Amanah Ikhtiar Malaysia managing director answers…
1. What are the challenges in the microfinance business? How do you effectively manage the loan default rate? Chung King-Keong, Cheras
The following are the challenges particular to Malaysia:
1) Availability of funding
The continued expansion of microfinance is highly dependable on the availability and stability of the funds. As for Amanah Ikhtiar Malaysia (AIM), the requirement for more funding is brought about by our continued outreach programmes and bigger loan size.
2) Quality expansion
The geographical landscape in some parts of Malaysia especially Sabah and Sarawak poses a challenge for us. The organisation needs a lot of capital and manpower to reach out to these people, who are sometimes in remote places. AIM has its operations in Pulau Beruit (Sarawak) and in Pulau Banggi (Sabah).
3) Operational risks
With such a large network, AIM is continuously seeking ways to minimise operational risks such as security and fraud.
4) Human resource
Having competent and knowledgeable staff is a challenge for us. The specialised delivery system requires staff to understand the system.
5) Syariah compliance
In line with global recognition for Malaysia being the leader in Islamic finance, AIM’s products and services are also syariah compliant. AIM has its own syariah panel to advise on matters pertaining to its operations.
Our default rate stands at only 0.4 %. This has been consistent for the last five years and is due to our specialised credit delivery system. AIM cannot take legal action against defaulters. Every borrower is responsible to pay her/his loan accordingly.
However, we give considerations under certain circumstances:-
a) Repayment deferment for projects affected by natural disaster, fire and prolonged sickness. AIM provides a special loan to those who want to continue with their projects.
b) New repayment schedule for acceptable cases. If the borrower or spouse dies, the family need not pay the outstanding balance because all loans are covered under our Khairat Fund. AIM also has its own Welfare Fund whereby financial contribution is made to those who are sick, hospitalised and also those whose projects are affected by natural disasters.
2. What are you doing to ensure greater publicity and understanding of the services provided by AIM as many may not be aware of the micro-financing offerings? Chua Bing Guan, Malacca
For the last few years, we have been aggressively promoting our services through the media, (electronic and print), television and radio as well as direct involvement with the community. We have active and strategic collaboration with government departments and related agencies, banks and financial institutions and non-governmental organisations.
3. How do you see the growth of the microfinance industry compared with the banking industry in the next 10 years? How are you preparing to face the future?Desmond Teoh, Penang
Due to uncertainties in the global economy, the microfinance industry will show an upward-growing trend.
Based on our experience, the demand for microfinance loans was not heavily affected by the global recession. We foresee the group repayment track record will help us in meeting the credit demand from our borrowers. In addition, product enhancement and additional services will help to retain our clients.
AIM manages around 40% of the microfinance business in Malaysia. We expect to increase this to 50% in the next two years. The growing microfinance industry goes along with the government policy in addressing the less privileged 40% of the population. Currently, 2.4 million households have income less than RM2,300 per month.
The financial industry as a whole has transformed tremendously in Malaysia and organisations like the World Islamic Economic Forum (WIEF) have addressed the changes and opportunities in this field. Some of the past WIEF topics have addressed integrating Islamic banking into the global financial system, transforming traditional investment companies into Islamic investment companies, intra-trade financing facilities in Organisation of Islamic Countries members and even global economic and business scenarios for the next decade. These are pertinent topics which should continuously be addressed by financial institutions.
4. What is the mechanism by which those in the lower income can get financing? What is the percentage of success in 2011? Bulbir Singh, Seremban
AIM adopts an unconventional approach when it comes to its financing schemes. It reverses the smart conventional banking with disbursement of small loans to finance income-generating activities without any forms of collateral, guarantor or any legal action against defaulters.
Loan is practically brought to their door-step. A specialised delivery system was designed especially for the target group. This includes suitable loan conditions, simple procedures, group formation by potential borrowers and collective responsibility.
In 2011 alone, AIM has brought in about 60,000 (the largest so far) new members, bringing the total members to date to 320,000.
5. How does AIM solve the problem of those in the lower income brackets who do not have documentation for their income? TL Ong, Segamat
To determine income level, AIM conducts a survey. We interview potential customers in the identified locality. Confirmation on such information is obtained through word of mouth from friends, relatives and the local community.
On joining AIM, and after obtaining the first loan, AIM monitors the status of project and income generated on a scheduled basis. A full report is then tabled by the group chief and the centre chief during the weekly meeting, which is attended by our field staff.
Our criteria for approval includes credit discipline and an undertaking by borrowers to pay the loan amount in full. Considerations are given when they run into problems.
6. What are the challenges of the self-employed? Bernard Gideon Lim, Penang
Lack of skills and knowledge in managing a business, marketing and support. Continuous training and monitoring by a special unit on a scheduled basis must be done. On the aspect of marketing, business networking among borrowers would help. Support from those in the same group and centre helps to improve social networking.
7. What skills should borrowers have? Zailani Kassim, Gombak
Each one of us came into this world with different skills set. The most notable is the skill and will to survive. Whether we realise it or not, those skills can be utilised to generate income. We capitalise on the survival skills of women, particularly housewives. They utilise the loan to start a new income-generating business or to expand their existing business. As the business grows, we expose them to various training programmes.
8. How does Malaysia’s micro-financing programmes compare with those in India/Bangladesh in terms of nurturing entrepreneurship?
Chua Mei Ling, Petaling Jaya
Earlier this year, I had the opportunity to be a panellist at the World Islamic Economic Forum (WIEF) Foundation’s 5th roundtable session in Dhaka, Bangladesh. One of the sessions was moderated by none other than the Bangladesh central bank governor and the topic of discussion was Islamic microfinance: An instrument for poverty alleviation.
It was an ideal platform to network with other speakers and to exchange best-case practices and success stories. Such platforms should be provided to suit local developmental growth.
AIM was established in 1987. We have been successful in replicating the microfinancing model here by providing better opportunities for income earners to grow their businesses. Since inception, more than RM6.8bil has been disbursed to about 320,000 borrowers.
Being the first to replicate the Grameen Bank Bangladesh model, AIM has since expanded its role to create entrepreneurs among our borrowers. Vulnerable and poor clients are our focus. In order to reduce our borrowers’ vulnerability as a means of reducing the risk in lending to them, we do the following:
a) Facilitate income and assets growth by offering ways to invest in the expansion of their business through working capital or fixed assets loan, without collateral.
b) Reduce borrowing risk by linking loans to productive uses for those that do not currently have a regular secure income, and ensuring that loan sizes are kept small. Bigger loans are linked to growth in productivity.
c) Provide resources to carry them through during low income periods.
d) Strengthen financial literacy through training and education.
e). Empower clients by increasing their self-confidence which help them to make changes to in their lives.
9. Does AIM monitor or guide those who take up loans through its schemes?Mohd Ariff, Petaling Jaya
Our line of monitoring is decentralised at every level. First and foremost, everyone in the same group helps to monitor every one’s project. The leader will then report the progress and performance of members’ projects at the weekly meeting.
Our field staff visit the project within two weeks after full disbursement of the loan. In addition, the branch manager in the locality as well as our regional manager visit the project within six months after the first visit by our field staff.
10. Are the laws and governance adequate? Les Donovan, Petaling Jaya
There is no law or regulatory body for microfinance. As for banks and other financial institutions, their operations are regulated by Bafia, Insurance and Takaful under the Insurance and Takaful Act, while pawn brokers are under the Pawn Broker Act. In the case of AIM, our own trust deed regulates it.
The need to regulate and supervise banks rigorously is rarely challenged. The same cannot be said of the microfinancing industry (MFI). Although the majority of MFI is not large enough to threaten a country’s overall financial stability, it plays an important role in providing financial services to the underserved population with the potential to contribute to the economy.
Sound regulation helps ensure that microfinance clients are served by stable financial institutions.
The regulatory framework should also incorporate risk management.