islamic Sharia’a and also under the control of the Sudanese policy makers .By this one means the contribution that used to be given to the ADS on the part of UNDP used to be affected by funding problems that face UNDP. However ,even the government used to fall back at times interrupting the smooth flow of funds to the operation of the ADS projects in various states.

The two experiments by the two banks went on very well but the tempo was gradually brought to a halt and the PLS was used for other than improving the lives of those unbankable. What should been done by the CBS is as follows:

*The experiment of Faisal Islamic Bank in assisting Artisans and that of SIB in developing agriculture in Shihinab (as well as others) should have been carefully studied and improved and sustained.

*Every bank should have established a rural development department with well trained staff specially that the PLS is a sort of an investment challenge.

*Another step every bank should have established a single strong department in every branch to provide banking services under PLS formula to rural people and artisans and other small producers.

Instead of doing such an exercise the experiments started by these two banks declined in tempo and are even non-existent. However, the adoption of PLS continued by the Islamic banks but unfortunately assisting the already able people and companies rather than helping the small producers in rural and urban Sudan. In effect it had declined following the disappearance of imaginative and dedicated banks managers such as Mohamed Osman Khalifa of the SIB. Musharaka is actually second to Murabaha as a means of financing various operations using banks resources.

Therefore , one strongly feels that the Central Bank of Sudan, should have tried before involving itself in the issue of micro finance in the way it had been done now, to dwell and look into the two experiences using Musharaka formula referred to above and help bring it back to life to assist the small producers specially in rural Sudan through the spread of banks’ branches. Poor producers should not expected to come to banks but it is the other way round Islamic banks should go down to the small producers.

The other important aspect which is a result of observing the behaviour of international financial institutions and also UN institutions during ones long career, is that they are always very quick to pick up imaginative ideas coming from the developing countries with the aim of either giving it a modest push and taking it as a model for other countries or alternatively try to contain such ideas specially if they are loaded with ideology or belief such as Islamic Musharaka or PLS.Some institutions even make business of it for their experts even if the developing country assisted has all the expertise in the world. It is also true that some developing countries cannot resist the temptation of some few dollars in the form of technical assistance in order for the picked ideas to take the direction desired by such institutions.

Therefore, one is tempted to state in all earnest that if the policy makers in Sudan are adamant in carrying on seriously with the Islamic financing modes that the idea of applying the Musharaka financing formula and NOT the concept of micro finance should urgently be given top priority and brought back to life once again specially for the sake of those who are unbankable rather than those who are bankable.

*The writer is Professor of Economics, College of Business Studies, Sudan University of Science and Technology, Khartoum, Sudan. He is also Editor, www.sudanfinancialtimes.com . He can reached at [email protected]