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ECONOMICEMPOWERMENTFOR FINANCIAL INSTITUTIONSECONOMIC EMPOWERMENTDESIGN TOOLKITECONOMIC EMPOWERMENT DEPARTMENT (EED)

DisclaimerIsDBG does not guarantee the accuracy of the data included in this publication and accepts no liability forany consequence of their use. This publication is provided without any warranty of any kind whatsoever,either express or implied. Nothing herein shall constitute or be considered a limitation upon or waiver of theprivileges and immunities of IsDB, all of which are specifically reserved.Copyright ClauseAll rights reserved. No part of this publication may be reproduced, stored in a retrieval system ortransmitted in any form or by any means, electronic, mechanical, photocopied, recorded, or otherwise,without the prior written permission of the copyright holder, except for reference and citation, with properacknowledgment.

ECONOMICEMPOWERMENTFOR FINANCIAL INSTITUTIONSECONOMIC EMPOWERMENTDESIGN TOOLKIT

Economic Empowerment for Financial InstitutionsForeword from H.E the IsDB PresidentUnder this new model, our 57 member countries–mainly developing nations–face unprecedentedsocioeconomic challenges and financial constraints. Ifleft unchecked, these challenges threaten to plunge theglobal economy into economic malaise and secularstagnation, pushing millions more into poverty traps,which the IsDB and the international developmentcommunity need to tackle.Thus, the need to introduce innovative and unorthodoxapproaches/solutions to effectively provide lastingremedies and deliver impact has become exceptionallyimportant. Achieving sustainable growth anddevelopment in the modern context demands a shift inthe global development discourse, from a short-term(band-aid) mindset to a longer-term approach thatseeks to address the root causes of growth stagnationand development degradation.We find ourselves in a period of remarkable economicand social transformation. The developing anddeveloped countries are evolving, shifting towardschanging trends, norms, and realities. Civilization is onthe threshold of a fourth technology-driven industrialrevolution involving a digital transformation acceleratedand galvanized by the Covid-19 pandemic. A new erahas dawned upon us, and there is no turning back. Theway we live, work, and interact has been intrinsicallyand profoundly altered. Navigating through this newreality necessitates that we reformulate traditionalapproaches to tackling poverty, sustainable growth,and development.4Therefore, under the President’s Five-Year Program,the Islamic Development Bank has heralded a newparadigm to address development, the economicempowerment approach. Spearheaded by our newlyformed Economic Empowerment Department, it isa neo-impact investment philosophy that aims totransform aid recipients and destitute, poverty-strickenindividuals into empowered, productive members ofsociety with the ability to take control of their economicdestiny.Traditional access to finance solutions provided byfinancial and microfinance institutions is not enough.To empower the poor, integrated, comprehensive,and customized solutions that enable the poor to

Economic Empowerment Design Toolkitparticipate in highly competitive economic landscapes- thereby leveling the playing field - must be adopted.Consequently, the Islamic Development Bank’seconomic empowerment approach emphasizesbusiness engineering and design, i.e., the quality atthe inception of projects, programs, and initiatives. Bycombining access to finance and (i) access to markets,(ii) capacity building, (iii) supporting regulatoryenvironment, and (iv) supporting infrastructure, thisinnovative approach endeavors to ensure that thepoor are economically included and assimilated intothe mainstream economy as active participants andcontributors to sustainable growth and development.Islamic Development Bank has extensive experiencesupporting our partner financial institutions’transition from conventional institutions to economicempowerment financial institutions that utilize Islamicfinancial instruments effectively.In this regard, this Economic Empowerment Designtoolkit aims to provide guidance and practical tools toembark on this journey. The toolkit will explain how amicrofinance/financial institution can implement theeconomic empowerment methodology by analyzingvalue chains with the highest potential. The toolkitguides how the value chain analysis will help identifyand pursue business opportunities with their clients. Inaddition, this toolkit includes detailed case studies thatclarify the different business modules of the economicempowerment approach. These case studies weretaken from previous IsDB success stories in selectedmember countries (Palestine, Sudan, Egypt, andTunisia).This Economic Empowerment Design Toolkit and theother two complementing toolkits – the Monitoring& Evaluation Toolkit and Islamic Financial ProductImplementation Toolkit – will significantly contributeto mainstreaming the economic empowermentmethodology.This is important if we would like to innovateour financial inclusion approach and make asignificant developmental impact. We need a radicaltransformation to keep the promise we made, achievingthe Sustainable Development Goals.I believe economic empowerment is one of these radicaltransformations needed to contribute significantly toglobal challenges such as employment creation andpoverty alleviation.Dr. Bandar M. H. HajjarChairman, Islamic Development Bank Group5

Economic Empowerment for Financial InstitutionsAcknowledgementThe Economic Empowerment Design Toolkit is anessential resource for client-centric financial institutionsinterested in enhancing the value they provide to theirclients. The toolkit accumulates various technicalstudies, consultancy reports, standard operatingprocedures, operating manuals, and other resources.These documents were consolidated to guide financialinstitutions interested in going beyond financing/creditoperations to strengthening their partnership with theirclients by offering them economic opportunities.Ultimately, the toolkit aims to provide accessibleand easy-to-understand resources that simplify theprocesses leading to the adoption of the Islamic modesof finance and shariah-compliant banking, spurring thegrowth of the Islamic finance ecosystem. It sharesthe practical application of economic empowermentbased on global best practices.Developing the toolkit would not have been possiblewithout the dedication of the Economic EmpowermentDepartment staff, particularly the Programs Team, ledby Syed Hassan Alsagoff 1, with invaluable contributionsfrom Mohamed Mazen Dakhli 2 and Mehmet FehmiEken 3, as well as the critical support provided by SmailHaddad 4 and Hazem Hamdy Hassan 5 for the editorialreview and Aboubacar Kante 6 and Elhadi Elnahoui 7 forthe Sharia review.61Lead Economic Empowerment Programs Specialist, EconomicEmpowerment Department.2Economic Empowerment Programs Specialist, EconomicEmpowerment Department3Islamic Finance Specialist, Islamic Finance SectorDevelopment Department4Manager, Language Services Division5Senior Interpreter and Translator, Language Services Division6Lead Islamic Finance Expert, Shariah Compliance Unit7Senior Islamic Finance Expert, Shariah Compliance UnitFurthermore, the Economic Empowerment Departmentis indebted to our partner financial institutionsand experts who have selflessly contributed to theinput and review of the toolkit. Special appreciationgoes to the partner financial institutions that haveprovided inputs and the materials needed to developthis document. These partner financial institutionsinclude (i) Agrokredit, Albania; (ii) Akhuwat, Pakistan;(iii) Alshanek ya Balady Association for SustainableDevelopment, Egypt; (iv) Amanah Ikhtiar Malaysia;(v) IRADA Microfinance, Bank of Khartoum, Sudan;(vi) Islami Bank Bangladesh; (vii) Micro Small andMedium Enterprise Development Agency (MSMEDA),Egypt; (viii) Rahmania Foundation, Indonesia; (ix) WasilFoundation, Pakistan; (x) Zaman Bank, Kazakhstan;and (xi) Zitouna Tamkeen, Tunisia.Dr. Nabil GhallebDirector, Economic Empowerment Department

Economic Empowerment Design Toolkit7

Economic Empowerment for Financial InstitutionsContentsAbbreviations.10Chapter I - Economic Empowerment Introduction andMethodology.111. Introduction. 112. Microfinance and Financial Inclusion - Silver Bullets for Poverty Reduction?. 133. Theory of Change in Economic Empowerment - from Financial to EconomicInclusion. 174. IsDB’s Approach in Assisting the Poor by Promoting EconomicEmpowerment FIs. 19A.B.C.D.Developing the capacity of MFIs/FIs to trade and invest.19Methodology of empowering the poor through EconomicEmpowerment institutions.21Provide business development support.23Promoting Economic Empowerment through impact financing.245. Case Studies for Economic Empowerment in Practice. 25A.B.C.D.Case Study 1 - Loan, capacity building and trade through Salam in Palestine.25Case Study 2 - Venture capital investment through diminishing Musharaka(Wad Balal Cattle Fattening Project in Sudan).28Case Study 3 - Development of an incubator through partnership(Ard El Khair Cattle Fattening Incubator in Egypt).30Case Study 4 - Partnership with a leading firm (Danone in Tunisia).32Chapter II - Assessment and Strategy.351. Assessment of the Current Situation. 35A.B.C.Strategy definitions and perspectives.36Strategic analysis.37Analysis of the external environment: PESTLE.382. Analysis of the Environment - SWOT. 41A.B.C.D.E.Swot 42Threats.42F.Process.423. Current Situation Performance Assessment of the Financial Institution.434. Obtaining Feedback from Client Surveys, Focus GroupDiscussions and Interviews. 50A.B.C.Surveys and questionnaires in islamic microfinance.50Content of the feedback questions.53Designing effective questions.565. Gap Analysis Report.576. Business Strategy Action Plan.57Chapter III - Value Chain Analysis Tools and Approaches.611.2.3.4.5.6.8Overview of value chain - concepts and definition. 61Understanding value chain management. 62Advantages and uses of value chain analysis. 62What is agricultural value chain?. 63Agricultural value chain analysis. 64Limitations of value chain analysis. 66

Economic Empowerment Design Toolkit7. Agricultural Value Chain Analysis Tools. 68A.B.C.D.E.F.G.H.I.J.K.Tool 1 - Choosing priority sectors for value chain interventions.68Tool 2 - Designing informed strategies across the value chain.69Tool 3 - Conducting benchmarking and gap assessments.70Tool 4 - Upgrading and deepening the value chain.70Tool 5 - Identifying business models for replication.71Tool 6 - Capturing value through forward and backward linkages.71Tool 7 - Horizontal collaboration.72Tool 8 - Positioning products and value chains.73Tool 9 - Applying standards and certifications.73Tool 10 - Identifying needed support services for the value chain.74Tool 11 - Improving the operating environment.748. Implementation of Value Chain Analysis. 75A.B.C.D.E.F.G.Criteria for selecting a value chain commodity.76Why select commodities where market failure exists?.77Qualitative value chain analysis.77Quantitative value chain analysis.86Analysis of production accounts.89Analyze effects of possible intervention(s).90Value chain analysis - An incremental and practical approach.93Chapter IV - New Product Development.951.2.3.4.5.6.Introduction to New Product Development. 95Product Business Plan Development Framework.101Describe the Expected Benefit for the Client.102Product Design Framework.108Describe Similar Products in the Market and Conduct a SWOT Analysis.109Shari’ah Specific Product Policies for Various Islamic Modes Of Finance.112A.B.C.D.E.Murabaha guidelines. 112Qard Hasan guidelines. 114Salam policy. 115Mudaraba guidelines. 118Musharaka/ diminishing musharaka policy. 1207. Financing Strategy and Risk Analysis.123A.B.C.Institutional risk areas. 124Risk areas through external factors. 124Viability of the risk areas. 1248. Financial and Non-Financial Projections.1269. Finalizing the Trial Product and Timeline.131A.B.C.D.Introduce concept to clients - Step 1. 132Assess client feedbacks - Step 2. 132Refine concept - Step 3. 132Introduce concept to clients - Step 4. 1329

Economic Empowerment for Financial InstitutionsAbbreviations10ATMAutomated Teller MachinesMISManagement Information SystemBDSBusiness Development ServicesMOUMemorandum of UnderstandingBOKBank of KhartoumMSEMicro and Small EnterprisesCBACost Benefit AnalysisMSMEMicro Small and Medium EnterprisesCGAPConsultative Group to Assist the PoorMSMEDA Micro Small and Medium EnterpriseDevelopment AgencyDEEPDeprived Families EconomicEmpowerment ProgramNGONon-Governmental OrganizationDFIDevelopment Financial InstitutionPAPPProgram of Assistance to thePalestinian PeopleEEEconomic EmpowermentPARPortfolio at RiskEEDEconomic Empowerment DepartmentPESTLEEGPEgyptian PoundsPolitical, Economic, Social,Technological, Legal and EnvironmentalPPDPublic Private DialogueFAOFood and Agriculture Organization ofthe United NationsPSRProfit-Sharing RatioFIFinancial InstitutionROIReturn on InvestmentG20Group of 20 NationsSDGSudanese GuineaGDPGross Domestic ProductSMESmall and Medium EnterprisesGNPGross National ProductSWOTIFIslamic FinanceStrengths Weaknesses Opportunitiesand ThreatsUFAUniversal Financial AccessIFCInternational Finance CooperationUNDPUnited Nations Development ProgramIFIIslamic Finance InstitutionVATValue Added TaxesIMFInternational Monetary FundVCValue ChainIMFIIslamic Microfinance InstitutionVCMValue Chain ManagementIRRInternal Rate of ReturnWBWorld BankIsDBIslamic Development BankYESYouth Employment Support ProgramISFDIslamic Solidarity Fund for DevelopmentZTZitouna TamkeenMFIMicrofinance Institution

Economic Empowerment Design ToolkitCHAPTER01Economic Empowerment Introductionand Methodology1. INTRODUCTIONWhen Professor Muhammad Yunus of Grameenintroduced microfinance, he broke all misconceptionsthat no bank can, or should, lend money to the poor,because they are not creditworthy. The Nobel PeacePrize laureate demonstrated that by forming groups,provision of collateral is unnecessary, as socialpressure ensures that the group members repaytheir debt on time. Within a short time, microfinanceexpanded as a viable business proposition whengovernments, donors and private institutionsattempted to replicate the model. However, variousevaluation studies showed that the high interestrates (above 30%) imposed on the poor resultedin mixed results in terms of poverty alleviation. Themicrofinance industry produced various models,some being more developmental and dependent onsubsidies, while others focus on efficiency to operateon a commercial basis. The development-orientedmicrofinance programmes supported by governmentsand donors typically complement the line of financingwith business development support. The assumptionis that if the business of the beneficiary is successful,he will be able to repay the loan and his livelihood willalso improve. At the other end of the spectrum, somebanks adopted additional risk mitigation measures toensure that loans are repaid.Islamic microfinance institutions (IMFIs) made astart similar to that of Islamic Financial Institutions(IFIs), adapting the conventional model to beSharia compliant. In fact, most IMFIs started theiroperations with Murabaha financing, and as a result,their effectiveness as a means of poverty alleviationremain as limited as their conventional counterparts.Islamic finance requires financial institutions (FIs)to engage in trade and investment; it promotes risksharing and fairness in the relationship betweenfinancier and entrepreneur. In addition, it promotesthe involvement of FIs in the value-chain (i.e. valueadding in the process of getting the product from thesupplier to the consumer) and prohibits investment inany industry that may be detrimental to the society.Therefore, in alignment with the spirit of IslamicFinance, FIs should shift their focus from financialinclusion (providing appropriate financial solutions forthe poor) to economic inclusion (by helping the poorgain opportunities to improve their income-generatingability). This approach that aims to shift the focusfrom financial inclusion to economic inclusion iscalled “Economic Empowerment” in IsDB.Economic Empowerment is an approach that enableseconomically disadvantaged populations to play anactive role in the economic cycle in their countriesand let them realistically aspire for a decent living.Economic Empowerment, as practiced in IsDB, is theprovision of a package of Sharia-compliant financialand non-financial services to individuals, groupsand MSMEs that are excluded from the traditionalfinancial system, with a view to uplifting theirconditions by generating real economic value in thetransactions that are conducted with actors within thevalue chain. Economic Empowerment is often seen asthe component that embodies the true objectives ofIslamic Finance, given that it contributes to (a) incomegrowth; (b) redistribution of income and (c) promotionof equal economic opportunities for the members ofsociety as positive measures to uplift livelihoods.This toolkit aims to promote the salient valuesof Islamic finance in Economic Empowermentprogrammes/projects. Development of the toolkitwas built on the expertise and experiences ofexperts from successful microfinance and EconomicEmpowerment partner institutions, which we hope thetoolkit will help others emulate. Their contribution oflessons learnt and best practices highlighted in thetoolkit aims to help all FIs develop not just Shariacompliant products, but products that will also trulysupport Economic Empowerment of the poor bysustainably improving their livelihoods. The toolkit will11

Economic Empowerment for Financial InstitutionsThere are 689 million people living onless than US 1.90 a day.In 2018, four out of five people belowthe international poverty line lived inrural areas, 50% of the poor are childrenand women represent a majority of thepoor in most regions.At higher poverty lines, 24.1% of theworld lived on less than US 3.20 a dayand 43.6% on less than 5.50 a day in2017.Today, close to one-third of adults – 1.7billion – are still unbanked.World Bankhelp different FIs expand their range of products andservices accordingly, and will be a useful reference fordonors, NGOs and governments in IsDB member andnon-member countries.12business opportunities for investments. However, theywould need capacity-building and guidance on how toincorporate these new processes into their existingbusiness models. How can they conduct tradingtransactions? What are the operational and marketrisks involved? How can such risks be mitigated? Thetoolkit aims to answer as many questions as possiblerelating to how an MFI/FI can promote EconomicEmpowerment by identifying and pursuing businessopportunities with their clients.This toolkit is a compilation of various reportsstructured in a comprehensive manner in order toachieve the objectives mentioned above. In addition,it also includes examples and practices from someof the best Islamic microfinance and EconomicEmpowerment institutions operating around the worldtoday. The contribution of these institutions to thetoolkit is very much appreciated and their guidance inits development helped IsDB ensure its practicality.It is very important that MFIs/FIs have a clearunderstanding of the Economic his chapter,I am thatpleasedpresentthe 2018of the DevelopmentMicrofinance institutions (MFIs) and other FIs maycontinue to use their existing standard operatingprocedures relating to the sourcing and managementof clients and to appraisal, disbursement andcollection processes, as they hardly ever conflictwith the principles of Sharia, if at all. This EconomicEmpowerment Design Toolkit proposes modificationsto existing processes related to accounting, structureof financing, monitoring and engagement with clientsthrough value chain investments. The toolkit willhighlight what MFIs and other FIs need to introduce/adjust to enable them to apply the EconomicEmpowerment methodology. In doing so, MFIs willbe encouraged to perform the role of a trader or aninvestor instead of an arm’s length lender. The toolkitfollows an incremental approach that will developtheir capacity to engage with the value chain throughpractical approaches.where we Effectivenessdiscuss the Reportbusinessmodel,the theory(DER)highlightingkey B)change and the impact of conventional microfinance towardsachieving developmental results in our Member Countriesand financialinclusion initiatives. We then explain why(MCs) and Muslim communities in non-Member Countries.financial inclusion in itself is not enough to alleviateThe DERhow interventionsIsDB is fosteringpoverty andwhy showcasesnon-financialare sustainabledevelopment in MCs and around the globe. The report shedsalso important. The IsDB Economic Empowermentlight on progress towards achieving key objectives of theapproach,President’swhich iesand IsDB Group’s 10to provideYearfinancialandnon-financialservices to theStrategy (10YS) for MCs’ socio-economicdevelopment.The reportasprovidesevidence of IsDB’sprofoundcommitmentpoor, is elaborateda comprehensiveapproachthatin supporting the achievement of sustainable developmentovercomes the shortcomings found in conventionalgoals (SDGs).microfinance/microcredit. Additionally, we address2018, the needBank madein implementingP5Pwhat the Ininstitutionsto do progressto enhancetheirin order to transform IsDB to become more effective andimpact on poverty alleviation. We also present a typicalefficient development partner for its MCs, focusing on deliverytransformationaljourneyanalsoMFI/FIa practicingand results.The ofP5Paimsintoto addressthe root ly,we offersustainablegrowth inour MCs.The Bank’s newbusinessmodelof ‘MakingWorkfor Development’ isfour detailedcasestudiesthat Marketsillustratedifferentbased on the objectives of strengthening the competitivenessbusiness models for the Economic Empowermentof our MCs in strategic industries to become comparativelyapproach.advantageousThese casestudiesvalueweretaken fromin creatingchains.previous IsDB success stories in four membercountries (Egypt, Palestine, Sudan and Tunisia).Most MFIs/FIs will welcom

supporting our partner financial institutions' transition from conventional institutions to economic empowerment financial institutions that utilize Islamic financial instruments effectively. In this regard, this Economic Empowerment Design toolkit aims to provide guidance and practical tools to embark on this journey.

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