The Wasil Foundation’s Salam: An Innovative Agricultural Financing Option

Fall 2015

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The ChallengePhoto Credit: Ayesha Valleni

Credit: Piphany Productions

Poor farmers in Pakistan often either cannot or will not go to banks that require them to pledge their land and that charge penalties on late repayments regardless of the weather conditions.

Credit: Piphany Productions

So they go to Artees, middle men who provide either cash or seeds for the farmer’s agricultural (and personal) needs.

Credit: Ayesha Valleni

On harvest day, Artees arrive at the farmer’s house…

… and they announce the crop’s price, based on which they take their share of the crop

and store it until market prices go up.Credit: Ayesha Valleni

Credit: Ayesha Valleni

A few weeks later, prices have gone up by 25% to 30%...

Credit: Ayesha Valleni

… so Artees sell the collected crops with a good profit.

Credit: Ayesha Valleni

While farmers are left struggling.

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• Agriculture represents 25% of GDP

• 35% of land is agricultural

• 62% of the population lives in rural areas

Source: World Bank; according to the Pakistani government household survey of 2010-11, there are 6.4 members per household

Pakistan: An Agricultural Country

Photo Credit: Ayesha Valleni

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Pakistan: Home to Millions of Poor Farmers

• Farmers make up the majority of the poor

• 35 million people live below the national poverty line…

• ..and 88 million live below $2 a day

Source: World Bank; according to the Pakistani government household survey of 2010-11, there are 6.4 members per household

Photo Credit: Ayesha Valleni

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For 6 Million Smallholders (10 acres or less), Financing is Limited

Financiers ++ Advantages ++ -- Disadvantages --

Banks • Large amounts possible

• Require collateral• Inflexible installment frequency• Penalties on late repayment• Distance to the branch• Lengthy procedure

Microfinance Institutions (MFIs)

• Bullet repayment (lump sum)• Fast procedure

• Small amounts (average of $260 and maximum of $500)

• Penalties on late repayment

Artees (middlemen)

• Ease of access• In place for generations• Repayment in crops• Capacity to buy the crop

remaining after repayment

• High cost• Inputs of poor quality• Lack of transparency• Pricing not known at financing

time but at harvesting• Buy the remaining crop at

harvest but pay it at a later stage• Farmer & family in perpetual

debt

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Wasil’s Solution: SalamPhoto Credit: Ayesha Valleni

Wasil Farmer

Financing: Cash (day d)$650 against future wheat crop

(price agreement: $10 per bag of 40 Kg)

Repayment: Crops delivery (d+6 months)

65 bags of wheat or 2.6 tons

Market

3

1

2

Crops sale(d+8 months)

65 bags at market price (~$12-13 per bag)

Crops sale(d+6 months)

Remaining 65+ bags at market price (~$10 per bag)

2

Storage

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Salam Process

Photo Credit: Ayesha Valleni

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Wasil’s Procedure for Salam

Application form filled

IDPictureUtility bill

Credit bureau check

Client visit Credit committee

Including crops’ price negotiation

Contract signature &

disbursement

Done in groupsFarmers cash their check at the bank

Monitoring

Officers visit clients once a month

Bags provided to the farmer

Farmer delivers crops

at harvest

Rescheduling

In case of bad weather

Wasil picks up crops at harvest

Storage Sale

Optional Step

Headquarters

Branch

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Defining the Salam Financing Amount

Example:

Cultivated area and crop 5 acres of rice

Expected yield per acre 26 Mounds (1 Mound = 40 Kg)

Total expected yield 130 Mounds

Eligible for financing (up to 50%) 65 Mounds

Pre-agreed purchase price PKR 1,000 or $10 / Mound

Financing amount (maximum) PKR 65,000 or $650

Quantity of crops to deliver 65 Mounds (or bags)

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Results So FarPhoto Credit: Ayesha Valleni

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Salam Represents 10% of Wasil’s Portfolio

nov.-09 nov.-10 nov.-11 nov.-12 nov.-13 nov.-14 nov.-15 nov.-16 nov.-170

100

200

300

400

500

600

700

800

Wasil Salam Clients

Salam Clients Projected

Wasil’s Salam outreach is still limited and alternates wheat (November through May) and rice seasons (June through October)

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Salam Offering is Sustainable…

Indicator ValueGross Profit 30%

Internal Rate of Return (IRR) (1) 45%

Operating Expenses (2)

of which direct expensesof which indirect expenses

17%8%9%

Financing Expenses (3) 11%

Loss Provisioning Expenses (4) 2%Note: Figures provided by Wasil and to be considered as rough estimates; there are no accounting standards nor strictly defined performance indicators for Salam.

(1) IRR calculated based on actual cash flows.

(2) Officers are not specialized in Salam only, and manage a portfolio of 125 up to 150 Salam clients each.

(3) Combining a mix of fixed interest on conventional loans and variable cost on profit-sharing funding agreements (called ‘mudaraba’). The latter allows Wasil to match the maturity of its assets and liabilities by replacing fixed-term interest payment with profit sharing after the crops are sold.

(4) There have been very limited cases where farmers have not delivered their crops so far. There have also been some cases of rescheduling due to bad weather.

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…and Allows Farmers to Build their Assets within 5 Cycles

Ishfaq manages 9 acres of land that belong to his father. He saw Wasil’s advertising and went into the branch to get a 65,000 Rs financing for his wheat crop.

He used to deal with a bank but found it difficult to make bullet repayments of the capital and interest: his bank allowed differing the capital repayment provided he paid the interest, so he got to invest the capital only once, but kept paying interest for several years. There, he also had to pay penalties on late payment.

With Wasil, not only did he get his financing approved in 5 days instead of 15-20, but he finds it much easier to pay back with wheat.

He can also be a few days late in delivering his crops without having to pay penalties. This is particularly important when weather conditions are not ideal.

Last, Salam financing is Riba-free (interest-free), and this is important for him.

“Before, I sometimes needed to sell a buffalo to get fertilizers. The

sale took time, so I would not always get the fertilizers on time.

Now, I can plan ahead.”

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…and Allows Farmers to Build their Assets within 5 Cycles

Mohammed Saleem owns 2.5 acres of land. He is married and has two sons. He met one of Wasil’s officers when he was in need of a 69,000 Rs financing. He consulted with his wife, and decided to apply.

Banks are very far from his house, and he finds them expensive. He also does not approve of Riba. He used to deal with Artees, but does not need them anymore.

“My yield has increased by 67% thanks to better seeds and to

fertilizers bought on time. Now, I save much more.

I bought a buffalo.”

Photo Credit: Ayesha Valleni

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“I used to work with Artees and they charged a lot. Now, I opened a bank account. I also got my own tractor that I rent to neighbors.”Saleem, Wasil Client

Photo Credit: Ayesha Valleni

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Example of Payment Schedule (1/2)

Salam-RiceAmount PKR 65,000 Purchase price PKR 1,100/bagFees PKR 1,000 Crop equivalent 59 bags of 40 KgTenure 6 months Sale price PKR 1,350/bagStorage n/a Profit margin 23%

Period Financing Balance

Wasil’s Income

Net Cashflow

0 65,000 1,000 -64,0001 65,000 02 65,000 03 65,000 04 65,000 05 65,000 06 0 14,773 79,7737  8  9  

10  11  12      

Total   65,000 15,573  IRR 45%

Photo Credit: Ayesha Valleni

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Salam-WheatAmount PKR 65,000 Purchase price PKR 1,050/bagFees PKR 1,000 Crop equivalent 62 bags of 40 KgTenure 6 months Sale price PKR 1,300/bagStorage 2 months Profit margin 24%

Period Financing Balance

Wasil’s Income

Net Cashflow

0 65,000 1,000 -64,0001 65,000 02 65,000 03 65,000 04 65,000 05 65,000 06 0 65,0007  08 15,476  15,4769  

10  11  12      

Total   65,000 16,476  IRR 44%

Example of Payment Schedule (2/2)

Photo Credit: Ayesha Valleni

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Islamic Microfinance Challenge Award Photo Credit: Ayesha Valleni

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• CGAP, Al Baraka Banking Group, GIZ, the Islamic Development Bank, and Triple Jump launched Challenge in November 2013

• $100,000 grant award, to spur innovation and help scale up Sharia-compliant products

• Theme was “Beyond Murabaha”

• 11 institutions applied

The Islamic Microfinance Challenge: Quick Facts

Learn more at http://www.cgap.org/news/innovation-islamic-microfinance

Photo Credit: Ayesha Valleni

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Pakistan’s Wasil Foundation was the winner and judges selected its entry – an innovative product package focused on agricultural finance – for its impact on the lives of its clients, the sustainability of the offering and its potential to scale up in Pakistan and in other predominantly Muslim countries.

Wasil Foundation Wins

Photo Credit: Ayesha Valleni

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Wasil has used the grant money to purchase land and build a warehouse in Gojra, about 200 km southwest of Lahore.

The warehouse can store up to 800 tons of crops, with potential to expand to 2,300 tons.

Gojra WarehouseDesigned for Salam and for Agricultural Promotion

Photo Credit: Ayesha Valleni

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HALL90 x

55 feet

The hall, where humidity level and temperature will be controlled, can store the crops of up to 400

farmers per season

DRIVE WAY

Covered with bricks, this driveway will prevent

trucks from getting stuck in the mud in case of rain

Three doors for off- or on-loading will avoid

bottlenecks

LAWN114 x 95

feet

This lawn will serve for tunnel farming powered

with solar energy demonstration

POOL25 x 25

feetThis rainwater pool will be

used for drip irrigation

Gojra Warehouse

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Risks & Success Factors for Replication Photo Credit: Ayesha Valleni

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Financier’s Risks Mitigating Measures

Downside pricing risk • Analysis of price trends and forecast studies (e.g. wheat’s price slightly

higher than the Government’s spot price) (1)

• Limits on exposure to a single farmer (e.g. maximum 50% of the expected land’s yield)

Upside pricing risk / Side-selling

• Offer farmers to share back profits when prices go above 30% of the one agreed upon at financing time

Climate risk • Rescheduling (e.g. 1 or 2 seasons), accompanied with aid and refinancing• Crop insurance

Storage risk • Adapted warehousing conditions (2)

• Stock / Inventory insurance (currently not available for Wasil)

Maturity risk • Limits on exposure to Salam (e.g. maximum 30% of the total portfolio)

Legal risk • Analysis of licensing requirements for commodity storage and trading

Sharia compliance risk • Sharia board and advisors

(1) Salam is mainly offered for wheat and rice. The wheat’s price is set by the Pakistani Government, which buys large quantities in bulk. This price has been steadily rising over the past 14 years. The rice’s price is set by international demand, but has also been on an increasing trend.

(2) Wheat is easy to store, rice has to be dried before storage, cotton requires tight control over humidity levels, etc. For now, Wasil only stores wheat and sells rice immediately after harvest, making profit because it is able to provide large volumes. It plans on offering Salam for corn in the near future.

Risks and Mitigating Measures

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Implemented by

Advancing financial inclusion to improve the lives of the poor

www.cgap.org