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Mohammed Obaidullah, PhD

REVISITING ISLAMIC PHILANTHROPY FOR SUSTAINABLE OPPORTUNITIES FINANCE

Plan of Presentation

1. Opportunity Finance through Islamic Philanthropy: The Rationale

2. Promise of Islamic Philanthropy and the Reality

3. Appropriate Strategies for Managing Islamic Philanthropy

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OPPORTUNITY FINANCE THROUGH ISLAMIC PHILANTHROPY:

THE RATIONALE

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A Few Disturbing Numbers

• Over a billion people still live on less than one dollar a day, and almost 3 billion on less than two; in abject income poverty (WB)

• About 805 million people or one in nine, routinely go hungry (FAO); about 750 million people around the world lack access to safe water and almost 2.5 billion do not have access to adequate sanitation (WHO & UNICEF)

• Approximately 100 million people without any kind of shelter, whatsoever (UN)

Need for “opportunity finance” because capital is not yet aligned with social, economic, and political justice

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Conditions Worse in Muslim Countries

• Five of the IsDB member countries account for over half a billion of the world’s poor with incomes below $2 a day or national poverty line

• With another five countries, they account for over 600 million of the world’s poor

• Most IsDB Member Countries rank among the lowest as per the Development Indicators

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Financial Exclusion in Muslim Countries

Out of 44 IsDB Member Countries for which the estimate of financial access is available,

• In as many as 17 countries over 80 percent of adult population lack access;

• In 21 countries over 75 percent lack access

• In 31 countries over two-third lack access to formal financial services

• In just 3 countries over half of their adult population have access

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Is Islamic Microfinance the Answer?

• “Islamic Microfinance has the potential to combine the Islamic social principles of caring for the less fortunate with microfinance’s power to provide financial access to the poor” - CGAP

• “Unlocking this potential could be the key to providing financial access to millions of Muslim poor who currently reject microfinance products that do not comply with Islamic law. Islamic microfinance is still in its infancy, and business models are just emerging” - CGAP

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Role of IsMFIs in Opportunities Finance

Islamic Replications of Conventional Microfinance:

• Joint-Liability-Groups (JLG)

• Self-Help-Groups (SHG)

• Village-Banks

• Credit-Unions

• ROSCAs

• Pawning

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Issues with Islamic Replicators

• High Cost of Finance

• Often Excludes Ultra Poor

• Perpetuation of debt

• Less emphasis on skill enhancement; business development services and support services

• Less emphasis on project viability

Can composite models that combine social funds rooted in Islamic philanthropy with for-profit modes resolve the issues in a sustainable manner?

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Islamic Social Funds: Rooted in Philanthropy and Benevolence• Zakat: Shariah-mandated annual contribution by rich that can be used for

eligible categories of recipients:The fuqarā (poor); the masākin (needy); the ameleen-a-alaiha (those who are in charge thereof); the muallafat-ulquloob (those whose hearts are to be won over); fir-riqaab (human beings in bondage); al-gharimeen (those overburdened with debts); fi-sabeelillah (in Allah’s cause), and ibn as-sabil (the wayfarer)

• Waqf: Endowment of assets that may provide for a sustainable source of funds for community welfare in line with intentions of the endower

• Sadaqa: Free charity funds

• Qard: Cost-free loans

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Composite Indigenous Models in Opportunities Finance • Zakat/ waqf-funded credit pool

• Qard-funded credit pool

• Zakat-funded equity

• Zakat/ waqf-funded safety net + for-profit MF

• Zakat/ waqf-funded skill-enhancement + for-profit MF

• Zakat-funded guarantee + for-profit MF

• Waqf-funded micro-takaful + MF

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Some Models that Stand Out – IAkhuwat Pakistan

Lowering of cost of finance to ensure affordability and ensuring Shariah compliance

through

• Institutionalization of charity and good giving

• Institutionalization of voluntarism

• Encouragement to past beneficiaries to donate

• Innovative lending method; Use of innovative ways to reduce operational costs, e.g. use of masjids and Islamic centers (waqf) as center of activity

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Some Models that Stand Out - IIDompet Dhuafa Republica, Indonesia

Sustained use of zakat for economic empowerment

• Awareness building to induce change in attitude and preference

• Funded by zakat; lease & loans

• Technical and marketing support

• Help to beneficiaries to get organized as formal communities

• Exit when communities have developed the capacity to manage the formal organizations independently

• Transfer of assets to new local organization

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Some Models that Stand Out - IIIIrada Microfinance, Sudan

A Partnership to create and nurture partnerships through

• Assisting clients to procure the required physical assets

• Undertake investments to support the funded micro projects, e.g. retail centers,

warehouses, etc. Extensive business development services

• Safety net to clients till the project starts generating adequate returns

• Use of zakat for the indebted

• Murabaha financing at modest 15 percent

• Declining mudharaba ending with ownership of project by beneficiaries in a finite

time period

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PROMISE OF ISLAMIC PHILANTHROPY

……… AND THE REALITY

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Estimating the Resource Gap

The resource gap has been estimated by using the poverty gap index, which is defined as the mean shortfall below the poverty line, expressed as a percentage of the poverty line.

P1= 1/𝑁 𝑖=1𝑞(𝑍 − 𝑌𝑖)/Z, Where, N is total population, Z is poverty line and Yi is

the income (consumption) of the ith household. The poverty gap index has been re-arranged to get the absolute resource shortfall of the countries concerned.

𝑖=1𝑞

𝑍 − 𝑌𝑖 = P1NZ

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The Potential of Zakat

Estimates for zakat potential of the countries under study are based on three different opinions of jurists regarding zakatable assets, denoted as Z1, Z2 and Z3

• Z1: estimated in accordance with the majority traditional view according to which zakat is levied on agriculture, livestock, stock in trade, gold, silver and money

• Z2: based on the views of some contemporary Muslim scholars according to which zakat is payable on net returns of manufacturing concerns, rentals of building and net savings out of salaries

• Z3: based on Malikite views, where the zakat base includes buildings and other fixed assets except those assigned for personal and family use.

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Can Zakat Alone Meet the Resource Gap?

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Country

Resource Gap % of

GDP at $ 1.25 per

day

Resource Gap

% of GDP at $

2.0 per day

Z1 % of

GDP

Z2 % of

GDP

Z3 % of

GDP

1 Bangladesh 7.57 33.36 1.63 3.48 3.92

2 India 2.39 (0.344) 12.59(1.813) 0.26 0.55 0.63

3 Indonesia 0.35 2.74 1.59 3.39 3.82

4 Malaysia 0.00 0.02 1.11 2.36 2.66

5 Pakistan 1.62 13.35 1.74 3.71 4.18

6 Kenya 0.32 0.96 0.13 0.27 0.30

7 Nigeria 1.47 3.50 0.86 1.84 2.08

8 South Africa 0.001 0.01 0.03 0.06 0.07

9 Sudan 0.49 2.20 1.44 3.08 3.47

10 Tanzania 3.02 8.17 0.54 1.15 1.30

The Potential of Waqf

India: Market value of the properties at about US$ 24.0 billion. At a minimum return of 10 per cent per annum, resources generated are about 0.3 percent of the GDP against the resource shortfall of the Muslim poor at 0.344 percent

Indonesia: Market value of registered land waqf is about USD 60 billion. At a similar minimum rate of return of 10 per cent, these assets may generate an annual cash flow of US$ 6 billion, which is 0.849 percent of Indonesia’s GDP. This compares favorably against a resource shortfall of 0.35 percent

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The Reality

Actual zakat mobilized falls far short of its potential in most countries

Indonesia: Actual zakat collected is 0.025 percent of GDP against a potential of 1.59 percent, while estimated resource shortfall is 0.41 percent of GDP

Pakistan: Actual zakat collected is 0.06 percent of GDP against a potential of 1.74 percent, while estimated resource shortfall is 0.709 percent of GDP

Sudan: Actual zakat collected is 0.33 percent of GDP against a potential of 1.44 percent and an estimated resource shortfall of 0.49 percent

Malaysia: Contrary is true. Actual zakat collected is 0.24 percent of GDP against the potential of 1.11 percent with an estimated resource shortfall of 0.012 percent of GDP.

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There is Hope

An Increasing Trend in Many Countries

• Indonesia: Increased by over 32 times over 10 years

• Pakistan: Increased by 40 percent over 3 years

• Singapore: Increased by 20.2 percent over 3 years

• Brunei Darussalam: Increased by 55 percent over 10 years

• Malaysia: Increased by 7 times over last 12 years and 37 times over 22 years

• Sudan: Increased by 4.8 times over last 9 years

Figures for Pakistan exclude zakat collected by private institutions and individuals.

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There is Hope

In Pakistan and Indonesia where private institutional zakat collection is permitted, several non-government actors are observed to perform exceedingly well.

In Indonesia where official figures are available, private institutional collectors together mobilize about 38 percent of total national collection. Interestingly just 3 institutions account for 17 percent or one-sixth of total national collection.

Similarly according to unofficial estimates, just one NGO – the EdhiFoundation - collects about 16 percent of all zakat mobilized in Pakistan.

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There is Hope

The poor account for:

• Above 90 percent in Indonesia, India, Pakistan, Bangladesh

• 35-40 percent in Malaysia & Singapore

• Above 80 percent in Brunei Darussalam

• About two-third in Sudan

• Fi-sabilillah accounts for:

• Less than 5 percent in Indonesia and Sudan

• About 40 percent in Singapore & Malaysia

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There is Hope

• Within the poor category, education, health, social safety nets receive priority; around ten percent for economic empowerment programs in Indonesia.

• The proportion of zakat distributed to zakat collected shows reversion to unity over intervals for Malaysia, Singapore (in Brunei Darussalam it varies widely between 50-500 percent showing symptoms of zakat “holding” or accumulation of surplus)

• The proportion of admin costs to zakat collected varies between 0-10 percent for most countries (except in India where anecdotal evidence shows the percentage to be as high as over 30 percent). In countries with in-kind zakat, e.g. Sudan and Nigeria the costs are higher due to costs of storage and transportation. Sudan considers 20 percent as the cap for proportion of admin costs.

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There is Hope

As far as mobilization of waqf resources are concerned, data indicate a near-freeze in the creation of new social waqf, though religious awqaf continue to be created.

Masjids and madrasas have shown an increase in numbers, especially where new Muslim communities have come up.

There has been some rejuvenation of social waqf in the form of cash waqf in Malaysia, Indonesia and Singapore.

There have also been cases of redevelopment of waqf assets and their prudent investment for generating returns in these countries as well as in Sudan.

Sudan is also known for its successful family awqaf.

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Points to Ponder

• What factors have contributed most to success in mobilization, distribution and utilization of zakat and waqf?

• What factors constitute major obstacles, hindrances and challenges?

• What should be the strategic response of policy makers?

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APPROPRIATE STRATEGIES FOR MANAGING

ISLAMIC PHILANTHROPY

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Good Practices in Mobilizing Zakat Resources

• Contrary to commonly held perceptions regarding lack of dependability in flow of donations, zakat is sustainable, dependable and could be a growing source of funds for institutions that acquire the necessary professionalism in fund-raising and seek continued betterment in their social credibility through integrity, transparency and good governance.

• Malaysia and Sudan provide supporting evidence for compulsory zakat. In Indonesia, Pakistan and South Africa, the voluntary zakat organizations have reported excellent performance. It is the presence of a network of healthy institutions at multiple levels – in public or private domain - that seems to lead to greater public awareness and greater public participation in the process of poverty alleviation through zakat.

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Good Practices in Mobilizing Zakat Resources

• The issue of incentivizing zakat payment is quite crucial. Where zakat payment is made compulsory and non-compliance invites penalties and punishment, weak enforcement can cause zakat collection to be poor

• Where zakat collection and distribution is entrusted entirely to the state, zakat may be seen as a component of aggregate resources available to the state. In this sense, zakat payment may be seen as a perfect substitute of the direct taxes to the state and may be allowed as deductions to tax payable.

• The case for having standardized and globally acceptable definitions of zakatableassets and methods of estimating zakat liability does not appear to be a strong one. The diversity in legal opinions should be respected.

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Good Practices in Mobilizing Zakat Resources

• The coexistence of public and private agencies as zakat collectors raises fairness issues. Competition among multitude of zakat institutions brings efficiency and gives more choice to the muzakki. However, competition also presupposes a level-playing field for the players. Where the public agency also assumes the role of the regulator of the zakat sector, it should restrict itself to regulation only, leaving zakat collection to private agencies.

• Corporatization that implies use of a large network of private institutional collectors for zakat mobilization is seen to be far more efficient as compared to a large number of unconnected private individual collectors. The issue of how to remunerate the corporate collector should be addressed in a transparent manner to ensure that a minimal percentage of zakat collected is utilized as remuneration.

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Good Practices in Mobilizing Zakat Resources

• In the context of in-kind zakat like crops and livestock, the vast expanse of agricultural areas makes the monitoring task challenging

• Zakat collection efforts may be timed with seasonality of crops, taking periodic breaks after zakat collection is completed for a given cycle of crops

• Zakat mobilization should actively involve local committees as a way to build social capital and enhance community solidarity

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Good Practices in Mobilizing Waqf Resources

• No undue restriction on creation of new waqf, e.g. approval of the head of the state

• Level playing field with common trusts and foundations; No additional financial and non-financial costs

• Both non-Muslims and institutional waqif should be permitted

• No restriction on the definition of the endowed asset (e.g. immovable tangible assets); explicit recognition to movable, financial and intangible assets

• Revival on the institution of family waqf

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Good Practices in Utilizing Zakat Resources

• A case in favor of a scheme of prioritization among different types of beneficiaries with highest priority being given to the needs of the ultra-poor

• Basic consumption needs are, by definition, more urgent than needs that may be deferred to a future date. However, a complete neglect of the empowerment dimension is likely to perpetuate the dependency syndrome among the poor

• Recent evidence available in development literature in favor of unconditional cash transfers (UCT) over alternative ways of financial assistance to beneficiaries. However, it is perhaps a good idea to treat the issue more as an efficiency-related one instead of a Shariah-legal one.

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Good Practices in Utilizing Zakat Resources

• While traditionally scholars have frowned upon the prospect of giving zakat as loans, the objections seem to lose weight in the face of the leveraging possibility that loans offer. Further, a scenario where the poor are also made the sole owner of the revolving fund is on far stronger grounds.

• A zakat institution essentially acts as an agent of zakat payer or muzakki. As agent it must ensure that the zakat funds flow to eligible beneficiaries according to Shariah.

• It is extremely important to ensure a wall of separation between zakat and other types funds. The zakat institutions must put in place appropriate standard operating procedures, accounting and governance practices to ensure the same

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Good Practices in Utilizing Zakat Resources

• Shariah identifies the zakat officials as one of the eight eligible categories of beneficiaries. As a good practice, a zakat institution that typically collects other forms of donations, should absorb its administrative and operational costs in such “free” funds as much as possible.

• A zakat payer may have a unique preference or priority scheme in favor of specific regions, beneficiaries or projects. In the interest of good governance, a zakat institution should ensure compliance of such “revealed preferences”

• The simultaneous functioning of a micro-credit initiative and a zakat-based initiative to cover credit defaults by poor borrowers under the same organizational umbrella may involve serious conflict of culture and moral hazard issues

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Good Practices in Utilizing Waqf Resources

• Preservation of waqf is undoubtedly the most important concern in waqf management. In case old laws fail to ensure protection, they must be replaced with new provisions that enable recovery of lost waqf assets.

• While preservation is important, law must clearly recognize the importance of sustaining and enhancing the benefits flowing out of the waqf, this being the ultimate purpose of the act of waqf. This is possible only when the importance of development of waqf is clearly recognized.

• Waqf is originally and always meant to be in the voluntary sector. However, state has often played a dominant role, at times governed by motives to expropriate and at other times, by need to curb corrupt practices of private trustee-managers. There seems to some be positive evidence that the state can indeed play the role of an efficient manager of awqaf.

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Good Practices in Utilizing Waqf Resources

• Where waqf management is in private hands, the state agency as regulator should clearly stipulate elaborate and clear eligibility criteria for a mutawalli or nazir or trustee-manager not only covering aspects of integrity and trust-worthiness but also professional competence.

• There is every reason for the state to take punitive action against mutawallis who fail the tests of efficiency, integrity, transparency. Financial penalties tend to lose their effectiveness as deterrents with time. Physical punishments are potentially more effective.

• Waqf development must be a mandatory obligation of the waqf management. Innovative methods may be employed that facilitate partnerships (e.g. involving issue of sukuk) that involve transfer of rights to lease as distinct from ownership rights to private financing entities for finite, yet long enough period to provide a fair return on investment capital.

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Good Practices in Utilizing Waqf Resources

• It is compulsory to invest waqf assets, be it real estate or moveable assets like cash. Investment can alone generate returns which may then be applied to the purpose for which the waqf has been created.

• The conditions given by the waqif with regard to the investment of the waqf and/or that the returns from investment are to be spent on specific areas, is binding.

• It is rational to seek risk minimization through diversification or avoidance of high risk investment avenues. Risk minimization may however not be sought if the purpose of the waqf itself is to engage in specific risky ventures.

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Key References:Islamic Social Finance Report 2014, IRTI, Islamic Development Bank

Islamic Social Finance Report 2015, IRTI, Islamic Development Bank

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Thank You