ISLAMIC SOCIAL FINANCE REPORT 2014 - ICCIA
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ISLAMIC SOCIAL
FINANCE REPORT
2014
An initiative by: Member of Strategic Partner:
Table of Contents
0.1 Message (from Director General, IRTI) 08
0.2 Acknowledgement 09
1.0 Executive Summary 13
2.0 Region under Focus 25
2.1 Economic Indicators 27
2.2 Potential of Islamic Social Finance 34
3.0 ZAKAH 39
3.1 Overview of Zakah Sector 42
3.2 Institutional Structure 55
3.3 Regulatory and Policy Framework 58 3|
3.4 Supporting Infrastructure 62
3.5 Success Stories & Good Practices 64
3.6 Lessons and Policy Implications 70
4.0 AWQAF 73
4.1 Overview of Awqaf Sector 74
4.2 Institutional Structure 76
4.3 Regulatory and Policy Framework 80
4.4 Supporting Infrastructure 88
4.5 Success Stories & Good Practices 88
4.6 Lessons and Policy Implications 93
5.0 ISLAMIC FINANCIAL COOPERATIVES & NON-PROFIT-ORGANIZATIONS 98
5.1 Overview of Islamic Financial Cooperative and NPO Sector 99
5.2 Institutional Structure 104
5.3 Regulatory and Policy Framework 105
5.4 Supporting Infrastructure 108
5.5 Success Stories & Good Practices 109
5.6 Lessons and Policy Implications 121
6.0 GLOSSARY 124
Islamic Social Finance Report
Figures TABLEs
2.0 Region under Focus 2.0 Region under Focus
Figure 2.1: GDP Per Capita , 2011 (current USD) 27 Table 2.1: Total Population, Density of Population and Percentage of Muslim Population 26
Figure 2.2: GDP in billion USD 28 Table 2.2: Income Distribution - GINI index 32
Figure 2.3: Average Annual GDP Growt h 2000-2012 28 Table 2.3: Head Count Ratio 2000-2012 33
Figure 2.4: GDP Growth Rate 2000-2012 Br unei , Indonesia , Malaysia and Singapore 28 Table 2.4: Resources gap for poverty alleviation 34
Figure 2.5: GDP Growth Rate 2000-2012 Bangladesh, India and Pakistan 29 Table 2.5: Estimate of Zakah Potential 35
Figure 2.6: Agriculture, Industry, and Services in the 7 countries for 2011 29 3.0 ZAKAH
Figure 2.7: Inflation, Average Consumer Prices, 2000-2011, Bangladesh, India and Pakistan 30 Table 3.1. Share of Private and Public Agencies in Zakah Collection in Indonesia 42
Figure 2.8: Inflation, Average Consumer Prices, 2000-2011, Brunei , Indonesia, Malaysia and Singapore 31 Table 3.2: Time Series (2002-2012) of Zakah Collected in Indonesia 43
Table 3.3: Pattern of Zakah Distribution by LAZ in Indonesia 2004-2008 44
3.0 ZAKAH
Table 3.4: Pattern of Zakah Distribution by BAZNAS in Indonesia 2011-2012 44
Figure 3.1: Time Series (2002-2012) of Total Zakah Collected in Indonesia 43
Table 3.5: Time Series of Zakah Collected & Distributed in Malaysia 1991-2011 (Million RM) 45
Figure 3.2: Pattern of Zakah Distribution by BAZNAS in Indonesia (2012) 45
Table 3.6: Zakah collection and distri bution across states in Malaysia * 47
Figure 3.3: Time Series of Zakah Collected in Malaysia 1991-2011 46
Table 3.7: Distribution of zakah among asnaf in Malaysia * 47
|4 Figure 3.4: Distribution of Zakah among asnaf in Malaysia (2010) 48 5|
Table 3.8: Time Series of Zakah Collected in Singapore 2009-2012 (Million S$) 48
Figure 3.5: Time Series of Zakah Collected in Singapore 2009-2012 48
Table 3.9: Time Series of Zakah Distributed in Singapore 2009-2012 (‘000 S$) 49
Figure 3.6: Distribution of Zakah among asnaf in Singapore (2012) 49 Table 3.10: Time Series of Zakah Collected in Brunei Darussalam 2001-2008 (Million BND$) 49
Figure 3.7: Time Series of Zakah Collected in Brunei Dar 50 Table 3.10: Time Series of Zakah Distributed in Brunei Darussalam 2000-2010 (‘000 BND$) 51
Figure 3.8: Distribution of Zakah among asnaf in Br unei Darussalam (2010) 50 Table 3.11: Time Series of Zakah Distributed in Pakistan 52
Figure 3.9: Distribution of Zakah in Pakistan (2010) 51 Table 3.12: Composition of Zakah Distribution in India 53
Figure 3.10: Distribution of Zakah in India 54 Table 3.13. Multiple channels for zakah mobilization in Malaysia 61
Table 3.14. Services provided by SKMCH&RC as in 2012 64
Charts Table 3.15. Revenue Growth of SKMCH&RC (1994- 2011) 65
3.0 ZAKAH Table 3.16. Collection & Utilization of Zakah and Charity Funds (2010-2011) 67
Chart 3.1: Institutional Structure for Zakah in Indonesia 55 Table 3.17. 5-year Details on Economic Empowerment Programs by DDR 68
Chart 3.2: Institutional Structure for Zakah in India 56 5.0 ISLAMIC FINANCIAL COOPERATIVES & NON-PROFIT-ORGANIZATIONS
Chart 3.3: Institutional Structure for Zakah in Pakistan & Bangladesh 56 Table 5.1. Initial Capital of BMTs 99
Chart 3.4: Institutional Structure for Zakah in Malaysia, Singapore and Brunei Darussalam 57 Table 5.2. Age of BMTs 100
Table 5.3. Area of Operation of BMTs 101
4.0 AWQAF
Table 5.4. Asset Structure of BMTs 101
Chart 4.1: Institutional Structure for Waqf in Indonesia 76
Table 5.5. Distribution of BMTs Based on Asset Size 102
Chart 4.2: Institutional Structure for Waqf in India 77
Table 5.6. Asset Growth of BMTs 102
Chart 4.3: Institutional Structure for Waqf in Pakistan 77
Table 5.7. Age and Asset Growth of BMTs 102
Chart 4.4: Institutional Structure for Waqf in Bangladesh 78
Table 5.8. Sources of Funds for BMTs 103
Chart 4.5: Institutional Structure for Waqf in Malaysia and Brunei Darussalam 78
Table 5.9. Modes/Products and Beneficiaries at Wasil 110
Chart 4.6: Institutional Structure for Waqf in Singapore 79 Table 5.10. Time-series of Major Performance Indicators 113
Chart 4.7: Wakaf Syed Omar Ali Aljunied (Bencoolen) 91 Table 5.11 Operational Expenses 2008-12 115
5.0 ISLAMIC FINANCIAL COOPERATIVES & NON-PROFIT-ORGANIZATIONS Table 5.12. Flow of Charity Funds (2008-13) 116
Chart 5.1: Institutional Structure for BMTs in Indonesia 104 Table 5.13. Donations from Borrowers (2008-13) 116
Table 5.14. Growth of RDS 118
Islamic Social Finance Report
President of Islamic Development Bank (IDB)
Group Ahmed Muhamed Ali speaks during
the “Third IDB 1440H Vision Commission
Meeting” in Kuala Lumpur March 23, 2006.
REUTERS/Zainal Abd Halim
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MESSAGE AcknowledgEment
The Islamic social finance sector comprising zakah, awqaf and non-profit microfinance institutions After growing at a frenetic pace for over four decades, development. Some of the experts who deserve special
faces many challenges. At a micro level, institutions in this sector need to address the issue of mainstream Islamic finance is now understood to comprise mention are:
sustainability in the supply of funds. A sustained flow of social funds demands high degrees of banking, insurance and financial market participation. • Dr Didin Hafidhuddin, BAZNAS and World Zakat Forum,
social acceptance and credibility, which in turn, are influenced by levels of integrity, transparency These are for-profit segments of the Islamic economy. Indonesia
and professionalism in the management of these funds. Related to this is the institutional need The impressive growth has also been matched by a large • Dr Irfan Syauki Beik, BAZNAS, Indonesia
for adequately trained professionals and managers well-versed in the Shariah aspects well as in scale increase in research and documentation pertaining • Sr Nana Mintarti, Indonesia Magnificence Zakat (IMZ),
scientific techniques of management of such charity-based and not-for-profit institutions. At a to these segments. At the same time there appears to be Dompet Dhuafa Republica, Indonesia
meso level, there appears to be a need for better supporting infrastructure including networks, a gross imbalance in resources committed to research and • Br Ali Sakti, Bank Indonesia, Indonesia
associations, providers of education, training and consultancy services. Macro level challenges documentation of the Islamic social, philanthropy-based and • Dr Amin Aziz, Center for Microenterprise Incubation
perhaps include absence of enabling regulatory and policy frameworks. Identifying these not-for-profit sector. The IRTI internal team entrusted with (PINBUK), Indonesia
challenges constitutes the first step towards meeting them. the formulation of its Strategy noted this imbalance with • Dr Rahmatullah, All India Council for Muslim Economic
concern and rightly identified the present study as a flagship Upliftment, India
A comprehensive understanding of the sector requires information. Unfortunately the available multi-year project of IRTI. The team merits appreciation of all • Br Arshad Ajmal, Al Khair Credit Cooperative, India
|8 information pertaining to the sector is neither timely, nor adequate. New information need to be stakeholders in the sector including that of the authors of the • Dr Amjad Saqib, Akhuwat, Pakistan 9|
produced through research and documentation. The present initiative is a step in this direction. present study. • Sr Farida Tariq, Wasil Foundation, Pakistan
This is the first in a series of research-based reports towards a comprehensive documentation of • Dr Raja Muhammad Hanif, Ministry of Religious Affairs,
trends in the Islamic social finance sector comprising zakah, awqaf and non-profit microfinance This study on the Islamic social finance sector comprising Government of Pakistan
institutions. The report also undertakes a rigorous analysis of the legal and regulatory institutions rooted in Islamic philanthropy, e.g. zakah, • Br Mirza Rizwan Baig, Shaukat Khanum Cancer Hospital,
environment, supporting infrastructure and good practices by key players in the sector. sadaqa and awqaf and in cooperation and solidarity has Pakistan
been undertaken by an internal cross-functional team of four • Dr Mahmoud Ahmad, IBTRA, Islami Bank Bangladesh
Zakah, sadaqah and awqaf as instruments of philanthropy as well as various not-for-profit modes researchers from IRTI. Major findings of a study undertaken • Dr. Shamsiah Bte Abdul Karim, Majlis Ugama Islam
of Islamic finance occupy a central position in the Islamic scheme of poverty alleviation. Therefore, for this purpose were presented at an intensive workshop Singapura (MUIS), Singapore
this initiative is of special significance to IRTI, since poverty alleviation and promotion of Islamic on the theme “Strengthening Islamic Social Financial • Br Amran Hazali, PPZ-MAIWP, Malaysia
economics and finance are two strategic objectives in line with the vision and mission of the IsDB Sector” held in Bogor, Indonesia during April 29-30, 2013 • Dato Dr Syed Ghazali Wafa, Angkasa Syariah Financing
Group and IRTI. in collaboration with the National Zakat Board (BAZNAS), Cooperative Limited (KOPSYA ANGKASA), Malaysia
Bogor Agricultural University and the Indonesian Association • Dr Norazlina Abd Wahab, Islamic Busines School,
The report has been prepared by a team of researchers from IRTI who have painstakingly collected of Islamic Economics. The event was attended by a large Universiti Utara Malaysia
and analyzed data pertaining to the sector throughout the year using a variety of means including number of participants from the academia, Ministries of • Hjh Rose binti Abdullah, Universiti Islam Sultan Sharif Ali,
personal visits and focus group discussions involving key stakeholders in the sector. Let me take Religious Affairs, apex regulatory bodies, central banks, Brunei Darussalam
this opportunity to congratulate the team for producing an excellent piece of work. At the same networks and associations and organizations that are • Br. Ak Md Hasnol Alwee Pg Md Salleh, Universiti Brunei
time, let me also invite you to share your views and opinions for further enhancement of its value. engaged either in direct mobilization and management of Darussalam, Brunei Darussalam
zakāh and waqf resources as a tool to alleviate poverty, or in
I hope this report would play a very positive role in initiating and shaping a productive dialogue development of good practices in the field of management A project of this nature would not have been possible without
among policy makers and all major stakeholders for strengthening the global Islamic social of these sectors through research, training and consultancy. the cooperation and support of major stakeholders in the
finance sector. The revised document was later presented at the Global sector. We are much beholden to those who have contributed
Islamic Finance Forum organized by IRTI and General to the present study and look forward to their continued
Council of Islamic Banks and Financial Institutions (CIBAFI) support as we move forward.
in the sidelines of the Islamic Development Bank Group BoG
Meetings at Dushanbe, Tajikistan on May 19, 2013. Dr. Mohammed Obaidullah
Project Leader
The study and the preparation of the Report have involved Islamic Social Finance Report
interaction with these experts at various stages of its
Prof. Dato’ Dr. Mohd. Azmi Omar
Director General
Islamic Research and Training Institute
Islamic Social Finance Report
The British Telecom tower is seen silhouetted at dusk in central London on April 28, 2008. REUTERS/Toby Melville (BRITAIN)
EXECUTIVE SUMMARY The sun sets behind the Petronas Twin Towers in Kuala Lumpur June 26, 2006. REUTERS/Zainal Abd Halim (MALAYSIA)
The Islamic social finance sector broadly comprises the A. Zakah efficiency and gives more choice to the muzakki. However,
competition also presupposes a level-playing field for
traditional Islamic institutions based on philanthropy - 1. How do we ensure standardization in defining zakatable
the players. Where the public agency also assumes the
role of the regulator of the zakah sector, it should restrict
assets and estimating zakah liability in the presence of
zakah, sadaqah and awqaf; those based on mutual diversity in legal opinions?
itself to regulation only, leaving zakah collection to private
agencies.
cooperation e.g. qard and kafala; and also the The case for having standardized and globally acceptable
definitions of zakatable assets and methods of estimating 6. Should zakah payment be allowed as a deduction to
zakah liability does not appear to be a strong one. Since
contemporary Islamic not-for-profit microfinance Islamic societies are typically characterized by multitude
income tax payable or to taxable income?
of madhabs and schools of thought, the zakah laws must Where zakah collection and distribution is entrusted
institutions that use for-profit modes primarily to cover retain enough flexibility to accommodate alternative entirely to the state, zakah may be seen as a component of
views. The diversity in legal opinions should be respected. aggregate resources available to the state. In this sense,
costs and sustain their operations. It is more practicable to ensure that zakah estimation is an zakah payment may be seen as a perfect substitute of the
direct taxes to the state and may be allowed as deductions
outcome of consultative processes between the muzakki
and the zakah collecting institutions. to tax payable. However, there seems to be merit in
allowing zakah payment as a deduction to taxable income
This report presents the historical trends, future challenges and prospects for the various segments of the Islamic social finance only (at par with various kinds of charity flows) where
2. Is zakah a dependable source of funds for institutions?
private agencies are permitted to collect zakah. Treating
sector in South and Southeast Asia, with the following countries under study: Indonesia, India, Pakistan, Bangladesh, Malaysia,
Contrary to commonly held perceptions regarding lack of zakah payment at par with taxes to state when the same
Singapore and Brunei Darussalam. This report examines the broad regulatory and policy environment at the macro level as dependability in flow of donations, zakah is sustainable, is made to private agencies might seriously erode state
well as good and bad practices at the meso and micro levels to seek answers to the following questions as well as to encourage dependable and could be a growing source of funds for revenues.
healthy deliberations around them: institutions that acquire the necessary professionalism
| 14 15 |
in fund-raising and seek continued betterment in their 7. Is corporatization good for zakah management?
social credibility through integrity, transparency and good
• How much regulation is right for the Islamic social finance sector? Do stringent laws and over-regulation stifle the sector? Corporatization that implies use of a large network of
governance.
• How do we harmonize the different regulatory frameworks governing institutions based on religious and secular philanthropy, private institutional collectors for zakah mobilization
is seen to be far more efficient as compared to a large
co-operation, not-for-profit and for-profit finance? How do we develop a unified and integrated framework for the Islamic 3. Does the state perform better than private institutions in
number of unconnected private individual collectors.
social finance sector? the domain of zakah management?
The issue of how to remunerate the corporate collector
• What role do supporting institutions, e.g. networks and associations, institutions of higher learning, trainers and consultants, The success or failure of an institution as zakah collector is however a trickier one and calls for putting in place
developers of standards play in the sector? and distributor is not so much dependent on whether it is adequate and transparent mechanisms to ensure that
in government or private hands, but on the credibility and a minimal percentage of zakah collected is utilized in
• How do we enhance transparency, accountability and governance in the sector? trust it enjoys among the muzakki population, which in this manner. Corporatization should not be pushed too
turn are a function of the integrity, transparency and good far, e.g. private agencies being allowed to offer zakah
More specifically, the following questions relevant to specific sub-sectors have major policy implications. While we need to governance reflected in its practices and as perceived by investment services as this may involve a misalignment
the stakeholders. of objectives of such private agencies with those of other
differentiate between Shariah-legal questions and efficiency-related questions for better comprehension, many apparently
stakeholders.
Shariah-legal issues are related to efficiency.
4. Should zakah payment be made compulsory?
8. Should zakah be allocated for other types of beneficiaries
At a macro-level growth in zakah mobilization appears to
“only” after the needs of the ultra-poor are addressed?
be influenced more by incentives that make zakah payment
an attractive proposition and less by penalties and In the light of various legal opinions relating to distribution
punishments. Where zakah payment is made compulsory of zakah among eligible beneficiaries there is a case in
and non-compliance invites penalties and punishment, favor of a scheme of prioritization among different types
enforcement is invariably weak for a variety of reasons. of beneficiaries with highest priority being given to the
Strict laws do not combine well with weak enforcement. needs of the ultra-poor.
At the same time, where zakah payment is voluntary, its
mobilization has not been any less impressive. 9. How do we ensure that zakah does not create
dependence among beneficiaries and leads to their
5. Should a muzakki be allowed to choose between public economic empowerment?
and private zakah collector?
Basic consumption needs are, by definition, more urgent
There seems to be nothing inherently wrong with than needs that may be deferred to a future date. In this
coexistence of public and private agencies as zakah sense, zakah is traditionally viewed as a solution to the
collectors. Zakah mobilization is expected to be institution- consumption needs of the poor. However, there is also
elastic just as savings mobilization is. Competition brings merit in using zakah to enhance the wealth-creating
Executive Summary Islamic Social Finance Report
capacity of the poor so that they are able to get out of Shariah. A zakah institution essentially acts as an agent however, need for adequate caution while designing an
the vicious circle of poverty and find lasting solutions to of zakah payer or muzakki. As the principal, the zakah institutional mechanism for this purpose. It is not easy to 4. How does waqf compare with trusts and other forms
their needs. A complete neglect of the empowerment payer or muzakki would like its agent to ensure that the differentiate between genuine and willful defaulters for of not-for-profit organizations in terms of financial and
dimension is likely to perpetuate the dependency zakah funds flow to eligible beneficiaries according to any microfinance institution operating with inadequate non-financial costs?
syndrome among the poor. Shariah. Therefore, fulfillment of the conditions relating and imperfect information. The simultaneous functioning Awqaf in general, have fallen behind common trusts
to collection and distribution of zakah is the most of a micro-credit initiative and a zakah-based initiative to and other forms organizing charitable and not-for-profit
10. Does the requirement of tamleek imply unconditional fundamental requirement for a zakah institution to earn cover credit defaults by poor borrowers under the same activities in terms of responding to evolving societal
cash transfer? the trust of the zakah payers and enhance its credibility. organizational umbrella may also involve serious conflict needs. Creation and management of waqf is a relatively
of culture and moral hazard issues. more complex and demanding process and involves
The term tamleek implies a process of imparting additional financial and non-financial costs. Incentivizing
13. How important is the need to separate zakah funds from
ownership. In the context of zakah, tamleek is seen as a waqf in a manner similar to secular trusts and other
other forms of donor funds?
requirement that essentially implies making the mustahiq
the owner of donated funds. This clearly rules out the Separation of zakah funds from other forms of donations B. Awqaf forms of not-for-profit organizations, e.g. tax rebate on
contributions for the donor/ endower would make the
possibility of giving zakah as a loan to be repaid later. is a primary concern for a zakah institution acting as an system both efficient and fair.
The ownership question however, opens up two further agent of the zakah payer or muzakki for distribution of 1. What should be the coverage of an ideal legal framework
issues. Should the poor beneficiary have absolute right zakah. Since the conditions relating to eligibility apply for awqaf?
to decide how he/she is going to use the funds? Where only to zakah and not to other forms of donor funds, 5. Must a waqif (endower) always be an individual Muslim?
Waqf law should provide a comprehensive definition of
there is a genuine possibility that the poor may not use the it becomes extremely important to ensure a wall of The legal framework should not restrict making a waqf
waqf that includes both permanent and temporary waqf.
donated cash in an optimal way, can the zakah distributing separation between zakah and other types of funds. The only to Muslim individuals and should permit both non-
However, it must be recognized that once the waqf has
institution place a conditionality on the possible use of zakah institutions must put in place appropriate standard Muslims and institutional waqif as long as the purpose of
been declared, it is irrevocable. It must explicitly cover
zakah, e.g. zakah payment in the form of scholarship to operating procedures, accounting and governance waqf is religious or charitable.
various types of waqf: family and social waqf, direct and
poor students for covering tuition fees. Given the recent practices to ensure the same.
investment waqf, cash waqf, corporate waqf.
evidence available in development literature in favor of
6. Should waqf be restricted only to immovable properties
| 16 unconditional cash transfers (UCT) over alternative ways 14. How important is the need to place a cap on percentage 17 |
2. How should the regulator strike a balance between like land and buildings?
of financial assistance to beneficiaries, the case in favor of zakah that may be used to absorb administrative
of interpreting tamleek as unconditional cash transfer concerns of preservation and development? The legal framework should not restrict the definition of
costs?
appears to be a sound one. However, it is perhaps a good The legal framework must clearly articulate the permanent the endowed asset to immovable tangible assets, such as
idea to treat the issue more as an efficiency-related than a Shariah identifies zakah officials as one of the 8 eligible real estate, but should also explicitly recognize movable,
nature of waqf arising from the principle of “once a waqf,
Shariah-legal one. categories of beneficiaries. Therefore, a part of the zakah financial and intangible assets, e.g. cash, stocks, bonds
always a waqf”. At the same time, it must clearly recognize
mobilized by the institution may be used to absorb and financial securities, transportation vehicles, rights
the importance of sustaining and enhancing the benefits
the administrative and operational costs of the zakah on land and building, rights of leasing, and rights of
11. Should zakah be used for giving loans (qard)? Will the flowing out of the waqf, this being the ultimate purpose of
institution. While some would like to place a legal cap of intellectual property. Given the many benefits of cash and
answer be different if zakah funds are used to create the act of waqf. This is possible only when the importance
one-eighth on the percentage of zakah that may be utilized corporate waqf, law must explicitly provide a framework
a revolving fund (credit pool) to leverage the relatively of development of waqf is clearly recognized. An undue
for this purpose, others would like to treat the matter for them, including their investment dimension.
scarce zakah funds for meeting the needs of a much emphasis on preservation (e.g. constraints on leasing)
as one of good governance. As a good practice, a zakah
larger number of the poor? Will the answer be different would lead to neglect of developmental possibility with
institution that typically collects other forms of donations
if the revolving fund is owned by the poor? private participation. Similarly, an undue emphasis on 7. How should family waqf be dealt in the law?
should absorb its administrative and operational costs in
development, to the extent that it results in loss of full
Traditionally scholars have frowned upon the prospect such “free” funds as much as possible. The institution of family waqf must be revived. Since the
or partial ownership of asset to private developers)
of giving zakah as loans, since zakah is supposed to distinction between family and public waqf is largely a
would dilute and vitiate the very concept of waqf. The
make the mustahiq the owner of donated funds and not 15. How important is the need to ensure that the utilization matter of nature of beneficiaries, the law must provide for
regulatory framework must seek to strike a balance
a borrower of funds. The objections seem to lose weight of funds is in accordance with the wishes of the giver? an explicit basis of distinction. For example, where more
between concerns about preservation and development.
in the face of the leveraging possibility that loans offer. than 50 percent of the net available income of a waqf
Arguably, a professionally managed zakah-financed Within the overall eligibility framework stipulated by property is exclusively applied to religious and charitable
microfinance program can potentially serve a much larger Shariah, a zakah payer or muzakki may have a unique 3. How should the law ensure creation of new waqf? purposes, such a waqf may be deemed to be a public
population of the poor as compared to the prospect of preference or priority scheme in favor of specific waqf. Similarly, endowments where more than 50 percent
The legal framework must not put undue restriction
grant-making to a small number of beneficiaries. Further, regions, beneficiaries or projects. In the interest of good of the net available income is meant for the waqif’s
on creation of new waqf. There is no reason to disallow
a scenario where the poor are also made the sole owner governance, a zakah institution should ensure compliance descendants, such a waqf may be treated as family waqf.
individuals from making waqf beyond one-third of their
of the revolving fund is on far stronger grounds. While the of such “revealed preferences”. While there may be
assets, since fiqhi rules permit the same unless made on
first scenario appears to involve efficiency-related gains practical hurdles that come in the way of such compliance
the person’s deathbed. Legal requirements that make 8. How efficient is the state agency as mutawalli?
while raising Shariah-legal concerns, the second one is for some zakah institutions, an increasing use of IT in
the process more difficult, e.g. approval of the head
clearly superior as it simultaneously takes care of the zakah management may make a muzakki-to-mustahiq Waqf is originally an institution and always meant to
of the state, are both unnecessary and undesirable. A
tamleek requirement. flow a reality as well as a good practice to replicate. be in the voluntary sector with management of waqf
simple process of registration with the regulatory body
is both desirable and adequate. While obstacles to waqf entrusted to private parties. However, the state has often
12. How do zakah institutions enhance trust and credibility? 16. Should zakah be used for covering or guaranteeing creation must not be there, the legal framework should sought to play a role in the ownership and management
against credit defaults? actually encourage creation of new waqf by minimizing of awqaf, at times governed by motives to expropriate
Zakah payment is an act of worship (ibadah) for the zakah and at other times, by need to curb corrupt practices
There is a case in favor of using zakah for covering genuine financial and non-financial costs of waqf creation and
payer or muzakki. It is a matter of grave concern for the of private trustee-managers. Whether ownership and
credit defaults by the poor, since such borrowers qualify management.
muzakki to ensure that his/her zakah is not only paid, management of awqaf should be in private hands or with
but also distributed in conformity with the norms of the as eligible beneficiaries in the eyes of Shariah. There is, the state, has no clear answer. There seems to be some
Executive Summary Islamic Social Finance Report
positive evidence that the state can indeed play the role as an exception to the above general rule, when this is the expected return on the micro-enterprise is higher
of an efficient manager of awqaf. Contrary to general deemed to be in the public interest. Such exchange would C. Islamic Financial Cooperatives & than the cost of debt. Such expectations may indeed
belief, state control may not necessarily hamper creativity however, require prior permission from the regulator with Not-for-Profit Organizations materialize for the successful projects passing through
and innovation in awqaf development (e.g. corporate additional conditions that the same is (i) necessary or “good times”. However, the same may not be true for all
waqf as well as cash waqf in Malaysia and large-scale beneficial to the waqf; (ii) consistent with the objects of the projects at all times. Debt-related liability can compound
development of existing awqaf in public-private mode in waqf; (iii) against another asset of equal or higher value; 1. Is Islamic microf inance better placed than its and accentuate the financial problems of a project
Singapore). (iv) and with due respect to the inalienability of religious conventional counterpart to address the needs of the experiencing bad times and hasten its failure. The pace,
awqaf. ultra-poor? frequency and intensity of such failure is directly related
9. Where waqf management is in private hands, what There are sound economic reasons why conventional to the levels of cost of debt. In contrast to debt, profit and
should be the role of the regulator in its appointment, 12. How should existing awqaf be developed? microfinance and especially micro-credit may not be risk-sharing mechanisms provide for a clear alignment
and monitoring? appropriate for the chronically poor and the destitute. between profitability of the project and cost of capital.
Waqf development must be a mandatory obligation of the Loans to the destitute may in fact make the poor poorer The latter rises and falls in line with the realized profits
Where waqf management is in private hands, the state waqf management. Innovating financing methods may be if they lack opportunities to earn the cash flow necessary of the venture. Islamic MFIs as compared to conventional
agency as regulator should clearly stipulate and clear employed that bring in new waqf capital for development to repay the loans. While a destitute may or may not MFIs are more inclined to use profit and risk sharing
eligibility criteria for a mutawalli or nazir or trustee- of existing awqaf. Innovative methods may also be be reluctant to incur debt and start a microenterprise modes. Even when they use modes creating debt, e.g.
manager not only covering aspects of integrity and employed that facilitate private-public partnerships (e.g. because of risk and uncertainty with cash flows, profit- murabahah, the quantum of debt once created cannot
trust-worthiness but also professional competence. Given involving issue of sukuk) that involve transfer of rights to maximizing and risk-minimizing behavior on the part of be increased through restructuring if the client fails to
that the individual or institution so nominated meets the lease as distinct from ownership rights to private financing the microfinance institution (MFI) would lead to exclusion clear the debt in time. Further, given the Islamic emphasis
criteria, the regulator must respect the expressed intention entities for finite, yet long enough period to provide a fair of such clients. Usually such clients do not possess on avoidance of debt, an Islamic MFI should refrain from
of the waqif or endower. Laws must clearly articulate the return on investment capital. Legal constraints motivated entrepreneurial and technical skills needed for wealth seeking to entrap a client in ever-rising levels of debt.
responsibility of waqf management that should not only by preservation concerns, such as on long-term leasing of creation. Such an economically inactive individual would
emphasize preservation and protection of waqf assets, awqaf assets should be removed. find it difficult to obtain financing from the for-profit MFIs. 3. How should charity be integrated with microfinance for
but also their development. The responsibility should also Indeed, more than financial services, these individuals IsMFIs?
| 18 include transparent and honest reporting of financials. 13. How effective are the penalties imposed by law against must be provided for their basic needs, such as food, 19 |
Laws must clearly stipulate the method of determination erring and dishonest private mutawallis? shelter, or guaranteed employment. Such safety nets Charity and philanthropy occupy a central position in the
of remuneration of managers, sufficiently incentivizing may be funded through charity. In order to cross the Islamic scheme of poverty alleviation. Shariah clearly
sound and professional management of waqf assets. Financial penalties, especially when these are expressed identifies 8 categories of beneficiaries who may benefit
skill-related barrier, such individuals would also need
in absolute numbers tend to lose their effectiveness as from zakah. Out of these, the potential beneficiaries
training for skills-development before they are able to
deterrents over time. These should either be subjected relevant from the standpoint of poverty alleviation
10. Should the state have absolute power to terminate a make good use of microfinance. The safety nets may then
to continuous revision or be linked to the quantum of programs are the poor (fuqara), the destitute (masakeen),
mutawalli nominated by waqif and take waqf assets be linked with microfinance programs, so that the same
misappropriation. Physical punishments are potentially the indebted (gharimeen) and the zakah administrators
under its own management? individuals may move through several stages – from
more effective. (amileen). Scholars generally agree that zakah may be
abject penury to a stage where they are able to meet
There is every reason for the state to take punitive disbursed in the form of a grant or be used to form a
their consumption needs - then to a stage where they
action against mutawallis who fail the tests of efficiency, 14. How should the corpus of waqf be invested? revolving credit pool from which micro-loans may be
come to acquire necessary technical and entrepreneurial
integrity, and transparency. The measures must act as provided. Zakah could thus form the basis of designing
It is compulsory to invest waqf assets, be it real estate skills for setting up microenterprises - and then to a
effective deterrent against further acts of apathy, neglect a range of programs for the poor, e.g. (i) safety net
or moveable assets like cash. Investment can alone stage where they are able to obtain required funds
and misappropriation. At the same time, the state should programs to meet basic consumption needs, health
generate returns which may then be applied to the from microfinancing institutions (MFIs) and have the
not be allowed to wield absolute power to engage in and education; (ii) economic empowerment programs
purpose for which the waqf has been created. The microenterprises up and running. Fighting poverty thus,
irrational or whimsical action against the mutawalli. involving skill enhancement and business development
assets purchased using the waqf investment returns would require an integrated finance-plus approach or
Instances of unfair and unlawful action by the state are services; (iii) programs to provide emergency grants or
do not form part of the waqf and therefore, may be the provision of financial services along with business
numerous, as are cases of corrupt mutawallis. There credit; (iv) programs to provide micro-takaful; and (v)
resold unlike the original assets that have been given development services and that is linked to social safety
needs to be effective checks and balances in the law programs to provide guarantee against credit default.
as waqf. Further, the conditions given by the waqif with nets. This is possible only by bringing philanthropy
against wrongful acts both by the state as well as the The administrative costs related to zakah management
regard to the investment of the waqf and/or that the and cooperation into the model of microfinance. With
private mutawallis. Power has a tendency to corrupt and may partially be recovered from the zakah collected, thus
returns from investment are to be spent on specific institutionalization of philanthropy and its integration
the possibility of such action can significantly increase paving the way for a self-sustained zakah management
areas, is also binding. It would be rational to seek risk with for-profit microfinance, Islamic MFIs are perhaps
the non-financial cost of creating new waqf. Endowers institutional infrastructure.
minimization through diversification or avoidance of high better placed to address the needs of the ultra-poor.
are likely to seek alternative forms of organizing their
charitable activities if there is a possibility of undue state risk investment avenues. Risk minimization may however
not be sought if the purpose of the waqf itself is to engage 2. Does high-cost microfinance push the beneficiaries into There is total flexibility with respect to beneficiaries of
interference in the management of the endowed assets or
in specific risky ventures. a debt spiral? How is Islamic microfinance different in voluntary sadaqah. In case of sadaqah jariya or waqf,
outright usurpation of the endowed assets by the state.
this respect? perpetuity of endowed assets is an essential condition
that ensures that benefits from the assets flow to the
11. How should existing awqaf be preserved and protected? There are also sound economic reasons why high-cost beneficiaries on a sustainable basis. Waqf similar to
microfinance may push the beneficiaries into a spiral of zakah may form the basis of designing various poverty
The law must explicitly prohibit the waqf asset from
debt. Microfinance entails high administrative charges, alleviation initiatives as stated above. While in case of
being used as a mortgage, confiscated, given away, sold,
monitoring costs and of course, high portfolio risk. As zakah the major requirement is that benefits must flow
inherited, exchanged or being alienated into any form
such, it is invariably costlier than the traditional sources into the hands of the poor, in case of waqf the same must
of right. The waqf asset may however be exchanged
of finance. At the same time, both the MFI and its clients flow to beneficiaries as intended by the donor. However, if
may find this an attractive option if they believe that the intention of the donor is not explicit, the proceeds may
Executive Summary Islamic Social Finance Reportbe used for general-purpose community welfare projects less favored. (ii) Murabahah is familiar. For conventional salam can involve exploitation when the advance price future of mankind. It also sees a balanced role for men
including poverty alleviation initiatives. Waqf therefore, MFIs venturing into Islamic MF and using murabahah, paid to the poor farmer is artificially pegged at low levels and women in ensuring the economic and social well
provides a definitive mechanism with added elements the transition is least demanding. Among all Islamic due to his/her weak bargaining power. being of the family. Islam promotes the concept of “family
of sustainability and flexibility. The issue of high cost products, murabahah comes closest to interest-bearing empowerment” by exhorting men and women to play
microfinance may now be addressed by creating awqaf micro loans. An Islamic economy promotes free pricing and allows their respective roles in seeking economic and social
whose benefits may now be dedicated for absorption intervention by the regulator only when natural forces well-being of all members of the family. Indeed, the
of specific cost elements so as to make microfinance For Islamic modes of finance involving multiple contracts, of demand and supply are manipulated to result in “women only” approach to conventional microenterprise
affordable to the ultra-poor. e.g. murabahah, Shariah-compliance often requires an artificial price. By implication, price ceilings or development and poverty alleviation is alien to Islamic
careful sequencing of contracts to ensure that profits administered prices are to be frowned upon in a market principles and values. Further, there is the possibility
In an Islamic system, far greater priority is given to the are associated with risk-bearing. However, in the context where there is free and fair play of competitive forces in that women may be doubly exploited instead of being
needs of the chronically poor than those of the poor or the of microfinance involving large number of repetitive determination of prices. However, in case of modes where empowered where they are made to take the loan related
moderately poor or the not so poor. Therefore, an Islamic contracts involving small values, adherence to desired the regulator is in a position to determine a fair estimate liability while the male member in the family manages
MFI unlike its conventional counterpart is expected sequencing becomes practically impossible. Creative fiqhi of the costs for the MFI, it may seek to regulate the profit to “pocket” the cash. Therefore, there is merit in the
to aggressively integrate the various forms of Islamic solutions, e.g. istijrar may have significant advantages margin so that prices charged by MFIs ensure full cost argument that Islamic MFIs should aim to empower
philanthropy with for-profit microfinance to address the above murabahah as the former is tailor-made for recovery and a fair amount of returns in the interest of families and not women alone.
multiple issues related to poverty alleviation programs. repetitive transactions. sustainability.
10. Should voluntarism be an integral component of
4. Should financial cooperatives and not-for-profits be Par tnership-based modes are demanding on the At times, identifying appropriate organizational structure microfinance?
grouped with for-profit microfinance institutions and be part of the beneficiary in terms of the need for proper may offer a bulwark against possible exploitation. In Given the discomfort associated with high cost of
subjected to a unified regulatory framework? bookkeeping and ascertainment of the financial results case of salam, an example presented is one of a farmer’s microfinance making it unaffordable to the ultra-poor, the
of the business. Financial illiteracy acts as a constraint. cooperative replacing the vendor and thus preventing institutionalization of charity as well as voluntarism is a
There seems to be merit in a uniform regulatory framework
Further, the beneficiaries may be justifiably reluctant to exploitation of individual farmers by the latter. creative strategy that has the effect of drastically cutting
for all forms of organizations that are engaged in
| 20 share information relating to all aspects of their business down operational costs. Thus, microfinance may now be 21 |
microfinance activities. The laws applicable to the banking
with the MFI. Output-sharing modes or revenue-sharing 7. How do we ensure that the actual cost of operations in provided at low or zero costs, making it affordable to the
sector are deemed to be too restrictive for microfinance
modes may work better in such situations due to the case of not-for-profit modes, e.g. qard and kafala forms poorest of the poor.
activities. At the other extreme the laws applicable to
“revealed” nature of the benefits to be shared between the basis of pricing?
cooperatives may accord the necessary flexibility of
the parties and difficulties, uncertainties associated with
operations. On the flip side, a growing microfinance There is no consensus on how to estimate the actual 11. Should philanthropy and for-profit finance be offered
cost calculation.
institution, if organized as a cooperative may face funding cost of operations chargeable to the beneficiary under under one umbrella, as in the case of BMTs?
constraints due to the one-member-one-vote rule. not-for-profit modes, such as qard and kafala. There is
6. Should profit rates be administered in case of micro- Models offering philanthropy and for-profit finance under
Expansion of capital in a cooperative would require steady a need to develop accounting standards for estimation
murabahah and other modes? What measures need to one umbrella, as in the case of baitul maal (BMTs) may
growth in membership. Compared to a cooperative, a of actual cost of operations and clear guidelines on what
be taken to ensure that Shariah-compliant modes of involve serious problems due to conflicting organizational
corporate entity apparently makes it relatively easier to should ideally be passed on to the beneficiary. Vigilance
microfinance, e.g. murabahah, ijarah, salam, mudharaa, culture and conflicting policy and regulatory framework.
raise capital where voting rights are proportional to shares by Shariah scholars to prevent disguised riba may also
musharakah, mudharabah etc. do not turn into modes of As has been observed in the case of Indonesian BMTs,
held. This realization has led to the search for dedicated ensure that actual administrative costs recoverable from
exploitation? most of them have over time, preferred to do away with
laws for microfinance providers irrespective of whether the beneficiary in qard or kafala are not overstated. their philanthropic aspirations (as charity houses) and
these are organized as cooperatives or corporations or For-profit Shariah-compliant modes offer no in-built concentrated on for-profit financing (as financing houses).
any other organization forms. A general consensus seems protection against exploitation and abuse through over- 8. What specific issues confront a conventional MFI seeking The twin-track nature of the model seems to have been
to exist on the need for simple regulations that are not pricing. For example: to transform into Islamic MFI? abandoned for all practical purpose.
over-restrictive, which do not stifle creativity but improve
transparency, accountability, good governance, and allow A conventional MFI seeking to transform into an Islamic
the MFIs to meet the capital needs of growth. Islamic MFIs a. Rates on micro-murabahah and micro-ijarah financing Fur ther, combining Islamic charity, especially zakah
MFI is confronted with a range of issues at various levels.
in general, should be permitted to raise deposits from are deemed Shariah-compliant while interest rates are collection and application with for-profit financing involves
It requires an enabling environment, a regulatory and
their members. Raising deposits from the public is likely not. However, both can be and often are exploitatively serious transparency and governance issues associated
policy framework that permits the MFI to engage in trade,
to bring other prudential norms into place. high. with commingling of funds. A major condition with raising
leasing and investment in real projects. This is usually not
permitted for a conventional MFI, viewed as a financial zakah funds requires such funds to be directly channeled
b. In case of participator y modes e.g. mudharabah, intermediary. Law must recognize the special status of into the hands of the eligible beneficiaries or the poor and
5. How does the asset composition of a typical Islamic MFI
musharakah and mudharaa the sharing ratio could be Islamic MFIs that are financial intermediaries as well cannot simply be credited to the organization capital. In the
look like? Is there an “ideal” mode of finance that needs
unfairly biased against the poor beneficiary because of as players in the real economy at the same time. Fiscal absence of relevant accounting standards and regulatory
to be promoted?
their low bargaining power. Similarly, in case of fee-based constraints in the form of taxes on real transactions must norms to ensure the above, the Shariah scholars have
Murabahah remains overwhelmingly popular among modes, e.g. wakala and hawala, the agent-MFI may be removed. generally discouraged the use of zakah funds in economic
IsMFIs for the following reasons. (i) Murabahah is simple. charge an exorbitant fee for the same reasons. empowerment initiatives preferring the direct channels of
The straightforward calculation of the installments distribution for consumption purposes instead. Law relating
for repayment is more easily comprehensible by the 9. Should Islamic MFIs engage in “ women-only ” to charities must clearly address such governance issues.
c. The permissibility of salam (sale of non-existent produce) microfinance?
beneficiary. In contrast to this, the payments under a is linked to the economic benefits it confers on poor
partnership-based mode are uncertain and therefore, farmers in need of pre-cultivation financing. However, Islam gives utmost importance to family as the nucleus Answers to the above questions require careful collection
social institution that plays a major role in shaping the and analysis of data and information pertaining to legal
Executive Summary Islamic Social Finance Reportand regulator y frameworks as well as good and bad Notwithstanding this major constraint, the data that could
practices at macro, meso and micro levels. Attempts to finally be collected were invaluable and provided the
collect, analyze, collate and interpret data involved personal researchers with excellent insights into the inter-country
visits to key stakeholder organizations, e.g. ministries of differences in practices. The following first-cut observations
religious affairs, central banks, apex regulatory bodies, have serious policy implications and therefore, may form
networks and associations, major private not-for-profit the basis of further research and policy dialogue. These are
organizations. Methods of data collection involved interviews, presented as responses to the above mentioned questions
focus group discussions and workshops. An initial finding and presented in the same order. It should be noted that the
that such research yielded is that the availability of data responses should not be viewed as definitive answers to the
on the sector in a given country is very much a function critical questions, but as first-cut answers based on existing
of maturity, efficiency, and professionalism in the sector regulations and practices in countries and regions that have
in that country. The less developed a sector is in a given witnessed impressive growth and may be considered healthy
country, the more difficult it is to obtain any relevant data. and reasonably well-developed.
| 22
Office workers cast their shadows as they walk on a busy street
in central Sydney June 9, 2011. Australian employment rose
by a disappointingly meagre 7,800 in May, a second month of
weakness that led investors to slug the local dollar while greatly
scaling back expectations of a rate rise at all this year.
Executive Summary
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