Financial Instruments for the Poor

Financial Instruments for The Poor

10 Introduction

This report is prepared as a requirement of the course ldquoFinancial Institutes amp Marketsrdquo It starts with a discussion on the origin of the report (11) objective of the study (12) and methodology of the study (13) Then relevance and background of the research (14) are discussed to provide a clear understanding about the research After the background an elaboration is given on the problem definition the aim and the added value of the research (15)

11 Origin of the Report

The report originated from the requirement to do for 4th semester of the Department of Finance amp Banking Jahangirnagar University has assigned the researcher to conduct a report which would be followed by a formalities rules and regulations of formal report preparation The researcher has chosen the topic of ldquoFinancial Instruments for the Poorrdquo and he had approved the proposal and gave the researcher useful direction to prepare the Report

12 Objective of the Study

The main objective of the report is to discuss any kind of method or item that increases the financial asset of an entity and at the same time financial liability of another entity

13 Methodology of the Study

Sources of Data In preparing our report we have gathered information from both primary and secondary resources

The whole information has been gathered from the Internet different books magazines newspapers and class lecture sheet We have also visited many places and done field work to collect data for the research

Data is analyzed from different perspective of views These analyzed data will be disseminated with the relevant parties

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14 Background and relevance of the research The Context

Bangladesh is a small country with a very low per capita income Here people still struggle for the basic needsrsquo fulfillment When still lots of people struggle to have a minimum shelter little amount of food to live they need to develop their financial condition Therefore as they need to be financially improved some financial instrument can specifically improve them Government is trying to build a proper framework for the improvement of the poor people

The background of this research is those factors which lead the development of the financial condition of the poor along with an analysis of some financial instruments

15 Problem definition aim and the added value of the research

This research is basically a descriptive one with some characteristics of normative research focusing on ldquoFinancial Instruments for The Poorrdquo Here it tries to define how different processes can reduce the poverty efficiently which we define as financial instruments Focusing on these financial instruments we basically try to work to find a solution of a serious problem perhaps the main problem that

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20 Economy of Bangladesh

Bangladesh is a small country with quite a small and poor economy Since its independence the country has been administered by lots of undisciplined administrations that could not ensure the maximum utilization of the available resources let alone finding the new sources of resources As a result the country is still a developing countryBangladesh is basically an agrarian country Majority of the population is involved with agriculture either directly or indirectly But the contribution of agriculture in total GDP has been decreasing in the last few years and currently service is the dominating sector in the Bangladesh economy

Figure-21 Sector Wise Contributions to GDP (Source BBS 2006)

But from the labor involvement perspective still agriculture sector has the dominance in the economy This sector has the highest level of direct labor involvement and one of the major findings is that though the contribution of agriculture in GDP is decreasing labor involvement is not decreasing Rather more and more labor force is being involved in the agriculture sector It might happen due to the high level of unemployment in the country Service sector involves the second highest amount of labors The labor involvement in construction sector is increasing year to year It well explains that the sector is a growing sector

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Table-21 Sector wise employment (in million)

30 Financial Liberalization and Reforms in Bangladesh

There is no denying the fact that the financial system plays a significant role in the economic development of a country The importance of an efficient financial sector lies in the fact that it ensures domestic resources mobilization generation of savings and investments in productive sectors In fact it is the system by which a countryrsquos most profitable and efficient projects are systematically and continuously directed to the most productive sources of future growth The financial system not only transfers funds from savers to investors it must be able to select projects which will yield the highest returns accumulate sufficient quantities of capital to fund the range of investment projects across economic activities account for price risks across assets monitor performance and enforce contracts According to the McKinnon- Shaw hypothesis (1973) the conventional wisdom is that flexibility and efficiency of the financial system are crucial to the growth and development of a market economy A comprehensive study by King and Levine (1993) from across 119 developed and developing countries over the 1960-1989 period provides compelling evidence that economic growth is dramatically dependent on the size of financial sector credit to private sector and enterprises and interest rates The larger the financial sector in the context of the overall economy the greater the share of lending by depository rather than central banks and the greater the share of credit to private sector rather than public sector the greater is the rate of economic growth Financial sector in Bangladesh like most in developing countries is dominated by banking institutions With recent gains in financial fronts Bangladeshs financial sector is now comparable with most of the countries in South and East Asia in terms of financial deepening (measured by broad money to GDP ratio) This was 80 percent in India (2008) followed by 50 percent in Bangladesh (2008) and Pakistan

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(2007) and 35 percent in Sri Lanka Bangladesh like other developing countries still has an underdeveloped financial system and is facing serious problems with the operation of its financial system and poor financial intermediation presents significant disincentives to foster economic growth Given the very low levels of both domestic and national savings and together with population growth Bangladesh needs more resources for investment Thus financial development is a prerequisite for economic growth There is broad agreement that the establishment of a competitive efficient and transparent financial system will result in higher economic growth and create employment opportunities Therefore evolution of a sound and well-integrated financial system through appropriate policy stances in the monetary and banking arena is essential to facilitate the economic development of any country

40 Financial Instruments

Actually by financial instrument we want to mean any kind of method or item that increases the financial asset of an entity and at the same time financial liability of another entity But here we will not working with all the financial instruments rather emphasizing on those which help to reduce the poverty

41 Financial Instruments to Reduce Poverty

We want to show what kind of financial instruments can be used for poverty reduction Because we have a strange thinking when we talk or think about poverty as most of us assume that by very nature of not having the money the poor cannot manage themselves properly and cannot get themselves free from the curse of poverty But through in our report we want to show you that empirical facts do not support this Besides money we have couple of ways which are known as financial instruments can be used for poverty reduction In recent days poverty alleviation has become a buzzword in our country And thatrsquos why different types of financial instruments are used Those are micro credit Zakat Wakf sukuk etc

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411 Microcredit

Microfinance and the impact it produces go beyond just business loans The poor use financial services not only for business investment in their micro-enterprises but also to invest in health and education to manage household emergencies and to meet wide variety of other cash that they encounter The ranges of services include loans savings facilities insurance transfer payments and even micro-pensions Evidence from the millions of micro-finance clients around the world demonstrate the access to financial services enables poor people to increase their household incomes build assets and reduce their vulnerability to the crisis that are so much a part of their daily lives

4111 Achievement of micro finance Social aspects

Microfinance and the impact it produces go beyond just business loans The poor use financial services not only for business investment in their micro-enterprises but also to invest in health and education to manage household emergencies and to meet wide variety of other cash that they encounter The ranges of services include loans savings facilities insurance transfer payments and even micro-pensions Evidence from the millions of micro-finance clients around the world demonstrate the access to financial services enables poor people to increase their household incomes build assets and reduce their vulnerability to the crisis that are so much a part of their daily lives Access to financial services also translates into better nutrition and improved health outcomes such as higher immunization rates It allows poor people to plan for their future and send more of their children to school for longer It has made women clients more confident and assertive and thus better able to confront gender inequities

Microfinance clients manage their cash flows and apply them to whatever household priority they judge most important for their own welfare Thus micro finance is an especially participator and non-paternalistic development input Access to flexible convenient and affordable financial services empowers and equips the poor to make their own choices and build their way out of poverty in a sustained and self-determined way

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Specifically it assesses impact in the areas of eradicating poverty promoting childrenrsquos education improving health outcomes for women for women and children and empowering women A short description of specific areas is given below

Eradication poverty Promoting childrenrsquos education Improving health outcomes for women and children Empowering women Participation in social activities Reduction of unemployment rate Beggar can turn to business Information technology for the poor

4112 Microcreditrsquos impact

For many women helping establish and operate their Village Banking group is their first experience in self-governance and democracy serving as a Village Bank officer is their first leadership opportunity

Womenrsquos status within the home increases as their self-confidence and economic self-sufficiency grow They demonstrate significantly greater empowerment as measured by physical mobility ownership and control of productive assets such as land involvement in family decision-making and legal and political awareness and participation And their empowerment increases the longer they stay with their microfinance programs ndash compelling evidence of a causal link

Microcredit lending is based on a culture of accountability and ownership where women have a setting to realize their potential with total dignity Since this is their money their responsibility their skills and their businesses they take total ownership

After a year or more many Village Bankers make significant improvements to their businesses their homes and their lives Because neighbors support each other while growing their businesses Village Banking helps invigorate entire communities

By having access to credit and by building collateral through participation in these programs borrowers can eventually graduate into a more formal system that will provide them with loans for education health housing and emergency family funds Microcredit grows self-esteem for borrowers because it provides options and opportunities to become independent economically

Microcredit institutions combine microfinance new technologies and innovation to empower the worldrsquos poorest people to escape poverty From simple small loans the worldrsquos poorest families can then create their own jobs raise household incomes and improve their standard of living

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4113 Micro-insurance

Providing the poor with insurance against risks of any kind is the mission of micro-insurance A small and repetitive payment covers - in a pool of people - the probability of a negative event deeply effecting one of them By sharing the risk the price can be kept low and the disruption to the partners of the affected person can be avoided

For instance the death of a micro-credit borrower potentially leading to a negative legacy to the already badly hit family can be insured so that the debt is eliminated (and the family even given the money for the funeral) while the MFI recovers the money from the insurer By pooling all the MFI clients the payment required for covering this risk can be kept quite low

Micro-insurance is getting into new areas such as health risks property damages in productive assets weather-indexed crop insurance for farmers storm housing damage etc These extensions rely on the observation that poverty can easily be the result of negative events that the poor are the most hit by many widespread risks and that their precautionary savings are freezing badly needed resources

At the same time the huge number of poor and their wide geographical distribution is an attractive feature for the insurer since the larger the pool and the less correlated the events the lower the payment necessary to cover the negative occurrence thus its affordability for the poor themselves These opportunities are at odds with traditional insurance institutions those are usually excluding the poor from coverage

4114 Micro-franchising for innovative and clean goods

A recent development in microfinance is to identify a technological innovation that embodied in a new durable good or equipment could improve the life of the poor directly or by the revenues achieved through the commercial sales of the services it provides

For instance mobile phones have been purchased by poor women in Bangladesh (using a micro-loan) and the services of phone calls sold to the entire village boosting not only the woman revenues (and her capability of paying back the loan) but also her social centrality (Before nobody invited me to marriage ceremonies now I am the first to know and be invited because they use the phone to invite all the others as Muhammad Yunus quoted at the Asian-Pacific Microcredit Summit 2008)

The key partner is the producer of the innovation or the global service provider (eg the mobile phone producer or the phone company) that is crucially interested in selling in rural areas and to the poor By signing and implementing franchising

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partnerships with economic giants or new entrants MFIs become the vehicle of modernization of the areas where they operate empower the technological level of their clients and diversify their products

In other cases the microfinance institution could be selling durable goods directly operating a commercial margin to contribute to fixed costs

412 Islamic Economic System

Islam is a comprehensive religion Islamic economic discussion is as old as Islam itself that is an integral part of Islamic teaching Basic principles of this economic system are al-Quran and al-Sunnah Itrsquos revelation took place gradually It is based on situation

4121 Basic Characteristics of Islamic Economics

1 Islamic Economics is developed based on several philosophical foundations derived from the Quran and the Sunnah tawheed justice freedom amanah (trust) and responsibility al-tarsquoawwun wa altakaful (cooperation spirit)

2 Islamic economics is based on real sector productivity Monetary sectorrsquos performance will be determined by the real sectorrsquos performance It is because all economic transactions and instruments in Islamic perspective are based on the real sector eg Musharakah and Mudarabah

3 the existence of principle of halal and haram halal permissible haram not permissible (in terms of ldquothe thingrdquo itself and in terms of process such as prohibition of maysir and gharar)

Instruments for Poverty Reduction according to Islamic Economies1048578 Zakat and Infak1048578 Wakaf1048578 Sukuk

4122 Zakat

Zakat is a financial instrument that is obligatory for those whom are eligible to be ldquomuzakkirdquo (zakat payer) It is distributed to 8 groups called ldquomustahikrdquo (zakat recipients) with priority given to the poor and the needy

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41221 Objectives of Zakat

1048578 Increases welfare level of zakat recipients1048578 Increases productivity1048578 Promotes business ethic1048578 works as potential funding source for development1048578 Increases the wealth and asset in productive ways1048578 Encourages people to perform their worship in the best way1048578 Reflects the spirit of ldquosharing-based economy

41222 Impact of Zakat to reduce poverty

Proper utilization of Zakat could effectively alleviate poverty from the society only micro credit alone could not remove poverty from the society Proper utilization of Zakat could play an effective role in this connection The fund of Zakat should be utilized in a planned manner to eradicate poverty economic development and for improved living of the neglected section of the society Zakat should be incorporated in development strategies of the government Islam always encourages the rich to be kind helpful and champion of human dignity Zakat is a unique instrument for poverty alleviation as wealth is transferred from rich people to poor people This will improve the living condition of the poor people of the society and make them self- sustained Zakat is a financial tool that can ease the burden on the state budget and meet the needs of the poor It is not only a type of charity but a duty imposed on rich Muslims by our Islamic Sharia too

413 Waqf

Waqf means denoting a building or plot of land or even cash for Muslim religious or charitable purposes The donated assets are held by a charitable trust In this concept Mutavalli (Cash-Waqf Fund manager) collects the fund from Waqif and invest the money in the real sector (mainly Small amp Medium-sized Ventures) and in any Shariah based investment opportunities Mutavalli will then allocate all profits

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and returns gained from the investment to any poverty alleviation program to enhance the quality of poor peoplersquos life such as free education and health services cheap basic food etc

4131 Cash Waqf

Cash waqf is one of the alternative solutions amid the inability of government in providing prosperity for Indonesian society On the other side the system of cash waqf return allocation need to be rejuvenated in a professional way Waqf or Islamic endowment is a well-known topic in the area of Islamic economics Islamic finance and Islamic jurisprudence In general waqf could be categorized into several categories from three different aspects ie timing of waqf purpose of waqf (the beneficiaries) and the waqf object

Figure 41 Categories of Waqf in Islamic Jurisprudence

41311 Cash Waqf collection and allocation

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Waqf

Purpose ObjectTimings

Permanent Temporary

Family Charity Moveable Immovable

SpecificGeneral


Cash Waqf collection is basically made for 2 purposes

i)Distribution for social sector

ii)Distribution for productive sector

Figure 42 Cash Waqf collection and allocation

414 Sukuk

Sukuk is an innovative Islamic financial product Islamic bond operated based on Islamic transactions which are ldquoreal-sector basedrdquo It can be used in mobilizing huge fund available in financial market It is invested in real sector projects that can be used in poverty eradication project1048578 eg Ijarah sukuk for the purchase of ships given for the poor fishermen

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Cash Waqf collection

Distribution for social sector

Distribution for productive sector

Allocation

Facility amp Social

Services

Health amp Cleanliness

Victims of natural disaster

Education amp Culture

Rehabilitation of Poor family


415 The Rationale for Financial Sector Reforms

Financial sector reform means two distinct but complementary types of changes that are to establish a modern financial system capable of acting as the ldquowheel of the economyrdquo and allocating the economyrsquos savings in the most productive way among different potential investments First liberalization of the sector putting the private sector rather than the government in charge of determining who gets credit and at what price Second establishing a system of prudential supervision designed to restrain the private actors so that it can be reasonably sure that their decisions will also be broadly in the general social interest The use of endowment and Zakat funds - properly linked to State general plans - can supplement resources for the state budget deficit It is an economic vision applied successfully in some countries such as Malaysia There are many powerful economic studies about it It is also a fundamental part or our faith rooted in the teachings of our religion which helps us fight even eradicate poverty

50 Conclusion

Poverty is the main obstacle in the way of development of a country Not only for a specific country but also for the whole world It is perhaps the basic problem In the countries of the third world and the developing countries are mainly affected with this problem By making poor countries poorer this problem actually makes discrimination between the countries of the world As the third world and developing countries can not solve the poverty problem rather they are facing more poverty problems as a result there creates difference among the countries As a

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developing country this problem is more acute So if we want to see our country as a developed country we have to find the solution of poverty first Thatrsquos why through this report it is shown different types of poverty reduction processes which we define as financial instruments can be used to reduce the poverty gradually from the countryThe main instrument can be the microcredit which is a process of issuing loan to marginal people just to make them financially stable It can be main weapon for us to fight with the poverty Here it also shows other various instruments like Jakat Waqf Sukuk etc But the main purpose of these instruments is the poverty reduction and proper allocation of resources among the people above all among the countries of the world so itrsquos the time the govt of the countries should come forward and take necessary steps to get free from the curse of the poverty by trying to use these financial instruments efficiently and effectively

Reference

Bangladesh Bureau Of Statistics(BBS) wwwfinancialdiariescom wwwfinancialexpressscom httpnextbillionnetinterview-with-brigit-helms-ceo-of-unitus wwwmicrofinacegatewaycom

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14 Background and relevance of the research The Context

Bangladesh is a small country with a very low per capita income Here people still struggle for the basic needsrsquo fulfillment When still lots of people struggle to have a minimum shelter little amount of food to live they need to develop their financial condition Therefore as they need to be financially improved some financial instrument can specifically improve them Government is trying to build a proper framework for the improvement of the poor people

The background of this research is those factors which lead the development of the financial condition of the poor along with an analysis of some financial instruments

15 Problem definition aim and the added value of the research

This research is basically a descriptive one with some characteristics of normative research focusing on ldquoFinancial Instruments for The Poorrdquo Here it tries to define how different processes can reduce the poverty efficiently which we define as financial instruments Focusing on these financial instruments we basically try to work to find a solution of a serious problem perhaps the main problem that

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411 Microcredit





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4122 Zakat


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413 Waqf


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4131 Cash Waqf




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Waqf


Permanent Temporary


SpecificGeneral






414 Sukuk


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Allocation

Facility amp Social

Services








50 Conclusion


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Reference


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411 Microcredit





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4122 Zakat


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4131 Cash Waqf




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Waqf


Permanent Temporary


SpecificGeneral






414 Sukuk


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Allocation

Facility amp Social

Services








50 Conclusion


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Reference


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411 Microcredit





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4122 Zakat


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4131 Cash Waqf




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Waqf


Permanent Temporary


SpecificGeneral






414 Sukuk


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Allocation

Facility amp Social

Services








50 Conclusion


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Reference


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411 Microcredit





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4122 Zakat


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413 Waqf


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4131 Cash Waqf




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Waqf


Permanent Temporary


SpecificGeneral






414 Sukuk


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Allocation

Facility amp Social

Services








50 Conclusion


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Reference


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411 Microcredit





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4122 Zakat


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413 Waqf


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4131 Cash Waqf




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Waqf


Permanent Temporary


SpecificGeneral






414 Sukuk


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Allocation

Facility amp Social

Services








50 Conclusion


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Reference


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4122 Zakat


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413 Waqf


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4131 Cash Waqf




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Waqf


Permanent Temporary


SpecificGeneral






414 Sukuk


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Allocation

Facility amp Social

Services








50 Conclusion


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Reference


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4122 Zakat


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413 Waqf


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4131 Cash Waqf




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Waqf


Permanent Temporary


SpecificGeneral






414 Sukuk


12 | P a g e




Allocation

Facility amp Social

Services








50 Conclusion


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Reference


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4122 Zakat


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413 Waqf


10 | P a g e



4131 Cash Waqf




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Waqf


Permanent Temporary


SpecificGeneral






414 Sukuk


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Allocation

Facility amp Social

Services








50 Conclusion


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Reference


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413 Waqf


10 | P a g e



4131 Cash Waqf




11 | P a g e

Waqf


Permanent Temporary


SpecificGeneral






414 Sukuk


12 | P a g e




Allocation

Facility amp Social

Services








50 Conclusion


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Reference


14 | P a g e


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4131 Cash Waqf




11 | P a g e

Waqf


Permanent Temporary


SpecificGeneral






414 Sukuk


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Allocation

Facility amp Social

Services








50 Conclusion


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Reference


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414 Sukuk


12 | P a g e




Allocation

Facility amp Social

Services








50 Conclusion


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Reference


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50 Conclusion


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Reference


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Reference


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Documents

Financial Instruments for the Poor