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© 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]

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

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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.

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Page 1: Rural islamic credit card  (a shariah compliant rural micro financing & payment instrument)

© 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]

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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

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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

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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

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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

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Proposed Financial Product

Shariah Compliance

No Restriction on Withdrawal & Purchases

Flexible Rescheduling

Takaful Coverage

Convenience & Practical Payment Services

Collateral & Interest Free

Financing

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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)

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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

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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

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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

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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

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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

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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

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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.

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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

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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.

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Thank You [email protected]

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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.