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Islamic Research and Training Institute (IRTI): Equitable Islamic Finance

IM Insights
By IM Insights
2 years ago
Islamic Research and Training Institute (IRTI): Equitable Islamic Finance

Amanah, Fiqh, Gharar, Islam, Islamic banking, Mufti, PLS, Salah, Salam, Sukuk, Sunnah, Ummah, Waqf, Zakat, Usufruct, Mannan, Participation, Provision, Salaf


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1 year ago
IAIN Jember

Please, is there anyone who knows how to have this publication? (edited)

1 year ago
IslamicMarkets.com

Dear Khairunnisa,

Thank you for the enquiry.

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  1. EQUITABLE ISLAMIC FINANCE Edited by : Muhammad Khaleequzzaman Nasim Shah Shirazi Abdul Rashid Mohammed Obaidullah ISLAMIC RESEARCH AND TRAINING INSTITUTE A Member of the Islamic Development Bank Group Book 2.indd 1 10/16/17 4:56 PM
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  7. CONTENTS Acronyms Glossary of Arabic Terms List of Contributors Foreword Acknowledgement Introduction Muhammad Khaleequzzaman , Nasim Shah Shirazi, & Dr. Abdul Rashid Equitable Finance Muhammad Khaleequzzaman Section 1: PHILANTHROPY AND ISLAMIC MICROFINANCE 1 Integration of Waqf and Islamic Microfinance for Poverty Reduction in OIC Member Countries: A Case Study of Nigeria Mohamed Aslam Haneef, Aliyu Dahiru Muhammad, Mustafa Omar, Ataul Huq Pramanik, & Fouad Amin 2 Socio-Economic Role of Zakāh and Waqf in Islamic Finance Ahmad Bello Dogarawa 3 Role of Zakāt in Alleviating Poverty Ahmad Abdulkadir Ibrahim 4 Philanthropy, Markets, and Islamic Financial Institutions Toseef Azid & Muhammad Azeem Qureshi Section 2: FINANCIAL INCLUSION 5 Financial Inclusiveness in Islamic Banking: Comparison of Ideals and Practices Based on Maqāṣid al-Sharīʿah Dr. Abdul Ghafar Ismail, Dr. Shahida Shahimi, Dr. Mohd Adib Ismail, & Salman Ahmed Shaikh 6 Reconstructing the ‘Bank for Poor Family’ through Islamic Linkage Programme Khairunnisa 7 Reducing Poverty through Promoting Financial Inclusion, Shared Prosperity and Social Solidarity: The Role of Islamic Finance and Qarḍ Ḥasan Amin Mohseni-Cheraghlou 8 The Regulatory and Supervisory Role of Central Bank of Nigeria in Enhancing Inclusion through Islamic Finance iii Book 2.indd 7 10/16/17 4:56 PM
  8. Nurudeen Abubakar Zauro , Ram Al Jaffari Bn Saad, & Norfaiza Bnt Sawandi Section 3: SOCIAL SECTOR DEVELOPMENT 9 Socio-economic Policy Making and Maqāṣid al-Sharīʿah Based Socio-economic Variables Dr. Azam Ali 10 Market Orientation and Accountability of Islamic Microfinance Institutions in Financial Sustainability: A Case Study of TEKUN Soheil Kazamian, Rashidah Abdul Rahman, Zuraidah Mohd. Sanusi, & Adewale Abideen Adeyami Section 4: HUMAN DEVELOPMENT THROUGH ISLAMIC FINANCE AND SECTORAL GROWTH 11 What Active Role Have Islamic Endowments (Waqf and Zakāt) Played in Development of Human Capital through Education? Dr. Muhammad Tariq Khan 12 Growth Volatility and Export Diversity in OIC Countries Salman Syed Ali 13 Role of Islamic Banking in Short-Term Advancing to Agribusiness Development: Case of Pakistan’s Islamic Banking Muhammad Mahmood Shah Khan, Farrukh Ijaz, & Syeda Hameeda Batool iv Book 2.indd 8 10/16/17 4:56 PM
  9. ACRONYMS BMT CBN CGAP DFID DMO EMDEs FIRS FRC GDP IDB IFSB IIIE IIUI IMFI IWIMM LAC LSO MENA MFB MFI MPI MSMEs NAICOM NAICOM NDIC NDIC NFIS NGOs NIFI NRSP NSE NSE OIC PENCOM PPP SEC SMEs SSA TEKUN UN UNDP YES Program Bayt al-M āl wa-al-Tamwīl Central Bank of Nigeria Consultative Group to Assist the Poor UK Department for International Development Debt Management Office emerging market and developing economies Federal Inland Revenue Service Financial Reporting Council Gross Domestic Product Islamic Development Bank Islamic Financial Services Board International Institute of Islamic Economics International Islamic University Islamabad Islamic microfinance institution Integrated Waqf based Islamic Microfinance Model Latin America and the Caribbean Local Support Organization Middle East and North Africa microfinance bank microfinance institution Multidimensional Poverty Index micro, small, and medium enterprises National Insurance Commission National Insurance Commission Nigeria Deposit Insurance Corporation Nigeria Deposit Insurance Corporation National Financial Inclusion Strategy non-governmental organizations Non-Interest Financial Institutions National Rural Support Program Nigeria Stock Exchange Nigeria Stock Exchange Organization of Islamic Cooperation National Pension Commission Purchasing power parity Securities and Exchange Commission Small and Medium Enterprises Sub-Saharan Africa Tabung Ekonomi Kumpulan Usaha Niaga The United Nations United Nations Development Programme Youth Employment Support Program v Book 2.indd 9 10/16/17 4:56 PM
  10. GLOSSARY OF ARABIC TERMS Bay ʿ bi-Thaman Ājil Bayʿ Mu‟ajjal Ijārah Istiṣnāʿ Juʿālah Maqāṣid al-Sharīʿah A contract that refers to the sale and purchase transaction for the financing of assets on a deferred and an installment basis with a pre‐ agreed payment period. The sale price will include a profit margin. Literally, a credit sale. Technically, a financing technique adopted by Islamic banks; it is a contract in which the seller allows the buyer to pay the price of a commodity at a future date in a lump sum or in instalments. The price fixed for the commodity in such a transaction can be the same as the spot price or higher or lower than the spot price, but generally it is higher than the spot price. Letting on lease. Sale of defined usufruct of any asset for a defined period in exchange of definite rent; only those assets can be leased the corpus of which is not consumed with use or the form/shape of which is not entirely changed with use. For example, cotton, yarn, fuel, milk, money can be sold/bought, but not leased against rentals. This is because the lessor has to bear the risk related to the ownership of the asset, and this is possible only if the leased asset remains intact and the lessor gets reward in the form of rental against taking risk. Order to manufacture (for purchase). It is a contractual agreement for manufacturing goods and commodities, allowing cash payment in advance and future delivery or future payment and future delivery. Istiṣnāʿ can be used for providing the facility of financing the manufacture/construction of houses, plant, projects, bridges, roads and highways. Rendering a service against reward; literally, wages, pay, stipend or reward for a job. Legally, it refers to doing any job or providing any service for achieving an objective which is not sure to be achieved for someone against a prize, fee or commission. Achievement of the end result is necessary for entitlement to the fee or prize. The determination of the required end result of the transaction is considered to be sufficient to make it permissible. Ju‗alah is a relevant and useful transaction in events that cannot be accomplished through Ijārah, such as bringing back lost property from an uncertain location, because an Ijārah contract requires that the work and the wage must be known and specified without any hazard. The term ‗Maqāṣid (plural: Maqāṣid) refers to a purpose, objective, principle, intent, goal, end. Maqāṣid of the Islamic law are the objectives/purposes/intents/ends/principles behind the Islamic rulings. For a number of Islamic legal theorists, it is an vi Book 2.indd 10 10/16/17 4:56 PM
  11. alternative expression to people ‘s ‗interests‘ (Maṣāliḥ). Muḍārabah Murābaḥah Mushārakah Qarḍ Qarḍ Ḥasan Ribā Ṣadaqah Salam A form of partnership where one party provides the funds while the other provides expertise and management. The latter is referred to as the Muḍārib. Any profits accrued are shared between the two parties on a pre-agreed basis, while any loss is borne by the provider of the capital. Literally it means a sale on mutually agreed profit. Technically, it is a contract of sale in which the seller declares his cost and the profit. This has been adopted by Islamic banks as a mode of financing. As a financing technique, it can involve a request by the client to the bank to purchase a certain item for him. The bank does that for a definite profit over the cost. Partnership between two parties, who both provide capital towards the financing of a project. Both parties share profits on a pre-agreed ratio, but losses are shared on the basis of equity participation. Management of the project is carried out by both parties. However, the partners also have a right to forego the right of management/work in favour of any specific partner or person. There are two main forms of Mushārakah: Permanent Mushārakah and Diminishing Mushārakah. Literally ―to cut‖. It is so called because the property is cut off – transferred to the borrower. Legally, Qarḍ means to give anything having value in the ownership of the other by way of virtue so that the latter may avail himself of the same for his benefit with the condition that the same or similar amount of that thing will be paid back on demand or at the settled time. The repayment of loan is obligatory. Loans under Islamic law can be classified into Salaf and Qarḍ, the former being a loan for a fixed time and the latter payable on demand. Qarḍ is, in fact, a particular kind of Salaf. A virtuous loan. A loan with the stipulation to return the principal sum in the future without any increase; in Islamic law, all loans have to be virtuous, as seeking any benefit from loaning amounts to Ribā. Literally, an excess or increase. Technically, it means an increase over the principal in a loan transaction, over a debt or in exchange transactions, accrued to the lender/creditor or a party to exchange without giving an equivalent counter value or recompense (ʿIwaḍ) in return to the other party. Pl. ṣadaqāt means "voluntary charity". This concept encompasses any act of giving out of compassion, love, friendship (fraternity), religious duty or generosity. A contract in which advance payment is made for goods to be vii Book 2.indd 11 10/16/17 4:56 PM
  12. delivered later on . The seller undertakes to supply some specific goods to the buyer at a future date in exchange of an advance price fully paid at the time of the contract. According to normal rules of the Sharīʿah, no sale can be executed unless the goods are in existence at the time of the bargain, but Salam sale forms an exception given by the holy Prophet himself to the general rule, provided the goods and their prices are defined and the date of delivery is fixed. It is necessary that the quality of the commodity intended to be purchased is fully specified, leaving no ambiguity leading to dispute. The objects of this sale are goods and not media of exchange like gold, silver or currencies, because these are regarded as monetary values, the exchange of which is covered under the rules of Bayʿ al-Ṣarf, i.e. hand to hand without delay. Barring this, Bayʿ al-Salam covers almost everything which is capable of being definitely described as to quantity, quality and workmanship, subject to the fulfilment of other conditions for valid Salam. Sharīʿah Sharikah Ṣukūk Takāful ʿUrbūn ʿUshr Wakālah Waqf Divine guidance as given by the Holy Qur‘ān and the Sunnah of the Prophet Muhammad (pbuh); embodies all aspects of the Islamic faith, including beliefs and practice. Commingling by two or more people of their money or work or obligations to earn a profit or a yield or appreciation in value and to share the loss, if any, according to their proportionate ownership. In the present Islamic banking terminology, it may include both Mushārakah and Muḍārabah and various kinds of Mushārakah like business/commercial partnership, partnership by ownership and permanent or redeemable partnership. Certificates of equal value representing undivided share in ownership of tangible assets of particular projects or specific investment activity, usufruct and services. A form of Islamic insurance based on the principle of Taʿāwun or mutual assistance. It provides for mutual assistance in cases of loss to life, assets and property and offers joint risk-sharing in the event of a loss incurred by one of the pool members Down payment; a nonrefundable deposit paid by a buyer retaining a right to confirm or cancel the sale. Zakāh on agricultural produce. Contract of agency, can be commutative or noncommutative. Pl. Awqāf: literal meaning: to contain, to stop, to preserve; Sharīʿah meaning: to transfer the ownership of a portion of ones wealth, in cash or kind, to Allah as a dedication for any Sharīʿah compliant purpose. Closest English term for a waqf is a philanthropic or charitable endowment. Another term often used viii Book 2.indd 12 10/16/17 4:56 PM
  13. is ―trust fund‖ or ―trust property‖. The corpus of the waqf always remains intact. i.e. if it is in the form of a capital asset, the said asset is neither sold (save to improve the corpus), gifted, or inherited. Zakāh Gharar Sunnah Zakāh is the third out of five pillars of Islam. A religious tax on Muslims having wealth over and above an exemption limit (Niṣāb) at a rate fixed by the Sharīʿah. As such, it is not a tax on income, but on the assets held by a Muslim at a prescribed date (a Zakāt day has to be determined for calculation of Zakāt money to be paid annually) over and above the amount of Niṣāb after fulfilment of the normal needs of the owner. The objective is to take away a part of the wealth of the well-to-do and to distribute it among the poor and the needy. It is levied on cash, cattle, agricultural produce, minerals, capital invested in industry and business, etc. The rates are different for different natures of assets. The recipients of Zakāh funds have been identified in the Holy Qur‘ān (9: 60) and are the poor, the needy, Zakāh collectors, new converts to Islam, travellers in difficulty, captives and debtors and for the cause of the Almighty. Literally, uncertainty, hazard, risk relating to major elements of a contract; technically, sale of a thing which is not present at hand, or the sale of a thing whose consequence or outcome is not known, or a sale in which one does not know whether it will come to be or not, such as fish in water or a bird in the air. It refers to an element of absolute or excessive uncertainty in any business or a contract about the subject of contract or its price, or mere speculative risk. It leads to undue loss to a party and unjustified enrichment of another, which is prohibited. Gambling is a form of Gharar because the gambler is ignorant of the result of the gamble. Selling goods without allowing the buyer to properly examine the goods is also a kind of Gharar. Some examples of Gharar are: selling goods that the seller is unable to deliver; selling known or unknown goods against an unknown price, such as selling the contents of a sealed box without exact information about its contents; selling goods without proper description; selling goods without specifying the price, such as selling at the ―going price‖. Literally, custom, habit or way of life. Technically, it refers to actions, sayings and utterances of the holy Prophet Muhammad (pbuh), or actions of others tacitly approved by him, as reported in the books of Ḥadīth. ix Book 2.indd 13 10/16/17 4:56 PM
  14. LIST OF CONTRIBUTORS Abdul Ghafar Ismail , Islamic Research and Training Institute, IDB, Jeddah, Saudi Arabia Adewale Abideen Adeyami, Universiti Teknologi Mara, Malaysia Ahmad Abdulkadir Ibrahim, International Islamic University Malaysia Ahmad Bello Dogarawa, Ahmadu Bello University, Zaria, Nigeria Aliyu Dahiru Muhammad, International Institute of Islamic Banking and Finance, Kano, Nigeria Amin Mohseni-Cheraghlou, American University, Washington D.C. Ataul Huq Pramanik, International Islamic University Malaysia Azam Ali, State Bank of Pakistan Farrukh Ijaz, University of Management Technology, Lahore, Pakistan Fouad Amin, International Islamic University Malaysia Khairunnisa, State Institute of Islamic Studies, Jamber, Indonesia Mohamed Aslam Haneef, International Islamic University Malaysia Mohd Adib Ismail, National University of Malaysia Muhammad Azeem Qureshi, Oslo Business School, Oslo Muhammad Mahmood Shah Khan, University of Management Technology, Lahore, Pakistan Muhammad Tariq Khan, University of Haripur, Pakistan Mustafa Omar, International Islamic University Malaysia Salman Ahmed Shaikh, National University of Malaysia Salman Syed Ali, Islamic Research and Training Institute, IDB, Jeddah, Saudi Arabia Shahida Shahimi, National University of Malaysia Siti Alawiah Siraj, International Islamic University Malaysia Soheil Kazamian, Rashidah Abdul Rahman, Universiti Teknologi Mara, Malaysia Syeda Hameeda Batool, University of Management Technology, Lahore, Pakistan Toseef Azid, Qassim University, Saudi Arabia Yusuf Ismail, International Islamic University Malaysia x Book 2.indd 14 10/16/17 4:56 PM
  15. FOREWORD It is our pleasure to present the proceedings of the 4th International Conference on Equitable Islamic Financial Sector Development held from 16 to 18 November 2015 at International Islamic University Islamabad , Pakistan. The conference, organised jointly by the Islamic Research and Training Institute (IRTI) of the Islamic Development Bank and the International Islamic University Islamabad, provided the opportunity to bring together multilateral institutions, practitioners, academics, microfinance networks/forums, regulators, and development activists. The prime objective of the conference was to discuss the best practices that could help in developing an equitable financial sector and to devise an action plan to address the various challenges in this regard. It would not have been possible to publish the proceedings without the contributions of many individuals, first and foremost the authors themselves, who, besides making presentations at the conference and then writing papers based on them, also submitted to a rigorous process of review and editing in order to prepare their work for publication. We also would like to express our thanks to the various groups who assisted with this process. This includes the reviewers who evaluated the submissions, content editors who worked with authors on revisions, and copy editors who proofread manuscripts for final publication. Not only did many of these contributors go above and beyond what was expected of them, many also contributed in more than one area. Their dedication and professionalism is much appreciated. We are also grateful to the editors, Dr. Muhammad Khaleequzzaman, Dr. Nasim Shah Shirazi, and Dr. Abdul Rashid, for transforming the proceedings of the conference into this book. This might not have been accomplished without their concerted efforts to produce this document of significant value that would be an addition to the precious resource of equitable finance. Finally, we would like to thank our readers, as the excellent work represented here would be of little consequence without an interested audience to carry on the discussion. We hope that all of you, contributors and readers alike, will return for future conferences and their proceedings. Prof. Mohamed Azmi Omar Director General, IRTI xi Book 2.indd 15 10/16/17 4:56 PM
  16. INTRODUCTION Despite the exemplary growth of the Islamic finance over the past decades , already crossing USD 1 trillion mark, neither have the poor segments of the societies been duly attended to nor have the common masses been offered adequate chance to benefit from Islamic financial services. The corporate sector has virtually become the major beneficiary of this development since the Islamic financial institutions have largely ignored the objective of value orientation pertaining to Islamic finance. The Islamic Development Bank (IDB) has initiated a number of programs focusing on development of micro and small enterprises in member countries, the latest being Youth Employment Support (YES) Program to address the unemployment issues of educated youth by developing entrepreneurial capacity and providing financial resources through Islamic financial instruments. However, to reach the appropriate scale, the effort and will of governments is required. The IDB and Organization of Islamic Cooperation (OIC) have also underscored the crucial situation and held a seminar on ‗Islamic Microfinance for Poverty Alleviation in OIC Member Countries‘ in May 2016 in Indonesia, and noted that the global economy continues to face the perennial problems of poverty, persistent youth unemployment, and excessive inequalities of income and wealth. Therefore, the effort should be aimed to link both inclusive and sustainable socio-economic development. This is in line with the Islamic Development Bank‘s experience in this area, which shows that financial inclusion is important for growth and reducing inequality and poverty across the member countries. IDB has further noted that although the Islamic finance industry has made significant contributions in all the areas relating to financial viability, profitability and competitiveness, there are concerns that a segment of the Islamic finance industry, namely Islamic banks have not been able to reach and bring vast segments of the population, especially the underprivileged sections of the society, into the fold of basic banking services. In many developing countries, the majority of the population lives in rural areas while financial institutions concentrate in urban centers. Consequently, this segment of the population remains underserved in terms of access to financial services. This situation requires the governments and the societies to play a catalytic role by supporting an inclusive financial sector and country-level policy framework should be developed with a clear vision to face the challenge of devising well thought out action plans. In the context of sustainability, it is widely recognized that the donordependent, piecemeal, and un-sustainable interventions cannot provide the solution unless a programmed strategy for financial inclusion is developed within the overall scenario. Keeping these considerations in view, the 4th International Conference on Inclusive Islamic Financial Sector Development was held jointly by the Islamic Research and Training Institute (IRTI) of the Islamic Development Bank, Jeddah and the International Islamic University Islamabad in November 2015. The conference provided the opportunity to bring together multilateral institutions, practitioners, academics, microfinance networks/forums, regulators, and development activists. The main objective was to discuss the best practices that could help in developing an inclusive financial sector and to devise an action plan to address the various challenges in this regard. The major areas of focus were:  Global challenge of poverty and potential for Islamic finance xii Book 2.indd 16 10/16/17 4:56 PM
  17.  Innovation in Islamic finance for the disadvantaged  Integrating micro and small enterprise development with mainstream Islamic finance sector  Islamic insurance and financial inclusion  Role of central banks to enhance inclusion through Islamic finance  Regulatory and supervisory concerns in promoting Islamic finance  Demand for Islamic micro financial services  Country experiences in improving access to financial services  Financial literacy as a tool to increase inclusiveness The conference attracted participation by diverse economists to translate their ideas and research into the growth of this sector, expanding access to financial services in respect of millions of households currently excluded from this economic opportunity. The papers received went through an anonymous review process and only the authors of selected papers were called to present their papers. The thematic presentations of the participating delegates and productive discussions produced in a one-day Preconference Workshop (16 November 2015) followed by a Two-day Conference (17-18 November 2015) have also devised important recommendations in the form of concrete synthesis report on various outcomes of the conference useful to enhancing financial inclusion. The conference papers were presented by scholars from Indonesia, Malaysia, Nigeria, Kenya, Kingdom of Saudi Arabia, Sudan and USA. The papers presented in the conference are introduced in the following subsections. Philanthropy and Islamic Microfinance The paper, ―Integration of Waqf and Islamic Microfinance for Poverty Reduction in OIC Member Countries: A Case Study of Nigeria‖ by Mohamed Aslam Haneef and Aliyu Dahiru Muhammad examines the role of waqf in poverty reduction. Specifically, the paper empirically studies how integration of waqf and Islamic microfinance helps reduce poverty in OIC member countries. The paper employs survey technique to collect data from 248 respondents from Kano State Zakah and Hubsi Commission and Grassroots Microfinance Bank based in Kano. The data was analyzed using structural equation modelling. The findings of this paper show that all the factors used have high Cranach alpha with minimum of 0.7. The hypotheses tested were all accepted at 5 percent significance level. One of the key implications of the paper is that waqf resources can be channelled through Islamic microfinance to improve the welfare of the clients, and solve their capital need and human resource deficiency The paper, ―Socioeconomic Role of Zakāh and Waqf in Islamic Finance‖ by Ahmad Bello Dogarawa discusses the socioeconomic role of the institutions of Zakāh and Waqf in Islamic finance. This paper shows how the two institutions could provide an economic safety net to society. The paper posits that Zakāh and Waqf undoubtedly are among the several instruments that are used in Islamic finance to alleviate poverty and enhance welfare in the society, and that in the modern economy, Zakāh could be used for provision of Islamic education; vocational training and necessary tools; agriculture and cottage industries; simple fixed assets for small utility and trade projects working capital to craftsmen; as well as low-cost housing and medical facilities for its beneficiaries. Further, the paper suggests that Waqf funds could also be used for contemporary socioeconomic issues such as education, skills and micro entrepreneurial development, health care and care of HIV/AIDS infected population, and water and sanitation xiii Book 2.indd 17 10/16/17 4:56 PM
  18. facilities . Finally, the paper concludes that to activate and revitalize the institutions in Muslim societies and communities, there is a dire need for reform in their management formulas and to address the unsettled issues inherent in the institutions. While the previous paper focuses on socioeconomic role of Zakāt and waqf in Islamic finance, the paper, ―Role of Zakāt in Alleviating Poverty‖ by Ahmad Abdulkadir Ibrahim also provides a conceptual framework on the roles of Zakāt in alleviating poverty from the Islamic perspective. This paper also aims to highlight the theoretical roles of Zakāt in alleviating poverty as well as Zakāt practice during the ruling of the Rightly Guided Caliphs. The paper suggests that Zakāt is an effective tool for alleviating poverty in the Muslim community then and now eternally. Hence, Muslims should offer the means of poverty alleviation via Islamic concept of Zakāt and how it can be applied in the Muslim community. The paper also observes that Zakāt institutions, with the cooperation of relevant authorities, must establish proper measurement. An important conclusion emerging from the paper is that the effectiveness of Zakāt institutions may improve by collaborating with other institutions such as microfinance institutions. In their paper ‗Philanthropy, Markets, and Islamic Financial Institutions‘, Toseef Azid and Muhammad Azeem Qureshi express that there is no consensus among experts that welfare can be increased through philanthropy or the market is sufficient for the achievement of targeted level of welfare. It is still a main quest that giving visible good to one known fellow is better, or market ethos have more positive impact on the society where we have needs of thousands of unknowns. They referred to Hayek‘s view that markets are superior to philanthropy economically, ethically, and epistemologically - because they ―confer benefits beyond the range of our concrete knowledge‖ and thus provide ―a greater benefit to the community than most direct ‗altruistic‘ action‖. The authors expected the same from the ethical and moral financial institutions that carry not only the objective to increase their profits but also equally attempt to serve the community. This paper therefore proposes a constructive model in which markets, philanthropy and financial institutions work together to enhance welfare, human freedom, and voluntary social cooperation. Firstly, the conceptual dualisms have been examined through which the commerce-philanthropy relationship (e.g., modern versus Islamic socialism) and the historical-philosophical context in which they were formulated. This helps to integrate philanthropy into Hayek‘s theory of economic and social order through financial institutions. Secondly, the foundations of an Islamic view of philanthropic action has been explored. This discussion is inspired by the emerging literature of positive psychology and double movement of Polanyi. Without abandoning Hayek‘s theory of markets, a view of commercial society has been sketched where the markets and philanthropy work together to enhance human welfare and freedom, and voluntary social cooperation guided by Islamic values. The paper also explores the different dimensions as to how Islamic financial intuitions can become the instrument for the incremental change through this integration. Financial Inclusion The paper ‗Financial Inclusiveness in Islamic Banking: Comparison of Ideals and Practices Based on Maqāṣid al-Sharīʿah, presented by Abdul Ghafar Ismail, Mohd Adib Ismail, Shahida Shahimi, and Salman Ahmed Shaikh, attempts to document the progress in the Islamic banking industry of Pakistan towards fostering an egalitarian and equitable financial intermediation. The underlying theme of the paper related to Maqāṣid al-Sharīʿah explores as to whether the current Islamic banking is responding to this cause or not. To evaluate the very objective, the authors have used a set of quantitative indicators to evaluate the performance of Islamic banks towards xiv Book 2.indd 18 10/16/17 4:56 PM
  19. participative , inclusive, cost effective and real sector oriented financial intermediation. The paper highlights that the current performance of Islamic banks on these fronts leaves much to be desired. At the same time, the low finance to deposit ratio and high average cost of financing turns inconsistent with Maqāṣid al-Sharīʿah. The paper also identifies various categories of poor people who are in need of finance for their health, education and small businesses, however, the current range of Islamic banking products and their structures do not match the nature of their needs. Also the geographical presence of Islamic banks shows that they are located mainly in urban centres where they can serve the commercial and corporate clients. The paper argues further that most of the debt-based products offered by Islamic banks are close but relatively expensive substitutes of conventional banking products. It argues also that real alternatives like equity based financing are still out of the scope of Islamic banks. Finally, the paper concludes that Islamic banks, out of their normative responsibility, should extend their presence in rural and remote areas and provide access to banking services to the underprivileged class by devising products and mechanisms suitable to the needs of agricultural, SMEs, and micro-financial clients. Khairunnisa Musari and Rusli Simanjuntak‘s paper, ‗Reconstructing the ―Bank for Poor Family‖ through Islamic Linkage Program: A Case Study of Indonesia‘, notes that Indonesia is renowned for its large scale micro enterprises sector but this sector does not enjoy adequate access to bank financing, particularly in rural areas. Microfinance institutions take on this role. Bank for Poor Family (Bank Gakin) is one of the institutions initiated by local government in Indonesia and uses the principle of joint responsibility among its members. Bank Gakin has gained positive response from the poor because of easier access to obtain loan for venture capital. But, in Islamic perspective, the practices of Bank Gakin still are not Sharīʿah compliant. Bank Gakin provides loans against interest although it looks cheaper and does not burden the borrowers. Therefore, this paper attempts to: (1) introduce the Bank Gakin as a policy of local government in Indonesia to finance the working capital for poor family; (2) reconstruct the scheme of Bank Gakin into Islamic linkage program that bridges the Islamic banks and microfinance institutions; and (3) propose an institutional arrangement for the Bank Gakin and Islamic banks to issue Ṣukūk as a tool for managing their liquidity. Finally, this study proves that demand for Islamic microfinance services is huge. In order to enhance financial inclusion, Islamic banking should be encouraged to assist the needs of the very poor and micro enterprise sector. If Islamic banks have not assisted in financing these enterprises, then there is no doubt that Islamic microfinance has been the missing element in their operation. Through an empirical analysis based on data from Findex, Bankscope, and World Development Indicator databases, Amin Mohseni-Cheraghlou presented his empirical study ‗Reducing Poverty through Promoting Financial Inclusion, Shared Prosperity and Social Solidarity: The Role of Islamic Finance and Qarḍ Ḥasan.‘ He found that overall access to Islamic financial assets is positively correlated with levels of financial inclusion in Muslim majority countries. He concludes that Muslims and especially those residing in the MENA region are more likely to be financially excluded for religious reasons. The paper shows that the percentage of unbanked adults (excluded owing to the religious reasons) is positively correlated with being located in the Arab Middle East and North Africa (Arab MENA) region and with the share of Muslim population in a given country and negatively correlated with the density of Sharīʿah complaint financial assets in an economy. These findings point to the potential role of Islamic finance in enhancing financial inclusion, leading to its many benefits for reducing poverty and inequality among Muslim communities around the world and especially in some of the OIC countries xv Book 2.indd 19 10/16/17 4:56 PM
  20. where financial exclusion due to religious reasons is among the highest in the world . The author holds that increasing the presence of Islamic finance is only a necessary but not the sufficient factor in boosting financial inclusion among the religiously minded Muslims in these regions unless the products feasible to their environment and needs are developed and their awareness is created. He argues that Qarḍ Ḥasan is more than simply an interest-free loan (Qarḍ), and that it seems to be the most effective instrument in Islamic finance industry to address the financial needs of the poor and the vulnerable and pave the path for their inclusion in and access to formal financial services. However, as of now, genuine Qarḍ Ḥasan is not being widely practiced by IFIs and therefore its potential benefits for reducing poverty have not been fully realized. Through presenting a novel definition and view of Qarḍ Ḥasan and its multifaceted benefits for the vulnerable and poor and the long-run health of an economy, this work hopes to start a theoretical and operational discussion around this widely misunderstood and misapplied lending instrument in Islamic finance industry. The successful case of Akhuwat, presented in the paper, confirms much of the theoretical discussion and shows that if implemented in ways that are in accordance with its spirit, Qarḍ Ḥasan can achieve much in alleviating poverty and enhancing shared prosperity and social/financial inclusion. Nurudeen Abubakar Zauro, Ram Al Jaffari Bn Saad, and Norfaiza Bnt Sawandi presented about ‗The Regulatory and Supervisory Role of Central Bank of Nigeria in Enhancing Inclusion through Islamic Finance‘ and discussed various regulatory and supervisory roles of Central Bank of Nigeria (CBN) in Islamic Finance as a means for enhancing financial inclusion in Nigeria. The paper is a descriptive study that is based on secondary data sourced from publications of CBN and other key stakeholders within the industry. Similarly, the contribution of other regulatory partners such as Nigeria Deposit Insurance Corporation (NDIC), National Insurance Commission (NAICOM), National Pension Commission (PENCOM), Debt Management Office (DMO), Federal Inland Revenue Service (FIRS), Securities and Exchange Commission (SEC), and Nigeria Stock Exchange (NSE) were reviewed. The paper identifies major challenges inhibiting the effort of CBN and other institutions and comes up with recommendations that would deepen Islamic Finance practices in Nigeria as a means for enhancing financial inclusion. The paper concludes that this will assist the bank in achieving its vision of reducing the exclusion rate to 20% by the year 2020 in order to foster inclusive growth and development in Nigeria. Social Sector Development In ―Socioeconomic Policy Making and Maqāṣid al-Sharīʿah based Socioeconomic Variables‖, Azam Ali identifies the important indicators that can help construct Al-Maqāṣid al-al-Sharʿīyah based socioeconomic index. He elaborates on how the identified indicators may tie with one or more objectives of Sharīʿah. He also explores the data availability across various countries on relevant indicators that may be useful in the construction of such index. He finally evaluates suitability of the variables by highlighting the multi-dimension of Maqāṣid to examine the extent and relevancy of variables to avoid overlap of the variables. While the previous paper identified the socioeconomic indicators associated with Maqāṣid alSharīʿah, the paper entitled ―Market Orientation and Accountability of Islamic Microfinance Institutions in Financial Sustainability: The Case Study of TEKUN‖ by Soheil Kazemian aimed at providing insights into how the three dimensions of market orientation, namely, customer orientation, competitor orientation and inter-function coordination, affect the most important xvi Book 2.indd 20 10/16/17 4:56 PM
  21. aspect of sustainability of Islamic MFIs , which is financial performance sustainability of Tabung Ekonomi Kumpulan Usaha Niaga (TEKUN) as one of the largest Islamic microfinance institutions in South East Asia. Het targeted the management level of TEKUN. Well-designed questionnaires were used to collect the required data from top management of TEKUN. The obtained data was analyzed by using PLS-SEM. The results provided empirical evidence that the financial sustainability of TEKUN is only influenced by customer orientation significantly. However, neither competitor orientation nor inter functional coordination has significant effects on management sustainability of TEKUN. The results of the paper enhanced further the literature in understanding the long-term sustainable financial performance-based market orientation. The findings are useful for policy makers, management of microfinance institutions, practitioners and academics to enhance microfinance system. Human Development and Sectoral Growth through Islamic Finance The paper, ―How Active Role Islamic Endowments (Waqf and Zakāt) Played in Development of Human Capital through Education?‖ by Muhammad Tariq Khan, examines the (indirect) role of waqf and Zakāt on poverty reduction through human capital development. The author argues that human capital with increasing globalization and the saturation of the job market is gaining wider attention particularly because of the recent setbacks in the economies of different countries of the world. The author also suggests that if the state has less resources to spend on development of human capital then Islamic endowments like Zakāt and waqf can make a system, which may help the state to make up this deficiency. He pointed out that Awqāf and Zakāt in the past have played a very active role in building human capital through education by establishing educational institutions throughout the Islamic world. This paper discussed human capital and highlighted the role waqf played in the development of human capital in the Islamic society in the past and the role that Zakāt played recently in Pakistan. In this respect, the paper discussed the role played by District Zakāt office in Abbottabad as a case study. Given the importance of international trade sector for stable economic growth, Salman Syed Ali analyzes ―Growth Volatility and Export Diversity in OIC Countries‖. He points out that while exports expand the market size and hence is important for economic growth, a narrow exportbase can have adverse effect that can make economic growth unstable by increasing its volatility. His paper measures the impact of export diversity on the volatility of growth of OIC countries as a group. It uses a new data set on trade flows at 4-digit STIC level issued by IMF. It finds that export diversification helps in reducing macroeconomic growth volatility of OIC member countries. In this context, diversification through extensive margin is relatively more important than through intensive margin. That is, for the OIC countries, adding new commodities to the export basket or adding new markets or new partners tends to have more stabilizing impact on GDP growth than balancing the volume of exports across the existing export commodities and across the existing trading partners. Recognizing leading role of agriculture sector in the growth of the economy, Muhammad Mahmood Shah Khan, Farrukh Ijaz, Syeda Hameeda Batool, and Asim Shahzad, discuss the role of Islamic banking in supporting the financing of short-term agricultural requirements. The paper, ‗Role of Islamic Banks Short Term Financing in Agri-Business Development: The Case of Pakistan‘, elaborates the results of a primary survey conducted in Pakistan to find out the various short term financing needs, availability, and awareness about Islamic banking financing xvii Book 2.indd 21 10/16/17 4:56 PM
  22. system . Surveying the respondents belonging to horticulture, floriculture, aquaculture, agricultural processing, and foresting sectors, it has been found that, in view of the seasonality of the agricultural business, there is a need for short term financing to meet and manage the day to day agricultural related expenses like purchases of various inputs, payment of wages, etc. The study also finds that majority of the respondents had no or low level of awareness about the short term financing provided by the Islamic banks. They were also of the opinion that Islamic banks did not provide short term financing. The paper recommends and calls for the active role of Islamic banks in providing short term Islamic financing for agricultural sector. Recommendations of the 4th International Conference on Inclusive Islamic Financial Sector Development The pre-conference workshop and the conference noted that despite exemplary growth of Islamic finance over past decades, the poor segments of the societies have not been attended to appropriately, nor the common masses have been offered adequate chance to benefit from Islamic financial services. This situation was deliberated in both the events, and summarized as under: A. The Pre-conference Workshop (16 November 2015) The conference was preceded by a pre-conference workshop conducted on 16 November 2015. The main purpose of the workshop was to organize a focus group discussion on sustainable product development and workable strategy for the inclusive financial sector. The workshop was attended by the participants of small and micro-finance institutions, Islamic banks, Takāful companies, consulting firms, Pakistan Poverty Alleviation Fund (PPAF), and the Islamic Microfinance Resource Centre (IMRC) based in Islamabad. The workshop made the following recommendations: 1. The communities should be involved to partly generate and manage the financial resources. The model of Local Support Organization (LSO) of National Rural Support Program (NRSP) in Pakistan should be used for the revolving funds being provided by PPAF out of interest-free grant available from the Prime Minister‘s fund. 2. The participants, in general, were susceptive of the use of financial products by the Islamic microfinance programs. They desired that the products and their process should reflect the true spirit of Islamic financial system to differentiation them from the conventional products. 3. PPAF also desired that a ready-to-market Islamic product should be designed for their clients practicing Islamic microfinance, which can also be used for their institutions currently obtaining revolving funds from Prime Minister‘s interest-free scheme. 4. NRSP desired that their institutions may be studied and workable Islamic microfinance system be recommended. 5. A two-tier mutual fund (Apex level venture capital fund) should be established at the country level, ensuring representation from all Islamic financial institutions operational in the respective countries. The tier-1 of the mutual fund would operate to raise funds according to the existing legal and governance framework applicable in accordance with the Islamic principles. The tier-2 of the fund may be used to xviii Book 2.indd 22 10/16/17 4:56 PM
  23. 6 . 7. 8. 9. B. establish pools of Muḍārabah or waqf for the microfinance NGOs that in turn disburse to their clients through various Islamic modes. Urban youth of Pakistan, as well as, in other countries is generally literate and the unemployment numbers are enormous. Keeping in view the medium term outlook of the economy, it is advisable that venture capitals can offer a great potential to this youth for successful start-ups and scale-ups later on. The Takāful operators (Pak Qatar Takaful Company of Pakistan) presented their views on the micro Takāful product development for both default risk and health insurance. They also learned about the micro insurance products being offered by NRSP and indicated that outline and contract of micro Takāful would be developed by them for indigenous use in Pakistan. The concept of community Takāful system was appreciated which needs more work and insight with respect to regulation of such organizations. A broad-based workshop should be organized later at IIUI to discuss these issues and bring more clarity on Sharīʿah concerns related to product development for Islamic microfinance. The Conference (17 and 18 November 2015) The major recommendations of the conference are as follows: 1. The conference has found a huge potential for philanthropic sector including Zakāt and waqf that can effectively provide a sustainable way out for inclusiveness of the unserved/ underserved countries. However, there is need to mobilize resources for the purpose. 2. Islamic microfinance institutions have the capacity to reach out to the masses because of their local character. However, these institutions are suffering from paucity of funds, limited resources and requisite Sharīʿah advisory and product development expertise. In case the Islamic banks scale down their operations through microfinance NGOs, the issue of reaching out to these masses can effectively be looked after besides instituting financial discipline and Sharīʿah advisory and product development expertise as trickledown effect. 3. Integration of waqf and microfinance has been highlighted through a number of research and policy papers. The synthesis recommends establishing cash waqf fund at national, regional and local levels. This will not only address the sustainability of microfinance sector but also provide the opportunity for all, i.e. the individuals, the institutions, Islamic banks, Islamic funds etc., to take part in this noble cause. In addition, linking philanthropy with microfinance will absorb the high cost of operation to the benefit of ultimate users. A study of OIC countries conducted by IRTI has found strong feasibility of integrating waqf with microfinance. The Islamic Development Bank‘s waqf fund can also play a significant role in actualizing the proposal. xix Book 2.indd 23 10/16/17 4:56 PM
  24. Equitable Finance Equitable finance is the ultimate key of unlocking the access to the opportunity of the underprivileged communities and gender-biased societies . In a way, this emerging concept addresses the issues of low levels of participation and sustainability of the programs targeted towards the said communities and bring the desired impact helpful in transforming the economies. Today, there is a strong imperative to consider equitable opportunities affording both justice and economic initiatives. Principally, the cause of equitable opportunities should be pursued more by the Islamic than conventional finance. However, the Islamic banks are following the footsteps of the conventional banks where commercial motive has replaced normative concerns, and Islamic values have been grossly ignored, thereby, dominating the fundamental Islamic ethics with profit motive. The Islamic banks cannot be absolved from the social responsibility and have to allocate efficiently the available resources for the larger benefit of the society. In the words of Siddiqui1, there is a widely shared perception that there is much more inequality in the distribution of income and wealth whereas Islamic finance has demonstrated little to meet the commitment of distributive justice. Sharīʿah compliance is not enough, rather the Islamic financial institutions, as suggested by ‗Islamic Financial Services Industry Stability Report‘ issued by IFSB2 in 2013, should look beyond that and respond to the ethical issues of poverty alleviation, financial inclusion, and responsible investments. IFSB expects that policy move of the commercially oriented financial institutions should be embarked to link previously neglected market niches that have remained unbanked due, particularly, to prohibition of Ribā or virtually no access to the financial services. Believing that the Islamic financial services industry continues to grow into a dynamic and competitive global financial system, the ethical and social dimensions being fundamental values cannot be ignored, and, as such, need to ensure that it is inclusive and accessible to all, particularly the lower income groups and small businesses. It is only by bringing the financially underserved population into the economic mainstream that we can truly contribute toward more sustainable and equitable economic growth. When Islamic finance is the true alternative of the conventional system, it should honor the values prescribed by Islamic injunctions as rationalized through Maqāṣid al-Sharīʿah. It has to reveal promoting and supporting equitable growth enabling the poor people to uplift their living standards with dignity. Extending financial services would not only afford them the opportunity of self-employment but also render them a productive agent of the process of growth and development. One of the most important objectives of Islam is to realize greater justice in human society. The Quran enjoins that a society where there is no justice will ultimately head towards decline and destruction (57:25)3. The saying of the Prophet (Sahih Muslim: 1827)4 expects best reward for 1 Siddiqi, M. N, ―Comparative Advantages of Islamic Banking and Finance‖, http://www.siddiqi.com/mns/Advantages.html 2 Islamic Financial Services Board 3 ْ ُ ْ‫ْۖٔ أ َ َْ شَ ن‬ ْْ‫س هْ َُا نَقَد‬ ِ ‫َابْ َي عَ ُٓ ُىْ َٔ أ َ َْ شَ نْ َُا تِانْ ثٍََُِّا‬ ْ ‫اص ْتِانْ ِق‬ ِ َُّ‫ٌْٔ َي َُافِ ُع ْنِه‬ ٌ ْ ‫َاْان َح دٌِدَ ْفٍِ ِّ ْتَأ‬ َ ‫ٕوْ َٔ انْ ًِ ٍشَ اٌَْ انْ ِك ت‬ ُ َُّ‫َي ٍْ ْ ان‬ َ ‫خْ ُر سُهََُا أ َ ْر‬ َ ‫اص‬ َ ‫ص ْشَ دٌِد‬ َ ْ ‫س ِط‬ َ ُ ‫ْٔ ِن ٍَ ْع هَ َى ّْللاَُّْ ِن ٍَق‬ ٌ ‫يْعَ ِش‬ ْ‫ٌش‬ ُ ٌَُْ ِ ٍَْ‫ْٔ ُر سُهَّ ُْتِانْ غ‬ ٌّ ِٕ َ‫ة ْْۚإِ ٌَّ ّْللاَّ َْق‬ َ ُ ِ ‫ص ُز‬ We have already sent Our messengers with clear evidences and sent down with them the Scripture and the balance that the people may maintain [their affairs] in justice. And We sent down iron, wherein is great military might and xx Book 2.indd 24 10/16/17 4:56 PM
  25. those dispensing justice . Where the conventional financial system focuses primarily on the economic and financial aspects of transactions, the Islamic system places equal emphasis on the ethical, moral, social, and religious dimensions, wealth distribution, and social and economic justice to enhance equality and fairness. Justice requires a set of rules or moral values, which everyone accepts and faithfully complies with. As such, the financial system may be able to promote justice if, in addition to being strong and stable, it satisfies at least two conditions based on moral values. One of these is that the financier should also share in the risk so as not to shift the entire burden of losses to the entrepreneur, and the other is that an equitable share of financial resources mobilized by financial institutions should become available to the poor to help eliminate poverty, expand employment and self-employment opportunities and, thus, help reduce inequalities of income and wealth. The Islamic financial system is founded on the absolute prohibition of the payment or receipt of any predetermined, guaranteed rate of return. This closes the door to the concept of interest and precludes the use of debt-based instruments. The system encourages risk-sharing, promotes entrepreneurship, discourages speculative behavior, and emphasizes the sanctity of contracts. Accordingly, Islamic finance is embedded on the principles of fairness, equality and ethics that lead to social well-being. Pointing to the similar issues, the IFSB and IRTI prescribe in ‗Islamic Financial Services Industry Development: Ten-Year Framework (2007)‘ that the critical issues of poverty alleviation and improvement in important socio-economic aspects of life such as health and education, reduction in child mortality, providing safe and secure future for youth etc., form the top public policy agenda of our societies. Ensuring the compliance of financial services with these guidelines is necessary for the services to be relevant for use by Muslims and hence broadening the public‘s access to financial services. The Islamic financial institutions cater to this special need of society. Simultaneously, it is also possible to capture demand beyond the Muslim population through the provision of innovative and high-quality Islamic financial service. While the framework requires to set a dynamic and sustainable future path for the industry, the strategic focus of the Islamic financial institutions needs to be included in national financial sector development policies. The national and regional authorities should therefore promote in their respective jurisdictions the economic development side by side rendering justice, social progress and financial stability and enhancing the role of the Islamic financial institutions in redirecting financial resources towards real investment and the creation of employment opportunities. Islamic finance with a wider application of equity-based financing and micro-finance products can facilitate greater outreach to small and micro enterprises to promote entrepreneurship and benefits for the people, and so that Allah may make evident those who support Him and His messengers unseen. Indeed, Allah is Powerful and Exalted in Might. 4 َّ ‫ع ْثد‬ ِْ‫ِّْللا‬ َْ ٍْْ ‫ع‬ َ ًِْ‫َحدَّثََُاْأَتُْٕتَ ْك ِزْتٍُْ ْأَت‬ ُ ْ ٍُْ‫ْت‬، ٌُ‫س ْفٍَا‬ ُ ْ‫َُْ ًٍَ ٍْزْقَانُٕاْ َحدَّثََُا‬، ٍُْ‫ْٔات‬، ٍ ‫ْٔ ُس ٍَْ ُْزْتٍُْ ْ َح ْز‬، َ ْ،‫ع ًْ ِزْٔت ٍِْْأ َ ْٔ ٍص‬ َ ٍْْ ‫ع‬ َ ْ-ْ‫َار‬ َ ٍْْ ‫ع‬ َ َْ‫عٍَْ ٍَُْح‬ ٍ ٌُِ‫ٌَْ ْعًُِْاتٍَْ ْد‬-ْ،ٔ‫ع ًْ ٍز‬ َ ‫ب‬ َ َ‫ش ٍْثَح‬ ْ ٌَّ ‫ْ"ْ ِإ‬ ُ ‫ْﷺْٔفًِْ َحدٌِث‬ َّ ‫سٕل‬ َّ َ‫ْان ًُ ْقسِطِ ٍٍَ ْ ِع ُْد‬ ْ‫ْﷺ‬ ْ ِ‫ُّْللا‬ ً ِْ ًٌٍَِْْ ‫ع‬ ُ ‫َْر‬ َّ ٍٍْ َ ٍِْْ ‫انزحْ ًَ ٍِْ ت‬ َ ْ‫ٕر‬ َ ِْ‫ّْللا‬ ٍ ٍَُْْ ِ‫ع َهىْ َيَُا ِت َزْي‬ َ ‫ِْس ٍَْ ٍْزْقَالَْقَْال‬ َّ ‫ْٔأَتُْٕ َت ْك ٍزْ ٌَ ْثهُ ُغْ ِتِّْانَُّ ِث‬ َ َ ‫ْقَالَْاتٍُْ َُْ ًٍَ ٍْز‬،ٔ‫ع ًْ ٍز‬ .ْْ"ْْ‫ٕا‬ ْ ُ‫أْن‬ َ َ ‫ْٔ َي‬ َ ‫ْٔأ َ ْْهٍِ ِٓ ْى‬ َ ‫َّْٔك ِْهت َاٌَْدَ ًٌٌَِِّْْ ٌٍٍ ْانَّذٌٍَِ ٌَْ ْع ِدنٌَُٕ ْفًِْ ُح ْكًِ ِٓ ْى‬ َ ‫ْٔ َجم‬ َ ‫ع َّش‬ It has been narrated on the authority of 'Abdullah b. 'Umar that the Messenger of Allah (‫ )ﷺ‬said: Behold! the dispensers of justice will be seated on the pulpits of light beside God, on the right side of the Merciful, Exalted and Glorious. Either side of the Being is the right side both being equally honorable. (The Dispensers of justice are) those who do justice in their rules, in matters relating to their families and in all that they undertake to do. xxi Book 2.indd 25 10/16/17 4:56 PM
  26. value-creating activities . Other steps can be formulated such as integrating commercial sector with Islamic social sector to come up with financial services that are reachable by the micro entrepreneurs and low income society to improve social welfare arrangement through variety of vehicles such as optimization of Awqāf funds, innovative Zakāt disbursement program that is contributive to the job creation initiatives and poverty alleviation program. Sensitizing the voluntary sector, a study developing an integrated waqf based Islamic microfinance model for poverty reduction in OIC member countries recommends that Islamic microfinance combined with waqf is expected to overcome the challenges of high cost of capital, low quality of human resource, and vulnerabilities of poor borrowers (Haneef et. al. 2014)5. We may conclude that Islamic finance is meant to provide universal access to all of the financial services providing equitable opportunities. The financial innovation is the need of the day commensurating wider scope encompassing employment and sustainable growth to the benefit of the underpreviledged, following the Islamic values to meet justice, circulation of wealth, and equity. Private partnership through voluntary sector represented by waqf and Zakāt can even broaden the prospect of the target segments. 5 Haneef, M. A., Muhammad, A. D., Paramanik, A. H., and Mohammed, M. O.,‖Integrated Waqf Based Islamic Microfinance Model (IWIMM) for Poverty alleviation in OIC Member Countries‖, Middle-East Journal of Scientific Research 19 (2): 286-298, 2014. xxii Book 2.indd 26 10/16/17 4:56 PM
  27. SECTION 1 PHILANTHROPY AND ISLAMIC MICROFINANCE (Section 1) Philanthropy And Islamic Microfinance xxiii Book 2.indd 27 10/16/17 4:56 PM
  28. Book 2 .indd 28 10/16/17 4:56 PM
  29. 1 Integration of Waqf and Islamic Microfinance for Poverty Reduction in OIC Member Countries : A Case Study of Nigeria Mohamed Aslam Haneef 6, Aliyu Dahiru Muhammad7, 8, Mustafa Omar9, Ataul Huq Pramanik10, and Fouad Amin11 Microfinance was celebrated in the year 2005 as an effective tool for poverty reduction. However, until now, the penetration of microfinance into the mainstream financing is very shallow and its total share to global credit falls below 1 percent. The private investment in the industry reaches 7.5 billion USD. Yet, significant number of poor micro-entrepreneurs is yet to be reached globally. This may not be unconnected with the ―one size fits all solution‖ approach of microfinance. Hence, the need for Islamic microfinance dominates the agenda of many Muslims countries today. Despite the rapid growth in the domestic market, with GPD growth rate of 7 percent in 2013, making it the largest economy in Africa, Nigeria remains prone to poverty and food insecurity that destabilize ordinary citizens and their survival. The celebrated microfinance has not helped much in Nigeria. In fact, out of the 900 microfinance banks in the country, more than 200 were shut down by the apex bank due to misappropriation of deposits and gross violation of the CBN guidelines. The objective of this study is to propose an integrated waqf based Islamic microfinance that is Sharia compliant and capable of harnessing the huge waqf sector to support Islamic microfinance and subsequently overcome shortage of capital faced by microfinance in the country. The study employs survey technique to collect data from 248 respondents from Kano State Zakāh and Hubsi Commission and Grassroots Microfinance Bank based in Kano. The data was analyzed using structural equation modeling. The findings show that all the factors used have high Cranach alpha with minimum of 0.7. The hypotheses tested were all accepted at 5 percent significance level. The implication of the study is that waqf resources can be channeled through Islamic microfinance to improve the welfare of the clients, solve their capital need and human resource deficiency. Keywords: Waqf, Islamic Microfinance, Integration, poverty reduction, Nigeria 1. Introduction Nigeria is a resource-rich country with huge population of almost 170 million as at 2014. This huge endowment of both human and natural resources coupled with vast agricultural land, puts the country in an advantageous position in the Sub-Saharan Africa. One fact however remains visible—the high incidence of poverty as the majority of the population falls below $1.25USD 6 International Islamic University Malaysia. International Institute of Islamic Banking and Finance, Bayero University Kano. 8 The researchers are grateful to Research Management Centre, International Islamic University Malaysia and Islamic Research and Training Institute, Islamic Development Bank for funding the research. 9 International Islamic University Malaysia 10 International Islamic University Malaysia 11 International Islamic University Malaysia 7 1 Book 2.indd 29 10/16/17 4:56 PM
  30. per day . Available statistics from National Bureau of Statistics show that poverty has increased from 54 percent in 2004 to 69 percent in 2011. This regressive development amid plenty of resources is not only too ironical but also deters decent living of the ordinary citizens of the country. From the country`s independence in 1960 to date, Nigeria has embarked on various programs to alleviate poverty, provide finance to the poor farmers through agricultural finance institutions, empower entrepreneurs through community banks and development finance institutions. Notable among these are Nigerian Industrial Development Bank (1964); Nigerian Agricultural Cooperative Bank (1973); Agricultural Credit Guarantee Scheme (1977); Rural Banking Program (1977); Community Bank (1990); National Directorate of Employment (1987); Bank of Industry (1987); Family Economic Advancement Program (1997); National Poverty Eradication Program (1999) and Bank of Industry (2001) among others. Recently, in 2007, Central Bank of Nigeria transformed all former community banks into microfinance banks and established few others. This gave birth to more than 900 microfinance banks in the country (Muhammad, 2012). The emergence of microfinance banks in Nigeria is majorly connected to the role of microfinance sector in poverty reduction particularly in Bangladesh, Indonesia and Malaysia. The year 2005 was declared as the year microcredit as a way of recognizing microfinance as an effective tool of fighting poverty in developing country. Since then it became a major policy agenda in many countries. However, the microfinance industry in Nigeria faces a myriad of challenges which hinders its smooth development to make dent in poverty reduction. For instance, out of the 900 microfinance banks in the country, more than 200 were shut down by the apex bank due to misappropriation of deposits of the poor and gross violation of the CBN guidelines. On the other hand, the large majority Muslim entrepreneurs are excluded in the interest-based microfinancing in the country. Hence, the objective of this study is to propose an integrated waqf-based Islamic microfinance that is Sharia compliant and capable of harnessing the huge waqf sector to support Islamic microfinance and subsequently overcome shortage of capital faced by microfinance in the country. This paper is spread into 5 sections. Section 2 covers the related literature. Section 3 presents the methodology used in the study. Sections 4 and 5 consist of empirical results and conclusion of the paper, respectively. 2. Literature Review 2.2 Concept, Nature, and Measurement of Poverty Poverty is a condition of insufficiency for basic needs such as food, clothing, and shelter. It is usually caused by lack of skills or resource endowment. Poverty reduction dominates the agenda of developing nations. The World Bank set the goals of reduction dominates. Galbraith (1969, cited in Nafziger, 1997) describes poor lucidly. To him, ―people are povertystricken when their incomes, even if adequate for survival, fall radically behind that of community, they are degraded, for in the literal sense, they live outside the grades or categories which the community regards as acceptable.‖ He further goes to describe the conditions explicitly when he explains that those afflicted by poverty have such limited and insufficient food, poor clothing, as well as such crowded, cold and dirty shelter that life is painful and comparatively short. This is similar to the perception of Johnson (1966), who explained that 2 Book 2.indd 30 10/16/17 4:56 PM
  31. poverty may be defined as existing when the resources of families or individuals are inadequate to provide a socially acceptable standard of living . Nevertheless, a more meaningful description of poverty is given by Maidugu (2002). According to western connotation, poor man in a developing country covers about 80 percent of the population. In the developed country, the number constitutes about 25 percent of the population that suffers from malnutrition. Thus, poor man is vulnerable to diseases and average life expectancy is short. He lives in huts, mud houses, under the bridges, parks, slums, or in a crowded apartment where squalor perpetually surrounds him. He is illiterate both in letter and skills and does not get his meals regularly. Besides that, the poor cannot afford good clothing, adequate hygiene, sufficient foods, and proper medication. The Human Development Report states that ―The dimensions of poverty go far beyond inadequate income—to poor health and nutrition, low education and skills, inadequate livelihoods, bad housing conditions, social exclusion and lack of participation‖ (HDR. 2010, p.94). Hitherto, economists do not pay attention to poverty and distribution of income. The popular trickledown effect of economic growth takes front seat in poverty reductions. Thus, it was suggested that poverty reduction goal can be accomplished by economic growth or income redistribution (Bigsten and Levin (2001). Income and consumption is considered as key indicators for economic welfare of the households. Thus, an income measure/benchmark of 1USD per day was developed by World Bank and later on revised to 1.25 dollar per day. This indicator suggests that a household falling short of 1.25 dollar per day is poor. This is used to measure percentage of population in poverty in a country or to compare between countries However, this approach was criticized by scholars since Gross National Product was heavily weighted by the income shares of the rich (Nafziger, 1997, p.125). In fact, Gary (1994) added that it is unfortunate that developmental studies focus on growth while neglecting ―information on who benefitted how much from economic growth and…who has been hurt how much by economic decline.‖ The passive opinion of automatic trickledown to reduce inequality and poverty has therefore not convinced all. How rapid and to what degree this process will occur remains unknown (Yusuf and Deaton, 2009, p. 21). In their attempt to describe poverty, Pramanik (1998) and Pramanik et al. (2008) argue that poverty is complex and should be viewed as multidimensional, resulting from economic, social, political, and religious factors in a given society. It is caused by both economic and noneconomic factors, so attacking it must not focus on income per capita only. The recently developed alternative measure of poverty cuts across income poverty and takes care about other non-material dimension applies in more than 100 developing nations. The new concept is termed as Multidimensional Poverty Index (MPI), which is used by United Nations Development Programme (UNDP) in its ―Human Development Report‖ in October 2010 (The Economist, July, 2010). Thus, to overcome weak economic condition of the poor, there is need for participation in the economic activity. Participation of the poor in the economy will improve their living conditions, make them healthier and by implication more productive and constitute more number of savers in the economy. This will create more loanable funds for investment and through multiplier effect the growth will accelerate further. Braun and Woller (2004) emphasise that the main motivation behind the microfinance development was poverty alleviation. Not only that, microfinance offered the potential to 3 Book 2.indd 31 10/16/17 4:56 PM
  32. alleviate poverty while paying for itself and perhaps even turning a profit —―doing well by doing good.‖ To them, this potential, more than anything, accounts for the emergence of microfinance onto the global stage. Salih (1999) similarly argues that one element of fundamental importance to successful poverty reduction strategy is the inclusion of mechanisms to help the poor withstand adverse shocks such as economic crises or natural disasters. Whenever these calamities occur, the number of poor increases as is affected disproportionately. Capability approach to fighting poverty is developed by the renowned economist, Amartya Sen (1981, 1987). According to Sen, poverty is not seen as a state of low income but as a state of lacking basic capabilities to live in a valuable life. Sen`s capability approach to fighting poverty measures poverty not only in terms of income but also in terms of basic capabilities of individuals. Some of these capabilities are the right to be educated, well nourished, avoiding morbidity and enjoying public participation in political and community life. According to Sen, poverty analysis involves two stages. First is to identify group of poor (identification), and second is to aggregate the characteristics of a set of poor people into an overall impact of poverty (aggregation). Thus, according to Sen, any meaningful and acceptable concept of poverty should, apart from categorizing the poor properly, illuminate the differences among the poor. Sen uses ‗identification‘ and ‗aggregation‘ to evaluate any approach to the concept of poverty (Tseng, 2011). Although Sen provides insight into the notions of well-being, his proposal suffers from lack of practical applications. Other scholars question the character and justifications of Sen`s approach. One set of objections as highlighted by Tseng (2011) is that the sufficient threshold feature embedded in Sen`s capability approach will (i) lead to over allocation of resources of social resources to vulnerable groups, (ii) the threshold are set arbitrarily and (iii) the approach pays no attention to inequality above the threshold. In addition, although, Sen stresses the importance of citizens` choice of basic capabilities the approach has not been practically embarked upon even in developed countries. Interestingly, Sen believes that microfinance can have two positive impacts on women, (i) increases in her income and social status, and (ii) empower women by increasing their decision making power, fertility, and family planning (Tseng, 2011, p.10). Tseng (2011) studies the impact of microfinance on poverty reduction in accordance with Sen`s capability approach. The assessment based on Sen`s capability theory focuses on its impact on education, health and women empowerment. The author concludes that the evidence that microfinance reduces poverty is weak. He added that microfinance does not substantially expand people`s real freedomcapabilities to possesses things they have reasons to value (Tseng, 2011). Relative poverty measurement: According to NBS (2011) relative poverty is defined by reference to the living standards of majority in a given society and separates the poor from the non-poor. Households with expenditure greater than two-thirds of the total household per capita expenditure are non-poor whereas those below it are poor. Further, desegregation revealed that households with less than one-third of total household per capita expenditure are extreme poor while those households greater than one-third of total expenditure but less than two-thirds of the total expenditure are moderate poor. Thus, the methods categorized poor into three categories non-poor, moderately poor, and extreme poor. Absolute poverty measurement approach: This is defined in terms of the minimal requirements necessary to afford minimal standards of food, clothing, healthcare, and shelter. 4 Book 2.indd 32 10/16/17 4:56 PM
  33. This approach considers both food expenditure and non-food expenditure using the per capita expenditure approach (NBS, 2011). Dollar-a-day measurement approach: Yet, another considerable measure of poverty is using monetary value to estimate the number of poor in the country or across the globe. This measure was developed by World Bank to serve as an international indicator of poverty largely for comparison and measuring performance of the economy. Thus, 1 dollar per day became the benchmark. A person is poor if he falls short of this indicator. Recently, due to depreciation of currency and high inflation it becomes 1.25 USD per day. This income measure of poverty faces criticism from various quarters because according to some critique it does not account for welfare improvement on non-monetary aspect of poverty. 2.3 Poverty Profile in Nigeria (1980---2010) Poverty in Nigeria remains very high with almost 70% of the population hits by the poverty incidence. In 2004, Nigeria‘s relative poverty measurement stood at 54.4%, but increased to 69% (or 112,518,507 Nigerians) in 2010 (NBS, 2011). The country is highly blessed with numerous solid minerals and natural gas in addition to the land mass of more than 90,000 square km. The human resource in the country could be a source for foreign exchange earnings if harnessed. The population currently is 168 million putting it the largest among African countries (World Bank, 2011). Table 1 presents poverty trends from 1980 to 2010. It shows that percentage of Nigerians that are non-poor, moderately poor, and extremely poor in the period under review. It was revealed from the table that from 1980 to 2010, there was deterioration in terms of poverty incidence in the country. For instance, the percentage of non-poor population in 1980 was 73 percent and nonpoor 27 percent. This figure was almost reversed three decades later (1980-2010) whereby the poor people constitute almost 70 percent of the population. This unprecedented development will, in no way allows an ordinary Nigerian to enjoy a dignified life, neither in the job sector nor in welfare improvements. Sadly, both the percentages of moderately poor and extremely poor were risen consistently from 1980 through 1996 when it slightly dropped. For the extremely poor the percentage rose from 6.2% in 1980 to 12.1 in 1985. It further inched-up to 13.9 % in 1992. However, in 1996, the figure increased to 29.3%. It was only in 2004 that it declined to 22 percent. This may be due to shift from military rule to civilian governments that comes with a number of opportunities and increased participation in the private sector. Unfortunately, in 2010, the percentage of people in extreme poverty increased more than ever before (38.7%). Thought, politically stable, there were massive corruptions at various levels of government. Similarly, privatizations of the formerly owned public corporations and increased insecurities in the country are the major causes of this unhealthy development. Table 1: Relative Poverty: Non-Poor, Moderate Poor, and Extremely Poor (%) Year 1980 1985 1992 1996 2004 2010 Non-Poor 72.8 53.7 57.3 34.4 43.3 31.0 Moderately Poor 21.0 34.2 28.9 36.3 32.4 30.3 Source: NBS, Harmonized Living Standard Survey, 2010. Extremely Poor 6.20 12.1 13.9 29.3 22.0 38.7 5 Book 2.indd 33 10/16/17 4:56 PM
  34. 6 Book 2 .indd 34 10/16/17 4:56 PM
  35. Table 2 shows poverty incidence from 1980 to 2010 . The figure reveals that poverty incidence has almost doubled from 27.2 in 1980 to 46.3 in 1985. It slightly fell from to 42.7 in 1992. The poverty incidence went up sharply to 65.6 in 1996 and declined to 54.4 in 2004. Unfortunately, it skyrocketed to 69% in 2010. In terms of the population fall in poverty, the trend remained consistently unfavorable to more and more people in the country in the period under review. For instance, during the 1980, the population that was poor was only 17 million. A decade later, this figure has increased to 39 million people. In fact, it worsened between 2004 and 2010. In 2004, the population in poverty was 68.7 million but woefully rose to 112.47 million people in 2010. Table 2: Poverty Headcount 1980-2010 Year 1980 1985 1992 1996 2004 2010 Poverty Incidence (%) 27.2 46.3 42.7 65.6 54.4 69.0 Estimated Population (million) 65 75 91.5 102.3 126.3 163 Source: NBS, Harmonized Living Standard Survey, 2010. Population in Poverty (million) 17.1 34.7 39.2 67.1 68.7 112.47 Table 3 reveals that regardless of the measurement technique used, poverty among the regions is very high. However, regional disparities were noted in the table. Using the relative measurement, the North West, North East, and North Central recorded highest poverty with 77.7%, 76.3%, and 67.5% respectively. The situation is better off in the South Geopolitical zones with 67.0% in South-East, 63.8% in South-South and 59.1% in South West. Using dollar per day, still the North Central, North West, and North East Geopolitical zones are at disadvantaged position. The poverty was 59.7% in the North Central, 69.1% in the North West and 70.4% in North East. The Corresponding figures in the South East is 59.2, South-south, 56.1% and South West 50.1%. The vulnerabilities in the Northern region require attention from all stakeholders in the region and beyond. Table 3: Incidence of Poverty by Zones using different Poverty measures (%) Zone North Central North East North West South East South-South South West Food Poor 38.6 51.5 51.8 41.0 35.5 25.4 Absolute Poor 59.5 69.0 70.0 58.7 55.9 49.8 Source: NBS, Harmonized Living Standard Survey, 2010. Relative Poor 67.5 76.3 77.7 67.0 63.8 59.1 Dollar Per Day 59.7 69.1 70.4 59.2 56.1 50.1 2.4 Microfinance Institutions in Nigeria The microfinance in Nigeria is one of the programs initiated by the government to combat poverty in the country. Thought, it comes late but it has to face challenges of the environment where business as usual dominates the mind of majority of people. The past experiences of and 7 Book 2.indd 35 10/16/17 4:56 PM
  36. current realities of the socioeconomic condition as well as policy environment could constraint the effective outreach thereby affecting the sustainability of microfinance in the country (CBN, ). The previous unsuccessful supply side micro/rural credit has left lessons for any meaningful initiative in the area. Generally, most of the programmes were aimed at enhancing credit supply to the poor farmers or micro-entrepreneurs to scale up, thus increasing growth in productivity and other economic activities. In the study conducted by CBN (2001), it is found that the economy has a preponderance of the poor mostly unskilled who are self-employed. The economic activities are most often subsistence with limited access to credit. Thus, in 2004, it was revealed that 40 percent of the population was in need of microfinance services (Anyanwu, 2004). This caused underutilization of productive capacity with less than half of the informal manufacturing sector operating at near full capacity. However, the acute short of funds, mismanagement, made the initiatives to fall short of achieving their targeted objectives. This led to emergence of Microfinance Policy, Regulatory and Supervisory Framework for the establishment of microfinance banks in Nigeria which was launched in December, 2005. This led to the conversion of former community banks into microfinance banks in 2007. The objective of the program is to increase the financial access to the large segment of potentially productive entrepreneurs, to enhance delivery service of microfinance to small and medium enterprises and to promote linkages between formal and informal sector among others. It was argued that, the microfinance initiative in Nigeria constitutes a market-oriented response to social problems by creating an avenue to help the poor exit poverty through access to finance (CBN). As in Iganiga (2008), the notable microfinance policy measures undertaken by the Central Bank of Nigeria and Ministry of Finance, which can be broadly categorized into (a) Regulatory Policies and (b) Promotion policies a) Regulatory Policies: i) ii) iii) iv) License and regulate the establishment of microfinance banks (MFBs). Strengthen the regulatory and supervisory framework for microfinance banks Strengthen the capital base of the existing microfinance institutions. Increase in the capital base of former community banks which become microfinance banks, from N250,000 (USD2, 115.06) to N20 million (USD169, 204.80). Broaden the scope of activities of microfinance institutions. b) Promotion Policies i) ii) iii) iv) Promote establishment of NGO based microfinance institutions. Promote the participation of Government in microfinance sector by encouraging states and local governments to devote at least one percent of their annual budgets to microcredit initiatives administered through MFBs. Promote the establishment of institutions that support the development and growth of microfinance service providers and clients. Promote sound microfinance practice by advocating professionalism, transparency and good governance in microfinance institutions. 8 Book 2.indd 36 10/16/17 4:56 PM
  37. v ) Mobilize domestic savings and promote the banking culture among low-income groups. 2.4 Prospects of Waqf Nigeria With regard to waqf it is seen as one of the vibrant sector that can contribute to socioeconomic development of the society. Galadanchi (2011) stresses the fact that waqf is a critical component for any Islamic community especially in terms of education and social welfare. The constitution of the Federal Republic of Nigeria, section 272(2) (c) mandates Sharia court of appeal to decide on Waqf or ―any question of Islamic personal Law regarding a Waqf, gift, will or succession where the endower, donor, testator or deceased person is a Muslim‖. However, in most of the states, there was a challenge of compromising this act with the land act. ―The Land Use Act has allowed the state government to allocate and take ownership of lands.‖ Yet, with all these challenges, Muslim dominated states particularly in sates in Northern part of the country that implement Islamic Legal System (Sharīʿah) from 2000 have enacted laws that establish several Zakāh and Waqf boards to regulate and improve mobilization of funds from Zakāt and waqf for socio-economic empowerment. These boards/commissions engage in collecting and disbursing funds that come from Zakāt and waqf. Times they utilize microfinance model to disburse the funds. Thus, the state Zakāh and waqf institutions could put more strategies to harness resources to and collaborate with microfinance institutions for effective utilization of the fund. Currently, Grassroot Microfinance Bank, the largest microfinance bank in Kano State mobilizes cash waqf for disbursement of Qarḍ Ḥasan and other economic empowerment programs in the State. The huge Muslims population could generate significant amount for similar purpose and this will have wide lasting impact on the poor entrepreneurs in the country. 3. Research Method This section focuses on the research method. The study uses empirical techniques in conducting the research. Thus, study area, sample size and sampling technique as well technique of data analysis were discussed. Following Hair et al. (2006) that suggests a minimum of 200 sample size, this study utilizes 248 samples to conduct the analysis. Out of this sample size, 100 were drawn from Grass Root Microfinance Bank while another 148 were from Kano State Zakāh and Hubsi Commission. Both institutions offer empowerment programs for poor and or entrepreneurs on Islamic principles. Purposive sampling was thereof adopted to collect the data from the respondents. The study employs structural equation modeling for the analysis (SEM). This advanced technique aims at testing the hypothetical relationships of the constructs of a conceptual model (Kline, 2010). Two steps structural analysis measurement were conducted. Firstly, measuring the model through confirmatory factor analysis (CFA) and secondly testing the full fledge structural model (Haneef et al., 2015). 3.1 Proposed Model to be Tested Hitherto, waqf is perceived as an instrument to build places of worships and for cemetery. Recently, scholars have advocated for the integration of waqf and microfinance for socio9 Book 2.indd 37 10/16/17 4:56 PM
  38. economic development of the society (Cizakca, 2004; Elgari, 2004; Kahf, 2004, Ahmed, 2007; Hasan, 2010). However, most of these studies have left a gap unfilled in the area operationalization of their proposal for the integration. Hence, IWIMM is particularly designed for the reduction of poverty with the support from Waqf fund via IsMFI while its other key components are Takāful, project financing and human resource development. The IWIMM has already been tested in Malaysia, Indonesia and Bangladesh. This study is an extension of previous study to obtain the perception of respondents on IWIMM. This is also to identify the applicability, suitability and sustainability of IWIMM in Nigeria. Figure 1 shows the components of IWIMM. Figure 1: Integrated Waqf based Islamic Microfinance Model (IWIMM) This study is intended to test the following hypotheses: H1: H2: H3: H4: H5: H6: H7 : Waqf Resources contribute to Islamic Microfinance Islamic Microfinance contributes to Takāful Financing Islamic Microfinance contributes to Human Resource Development Islamic Microfinance contributes to Project Financing Human Resource Development contributes to Project Financing Takāful Financing contributes to Poverty Reduction Project Financing contributes to Poverty Reduction 10 Book 2.indd 38 10/16/17 4:56 PM
  39. 4 . Data Analysis and Findings This section presents the empirical findings of the study. Various statistical tools are used to analyze the data and arrive at the results. 4.1 Profile of the Respondents According to Table 4, there were more female respondents than male respondents in this study. Out of 248 respondents, 185 female respondents represented 74.6% of the total sample size, whereas, only 63were male respondents which represented 25.4%. In this study, different age groups of the respondents were participated. The age groups were 15 - 29 years (25.4%), 30 - 44 years (44.4%), 45 - 59 years (23.8%), and 60 - 64 years (6.5%). Based on the data collection it was observed that 157 (63.3%) respondents were married, whereas, only 25 (10.1%), 49 (19.8%), 16 (6.5%), and 1 (0.4%) were single, divorced, widowed and single parent respectively. In terms of family size, 102 (41.1%) respondents have less than 5 members, 71 (28.6%) respondents have 5 – 7 members, 48 (19.4%) respondents have 5 – 10 members and 27 (10.9%) respondents have above 10 members. Table 4: Profile of the Respondents Variable Demographic Gender Male Female Frequency Percent 63 185 25.4 74.6 Age Group 15-29 years 30-44 years 45-59 years 60-64 years 63 110 59 16 25.4 44.4 23.8 6.5 Marital Status Single Married Widowed Divorced Single parent 25 157 49 16 1 10.1 63.3 19.8 6.5 0.4 Family Size Below 5 5-7 8-10 Above 10 102 71 48 27 41.1 28.6 19.4 10.9 Source: Field Survey, 2013. With regard to educational attainment Table 5 illustrates that 1 (0.4%) informal education, 129 (52.0%) Islamic schools/Madarasa, 24 (9.7%) primary school, 54 (21.8%) secondary school, 7 (2.8%) diploma/college, 5 (2.0%) tertiary education and 28 (11.3%) others educational 11 Book 2.indd 39 10/16/17 4:56 PM
  40. background holders were participated . In the survey questionnaire, the respondents were asked ―have you taken any vocational training‖ and based on the responses, 202 (81.5%) respondents did not take any vocational training yet, whereas, only 46 (18.5%) respondents taken the vocational training programme. Table 5: Education and Training Variable Level of Education Informal education Islamic schools/Madrassa Primary school Secondary school Diploma/college Tertiary institution Others Years of Schooling 5 years and below 6-10 years 10 years and above Have you taken any vocational training Yes No Vocational Training Yes No Source: Field Survey, 2013. Frequency Percent 1 129 24 54 7 5 28 0.4 52.0 9.7 21.8 2.8 2.0 11.3 56 38 154 22.6 15.3 62.1 46 202 18.5 81.5 46 202 18.5 81.5 Table 6 shows that most of the respondents` monthly income before joining the scheme falls below the poverty line benchmarks. 45.6 percent earns less than N6000 monthly. Another 20 percent are in the range of 6000 to 9000. Yet 16.5 percent earns 9001 to 12,000. Interesting, after joining the scheme the income of the respondents has increased. With regard to the monthly expenditure, again about 44 percent spent less than 6000 monthly. About 25 percent spent between 6000 to 9000 monthly. In addition, 12.5 percent spent between 9000 to 12,000, while only 6.6 percent spent more than 12,000. This finding shows that most of the respondents are low income earners since neither expenditure nor income exceeds even the minimum wage set by the federal government. 12 Book 2.indd 40 10/16/17 4:56 PM
  41. Table 6 : Distribution of Respondents Based on Income and Expenditure Variable Monthly income (before joining the scheme) Less than N 6000 N 6000 - N 9000 N 9001 - N 12000 More than12000 Frequency Percent 113 51 41 35 45.6 20.6 16.5 14.1 Monthly income (after joining the scheme) Less than N 6000 N 6000 - N 9000 N 9001 - N 12000 More than12000 16 12 16 36 6.5 4.8 6.5 14.5 Monthly expenditure (before joining the scheme) Less than N 6000 N 6000 - N 9000 N 9001 - N 12000 More than12000 109 63 31 16 44.0 25.4 12.5 6.5 Monthly expenditure (after joining the scheme) Less than N 6000 N 6000 - N 9000 N 9001 - N 12000 More than12000 16 12 29 24 6.5 4.8 11.7 9.7 Source: Field Survey, 2013. 4.2 Validating the IWIMM 4.2.1 Reliability Analysis According to Malhotra (2010), reliability refers to the extent to which measurements of the particular test are repeatable. Hair et al. (2010) stated that reliability is an ―assessment of the degree of consistency between multiple measurements of variables‖. In other word, reliability is the degree of uniformed results on repeated trails given by an instrument measure (Bougie and Sekaran, 2010). According to Cooper and Schindler (2011) and Zikmund et al. (2010), there are four common methods to measure reliability, namely the test-retest method, the alternative form method, the split-half method, and the internal consistency method which is known as Cronbach‘s alpha. The most popular method of testing the reliability of questionnaires is internal consistency, or Cronbach‘s alpha (Hilton et al., 2004). Internal consistency is the degree of different items that are homogeneous in measuring the same underlying construct (Cooper & Schindler, 2011). It was introduced by Kuder and Richardson in 1937 for dichotomous data and then generalized by Cronbach which can be applied to any data. In this study, Cronbach‘s alpha was used to test internal consistency of 16 items for all dimensions, which are, attitude toward behavior, subjective norm, normative belief, behavioral belief and behavioral intention. Cronbach‘s alpha score ranges from 0 to 1, with values close to 1 indicating high consistency (Hair et al., 2010). 13 Book 2.indd 41 10/16/17 4:56 PM
  42. Table 7 illustrates the Cronbach ‘s alpha for six dimensions of integration of Waqf and Islamic microfinance in Nigeria. The alpha values ranged from 0.808 to 0.980, exceeding the minimum requirement of 0.70 Cronbach‘s alpha. Thus, all research items and overall instruments were considered highly reliable. Based on the exploratory factor analysis (EFA) on the other hand, the minimum factor loading is 0.524, which meets the requirement. Moreover, KMO value 0.906 indicates all factor loadings results are acceptable for the further analysis. Dimension Islamic Microfinance Project Financing Takāful Financing Waqf Resources Human Resource Development Poverty Reduction 4.2.2 Table 7: Reliability Analysis No. of items 07 07 09 06 11 06 Cronbach’s Alpha 0.917 0.934 0.808 0.980 0.933 0.832 Confirmatory Factor Analysis (CFA) According to Kline (2010), the purpose of a measurement model points to the appropriateness as measurement instrument of the observed indicators representing a latent variable. This is echoed by Hair et al. (2010), who observed that in measurement theory, the purpose is to estimate the relationship between the observed and the underlying latent variables. The adequacy of a measurement model is performed by confirmatory factor analysis (CFA); in doing so, four fit indices are checked to ascertain the fitting of the model with the data: chi-square statistic, normed chi-square, root mean square approximation (RMSEA) and comparative fit index (CFI). For an adequate model fit, general guidelines suggest cut-off values for such indices: Normed Chi-Square and RMSEA are to be less than 5 and 0.088 respectively, while CFI values are to be above 0.9 (Hair el al., 2010; Byrne, 2010). Prior to testing the structural equation model, CFA was performed on the entire set of measurement items simultaneously. The process of evaluating the measurement model resulted in deleting terms based on the factor loadings only factor loadings of less than 0.40 (Field, 2009). Based on the CFA tests, all four dimensions had adequate model-to-data fit: normed chi square value below 3.0; CFI value above 0.9; and RMSEA value less than 0.08. Based on the CFA tests, authors also measured the reliability and validity of the each construct of this research. Cronbach‘s Alpha measures the reliability coefficient, which indicates the consistency of the entire scale (Hair et al., 2010), or the overall reliability of the questionnaire (Field, 2009). The results from this study showed all six dimensions reliability values above 0.70 which meets the requirements of the construct (see Table 7). This study has considered all two components of the construct validity, namely convergent validity and discriminant validity. For convergent validity, this study assesses factor loadings and constructs reliability (CR). A standardized factor loading of 0.50 or higher, ideally 0.70 or higher, provides strong evidence of convergent validity (Hair et al., 2010). In the measurement model, all the items had significant factor loadings, most of them greater than 0.70, suggesting adequate convergent validity. Moreover, the construct reliability of this study also indicates adequate convergence with values ≥ 0.7, thus indicating good reliability (Hair, et al., 2010). For 14 Book 2.indd 42 10/16/17 4:56 PM
  43. the discriminant validity , variance extracted of the each item on a construct should be calculated to get value of average variance extracted (AVE) and this value should be 0.5 or higher (Hair et al., 2010). Based on the CFA results, AVE values are greater than 0.5 for each construct which indicates that discriminant validity is supported for the measurement model. Fit Indices/Variables Waqf Islamic Microfinance Takāful Project Financing Human Resource Poverty Reduction 4.2.3 Table 8: Fitness of the Constructs CMIN/DF 2.51 (5) 2.38 (5) 2.51 (5) 2.04 (5) 1.64 (5) 1.51 (5) CFI 0.99 (0.95) 0.93 (0.95) 0.99 (0.95) 0.99 (0.95) 0.99 (0.95) 0.99 (0.95) RMSEA 0.078 (0.08) 0.075 (0.08) 0.078 (0.08) 0.066 (0.08) 0.051 (0.08) 0.046 (0.08) Structural Equation Modeling (SEM) and Hypotheses The structural equation modeling (SEM) is used to test the causal effect among the main constructs of a hypothesized model (Kline, 2010). In this study, a structural model was tested to examine the relationships of ‗waqf resources and Islamic microfinance investment‘, project financing and Islamic microfinance investment‘, ‗Takāful financing and Islamic microfinance investment‘, ‗human resource development and Islamic microfinance investment‘, ‗project financing and Takāful financing‘, project financing and poverty reduction, ‗human resource development and poverty reduction‘, and Takāful financing and poverty reduction. Fit Indices CMIN/DF CFI NFI RMSEA Cut-off 5 0.90 0.95 0.08 Table 9: Fitness of the Model Observed Value 2.897 0.915 0.95 0.088 Decision Accept the goodness of fit of the model Accept the goodness of fit of the model Accept the goodness of fit of the model Accept the goodness of fit of the model It can be observed from figure 1, the model had an adequate fit to the data: chi square per degree of freedom (1124.071/388) = 2.897, less than 3; CFI = 0.915, less than 0.9, p = 0.000, less than p ≥ 0.05; and RMSEA = 0.088 (Hair et al., 2010). 15 Book 2.indd 43 10/16/17 4:56 PM
  44. Figure 2 : Modified Structural equation modelling of Intention to adopt Islamic Micro Investment .32 Chi Square = 1124.071 df = 388 p = .000 Normed Chi Square = 2.897 CFI = .915 RMSEA = .088 err19 err20 err21 err22 err23 TF4 TF5 TF6 TF7 TF8 .86 .96 WR1 err5 WR2 .35 err4 .23 WR3 .98 err3 WR4 .96 .50 err2 err1 .32 .31 WR .24 .90 IMF7 IMF .74 .82 .84 .37 PF .96 .99 .73 err25 err13 .95 .68 .82 .71 err18 PF6 err17 IMF1 IMF2 IMF3 IMF4 IMF5 IMF6 err12 err11 err10 err9 err8 err7 PF5 .50 -.23 err35 .93 .61 PF4 err16 err15 PF3 err14 .55 .78 PR PR1 err26 PR2 err27 PR3 err28 PR4 err29 .25 .53 .78 err34 WR6 .38 .81 .73 .80 .53 WR5.79 .65 err24 TF .20 err6 .95 .92 .77 HRD .89 .96 .89 .85 HR1 HR2 HR3 HR4 err33 err32 err31 err30 As illustrated in Figure 2, the R square values for the five dependent (endogenous) variables were poverty reduction (0.40), Takāful financing (0.67), human resource development (0.27), project financing (0.10) and Islamic microfinance investment (0.10) which indicated that dependent (endogenous) variables moderately explained by the independent (exogenous) 16 Book 2.indd 44 10/16/17 4:56 PM
  45. variables . Based on the SEM analysis it was observed that all eight hypotheses were supported in the SEM model at 1% and 5% significant level. However, project financing have negative influence on poverty reduction in Nigeria through integration of waqf resources and Islamic microfinance investment (see Table 15). This may be due lack of its application in the microfinance sector in Nigeria. Hypothesis 1: Waqf Resource and Islamic Microfinance The first hypothesis stated that there is positive relationship between waqf and Islamic microfinance. Interestingly, the result shows the hypothesis is accepted. The value of coefficient was 0.315 and p-value as 0.001, which is statistically significant. Thought this relationship theoretically and conceptually was established (Hassan 2010, Muhammad, 2012, Shirazi, 2013 and Cizaka 1999), one might begin to ponder what motivate the respondents to perceived waqf as potential sector for poverty reduction. Perhaps this may be due to the presence of Zakāt and waqf institutions in the area of study. Additionally, majority of the respondents (148) were drawn from Zakāh and Hubsi Commission Kano State. The remaining respondents (100) were drawn from Grassroot Microfinance Bank, which equally generates waqf for socio-economic development of its clients from philanthropists as discussed elsewhere in the research. This is to effort to unlock the potential waqf for human development in the society. Hypothesis 2: Islamic MF and Project financing Hypothesis 4 proposes that Islamic microfinance influences project financing. The result shows that the hypothesis is accepted. The coefficient value was 0.324, which is significant at 5 percent. The anticipated outcome paves way for introducing project financing to combat poverty in the country through Islamic microfinance. However, this is not without its challenges for implementing the project financing, which could come in various forms such as individual or projects financing. Both way, the implementing agency must scrutinize the financial needs of the applicant(s) and filter out any disguise needs so as to mitigate and overcome agency problem. Though group lending has been developed as in countries like Bangladesh, yet there exist some elements of group lending especially in agricultural sector. The concept of project financing may be new which requires piloting the schemes before it becomes available to any applicant. Hypothesis 3: Islamic Microfinance and Takāful Hypothesis 3 proposes that Islamic microfinance influences Takāful significantly. The result shows this hypothesis is accepted with coefficient value of 0.202, which is statistically significant at 5 percent. Takāful, being a supporting product is not offered by many microfinance institutions. It is a cover for any risk on self or business of the clients. Additional dimension in the hypothesized Takāful financing is that the clients are willing to give to others, not only to cover their self and business. This will increase brotherhood and cooperation among the clients and even no-clients. In Nigerian context, Takāful seems to be very new except informal Takāful available among some cooperatives. This is because Islamic banking and finance is at its infancy stage in Nigeria. However, Grassroots Microfinance bank introduces compulsory saving to mitigate business risk 17 Book 2.indd 45 10/16/17 4:56 PM
  46. of the clients . In fact, among vulnerable poor micro-entrepreneurs, Takāful will be effective in reducing poverty or its incidence. Hypothesis 4: Islamic Microfinance and Human Resource Hypothesis 4 stated that Islamic microfinance has a positive relationship with human resource development. This proposition is supported by the result. The estimated value shows the coefficient value of 0.527, which is also statistically significant. This implies that Islamic microfinance can be used to build human resource development and improve capability of the clients of Islamic microfinance clients. The training ranges from book keeping to marketing as well spiritual aspect of human development. The Islamic ethics can be inculcated in the training such as trust, honesty and keeping promise and ensuring equity in all business dealings. This aspect, we believe, requires concrete effort to integrate it into the banking and finance practices in general and Islamic microfinance in particular. Hypothesis 5: Project Financing and Takāful Financing This hypothesis is part of the additional findings on the model. Perhaps the relationship between the project financing and Takāful expresses the linkages between the growths in business when insured by the Takāful. A mutual insurance such as Takāful, certainly contributes to stability of the client and the business in situation of loss that may lead to business failure. It may also indicate the logical flow of business undertaking with Takāful for poverty reduction or socioeconomic development of the clients. Thus, any project financing undertaken should have the backing of Takāful if that financing will lead to poverty reduction. Hypothesis 6: Takāful Financing and Poverty Reduction It has been hypothesized that Takāful financing and poverty reduction are positively related. Finding shows that the relationship is significant with coefficient value of 0.373 and p-value of 0.001, which is below the threshold 5 percent level. This as stated earlier shows the role of Takāful financing in poverty reduction. The Takāful covers both the person`s business and his family as well as willingness to give to others any form of support particularly in business and family. This promotes the acts of giving among the clients and as shown by the result it may have significant impact on poverty reduction. Hypothesis7: Project Financing and Poverty Reduction Project financing was hypothesized to affect poverty through partnerships arrangement. Thought the result from the analysis shows that it is significant but the relationship was negative. The coefficient value was -0.231. This could be due the need of additional supporting mechanism. Interestingly, there is a strong and positive relationship between project financing and Takāful. This may make it possible to undertake project financing only when there is Takāful coverage in the arrangement. Again, this integrated model need to pay attention to creating awareness and educating the stakeholders particularly the clients and the investors on the role plays by various components. 18 Book 2.indd 46 10/16/17 4:56 PM
  47. 19 Book 2 .indd 47 10/16/17 4:56 PM
  48. Hypothesis 8 : Human resource Development and Poverty Reduction In the original model, human resource development was hypothesized to reduce poverty reduction via project financing. In other words, training is a pre-condition for accessing the financing. This is to ensure proper utilization of the funds disbursed. However, at the baseline model that was tested, it seems to make the overall result not to fit the data. Thus, it was modified as suggested by the software to link the human resource with poverty reduction variables and the result turn out to be positive. This, however, does not necessarily mean predisbursement training is not required. Table 10 shows vividly the summary of the findings and their nature of relationships as well the value of parameters in the study. Table 10: Hypothesized Path Coefficients Hypothesized paths H1 Waqf Resources → Islamic Microfinance H2 Islamic Microfinance → Project Financing H3 Islamic Microfinance → Takāful Financing H4 Islamic Microfinance → Human Resource Development H5 Project Financing → Takāful Financing H6 Takāful Financing → Poverty Reduction H7 Project Financing → Poverty Reduction H8 Human Resource Development→ Poverty Reduction Coefficient (β) 0.315 0.324 0.202 P-value (sig.) 0.001 0.001 0.001 0.001 Remarks Supported Supported Supported Supported 0.735 0.001 0.001 Supported Supported -0.231 0.035 Supported 0.001 Supported 0.527 0.373 0.548 5. Conclusions Poverty alleviation remains one of the major challenges in the 21st Century Nigeria. However, several efforts to combat the poverty have not been successful and left the country with not only increasing figure but also the suffering of the poor majority. There were accusations that many of these initiatives are not structured for the interest of the poor themselves. The over forty programs of poverty reduction since independence have rather became the tools for perpetuating corruptions in the name of poverty alleviation. When left to the private sector, the effect is not that much since the business environment is either do not allow businesses to prosper or favors very little conglomerate who are linked with the government and the ruling political party. Amidst of abundant resources, the high incidence of poverty puts the country among the poorest countries in the world. The poverty rate increases from 54% in 2004 to 69% in 2010. Additionally, the distribution of resources has worsened from 2004 to 2010. The inequality in 2004 was 0.4296 and increase to 0.447. This suggests a rising inequality in the country by 4.1%. Additionally, in both rural and urban locations there was increase in inequality by 4.2% an 2.2% respectively. Observing some selected states, there were persistent deteriorations in the 20 Book 2.indd 48 10/16/17 4:56 PM
  49. inequality generally . However, Lagos state witnessed a tremendous fall in inequality by 26% from 2004 to 2010. The findings from this study show that all the factors used have high Cronbach alpha with minimum of 0.7. Overall the model fits the data as the result of the values of chi-square, CFI, and RMSEA are 2.89, 0.9, and 0. 088, respectively. The hypotheses tested were all accepted at 5 percent significance level. The implication of the study is that waqf resources can be channeled through Islamic microfinance to improve the welfare of the clients, solve their capital need and human resource deficiency. 21 Book 2.indd 49 10/16/17 4:56 PM
  50. References Ahmed , H. (2007). Waqf-Based Microfinance: Realizing the Social Role of Islamic Finance. Jeddah: Islamic Research and Training Institute, Islamic Development Bank. Anyanwu, C. M. (2004). Microfinance institutions in Nigeria: Policy, practice and potentials. Paper presented by the Deputy Director Central Bank of Nigeria at the G- 24 workshop on ―Constraints to Growth in Sub Saharan Africa,‖ Pretoria, South Africa, November 29-30, 2004. Bougie, R., & Sekaran, U. (2010). Research Methods for Business: A Skill Building Approach. 5th edition, John Wiley & Sons, Inc. Braun, J. C., & Woller, G. M. (2004). Microfinance: A Comprehensive Review of the Existing Literature. Journal of Entrepreneurial Finance and Business Ventures, 9 (1), 1-26 Byrne, B.M. (2010). Structural Equation Modeling with AMOS: Basic Concepts, Application, And Programming. Second Edition: New York: Routledge. Cizakca, Murat (2004), "Cash Waqf as Alternative to NBFIs Bank", paper presented in the International Seminar on Nonbank Financial Institutions: Islamic Alternatives, March 1-3, 2004, Kuala Lumpur, jointly organized by Islamic Research and Training Institute, Islamic Development Bank and Islamic Banking and Finance Institute Malaysia. Cooper, D.R., & Schindler, P.S. (2011). Business Research Methods. 11th edition, New York, McGraw-Hill. Elgari, Mohamed A. (2004), "The Qarḍ Ḥasan Bank", paper presented in the International Seminar on Nonbank Financial Institutions: Islamic Alternatives, March 1-3, 2004, Kuala Lumpur, jointly organized by Islamic Research and Training Institute, Islamic Development Bank and Islamic Banking and Finance Institute Malaysia. Field, A. (2005). Discovering statistics using SPSS. Second edition, Sage, London. Field, A. (2009). Discovering statistics using SPSS. Third Edition, London: SAGE Publications Ltd. Galadanchi, Bashir S. (2011). A Telephone interview with Dr. Bashir Galadanchi, Director IIIT Nigeria and former Commissioner to the Kano State Government, on 26/06/2011. Hair, J.F., Black, W.C., Babin, B.J. & Anderson, R.E. (2010). Multivariate Data Analysis: A Global Perspective. 7th edition, New Jersey: Pearson Prentice Hall. Haneef, A. Pramanik, A. Omar, M. Amin, F. Muhammad, A. (2015) Integration of WaqfMicrofinance for Poverty Reduction: The Case of Bangladesh, International Journal of Islamic and Middle Eastern Finance and Management, Vol.8 No. 2, 246-270 Hassan.M. Kabir. (2010). An Integrated Poverty Alleviation Model Combining Zakāt, Awqāf and Microfinance. Seventh International Conference – The Tawhidi Epistemology: Zakāt and Waqf Economy, Bangi 2010 Iganiga, B. O. (2008). Much Ado about Nothing: The Case of the Nigerian Microfinance Policy Measures, Institutions and Operations, Journal of Social Science, 17 (2) Kahf, Monzer (2004). Sharīʿah and Historical Aspects of Zakāh and Awqāf. Background paper prepared for Islamic Research and Training Institute, IDB, Jeddah. 22 Book 2.indd 50 10/16/17 4:56 PM
  51. Kano State Zak āh and Hubsi Commission (2003) Law and Comprehensive Achievements from inception to 2010, Aminu Kano Way, Kano State Kline, R.B. (2011). Principles and Practice of Structural Equation Modeling. 3rd edition, New York: Guilford Press. Maidugu, A.A. (2003), ―Poverty Alleviation through Islamic Redistribution Schemes: A Case Studyof Zamfara Zakāt and Endowment Board‖, unpublished thesis (PhD), Usmanu Danfodiyo University, Sokoto Malhotra, N. (2010). Marketing Research: An Applied Orientation. 6th edition, Pearson education, Inc. Mohamed A. Haneef, Ataul Huq Pramanik, Mustafa O. Mohammed, Aliyu Dahiru and Fouad B. Amin (2013a) ―Integration of Waqf and Islamic Microfinance for Poverty Reduction: A Survey in Kuala Selangor, Malaysia‖ Journal of Islamic Finance, Vol. 2 No. 2 (2013) 001 – 016. IIUM Institute of Islamic Banking and Finance ISSN 2289-2117 (O) / 2289-2109 (P) Mohamed Aslam Haneef, Ataul Haq Pramanik, Mustafa Omar Mohammad, Md. Fouad Bin Amin and Aliyu D. Muhd (2013b) ―Integration Of Waqf - Islamic Microfinance Model For Poverty Reduction: The Case Of Bangladesh‖ 9th International Conference on Islamic Economics and Finance, Istanbul, Republic of Turkey, on 9-10 September 2013 Istanbul. Muhammad A. and Na`iya, I. ―The Role of Waqf in Socio-economic Transformations of Muslims in Northern Nigeria‖ Journal of Awqāf, Kuwait Awqāf Public Foundation (2013) (forthcoming). Muhammad, A. D. (2012) Challenges of Microfinance and the Prospects of Developing and Introducing an Islamic micro-investment model in Nigeria, Unpublished P.hD. Thesis, International Islamic University Malaysia. Muhammad, A. D. (2013) Revitalizing Waqf in Northern Nigeria: An Agenda for Poverty Reduction, in (edit) Essentials of Islamic Banking and Finance in Nigeria, Benchmark Publishers, Nigeria Nafziger, E. W. (1997). The Economics of Developing Countries: (3rd ed.). Kansas State University NBS (2011), Harmonized Living Standard Survey, 2010 by National Bureau of Statistics NBS (2011), Harmonized Living Standard Survey, 2010 by National Bureau of Statistics Oseni, Umar (2009) Towards the Effective Legal Regulation of Waqf in Nigeria: Problems and Prospects: a paper presented at International Conference on Waqf Laws and Management: Reality and Prospects, organized by Management Centre, IIUM Pramanik, A. H. (1998). Poverty from Multidimensional Perspectives: A Micro Level Study of Seven Malaysian Kampungs (Villages). Cahaya Pantai (M) SDN. Pramanik, A. H., Haneef, M. A., Meera, A. K., and Yusoff, W. S. (2008) Poverty with Many Faces: A Case Study of Malaysia, IIUM publication Salih, S. A. (1999). The challenges of poverty alleviation in IDB Member Countries, Islamic Development Bank, Jeddah 23 Book 2.indd 51 10/16/17 4:56 PM
  52. Sen , Amartya (1981, 1987) 1987b. The Standard of Living, Cambridge: Cambridge University Press. Sen, Amartya. 1981. Poverty and Famine: An Essay on Entitlement and Deprivation, Oxford: Oxford University Press. Shirazi, Nasim (2013). Integrating Zakāt and Waqf into the Poverty Reduction Strategy of the IDB Member Countries, A presentation at the 2nd International Conference on Islamic Economics and Economies of the OIC Countries (ICIE 2013) 29-30 January 2013, Kuala Lumpur Tseng, C. (2011). Microfinance and Amartya Sen‘s Capability Approach, a thesis submitted to the University of Birmingham for the degree of Doctor of Philosophy World Bank (2011). World Development Indicators 2011. World Bank Publication Yusuf, S. Deaton, A. (2009). Development Economics through the Decades: A Critical Look at the 30 Years of the World Development Report, World Bank. Zikmund, W.G., Babin, B.J., Carr, J.C., & Griffin, M. (2010). Business Research Methods. 8th edition, South-Western College Publishing. 24 Book 2.indd 52 10/16/17 4:56 PM
  53. 2 Socioeconomic Role of Zak āh and Waqf in Islamic Finance Ahmad Bello Dogarawa1 This paper discusses the socioeconomic role of the institutions of Zakāh and Waqf in Islamic finance. The aim is to show how the two institutions could provide an economic safety net to society. The paper is both expository and analytical with presentation based on desk research. The methodology is considered appropriate in view of the nature and objective of the study. The paper posits that Zakāh and Waqf undoubtedly are among the several instruments that are used in Islamic finance to alleviate poverty and enhance welfare in the society, and that in the modern economy, Zakāh could be used for provision of Islamic education; vocational training and necessary tools; agriculture and cottage industries; simple fixed assets for small utility and trade projects working capital to craftsmen; as well as lowcost housing and medical facilities for its beneficiaries. Waqf funds could also be used for contemporary socioeconomic issues such as education, skills and micro entrepreneurial development, health care and care of HIV/AIDS infected population, and water and sanitation facilities. The paper concludes that to activate and revitalize the institutions in Muslim societies and communities, there is a dire need for reform in its management formulas and to address the unsettled issues inherent in the institutions. Keywords: Islamic Finance; Poverty; Social justice; Waqf; Welfare; Zakāh 1. Introduction One of the most important objectives of Islam is to realize greater justice in human society. Achieving this noble objective is not possible unless all human institutions, including the financial system, contribute positively towards this end. A system of finance may be able to promote justice if, in addition to being strong and stable, it satisfies at least two conditions. Firstly, financiers share the risk associated with the business for which they contribute capital so as not to shift the entire burden of losses to the entrepreneur. Secondly, an equitable share of financial resources should be available to the poor to help eliminate poverty, and reduce inequalities of income and wealth. It is argued that in view of its profit-risk sharing characteristics and socioeconomic function, and given its fine blend of community welfare, ethics and morality, and investments in the real economy, Islamic finance is well equipped with all that an economy requires to achieve not only financial stability and economic growth but also to promote justice through its numerous socioeconomic instruments (Ahmad, 2007). Among the several instruments that are used in Islamic finance to alleviate poverty and enhance welfare in the society, the two important are Zakāh and Waqf. On the one hand, Zakāh, the determined share of wealth prescribed by Allah to be distributed among the categories of those entitled to receive it, helps generate a flow of funds and recruit the necessary manpower, and on the other hand, Waqf, which stands for holding an asset and preventing its consumption for the purpose of repeatedly extracting its usufruct for the benefit of an objective representing righteousness and/or philanthropy for as long as its principal is preserved, provides the material 1 Department of Accounting, Ahmadu Bello University, Zaria, Nigeria, Email: abellodogarawa@gmail.com. 25 Book 2.indd 53 10/16/17 4:56 PM
  54. infrastructure and creates a source of revenue for use in , among others, social welfare enhancing activities at family, community, and state levels. Zakāh is a unique, spiritually charged filtering device primarily designed to cleanse one‘s possession or wealth, protect him against spiritual poverty and to achieve the objectives of promoting stable economic growth through investments, employment and balance consumption; and achieving greater income equality through an equitable distribution of wealth, thereby eliminating poverty and extreme disparities of wealth between the rich and the poor (Ali, 2009). Waqf, as an important institution of Islamic civilization, aims at taking care of the needs of the society that are otherwise ignored in the process of economic growth and development, the major social and economic objectives of which include heart reconciliation between the haves and the have-nots, satisfaction of the basic economic needs of the poor, defense of the Muslim Ummah and its ideology, and solving dangerous problems such as poverty, unemployment, and catastrophes (Ahmed, 2004; Kahf, 2007). It is observed that the obligation of Zakāh is not in any way affected if governments neglect it or in the absence of an Islamic government or constituted agencies. Where government or its agencies are not responsible for Zakāh administration, individual Muslims remain religiously obligated to give away their due Zakāh by distributing directly or through charitable voluntary organisations to the specified recipients in order to achieve its socioeconomic objectives throughout the society. However, due to a variety of eroding factors, the institution of Zakāh, which has once provided an economic safety net to society, has lost its meaning. Today, it has an irregular function reduced to almost a ritual practiced individually by a small number of Muslims. Many who pay Zakāh, unfortunately, do not even know how to accurately calculate it, let alone its potential economic impact on society. Furthermore, the absence of trustworthy and credible Zakāh administration voluntary organisations in many Muslim countries has made the socioeconomic role of Zakāh to be almost a thing of the past (Shehata, 1989). It is also observed that while the altruistic and philanthropic nature of Muslims has facilitated the establishment, growth and development of Waqf institution in the early generations of Muslim, thereby contributing significantly to the overall welfare of the Islamic society, establishment of revenue streams Awqāf to facilitate sustainable growth and development remains sadly lacking in most modern Muslim communities. This is despite the fact that the numerous education, health, food, investment, and other socioeconomic needs of Muslim communities, which the Government may not be able to provide cannot be catered for through Zakāh fund (even where Zakāh is efficiently collected and disbursed), given its restricted use, and therefore, communities will have to depend on voluntary donations like Waqf to pursue some of their needs in the modern economy. Arising from the foregoing, the questions that come to mind are follows. What is the socioeconomic role of Zakāh and Waqf in Islamic finance? To what extent could Zakāh and Waqf institutions be used in addressing the menace of poverty and promoting social justice in the modern Muslim communities? What are the pertinent issues and success factors for the revival of these great institutions? This paper discusses the socioeconomic role of the institutions of Zakāh and Waqf in Islamic finance. The paper is both expository and analytical with presentation based on desk research. The methodology is considered appropriate in view of the nature and objectives of the study. The paper contributes to the literature by synthesizing the various views on the socioeconomic role of 26 Book 2.indd 54 10/16/17 4:56 PM
  55. Zak āh and Waqf in modern Muslim communities and the process of revitalizing it. The paper also adds to the pool of literature on the subject of social role of Islamic finance. The paper is divided into six sections. Section 2 explains the concept, scope, and historical development of Zakāh and Waqf. Sections 3 and 4 discuss the socioeconomic role of Zakāh and Waqf, respectively. Section 5 highlights the imperatives for revitalising the institutions of Zakāh and Waqf in the modern economy. Section 6 concludes the paper and offers some suggestions. 2. Concept, Scope, and Historical Development of Zakāh and Waqf In Arabic linguistics, Zakāh simply means ‗blessing, growth, cleanliness, purification or betterment‘ (Kahf, 1999). In the Islamic law, the word Zakāh refers to the determined share of specified types of wealth prescribed by Allah to be distributed among the categories of those entitled to receive it at a specified period. It is a compulsory payment by the wealthy to the economically underprivileged (Mathews and Tlemsani, 2003) so as to set every Muslim free from the enslavement of fear and hunger based on the fact that man has created nothing but he adds to the utilities of things, thus must give a portion of it as the right of the poor and needy for the cause of Allah in order to realise the security and subsistence of every individual in society (Kahf, 1989). The payer while giving it has a deep sense of duty towards Allah, the Law-Giver, he has a genuine dedication to the aims and objects of the obligation, and he is aware of his ability to pay it. Zakāh is, therefore, a unique, spiritually charged filtering device primarily designed to cleanse one‘s possession or wealth necessary to protect the owners of wealth against spiritual poverty and to achieve the objectives of: promoting stable economic growth through investments, employment and balance consumption; and achieving greater income equality through an equitable distribution of wealth, thereby eliminating poverty and extreme disparities of wealth between the rich and the poor (Ali, 2009). Payment of Zakāh is compulsory on every Muslim who possesses the minimum Niṣāb (exemption limit or criterion of Zakatability) of wealth that enjoys growth or is a result of a growth process, whether the person is man, woman, young, old, sane, or insane (Qaradawi, 1999). The Niṣāb will not be valid unless it fulfills two conditions. One, the amount must be the excess or surplus from one‘s essential needs for living such as food, clothing, housing, vehicles, tools and machinery that is used in business. Two, Niṣāb must mature, that is the money is not liable for Zakāh unless it has remained a full year in the possession of a person except for farm produce, whose due is on the day it is harvested (Qaradawi, 1999). The government of the Prophet (Peace and blessing of Allah be upon him) used to collect and distribute Zakāh. The Prophet (Peace and blessing of Allah be upon him) and later his caliphs appointed Zakāh workers and assigned to them some income from Zakāh proceeds based on Qur‘ān, 9:60. During the early history of Islam, Zakāh officials used to go to potential Zakāh payers, and after having properly assessed their Zakatable assets, collect the due amounts. The application of this method was clear with regards to Zakāh on apparent and obvious wealth, that is, livestock and agricultural produce, while the responsibility of assessing and disbursing Zakāh on hidden wealth such as cash and items of trade was left to the payer. With the introduction of the idea of al-ʿUshr during the reign of Umar Ibn al-Khattab (May Allah be pleased with him), a new form of collecting Zakāh on merchandise was introduced at 27 Book 2.indd 55 10/16/17 4:56 PM
  56. check points on major highways , especially those coming from other countries and appointed tax collectors who used to collect both taxes on import from non-Muslim foreign traders and Zakāh from Muslim traders, a practice that continued throughout the early history of Islam (Ahmed, 2004). Until the end of the Ottoman Empire, it was the tradition of Muslim governments throughout the history to assign a fund or account in the treasury for Zakāh, and its proceeds are distributed within the Sharīʿah requirements. On the other hand, the state may delegate individual payers to dispose of their Zakāh to proper recipients as long as it is generally known that individuals are keen to pay it out of their religious enthusiasm (Kahf, 1999). Waqf on the other hand is a voluntary act of charity that comes under the general terms of Ṣadaqah (voluntary charity) and Infāq (voluntary spending for the sake of Allah). Linguistically, Waqf means stand still, hold still, not to let go (Ahmed, 2004). Technically, Kahf (1998) sees it as holding an asset and preventing its consumption for the purpose of repeatedly extracting its usufruct for the benefit of an objective representing righteousness and/or philanthropy for as long as its principal is preserved by its own nature - as in land - or from arrangements and conditions prescribed by the Waqf founder. Making a Waqf is considered a virtuous and meritorious act. The Prophet (Peace and blessing of Allah be upon him) encourages Muslims to create ongoing charity that will continue to generate benefits/revenues for use in the targeted objectives as reported in many authentic Ḥadīths. Throughout Islamic history and in all lands inhabited by Muslims, Waqf had had a formidable presence. The real innovations in the idea of Waqf came in the early Islamic period in Madinah and after the first generation of Muslims, it grew by leaps and bounds, and its endowment became a pillar in the religious, social, cultural, scientific, economic, and political life of Islamic society to the extent that for every conceivable enterprise of social benefit there was a Waqf covering mosques, education at all levels, hospitals and other health care facilities, orphanages, houses and food for the poor, the blind and battered/abused women, wells, aqueduct and fountains, public baths, watchtowers, bridges, cemeteries, salaries, pensions, guest houses, libraries, books, and animal welfare (Ali, 2009). In the history of Islam, the first known Waqf is the mosque of Qubaa in Madinah, which was built upon the arrival of the Prophet (Peace and blessing of Allah be upon him) followed by the purchase of the land and construction of the mosque, known today as the Prophet‘s mosque. According to Kahf (2007), mosque and real estates confined for providing revenues to spend on mosques‘ maintenance and running expenses are in the category of religious Waqf, which in any Muslim society adds to the social welfare of the community because it helps satisfy the religious needs of people and reduces the direct cost of providing religious services for any future generation. On the recommendation of the Prophet (Peace and blessing of Allah be upon him), a second kind of Waqf know as philanthropic Waqf, which is aimed at supporting the poor segment of the society and all activities that are of interest to people at large such as public utilities, libraries, scientific research, education, health services, care of animals and environment, lending to small businessmen, parks, roads, bridges, dams, etc was established. According to Kahf (2007) and Ahmed (2004), philanthropic Waqf began by the Prophet (Peace and Blessing of Allah be upon him) calling on people to alleviate the water-shortage related suffering of their brothers through buying the popular well of Rumah and making it into a Waqf free to whoever takes water, a task accomplished by Uthman Ibn Affan (May Allah be pleased with him). The Prophet (Peace and blessing of Allah be upon him) also advised Umar (May Allah be pleased with him) to make 28 Book 2.indd 56 10/16/17 4:56 PM
  57. Waqf of his most precious land in Khaybar . The land was made a Ṣadaqah that could neither be sold nor given as a gift, and the fruits from the far-flung were to be distributed to the poor and kinships, to liberate slaves, to provide for guests and the wayfarer, and some reasonable quantity to its custodian. Kahf (2007) documents another form of Waqf called posterity or family Waqf. According to him, this kind of Waqf started when Umar Ibn al-Khattab (May Allah be pleased with him) decided to document in writing his Waqf in Khaybar and invited some of the Prophet‘s companions (May Allah be pleased with them) to attest the document. Thereafter, many companions who owned real estate made certain Waqf, some of whom stipulated as part of the conditions that the fruits and revenues of their Waqf must first be given to their own children and descendants and only the surplus, if any, should be given to the poor. It is argued that the family Waqf is charitable in essence because it gives income/usufruct to persons free of charges and improves the welfare of future generation. In addition to the fore mentioned, the literature documents a type of Waqf called cash Waqf. Cash investment Waqf dates back to as early as the turn of first century of Hijrah, as related by Imam Malik and Bukhari in their books. Ahmed (2004) explains that cash Waqf had two forms: first, cash was made into Waqf to be used for free lending to the beneficiaries and second, cash was invested and its net return is assigned to the beneficiaries of the Waqf. Waqf as an important institution of Islamic civilization aims at taking care of the needs of the society that are otherwise ignored in the process of economic growth and development. It is an institution that helping social development keeps pace with economic growth in the society. The major social and economic objectives of Waqf include heart reconciliation between the haves and the have-nots, satisfaction of the basic economic needs of the poor, defense of the Muslim Ummah and its ideology, solving serious problems such as poverty, unemployment, and catastrophes (Ahmed, 2004; Kahf, 2007). The motivation of establishing such a socioeconomic activity is to control the desire for personal accumulation at any cost by encouraging socially orientated behavior; and to reduce socioeconomic differences by providing support to the havenots to bring them closer to the haves (Dogarawa, 2009). It is this motivation that has kept the institution of Waqf not only alive and active throughout Islamic history but also made it to contribute significantly to various social causes such as health, education, research and meeting the needs of less privileged/poor sections of the society. 3. Socioeconomic Role of Zakāh Zakāh is a cornerstone of the values that govern Islamic economics. Being directional and normative, it is argued that Zakāh defines the norms of economic activity and, through its effects on economic variables, determines the direction along which the economy should move. On the revenue side, it specifies the manner in which Zakāh revenue is to be raised and who pays it, and on the expenditure side, it sets forth the uses (recipients) of the revenue. Like any modern budget, it describes the economic order that it attempts to establish and express the ideals and aspirations of society. Finally, as a fiscal mechanism, Zakāh performs some of the major functions of modern public finance, which deals with social security entitlements, social assistance grants for childcare, food subsidy, education, health care, housing, and public transportation in a welfare state (Khan, 2007). Zakāh system provides a permanent mechanism from within the economy, to continuously transfer income from the rich to the poor, so that whatever is the number of poor people in a 29 Book 2.indd 57 10/16/17 4:56 PM
  58. society or whatever are the causes of poverty there is always a continuous flow of transfer to take care of the welfare of the poor (Qaradawi, 1999). The allocation of Zakāh and disbursement between the poor, needy and other recipients on one hand and between capital goods and consumption goods on the other, as well as the principle of tamlik, which means giving to the poor and needy on a grant basis, are considered to lead to more specific approach in dealing with the problem of eradication of poverty, since Zakāh addresses specific poor groups. Furthermore, what is given to the poor is essentially and basically determined with the aim of enriching them and removing them completely from the poverty level to such factory level in which they produce sufficient income to take charge of all their needs. Zakāh thus aims at eliminating poverty and the desire for personal accumulation at any cost, and encouraging socially orientated behavior. It aims for the reduction of socioeconomic differences by providing support and financial help to the have-nots to bring them closer to the haves. It is an effective means of redistribution of wealth on a yearly basis to keep the poor propertied and facilitate the attainment of full employment. The major social and economic objectives of Zakāh include purification of Zakāh payer, heart reconciliation between the payer and recipient, satisfaction of the basic economic needs of the poor, defense of the Muslim Ummah and its ideology, and solving serious problems such as poverty, unemployment, catastrophes, indebtedness and inequitable income distribution (Qaradawi, 1999). Zakāh distribution reduces the risk of debt failure as part of its proceeds is distributed to persons under debt; Zakāh collection and distribution increases employment through job creation for the management of Zakāh itself and transfer of some of segments of recipients into productive workers by means of distribution in the form of training, rehabilitation and provision of capital goods. It is also argued that in a contemporary Muslim society, Zakāh may increase labour force participation as well as labour productivity without any negative effect on the incentive to work among the rich; induce an increase in investment; and enhance efficiency of investment (Dogarawa, 2008) 4. Socioeconomic Role of Waqf Waqf institution has been recognised as an equitable, non-elitist and religiously as well as sociocultural authenticated socioeconomic system that has the potential to enrich Islamic civilization and contribute to establishment of economic and social institutions of the society in line with its developmental role. Kahf (2003), Ahmed (2004), Khan (2007) and Kahf (2007) stressed that the institution of Waqf in a socioeconomic set-up is an additional source to support programs relating to socioeconomic problems. They argued that the past history of Waqf suggests that the institution can now be used to mobilize additional resources for poor sections of the society to address socioeconomic issues such as education, skills, and micro entrepreneurial development, health care and care of HIV/AIDS infected population, and water and sanitation facilities in rural areas. Some modern economists even advocated the use of Waqf in structuring and operating Islamic insurance and Microfinance given its central role in poverty alleviation (Kahf, 2007). Additionally, the institution can maintain a fund, which if properly invested, can be utilized in periods of famine and other crisis to help extreme poor to survive the crisis or the famine. In the context of countries with extreme poverty, the institution can help people in extreme poverty facing starvation, death and diseases. The significance of Waqf in Muslim societies of the past is evident from information available on its size. In some countries, the institution reached one-third or more of total cultivable land and 30 Book 2.indd 58 10/16/17 4:56 PM
  59. other properties . This large investment in the social sector, according to Ahmed (2004) succeeded in transforming the society and empowering the poor segments of it. During the Ottomans for example, financing of education, health, and welfare was entirely left to the Waqf system. The system even flourished during that empire so much so that a person would have been born into a Waqf house, slept in a Waqf cradle, eaten and drunk from Waqf properties, read Waqf books, been taught in a Waqf school, received his salary from a Waqf administration, and when he died, placed in a Waqf coffin and buried in a Waqf cemetery (Baskan, 2002). The literature documents that education sector was among the main beneficiaries of Waqf institution over the years. Education, offered almost only by the Waqf institution in those days, enabled the poor to move up the economic ladder and obtain high levels of economic and political power. Since the early seventh century, Waqf has played a significant role in funding educational activities at all levels in Muslim societies. It is on record for instance, that Waqf was used to build about 300 elementary schools in the Island of Sicily, and its revenue was used for payment of teachers and supply of the needs of all the schools. Similarly, in Jerusalem, not less than 70 schools were funded by Waqf in the 5th through to 7th century (Laldin, 2010). In addition, Waqf fund was used to establish high schools and general purpose universities in major cities such as Quds, Damascus, Baghdad, Cairo and Nisapur as well as special purpose universities like Al-Qurawiyin in Fez, Al-Azhar in Cairo, and Al-Nizamiyah in Al-Mustansiriya, Baghdad (Laldin, 2010). Waqf assets were dedicated for building of many education centre, and proceeds from Waqf activities were used for payment of teachers‘ salaries, full or partial sponsorship of economically disadvantaged people to school, and acquisition of books, teaching and/or research materials and other facilities needed in learning and research centres at different levels (Johari & Alias, 2013). Another University that owes its development to Waqf is the famous Fatih Sultan Mehmet Waqf University (FSMWU) in Istanbul, Turkey that emerged from the historical Fatih Sultan Mehmet Waqf established in 1470. More recently, in Malaysia, Waqf was instrumental in the establishment and/or development of a number of public and private universities as well as financing of research, publications, and chairs (Johari & Alias, 2013). 5. Zakāh and Waqf in Modern Economy Effort is now been geared toward developing a modern Waqf model that could respond to contemporary challenges of benchmarking and performance-based management. As an institution capable of promoting good governance and a viable tool for poverty eradication and reducing socioeconomic gap in the society through the use of modern techniques of management, Waqf is receiving considerable attention with a view to making its management come to term with modern economy realities. Also, Zakāh proceeds, based on the opinion of some contemporary Muslim economists is now being used to finance Islamic socioeconomic infrastructure that include providing for its beneficiaries: Islamic education; vocational training and necessary tools; agriculture and cottage industries; simple fixed assets for small utility and trade projects working capital to craftsmen; and low-cost housing and medical facilities. The socioeconomic role of Zakāh and Waqf is likely to increase in countries with Muslim minorities than where the majority of the population is Muslim. This is because in states which at best are indifferent to their religion and to many of their special socioeconomic needs, Muslims have to use Zakāh and Waqf for the fulfilment of these needs and for the protection and promotion of Islam. This potential, however, can be harnessed only by providing appropriate legal protection and supportive environment. Here in lies the role of government and its agencies. It has been argued that direct involvement of state in organizing and managing the 31 Book 2.indd 59 10/16/17 4:56 PM
  60. institutions of Zak āh and Awqāf may not lead to an optimal mobilization of resources from these institutions (Osman, 2010). There are serious apprehensions expressed in different national and international fora about the governance issues among the public and hence a factor leading to reluctance of the public to hand their Zakāh and charity funds to government institutions. The effective role that state can play in this respect is creating conducive environment, providing supporting legal framework, and protecting property rights through effective enforcement of law. It is believed that creating awareness among the affluent members of society as well as Muslims abroad about the need and usefulness of establishing Awqāf institutions in Muslim minority countries with extreme poverty and partnering with international Islamic organisation such as Islamic Development Bank (IDB) or financial institutions can mobilize a lot of funds for the establishment of Awqāf for socioeconomic activities. It should be noted that today, Muslims, especially in non-Islamic countries are facing serious challenges vis-à-vis the institutions of Zakāh and Waqf. Some of these challenges are: How to make the institutions of Zakāh and Waqf vibrantly working in consideration of the fact that our economic system is not Islamic, and thus, government or its agencies are neither responsible for the assessment, collection and disbursement of Zakāh proceeds nor playing the role of enabler of conducive atmosphere and effective environment for the establishment and effective management of Awqāf. Even where Islamic voluntary organisations or NGOs volunteer to administer Zakāh, individual payers are likely to prefer handling their Zakāh personally than to pay through voluntary charitable organisations. (i) How to resolve some unsettled issues in the fiqh of Zakāh and Waqf. Some of these unsettled issues in Zakāh include Zakāh on salary, Zakāh on debt, Zakāh on stocks/shares, Zakāh on investment in companies that pay Zakāh, and Zakāh on royalties. Unsettled issues relating to Waqf include the permissibility or otherwise of temporary Awqāf and the possibility of extending activities of Waqf to cover usufruct and financial rights. Although, these are contemporary and burning issues among even international scholars, Muslim minorities in their own countries should look at the possibility of discussing and resolving them at conferences and seminars. (ii) (iii) Another challenge relates to enlightening programmes that will educate especially Muslim rich in different countries, who are mostly not well informed about this important pillar of Islam and the socioeconomic role of Zakāh and Awqāf in every Muslim society. 6. Conclusion and Suggestions History has shown that when societies get too unequal bad things happen. They either become economically inefficient or they become subject to social unrest. In many cases, both of these happen simultaneously. However, such societies as a whole do not prosper. Islam stands for complete eradication of absolute poverty and organisation of economic life in a manner that the basic needs of all human beings are met. To ensure fulfillment of the basic needs of all, Islam enunciates the principle of the poor having a ‗right‘ in the income and wealth of the well-off members of the society through the systems of Zakāh and Awqāf. Zakāh serves as a unique mechanism of compulsory transfer of income and wealth from the haves to the have-nots in the community. Through Zakāh, every individual in the society is assured of minimum means of livelihood, which provides social security system in an Islamic 32 Book 2.indd 60 10/16/17 4:56 PM
  61. society . Throughout history, whenever Muslims truthfully applied the system of Zakāh, as ordained by the Sharīʿah, the laudable and splendid objectives of Zakāh were fulfilled. Waqf on the other hand, has been used to provide the material infrastructure and create a source of revenue for use in, among others, social welfare enhancing activities both at family, community and state levels. This is not merely the matter of theoretical principles that are far removed from being able to reform reality. The Muslims applied these principles in their societies and achieved results, which are a source of historical pride and glory. To activate and revitalise the Zakāh and Awqāf systems in Muslim societies and communities, there is a dire need for reform in their management formulars and to address the unsettled issues inherent in the institutions. It should be noted that to have an organised system of Zakāh collection and disbursement requires high level of credibility and commitment from the side of voluntary organisations, and cooperation from the side of people while banking on legislative support from the government. In the case of Waqf, flexibility in its processes and procedures that will make its establishment much easy and benefits more reapable are required; and motivational measures that will make its management efficient are needed. Flexibility in the process and procedure of establishing Waqf may involve revision of the Fiqh of Waqf to accommodate two types of Waqf, namely perpetual and temporal so that while the condition of perpetuity of Waqf remains the general rule as it provides for capital accumulation in the third sector that, over time, builds necessary infrastructure for providing social service on a non-for-profit basis, temporary Awqāf for specific period that will be accompanied with an explicit expression in the founder‘s will, the nature of the property or the definition of the objective should be condoned as an exception in consideration of the needs and peculiarity of some societies, especially non-Islamic societies and/or the nature of some assets that are used for Waqf purposes. In addition, Waqf of usufruct such as driving a car on the toll way, passing through bridge or using a parking lot for some hours during Friday or Eid prayers; and financial rights such as patent and other talent rights, newspaper, magazines, periodicals and other objects that have repetitive character, educational software and many other intangible properties that have become important business in the modern days should be included in the principle of Waqf. 33 Book 2.indd 61 10/16/17 4:56 PM
  62. References Ahmad , H. (2007). Waqf Based Microfinance: Realising the Social Role of Islamic Microfinance, paper presented at the Singapore International Waqf Conference organized by the Islamic Religious Council of Singapore, Islamic Development Bank, Islamic Research and Training Institute, Warees Investments Pvte. Ltd. and Kuwait Awqāf Public Foundation on March 6 – 7. Ahmed, H. (2004). Role of Zakāh and Awqāf in Poverty Alleviation, Islamic Research and Training Institute, Islamic Development Bank, Jeddah, Saudi Arabia. Ali, I. B. (2009). WAQF: A Sustainable Development Institution for Muslim Communities, Takaaful T&T Friendly Society, Trinidad and Tobago, available at www.takaafultt.org. Baskan, B. (2002). Waqf System as a Redistribution Mechanism in Ottoman Empire, available online at www.Awqāfsa.org.za. Dogarawa, A. B. (2008). Islamic Social Welfare and the Role of Zakāh in the Family System: A Case for Muslim Minorities in Ghana, International Conference Paper, Al-Furqan Foundation, Tamale, Ghana. Dogarawa, A. B. (2009). Poverty Alleviation through Zakāh and Waqf Institutions: A Case for the Muslim Ummah in Ghana, paper presented at International Conference on Poverty and Muslim Minority in Ghana organised by Al-Furqan Foundation, Tamale, Ghana. Johari, F. & Alias, M. H. (2013). Potential of Waqf Funds and Instruments in Contemporary Economic System, http://nuradli.com/iecons2013/4B-4.pdf. Kahf, M. (1989). Zakāh: Unresolved Issues in the Contemporary Fiqh. Journal of Islamic Economics, International Islamic University of Malaysia, Kuala Lampur, Malaysia. Kahf, M. (1998). Financing the Development of Awqāf Property, Paper presented at the Seminar on Development of Awqāf organized by Islamic Research and Training Institute (IRTI), Kuala Lumpur. Kahf, M. (1999): ―The Performance of the Institution of Zakāh in Theory and Practice‖, Paper Presented at the International Conference on Islamic Economics towards the 21st Century, Kuala Lumpur. Kahf, M. (2003). The Role of Waqf in Improving the Ummah Welfare. Paper presented to the International Seminar on ‗Waqf as a Private Legal Body‘ organized by the Islamic University of North Sumatra, Medan, Indonesia. Kahf, M. (2007). The Role of Waqf in Improving the Ummah Welfare, paper presented at the Singapore International Waqf Conference organized by the Islamic Religious Council of Singapore, Islamic Development Bank, Islamic Research and Training Institute, Warees Investments Pvte. Ltd., and Kuwait Awqāf Public Foundation on March 6 – 7. Khan, M. F. (2007): ―Integrating Faith-based Institutions (Zakāh and Awqāf) in Poverty Reductions Strategies (PRS)‖, available at http://ctool.gdnet.org/conf_docs/Khan_paper_BRP_wk.doc. 34 Book 2.indd 62 10/16/17 4:56 PM
  63. Khan , M. F. (2007): Integrating Faith-based Institutions (Zakāh and Awqāf) in Poverty Reductions Strategies (PRS), available at http://ctool.gdnet.org/conf_docs/Khan_paper_BRP_wk.doc. Laldin, M. A. (2010). Waqaf in Education Funding: The Experience of International Islamic University Malaysia in Managing Endowment (Waqaf) Fund http://www.amanieiconnect.com/library/featured-articles/item/33-waqaf-in-education-funding-the-experience-ofinternational-islamic-university-malaysia-in-managing-endowment-waqaf-fund. Mathews, R. and Tlemsani, I. (2003). Zakāt and Social Capital: Parallels between Islam and the West. (draft), Centre for International Business Policy, Surrey. Osman, A. Z. (2010). Accountability of Waqf Management: Insight from Praxis of Nongovernmental Organisation (NGO), Seventh International Conference on the Tawhidi Epistemology: Zakāt and Waqf Economy, Bangi. Qaradawi, Y. (1999). Fiqh az-Zakāh (Arabic), Dar al-Taqwa LTD, London. Shehata, S. I. (1989). Limitations on the use of Zakāh Funds in Financing the Socioeconomic Infrastructure of Society, Imtiazi et al (eds) Management of Zakāh in Modern Muslim Society, Islamic Institute of Research and Training, Jeddah, Saudi Arabia. 35 Book 2.indd 63 10/16/17 4:56 PM
  64. 36 Book 2 .indd 64 10/16/17 4:56 PM
  65. 3 Role of Zak āt in Alleviating Poverty Ahmad Abdulkadir Ibrahim1 This paper attempts to provide a conceptual framework the roles of Zakāt in alleviating poverty from the Islamic perspective. It also aims to highlight the theoretical roles of Zakāt in alleviating poverty as well as Zakāt practice during the ruling of the Rightly Guided Caliphs. There is a need to examine the means of applications for Zakāt institutions which might reflect the challenges faced by those institutions for meeting their goals in reducing poverty among the Aṣnāfs (Zakāt recipients). The methodology adopted in this research is library research through the consultation of relevant literature, which focuses on the thematic study of the subject matter. This is followed with analysis and discussion on the contents of the materials used. It is concluded that Zakāt is an effective tool for alleviating poverty in the Muslim community then and now eternally. Hence, Muslim should offer the means of poverty alleviation via Islamic concept of Zakāt and how it can be applied in the Muslim community. The paper also observed that proper measurements must be established by the Zakāt institutions, with the cooperation of relevant authorities. It also observed that only the most deserving acquires Zakāt (beneficiaries) are expected to testify their effective use of the funds. An important conclusion is that the effectiveness of Zakāt Institutions may improve by collaborating with other institutions such as Microfinance Institutions. Keywords: Zakāt; Poverty; Alleviation; Zakāt institutions; Zakāt recipients; Islamic Perspective; Microfinance 1. Introduction Poverty has become an economic, social, and political issue all over the world. In alleviating the problem of poverty, Islam promotes a solution that is very precise and effective that makes it compulsory for qualified Muslims to pay Zakāt. Zakāt is the third from the five main pillars upon which the Islamic code of conduct is built. The importance of Zakāt payment can be clearly seen from the verses in Al-Quran, in which the obligation to perform salah (prayer) is usually followed by the obligation to pay Zakāt on Muslims who have the means. Islam affirms that Allah owns everything in the world and that the owner of any property is only a trustee who holds the property on behalf of the community. Further still, Islam enjoins man to struggle to earn his living through lawful means while it renounces earning through sinful means like looting, plundering, extorting, gamblingand robbery. It equally condemns begging as a means of sustenance. Hence the money should be earned through legitimate sources, in which its owner would be able subsequently to pay the Zakāt based on the Islamic guidance when the condition of Zakāt rate is fulfilled. By doing this, the poverty will definitely be eradicated from the society. 1 Ahmad Ibrahim, Kulliyyah Aaibrahim1@gmail.com. of Laws, International Islamic University Malaysia (IIUM), Email: 37 Book 2.indd 65 10/16/17 4:56 PM
  66. Muslims are obliged to pay Zak āt, one of the five ―pillars‖ of Islam. It is payable on business revenues and assets, gold and silver, and savings at the basic rate of 2.5%. Islam requires its followers to pay Zakāt so that the money collected can be of help for the poor to have basic requirements in life (Gambling & Karim, 1986). Unlike conventional tax, Zakāt is viewed by Muslims as a means of ‗purifications‘ and not just an obligation (Sulaiman 2003). Zakāt plays an important role not only in the economic activities, but also in the moral and social well-being of a society. Morally, Zakāt promotes sharing of wealth and eliminates greediness, whilst socially; it helps to reduce poverty within the community. As a result, wealth is widely distributed to all sections of the society and this, undoubtedly, encourages healthier economic environment… I will explain these three aspects thereafter. Islam has established the rights of the poor and needy to receive Zakāt from the rich and wealthy. The rich and wealthy Muslims who refuse to fulfil their obligation of Zakāt are basically being ungrateful and not thankful to Allah SWT who has granted richness to them, and, thus, they have committed a major sin. The rich are obliged to pay Zakāt to purify them from the sin of greed (Clarke et al., 1996; Haroon et al., 2010). Zakāt has a huge potential to achieve three major goals; to guarantee the fulfilment of the basic needs for all Muslims, to reduce inequalities in income and wealth, and to purify the Zakāt payers‘ inner self and wealth. The distribution of Zakāt is to fulfil six basic needs of the Zakāt recipients; food, clothing, shelter, education, health and transportation. Hence, Islam has clearly prescribed the eight groups of Zakāt recipients (Aṣnāf) as stated in the Holy Quran (Surat al-Tawbah 9: 60). The eight groups are the needy, the poor, the Zakāt collectors (ʻĀmil), new converts to Islam (Mu‟allafah), slaves (al-Riqāb), debtors (Ghārīmīn), Muslims who strive in the way of Allah (S.W.T) (Fī Sabīl Allāh), and the wayfarers (Ibn al-Sabīl) (Mohd Rodzi, Roshaiza & MohdNazli, 2013). Islam views the issue of poverty as something that needs to be addressed urgently through Zakāt, since poverty may lead to kufur (blasphemy) if not managed accordingly. This can be seen from the urging by Prophet Muhammad SAW that Muslims should seek refuge from poverty and kufr. It should be noted that during the time of Prophet Muhammad SAW in the early call to Islam in the Mecca period, many poor, weak and disadvantaged people including the slaves responded to the call to Islam. Al-Qur‘ān has called upon the rich people of Mecca to help the poor, the weak and orphans as an act of kindness since Allah has been kind to them by granting richness to them. It is well documented that Sayyidatuna Khadijah (the first wife of the Prophet SAW) and Caliph Abu Bakar (one of the Prophet‘s companion) generously helped the weak and the poor. To help the poor is very much ingrained in the Islamic teaching and this can be seen from the many verses of Al-Quran in which the instruction to perform Ṣalāh is usually followed by the instruction to pay Zakāt. Considering to the various sources of Zakāt fund, it is feasible to suggest that authorities have been used forZakāt collection to reduce the rate of poverty. Based on the report by Religious Council of Islam in some Countries, from the Zakāt Collection Centre (ZCC), Zakāt collection has reached hundreds of millions of dollars each year (Laporan Zakāt PPZ-MAIWP 2010). This amount is obviously large enough to assist the government in addressing the problem of poverty. Therefore, this study aims to assess whether the collection of Zakāt has actually helped to overcome the problem of poverty. The study also aims to expand the discussion on the role of Zakāt in the Chalip‘s era as well as the modern era. Likewise, the study aims to discuss Zakāt collection and distributing and how this can affect the Aṣnāf (group). The rest of this paper is organized as the discussion of Zakāt and poverty eradication by reviewing the relevant literature 38 Book 2.indd 66 10/16/17 4:56 PM
  67. and Islamic principles . Consequently, the study presents a brief discussion on effectiveness of Zakāt institutions such as Zakāt collection, Zakāt distribution, and poverty rate. Finally, the study presents some conclusions. 2. Definition of Zakāt and Poverty a) Zakāt lliterally means to grow and to increase, while in Sharīʿah, Zakāt is a concept referring to the redistribution of wealth prescribed by Allah (S.W.T) to the deserving category of people. According to Qarḍawi (1999), the word ―al-Zakāh” has been mentioned thirty times in the Holy Quran. b) Poverty is a concept which is related to the inability to obtain minimum necessities to maintain physical efficiency of fulfilling basic human needs. On the other hand, Islam defines poverty based on an individual failure to fulfil any of the five basic human requirements of life that is based on Maqāṣid Sharʿīyah which are: i) religion, ii) physical self, iii) knowledge, iv) dignity, and v) wealth. Al-Zakāt is the third pillar in Islam, it is hard to translate the word, or find its synonym in English. In Arabic, the word is driven from the root z.k.a and the verb that is driven from that root is Zakka which means "to purify", and also means ―make something grow and develop‖. It is commonly known that al-Zakāt is ―alms giving‖. This translation is not accurate, if we consider the philosophy behind that pillar. There is a difference between alms giving Ṣadaqah and Zakāt. Ṣadaqah is a ―voluntary service‖ of any kind that is given from any person to another. The Prophet Muhammad (S.A.W) encourages everyone to give Ṣadaqah. For instance, a smile, words of sympathy, half a fruit of a date can be a Ṣadaqah. Zakāt, on the other hand, is an assigned amount of money or crops that should be paid to the community. Zakāt is not a tax system where everybody pays some expenses in return of the public service which the government offers. It is not either a system of social insurance where the rich pays some instalments to guarantee some services in cases of any damage. It is the right of the community to take this percentage of money or crops from all its members, which is used to support the less privileged among them. In this sense, the person who pays the Zakāt gives the needy ―their rights‖as Allah the Almighty said: (And in their wealth and possessions (was remembered) the right of the (needy), him who asked, and him who (for some reason) was prevented (from asking) (Qur‟ān: 51: 19). The philosophy behind this act has multi dimensions. In other word, Zakāt implies that rich people's properties are not absolutely theirs, unless they pay the rights of the poor, otherwise they are considered as transgressors. It is also a yearly reminder of the fact that what we earn and what we have in our possession is not really ours, but it is a gift from Allah. We shoulder certain responsibility towards this gift,because socially and legally, what we have is ours, we are prone to get attached to what we have and forget that we are just passing by. Therefore, Zakāt emphasizes that fact indirectly. The awareness of that dimension protects the individual human being from feeling superior. This awareness may even raise feelings of overall responsibilities for what seemingly are his properties. 39 Book 2.indd 67 10/16/17 4:56 PM
  68. Imam Al-Ghazali In his book Ihya ‟ Ulumad-din, identifies two types of poverty, namely, real poverty and poverty due to greed. Real poverty implies lack of having basic necessity of life, while poverty due to greed comes as a result of man‘s insatiable wants of material wealth. The causes of poverty have also been delved into by scholars. This explains the difference in their perception of the term Faqīr and Miskīn. The Faqīr (the poor) is used for those who on account of some defects are unable to earn their living, while the Miskīn (the needy) are those who though fit to earn their living, but due to lack of resources or on account of poverty are unable to do so (Al-Ghazali and Hamid, 1993; Adebayo, 2015). In general, poverty refers to inadequate income of the household while absolute poverty means extreme poverty in which people cannot even afford to fulfil their basic needs. The scholars have different perception concerning the term Faqīr and Miskīn, as well as the causes of poverty. They said that the Faqīr (the poor) is used for those who on account of some defects are unable to earn their living, while the Miskīn (the needy) are those who though fit to earn their living, but due to lack of resources or on account of poverty are unable to do so. 3. Role of Zakāt in Islam Substantially, all prophets are enjoined by Allah to take care of the weak, orphans and the poor through the institution of Zakāt. In his own words, Prophet Isa (A.S) said that ―He has directed me to pray and give Zakāt as long as I live‖ (Qur‘ān 19:31). Of Ibrahim and Ya‗qub, the Qur‘ān says that ―We made them leaders, guiding by our command and revealed to them the doing of good actions and the establishment of prayer and the payment of Zakāt, and they worshipped Us‖ (Qur‘ān 21:73). This confirms that the institution of Zakāt has been in operation before the time of Prophet Muhammad (S.A.W). The Prophet was also commanded to collect and distribute Zakāt in the following words: “Take Ṣadaqah “alms” from their wealth in order to purify them and sanctify them with it, and invoke Allah for them. Verily, your invocations are a source of security for them; and Allah is All-Hearer, All-Knower” (Qur‟ān 9: 103). This verse indicates that apart from being a means of alleviating poverty, Zakāt also serves the purpose of security for them. In essence, both the donors and the receivers have the divine blessings of this spiritual exercise. The role of Zakāt has been rightly observed as an effective tool for welfare of the state and poverty alleviation. In short, if Zakāt is performed as imposed by Allah the Almighty it would be enough to eradicate poverty, and then poor distribution of income in Muslim societies. For instance, it is sufficient to note that the financial assets in banks for the wealthy Arabs – their number is estimated at two hundred thousand - is more than 1190 billion dollars, and then value of Zakāt levied on those amounts is 29.8 billion dollars. These amounts are capable of eradicating poverty in Arab countries, and create employment opportunities for the unemployed in all Arab countries. Therefore, following the principles of Islam through one pillar only (Zakāt) can guarantee the eradication of poverty and then income and wealth inequality in Islamic communities. Objectives of Zakāt are many. They can be summarized into moral, social and economic objectives. The moral objective is visualized in cleansing of the Zakāt funds; the social objective is visualized in the redistribution of income in favour of the eight social groups especially the 40 Book 2.indd 68 10/16/17 4:56 PM
  69. poor and needy . The economic objectives is visualized in fighting hoarding and moving the cash flow to support the necessary expenditure at the expense of luxury spending, fighting consumer loans and encouraging non-usury loans for those in bondage or heavily indebted (Al-Ghārimīn). Zakāt plays an important role in reducing the problem of poverty in the Muslim community, in addition to its vital and influential role in its development through redistribution of income and wealth for the benefit of the poorest. But the important question now is: is performing Zakāt alone in the manner intended by God Almighty sufficient to achieve these two objectives: eradication of poverty and the achievement of equal distribution? We try to answer this question through the following points: Islam had exclusively determined the eight groups to whom Zakāt funds could be given, and it is noted that these groups are the poorest in society, consequently, expenditure on necessary consumption increases thus increasing the aggregate demand in the community. Employers respond to this increase by increasing employment and production in the next stage which increases income. Depending on the income, a new cycle of increased demand and employment, production and income starts and so on. Due to spending multipliers in the community, income will be multiplied accordingly, and the national economy will be revived. Also increased spending leads to increased marginal propensity to consume in the community, thereby increasing the value of the multiplier, and then increase the strength of its effect on the national economy. Since Zakāt was imposed on saved money, the lack of investment of such money leads to stripping year after year which is an irrational behaviour that Islam does not approve. 'Umar Ibn al-Khattab said (Do trade in the property of orphans so as not to be eaten by Zakāt). The importance of Zakāt in the socio-economic framework of Islam and in reducing inequality is quite high. Scholars have identified three stages of distributional scheme procedures which were pre-production distribution, post-production distribution and redistribution in Islamic view. The distribution was to assure that the poor and destitute had equitable opportunities in the economy. The findings show that there is a positive link between high growth and inequalities. Allah the Almighty imposed Zakāt, as He says: ―So establish regular Prayer and give regular Charity; and obey the Messenger that ye may receive mercy‖ (Al-Nur, verse 56). Zakāt have many effects on the individual well as on society. It cleanses the heart of the one who performed Zakāt and removes hatred from the heart of the one who deserved Zakāt, and then establishes security and tranquillity in the community, and addresses many other social problems. In addition, Zakāt blesses and develops the money and increases the merits of the performer. Allah the Almighty said: ―The parable of those who spend their substance in the way of Allah is that of a grain of corn: it growth seven ears, and each ear Hath a hundred grains. Allah gives manifold increase to whom He please: And Allah cares for all and He knows all things‖ (Al Baqara, verse 261). 3.1 Role of Zakāt in Islamic Economy and Society Since the institution of Zakāh is a significant component of the Islamic economy, its role therein is both diverse and far-reaching, not least because Zakāh is the pivot of all public finance in Islam. However, for the sake of brevity and simplicity, the role of Zakāh within an Islamic economy can be said to cover three spheres, namely the moral sphere, the social sphere and the economic sphere. 1. The Moral Sphere: It is necessary to consider the role of the Zakāh insofar as the moral development of the Islamic man is concerned in some detail. According to the Islamic economists, one of the most important roles of Zakāh in the Islamic economic 41 Book 2.indd 69 10/16/17 4:56 PM
  70. order is that it ―washes away the greed and acquisitiveness of the rich‖, thereby seeking to undermine the excessive and over-zealous wealth accumulative attitude of some elements of the society. 2. The Social sphere: Islam has created a society more free from widespread cruelty and social oppression than any other society had ever been in the world before. (H G Wells, The Outline of History) Although the role of Zakāh in the Islamic economic order is both diverse and far-reaching, however, at the societal level the primary objective of Zakāh is to eradicate poverty. Not surprisingly, the situation in Muslim countries today is both desperate and alarming not only because the elites of those societies prefer not to pay Zakāh but because they are flagrantly violating Islamic commandments with regard to the obligation of Zakāh. Perhaps they should ponder over the following words of Caliph Abu Bakr: ―By Allah, I will wage war against those who differentiate between Ṣalāt and Zakāh‖. More importantly, the Prophet (S.A.W) said: "He is not a true Muslim who eats his full when his next door neighbor is hungry" (Al-Hadeeth). This shows the importance of charity and Zakāh in Islam. 3. The Economic Sphere: Undoubtedly, one of the most significant roles of Zakāh in an Islamic economic order is that it ―prevents the morbid accumulation of wealth in a few hands and allows it to be diffused before it assumes threatening proportions in the hands of its possessors‖. This suggests that the wealth and property are not expropriated and controlled only by a section of a society to the detriment or total exclusion of rest of the society. As it happens, Zakāh is a distributive mechanism par excellence in that it seeks to establish a society in which wealth, goods and services are both equitably distributed and shared and Muslims care for one another, so that inequity and injustice is eliminated on the one hand while poverty and hunger are alleviated on the other. The Quran constantly reminds the faithful that God commands justice and the doing of good and avoidance of wrong. Muslims need to return to this message of justice, fairness, and equality. And the sooner they do the better. 3.2 Zakāt Practice during Caliph’s Ruling Under the governance of Prophet Muhammad (S.A.W) Zakāt funds was collected and distributed by the appointed Zakāt workers (ʻĀmil). As one of the eligible Aṣnāf, the ʻĀmilīn were given a portion of the Zakāt funds. Later, under the reign of the second caliph, Umar Ibn Al-Khattab, a new method of Zakāt collections was introduced. Known as al-ʿUshr, Umar set several check points on major highways, especially those coming from other countries. An appointed tax collector was allocated at each check point and Zakātwas collected from the Muslim traders. (Qaradawi, 1999; Ahmed, 2004; Dogarawa, 2009) On the other hand, the non-Muslim traders were required to pay taxes on imports. This practice continued throughout the early history of Islamic government. Besides al-ʿUshr, Umar did also introduce the concept of Bayt al-Māl or Public Treasury in order to manage the Zakāt and waqf funds in 15 AH. Moreover, he also extended the list of Zakātable items to include some new sources of wealth that had been exempted under the governance of Prophet (S.A.W) by applying Ijtihād. 42 Book 2.indd 70 10/16/17 4:56 PM
  71. There are evidence that Zak ātis effective in eliminating poverty. A number of scholars claimed that during the period of Umar Ibn Al-Khattab (13-22H) and Umar bin Abdul Aziz (99-101AH), poverty was completely eliminated. During this period, it is believed that Zakāt money could not be distributed in some regions due to the non-existence of poor people. Referring to Ahmed (2004), under the ruling of Umar Ibn Al-Khattab, the Yemen governor, Mu‘adh bin Jabal sent one-third of the Zakāt collection in a particular year to Umar Ibn Al-Khattab. Umar rejected the fund by saying, ―I sent you to take from the rich and render it to the poor among them‖. Mu‘adh later claimed that he could not find anyone who deserved the Zakāt money. In the following year, Mu‘adh sent half of the Zakāt collection and similar conversation took place between them. Later, in the third year, he sent all the Zakāt collection to Umar and said, ―This year I did not find a single person who needs from me anything of the Zakāt‖. Similar scenario was found during the reign of Umar bin Abdul Aziz (Umayyads government) where an Egypt governor sent him a letter asking him on what to do with the proceeds of Zakāt funds as no deserving poor and needy was found in Egypt. As in Ahmed (2004), according to Umar bin Abdul Aziz, the funds then shall be used to ―Buy slaves and let them free, build rest areas on the highways and help young men and women to get married‖. Thus, it seems that practically, Zakātis efficient in combating poverty if being managed properly. (Ibrahim, 2015) Hence, the beneficiaries of Zakāt as contained in Qur‘ān ( 9: 60) indicates that Zakāt is instituted for the benefit of alleviating the problem of the poor, the needy and those in debt or in bondage, if properly collected and judiciously monitored by those entrusted with it. The institution of Zakāt in Islam also provides job opportunity for the people. A practical example of the instrumentality of Zakāt as a means of alleviating poverty was demonstrated in Damascus during the era of the Salaf and specifically during the Umayyad Caliph, Umar ibn Abdul-Aziz, who on his assumption of the throne of the caliphate took special interest in Zakāt administration. Less than three years after he became the caliph, there remained nobody in the capital, Damascus that was in need of Zakāt as a poor man, pauper or a debtor. 3.3 Zakāt Practice in our Contemporary Era In essence, if the principle of Zakāt is allowed to operate, and such depositors realize that rather than expecting interest on their money, their money that is left idle would be penalized through the annual Zakāt deduction, they would prefer the option of investing rather than saving, and this would be beneficial to them and the entire society. The recipients must be informed about the aspirations of Zakāt as a socioeconomic tool and held accountable for accepting the funds. The whole arrangement should be characterized like a contract whereby Zakāt institution has the responsibility to ensure that only the most deserving acquires Zakāt and for a stated limited time, within which, the beneficiaries are expected to testify their effective use of the funds. That way, the general public, primarily the Zakāt contributors will gain more confidence in the ability of Zakāt committee to support the government in alleviating poverty in the true sense. Nowadays, it is cynical to see many big, beautiful and expensive mosques are being built although the size of the congregation or the number of people attending the mandatory five times prayer (salah) in the mosques has not significantly increased (Rodzi, Roshaiza & Nazli, 2013).. Will the fate of Zakāt follow the fate of salah in the mosques, in such a way that the collection of Zakāt increases significantly but the success of eradicating poverty through Zakāt remains a vision? The role of Zakāt to overcome poverty is well documented in the history of early Muslims. During Caliph Umar Ibn Al-Khattab, the administration of Zakāt (Bayt al-Māl) had managed to overcome poverty so effectively that Zakāt payers could not find any person that was 43 Book 2.indd 71 10/16/17 4:56 PM
  72. qualified to receive Zak āt. This success was emulated during the time of Caliph Umar Abdul Aziz where poverty was once again eradicated. Zakāt as a poverty eradication tool has been proven effective not once but twice in Islam. The question now is that could Zakāt still play its pivotal role in overcoming poverty in modern days? To address this question, we need to examine the existing practices of Zakāt institutions in some Muslim Countries in regard to their management of Zakāt funds (collection and distribution) with special emphasis on their role in poverty eradication. Since Zakāt is imposed on the Muslims based on the religious requirement, its administration comes under the jurisdiction of the certain region. Furthermore, a study on the effective management of Zakāt is timely because currently, the collection of Zakāt indicates that some countries have become increasingly aware of and more interested in fulfilling their Zakāt obligation. That is, as collection of Zakāt reaches an increasing huge amount of money, there seems to be an urgent need to investigate the effectiveness of Zakāt distribution among the regions since this aspect is pertinent in ensuring Zakāt works to achieve its goals, which in this study in centred on its function to assist the poor and needy to the extent that it eradicates poverty in Muslim societies. 3.4 Recipient of Zakāt (Aṣnāf) The distribution of Zakāt itself has to be done in the most precise manner possible. This must be done by first matching the two groups of Aṣnāf (Fuqarā‘ and Masakīn) that are qualified to receive Zakāt based on Islamic principle with the concept of hardcore poor and poor groups. The details are given in Table 1. The first four groups mentioned in the verse (Surat al-Tawbah 9: 60) are referred as ‗muqaddam‘ while the next four groups are termed as ‗mu‟akhkhar.‘ Although the distribution of Zakāt is to cater for all eight groups, priority should be given to the muqaddam, as explained in a Ḥadīth narrated by Abu Ma‘bad: ―Allah‘s Apostle said to Muadh when he sent him to Yemen, ―You will go to the people of the Scripture (Rodzi, Roshaiza &Nazli, 2013). So, when you reach there, invite them to testify that none has the right to be worshipped but Allah, and that Muhammad is His Apostle. And if they obey you in that, tell them that Allah has enjoined on them five prayers in each day and night. And if they obey you in that tell them that Allah has made it obligatory on them to pay the Zakāt which will be taken from the rich among them and given to the poor among them. If they obey you in that, then avoid taking the best of their possessions, and be afraid of the curse of an oppressed person because there is no barrier between his invocation and Allah‖ (Ḥadīth related by Bukhari and Muslim 2: 573) It is clear that based on the Ḥadīth, the major thrust of Zakāt is to help the poor and needy by increasing their income. With an increase in income, they should have enough to be able to live and cater for their basic needs. Thus, the system of Zakāt, if managed properly, should be able to help the poor and needy to overcome poverty. The category of recipients of Zakāt which generates much discourse among scholars is the one set aside for the cause of Allah (Shah, 2010). Some scholars such as Maududi, Syed Qutb, Abul Kalam Azad and Shibli Nomani have taken the phrase Fī Sabīl Allāh to include such programmes which have direct bearing to the poor like propagation of Islam, Islamic education, social welfare programmes, economic development projects manpower training, and education in various scientific and technical fields. Also, Mohammed Qutub was cited to have included the 44 Book 2.indd 72 10/16/17 4:56 PM
  73. usage of Zak āt fund for provision of social services like hospitals and schools and for factories which create employment opportunities for the people. However, Qureshi and Shahhatah objected to usage of Zakāt on socio-economic structure except if such projects would enhance the position of the poor and the needy. Table 1: Description of eight categories (Aṣnāf) who are eligible to receive Zakāt: Aṣnāf Description Needy A person who does not have any property and source of income, or, if he/she has a source of income it would not fully meet his/her basic needs. Poor A person who has property or means of livelihood but is not able to meet his/her own needs or that of his/her family members. This individual is not required to perform Hajj and Zakāt, but instead is entitled to receive Zakāt. mil A person who is involved in the management of charity, whether as an officer or management support staff at all stages. He/she is entitled to acquire certain portion of the proceeds from Zakāt as wages. Mu‘allaf A non-Muslim who recently converts or ‗whose heart is made inclined‘ to Islam. It is believed that giving Zakāt toMu‟allafah can be seen as a recognition and reward for choosing the right path and as a way to show the beauty of Islam. al-Riqāb He is a servant who wants to liberate himself. Ghārīmīn A person who is eligible to receive Zakāt because by he/she has been declared bankrupt or is heavily burdened by his/her debt. Fī Sabīl Allāh A person who is in a ‗fight‘ or makes efforts and do activities to uphold, maintain and promote Islam and Islamic teachings. Ibn al-Sabīl A traveller who faces depleting funds while on his/her journey from his/her country in which the journey benefits and gives good returns to Islam. Although the eight categories of Aṣnāf that have been mentioned in the Qur‟ān, it is not compulsory to divide the Zakāt fund equally among them. According to Al-Qaradawi (1999), if all the categories of Aṣnāf require similar amount of Zakāt fund, then it must be divided equally among them. However, if some Aṣnāf require more Zakāt than the others, they can be given more money from the Zakāt fund. He clarified that it is left to the Zakāt institutions or agents to distribute the fund to those Aṣnāf whose needs are greatest. However, it is generally believed that the main priority of Zakāt fund must be given to the first two categories of Aṣnāf; hardcore poor and poor. According to Rahman and Ahmad, (2010), in general Zakāt distribution method is still focused on the periodical form of direct payment where Aṣnāf is given Zakāt money monthly or annually. 45 Book 2.indd 73 10/16/17 4:57 PM
  74. Nevertheless , many cases have shown that direct payments reducing Aṣnāf incentive to work and end up being dependent on Zakāt funds. Although direct payment of Zakāt is still acceptable especially for non-productive Aṣnāf such as the disabled and elderly, it is recommended that Zakāt should be distributed in the form of capital finance to the poor and needy in order to encourage business activities among Aṣnāf. In a long run, it is expected that the productive Aṣnāf will be more independent, and able to support themselves and their families, thus escaping from the poverty. Moreover, in some countries such as Malaysia and Pakistan, Zakāt funds are also used to help the household dependants by sponsoring their school and university fees (Ahmed, 2004). It seems that these educational and training programmes are useful to prevent the Aṣnāfs‟ children from living in poverty in the future, due to the lack of knowledge. 4. The Effectiveness of Zakāt Institutions The institution of Zakāt is undoubtedly one of the most widely discussed and analyzed aspects of the Islamic economy, this is perhaps because Zakāh is one of the five principal pillars of Islam along with shahādah (declaration of faith), Ṣalāt (daily prayers), Ṣawm (fasting during Ramadan) and Hajj (pilgrimage to Makkah).The institution of Zakāt in Islam provides job opportunity for the people, this is because its collection and distribution involved personnel for effectiveness. This explains why the Qur‘ān stipulates that a fraction of whatever is received as Zakāt be setaside for those who are working as its collectors and distributors. Proceeds from Zakāt may be spent to integrate new converts to Islam into the Muslim community, especially when such are cut off from their economic resources or are being intimidated for accepting Islam. Those confused about Islam or show tendency to renounce Islam could also be ‗lured‘ into Islam by giving them a share from the Zakāt proceeds. Also, the administrators of the Zakāt Fund must completely separate between the Zakāt funds and charity funds, so they can be able to use Zakāt funds in the eight legitimate ways. As in Ibrahim (2015), the institution of Zakāt has implications for micro and macro-economic variables. In the former, Zakāt is said to result in favourable effects on saving and investment behaviours without affecting work efforts. Favourable macro-economic effects are expected to cover several dimensions including allocative efficiency, economic growth, distribution of income, poverty eradication, social security and stabilization. It is the aim of the institution of Zakāt in Islam to alleviate if not eradicate hunger, poverty, disease and ignorance by guaranteeing the provision of basic necessities of life on one hand, and to some extent, solve the problem of unemployment on the other hand, so that they too may eventually become independent. Although, Zakāt is a purely religious levy which is one of the pillars of Islam, the enactment of Zakāt as a tax by law in the Sudan in 1984 changed the trend by making it as an Islamic tax which can be collected to finance government activities. Also, the non-Muslims in Sudan which constitute about a quarter of the population of the country were levied the same 2.5% under the name of the social equality tax. In Islam, social welfare services are considered part and parcel of faith. This explains why Zakāt is paired always with Ṣalāt in numerous verses of the Qur‘ān. In the light of this, social welfare services could be seen as a trust which must be discharged by the rich to the poor, the needy and the weak, failure of which can earn the rich the torment of Allah in the Hereafter. The following Qur‘ānic verses confirm this: (And spend (in charity) of that with which We have provided you before death comes to one of you and he says: “My Lord! If only You could give me respite for a little while, then I should give Ṣadaqah (i.e Zakāt) of my wealth, and be among the righteous. 46 Book 2.indd 74 10/16/17 4:57 PM
  75. And Allah grants respite to none when his appointment (death) comes. And Allah is All-Aware of what you do) (Qur‘ān 63: 10-11). Furthermore, in the institution of Zakāt, a reasonable amount is specified to be deducted from one‘s possession or accumulated wealth, when such remains in his possession for a whole year. Zakāt is levied at almost a uniform rate of 2 ½ per cent (2.5%) of such a wealth. This implies that 1 / 40 will be deducted from the wealth. On grains, oil seeds, beans, peas, there is livable tax of one-tenth of the crop, even when grown on rent paying land. Where irrigation is partly done by machine and partly by rain, the rate is 5% and if not, 10%. On fish and other marine wealth, the value of 85gms gold is its Niṣāb and a due of 10% is paid annually out of the net profit. 5. Conclusion Zakāt is declared as the third of five ―pillars‖ of Islam, and it is payable on the assets such as gold, livestock, agricultural products, and funds. The Zakāt - if performed as imposed by Allah the Almighty - would be enough to eradicate poverty. Consistent with the brotherhood concept in Islam, the requirement to pay Zakāt is also closely related with the idea of equality and justice that lies under the Islamic principles. The main purpose of Zakāt is to support the less fortunate group in the society such as the poor, the needy, the wayfarer, or the heavily indebted with the hope that this group of people will at least have the basic requirement to lead a normal life, thus eliminating poverty. It is generally believed that Zakāt plays an important role in term of economy, moral and social of a society. It has been proved historically that with proper management, Zakāt is capable to eliminate poverty. During the reign of Umar Ibn Al-Khattab and Umar bin Abdul Aziz, it was reported that there was so much prosperity that often it was hard to find an eligible recipient of Zakāt. The institution of Zakāt has implications for micro and macro-economic variables becausepoverty has become an economic, social, and political issue all over the world. The distribution of Zakāt itself has to be done in the most precise manner possible. This must be done by first matching the two groups of Aṣnāf (Fuqarā‟ and Masakīn) that are qualified to receive Zakāt based on Islamic principle with the concept of hardcore poor and poor groups. It is advisable for the future researchers with interest in welfare economics to carry out studies to investigate the perception of Zakāt among the Muslims, evaluate the efficiency of Zakāt fund mobilization and other forms of Islamic Economics tools available in meeting the needs of the society. When put into practice aptly, Zakāt is likely to be as functional as tax in a secular economy. The differences in objective and scope of both Zakāt (which many mistake as tax in Islam) and the taxation respond to similar economic challenges. There is the need for the government especially in the Muslim society to establish a Zakāt institution that will take care of the aged people, widows, orphans and victims of natural disasters, who constitute the bulk of the poor and needy in the society. 47 Book 2.indd 75 10/16/17 4:57 PM
  76. References Ahmed , H. (2004). Roles of Zakāh and Awqāf in Poverty Alleviation. Jeddah: Islamic Development Bank. Adebayo, R. Ibrahim. (2015). Zakāt and Poverty Alleviation: A Lesson for the Fiscal Policy Makers in Nigeria Al-Ghazali, A. Abu Hamid (1993), Ihya „Ulum ad-Din; Karachi - Pakistan, Darul- Ishaat, Urdu Bazar, First edition. Bakar, A. & Rashid, A. (2010). Motivations of Paying Zakāt on Income: Evidence from Malaysia. International Journal of Economics and Finance 2(3): 76-84. Clarke, F., Craig, R. & Hamid, S. 1996. Physical Asset Valuation and Zakāt. International Accounting9: 195-208. Dogarawa, A. B. (2009). Poverty Alleviation through Zakāh and Waqf Institutions: A Case for the Muslim Ummah in Ghana. Paper presented at the First National Muslim Summit,Ghana, 3 October 2009. Gambling, T. E. & Karim, R. A. A. (1986). Islamic and „Social Accounting‟. Journal of Business Finance & Accounting, 13(1), 39-50. Hamid, S., Craig, R. & Clarke, F. (1993).Religion: A Confounding Cultural Element in the International Harmonization of Accounting? ABACUS, 29(2), 131-148. Haron, N.H., Hassan, H., Jasni, N.S. & Rahman, R.A. (2010). Zakāt for Aṣnāf‟ Business by Lembaga Zakāt Selangor. Malaysian Accounting Review 9(2):123-138. Hudayati, A. &Tohirin, A. (2010).Management of Zakāh: Centralised vs Decentralised Approach. Paper presented at Seventh International Conference – The Tawhidi Epistemology: Zakāt and Waqf Economy, Bangi. Kusuma, D. B. W.,&Sukmana, R. (2010).The Power of Zakāh in Poverty Alleviation. Paper presented at the Seventh International Conference – The Tawhidi Epistemology: Zakāt and Waqf Economy, Bangi Selangor, Malaysia. MohdRodzi, Roshaiza&MohdNazli. (2013). Role of Zakāt to Eradicate Poverty in Malaysia. Journal of Management(39) 141-150. Mohammed, J. A. (2007). Corporate Social Responsibility in Islam. Unpublished doctoral thesis, Auckland University of Technology.Retrieved September 14, 2008, from Dissertationsand Thesis Databases. Mohamed Ibrahim, S. H. (2001). Islamic accounting – Accounting for the _ew Millennium?Paper presented at the Asia Pacific Conference. Kelantan, Malaysia International Islamic University Malaysia. Retrieved September 2, 2007, from:http://www.iiu.edu.my/iaw Md Isa, Y. Z. (2011). The Relationship Between Poverty Elimination and Aṣnāf Entrepreneurial Scheme.Unpublished Masters Theses.Universiti Utara Malaysia (UUM). 48 Book 2.indd 76 10/16/17 4:57 PM
  77. Othman , A. & Noor, A.H.M. (2012). Role of Zakāt In Minimizing Economic Inequalities among Muslim: A Preliminary Study on Non-Recipients Of Zakāt Fund (NRZF). 3rd International Conference on Business and Economic Research (3rd ICBER 2012) Proceeding. Golden Flower Hotel, Bandung, Indonesia. Pusat Pungutan Zakāt (2010). LaporanZakāt PPZ-MAIWP 2010. Kuala Lumpur. Qarḍawi, Y. (1999). Fiqh al Zakāh (Volume 1): A Comparative Study Of Zakāh, Regulations and Philosophy In The Light of Quran and Sunnah. Saudi Arabia: King AbdulAzizUniversity.Sadeq, A. H. (1997). Poverty Alleviation: An Islamic Perspective.Humanomics, 13 (3), 110 – 134. Adebayo, R. Ibrahim. (2015). Zakāt and Poverty Alleviation: A Lesson for the Fiscal Policy Makers in Nigeria. White, L. S. (2004). The Influence of Religion on the Globalization Of Accounting Standards. Retrieved on September 1, 2007, from http://cbfa.org/papers/2004conf/White.doc. 49 Book 2.indd 77 10/16/17 4:57 PM
  78. 50 Book 2 .indd 78 10/16/17 4:57 PM
  79. 4 Philanthropy , Markets, and Islamic Financial Institutions Toseef Azid1 and Muhammad Azeem Qureshi2 There is no consensus among the experts that welfare can be increased through philanthropy or the market is sufficient for the achievement of targeted level of welfare. It is still a main quest that giving visible good to one known fellow is better or market ethos have more positive impact on the society where we have needs of thousands of unknown. Markets, in Hayek‘s view, are superior to philanthropy - economically, ethically, and epistemologically - because they ―confer benefits beyond the range of our concrete knowledge‖ (Hayek 1988, 81) and thus provide ―a greater benefit to the community than most direct „altruistic‟ action‖ (ibid., 19). The same can be expected from the ethical and moral financial institutions those carry not only the objective to increase their profits but also equally attempt to serve the community. This article proposes a constructive model in which markets, philanthropy and financial institutions work together to enhance welfare, human freedom, and voluntary social cooperation. In this article, firstly, the conceptual dualisms has been examined through which the commerce-philanthropy relationship (e.g., modern versus Islamic socialism) and the historical-philosophical context in which they were formulated. This helps to integrate philanthropy into Hayek‘s theory of economic and social order through financial institutions. Secondly, the foundations of an Islamic view of philanthropic action has been explored. This discussion is inspired by the emerging literature of positive psychology (Chamlee-Wright and Myers 2008; Lewis and Chamlee-Wright 2008) and double movement of Polanyi (2001). Without abandoning Hayek‘s theory of markets, a view of commercial society has been sketched where the markets and philanthropy work together to enhance human welfare and freedom, and voluntary social cooperation guided by Islamic values. The article also explores the different dimensions as to how Islamic financial intuitions are becoming the instrument for the incremental change through this integration. Keywords: Philanthropy, Double movement, Islam, Market, Financial Institutions JEL Classification: D64, D64; D63, H55, M14, D31 1. Introduction There is no consensus among the experts that welfare can be increased through philanthropy or the market is sufficient for the achievement of targeted level of welfare. It is still a main quest that giving visible good to one known fellow is better or market ethos have more positive impact on the society where we have to cater needs of thousands of unknown. Markets, in Hayek‘s view, are superior to philanthropy - economically, ethically, and epistemologically - because they ―confer benefits beyond the range of our concrete knowledge‖ (Hayek 1988, 81) and thus provide ―a greater benefit to the community than most direct „altruistic‟ action‖ (ibid., 19). The same we can expect from the ethical and moral financial institutions those have not the only objective to increase their profit but also equally attempt to serve the community. This article proposes a constructive model in which markets, philanthropy and financial institutions work together to enhance welfare, human freedom, and voluntary social cooperation. The article first examines the conceptual dualisms through which commerce-philanthropy relationship (e.g., modern versus Islamic socialism) and the historical-philosophical context in which they were 1 2 Professor of Economics, College of Business and Economics, Qassim University, Saudi Arabia Associate Professor, Oslo Business School, Oslo and Akershus University College of Applied Sciences, Norway 51 Book 2.indd 79 10/16/17 4:57 PM
  80. formulated . This helps to integrate philanthropy into Hayek‘s theory of economic and social order through financial institutions. Second, the foundations of an Islamic view of philanthropic action have been explored. This discussion is inspired by the emerging literature of positive psychology (Chamlee-Wright and Myers (2008); Lewis and Chamlee-Wright 2008) and double movement of Polanyi (2001). Without abandoning Hayek‘s theory of markets, a view has been sketched where commercial society in which markets and philanthropy (―voluntary giving and association that serves to promote human flourishing‖ ) work together to enhance welfare, human freedom, and voluntary social cooperation under the umbrella of Islam. It leads to the debate again on the paradigm of ―state or market‖ and the ―welfare state or philanthropy‖. The market fails to produce just and fair economic system. Alternatively, the social programs should be moved by the government to address the state of welfare. Or the state of welfare should be pursued by the voluntary sector (Ismail 2013). The paper also explores the different dimensions that how the Islamic financial intuitions are becoming the instrument for the incremental change out of this integration. After presenting the modern theories of market vs. philanthropy and their role in increasing the welfare in section I, the rest of the paper is organized in the following manner. Section II discusses the role of Islamic philanthropy in social and economic welfare contexts and attempts to integrate market and philanthropy. Further, the integration process in the periphery of Islamic financial market has been explored. Lastly, some policy suggestions have been framed. Section I In this section we present a short discussion of the conventional point of view from different domains of the academic literature, that is, economics, sociology and psychology (e.g., Liberal, Neo-Liberal, Positive Psychology and Austrian School of thoughts). 1.1. Philanthropy and Virtuous Actions in Conventional Setting As a classical liberal, Hayek (1979) appreciates, on one end, the impact of philanthropy on the society as well as on economy. He recognizes that philanthropy can provide public and private goods which sometimes are never expected from the government sector. On the other end, Hayek (1980) criticizes philanthropy as, ―to restrict our actions to the deliberate pursuit of known and observable beneficial ends‖ (Hayek 1988, 80). He opines that it is better to serve thousands of unknown than to serve just the known neighbours (Hayek, 1978, 1979) and the benefit should be beyond our knowledge (Hayek 1978). He further adds that philanthropy or altruism cannot play a vital role in the uplift of the whole society (Hayek, 1976). In short, Hayek develops a commerce - philanthropy relationship. He also discusses the tribal morality that one should be responsible as the member of the group to serve the other members, which in his opinion do not have a positive impact on the productivity and peace of the great society3 (Hayek 1978, 66). Hayek (1988) explains that direct altruistic actions are not able to cover the whole community whereas earning a living in a well-functioning market provides a great benefit to the great society. However, Hayek is unable to give the solution if market forces are unable to provide the equal opportunity and if someone is unable to earn according to his abilities (Hayek, 1992, 1978). However, he constructs an idea that government should intervene if market is unable to provide equal opportunity to the members of the society. It is worth to note that he is unable to provide any guidance that how government will work in his proposed model. We can conclude that in 3 The Great Society requires that we treat all alike and thus that legally enforceable duties are those which can be fulfilled towards anyone 52 Book 2.indd 80 10/16/17 4:57 PM
  81. Hayek ‘s view the market and the philanthropy cannot be mixed with each other and both operate in the opposite directions. Ealy (2005) develops a model for commercial society in which markets and philanthropy (―voluntary giving and association that serves to promote human flourishing‖ work together to enhance human freedom, flourishing, and voluntary social cooperation. Cornuelle (1993) constructs a model based on the independent voluntary sector and claimed that this sector has a significant role in developing a good society and members of the society are ready to help others. He assumes that ―desire to serve others‖ that is ―as powerful as the desire for profit or power‖. Furthermore, the positive psychology puts more emphasis on the happiness, strength and virtue instead of disease, weakness, and damage (Seligman 2003). Seligman further narrates that ―(happiness) cannot be derived from bodily pleasure, nor … chemically induced or attained by any shortcuts. It can only be had by activity consonant with noble purpose‖ (Seligman 2002, 112). Seligman (2003) concludes that the peak of happiness is based on the voluntary action of human being. Happiness is not based on that how we are living in this cosmos; actually it is based on our own personality and our continuous behaviour. It also relates to our relations with others, with our professions, between ourselves and larger than ourselves, if these relations are on the right direction then we may be able to get the required degree of happiness (Haidt 2006). It should also be noted that positive psychologists believe on the virtuous cycle model of growth and personality development. It teaches us that virtuous actions develop the psychological capital (knowledge, skill, and character trait), social capital4 (brotherhood, kindness, love among the members of the society, and social interaction among the members of the community), human capital5 (improving health, education, and state of the economy ultimately having positive impact on the income of the individuals and the society). And, virtuous actions are increasing in response to the developed personality. This positive cycle increases the happiness of the human being. So virtuous actions leave the impact on different aspects of the society, as well as, the economy. They also bring incremental changes on the degree of happiness of the community. We can conclude that virtuous actions are closer to the happiness and cause the lasting happiness. As such, virtuous actions are considered as an investment, which will create psychological, social and economic capital for our future. Through the accumulation of these capitals, we will be able to increase our happiness, satisfaction and utility that will become barrier against the adverse conditions, at the same time, create more resources. According to Seligman (2002), the additional virtuous actions will increase the capacity of human being leaving positive impact on his productive abilities. The virtuous cycle takes away a person from the selfish to selfless state (lasting happiness), which will increase the productive capacity and capabilities of that person (Seligman 2002, 43 and 9; and Haidt 2006, 97–98). According to Cornuelle (1993) and Ealy (2005), philanthropy will enhance the level of social interaction, social learning, and mutual relations and ultimately impact positively the economic welfare of the community. We observe in the literature that the process of giving and receiving gift leaves positive impact on the development and growth of the personality, that is, gift receivers realise the importance of philanthropy, its virtuousness, and impact on the community and consequently they also try to become gift givers instead of gift receivers. They then enjoy the sense of sharing which increases different dimensions of the 4 Chamlee-Wright 2004, 2006, 2008; Lewis and Chamlee-Wright 2008; Chamlee-Wright and Myers (2008) explained that individuals are ―socially embedded,‖ for example, that the characters and capacities of individuals are shaped by the social networks in which they exist 5 Kass (2005) described human capital is developing through the philanthropic process, i.e., gifts as mutually beneficial interactions. 53 Book 2.indd 81 10/16/17 4:57 PM
  82. capital and generate the new resources (Kass 2005; Gunderman 2005). Gable and Haidt (2005), Seligman (2002) and Haidt (2006) support the hypothesis of higher phase of virtuous cycle and claim that with more happiness and higher level of human capital, persons are ready to donate more and become less self-centred. In real terms it is a two-way process; it generates the human betterment and develop a better and significant interaction between the donor and the receiver. Therefore, philanthropy increases the desire and aspiration to see the others living in a better socio-economic environment. Keyes and Haidt (2003) argue that community should be ready to become the best in delivering virtuous actions instead of preventing them to become the worst. McCloskey (2006) redefines the commercial society and states that everyone is free to increase the virtuous abilities and potentials. This implies that commercial society is far better than the market economy. One can conclude as: philanthropy in the conventional socio-economic network generates a mechanism that creates and increases the psychological, social, and human capital that increases our universal set of resources (both tangible and intangible) and addresses the complex problems of the modern world in the informal and formal set of universal sector just like the current day market mechanism. Section II 2. Concept of Philanthropy in the Religion of Islam The main source of guidance in the Islamic system are the Holy Quran and the practices and traditions of the Prophet (SAW). We present some verses of the Quran that instruct the followers to become philanthropists. 1. Islam teaches to his followers that their donations are for both known and the unknown: “They will question you concerning what they should bestow voluntarily. Say: 'Whatever good thing you bestow is for parents and kinsmen, orphans, the needy and strangers and whatever good you do God has knowledge of it” (2:211). And “The alms are only for the poor and the needy, and those who collect them, and those whose hearts are to be reconciled, and to free the captives and the debtors, and for the cause of Allah, and (for) the wayfarer; a duty imposed by Allah. Allah is Knower, Wise.” ( 9:60). And “But righteous is the one who, gives away wealth, out of love for Him to the near of kin and the orphans and the needy and the wayfarer and to those who ask, and to set slaves free” (2:177). And “So give to the near of kin his due, and to the needy and the wayfarer. This is best for those who desire Allah‟s pleasure” (30:38). And “Whatsoever Allah may restore Unto His apostle from the people of the cities is due Unto Allah and Unto the apostle and Unto the near of kin and the orphans and the needy and the wayfarer, so that it may not be confined to the rich among you. And whatsoever the apostle giveth you, take; and whatsoever he forbiddeth you, refrain from. And fear Allah; verily Allah is Stern in chastisement. (59:7) 2. Quran explains about the reward in the following way: 54 Book 2.indd 82 10/16/17 4:57 PM
  83. “Those who bestow their wealth in the way of God are like the grain of corn that sprouts seven ears, a hundred grains in every ear. So God multiplies for those whom he will” (2:263). 3. Methods of giving the charity (openly or secretly) is explained as: “Oh, believers, do not void your freewill offerings with reproach and injury as one who bestows of his substance to show off to men and believes not in God and the Last Day” (2:266). “If you publish your voluntary offerings, that is good; but if you conceal them, and give them to the poor, that is better for you, and will acquit you of your evil deeds” (2:272). “Whatever good you do surely God has knowledge of it. Those who expend their wealth night and day, openly or secretly, their reward awaits them with their Lord” (2:275). 4. What followers of Islam have to give in the way of Allah (SWT): ―You will not attain true piety until you voluntarily give of that which you love and whatever you give, God knows of it” (3:86). “O ye who believe! Spend of the good things which ye have earned, and of that which We bring forth from the earth for you, and seek not the bad (with intent) to spend thereof (in charity) when ye would not take it for yourselves save with disdain; and know that Allah is Absolute, Owner of Praise.”( 2:267) 5. Reasons of the philanthropy: “Is it they who allocate the mercy of your Lord? We have allocated among them their livelihood in the worldly life, and have raised some of them over others in ranks, so that some of them may put some others to work. And the mercy of your Lord is much better than what they accumulate.” (43:32) “And in whose wealth there is a right acknowledged, For the beggar and the destitute.” (70:24-25) 6. Reward and punishment for payment and non-payment of charity: “Who give not the poor-due, and who are disbelievers in the Hereafter.” (41:7) “Who is he that will loan to Allah a beautiful loan? For (Allah) will increase it manifold to his credit, and he will have (besides) a liberal reward.” (57:11) The saying of the Prophet Mohammad (SAW) emphasizes the charity. He said even the good deeds are also considered as charity: “The Prophet Muhammad (SAW) said: "Every Muslim has to give in charity." The people then asked: "(But what) if someone has nothing to give, what should he do?" The Prophet replied: "He should work with his hands and benefit himself and also give in charity (from what he earns)." The people further asked: "If he cannot find even that?" He replied: "He should help the needy who appeal for help." Then the people asked: "If he cannot do (even) that?" The Prophet said finally: "Then he should perform good deeds and keep away from evil deeds, and that will be regarded as charitable deeds."( Sahih alBukhari, Vol. 2, Number Ḥadīth 524) 55 Book 2.indd 83 10/16/17 4:57 PM
  84. 2 .1. Philanthropy and Virtuous Action in Islamic Setting Clearly the Quranic verses and sayings of Prophet (SAW) advise that in the religion of Islam, philanthropy6 and virtuous actions have the similar effects as discussed in the previous section. However, in Islam, intentions are more important. If intentions and actions are to please Allah (SWT) then the doer will get the reward in the life hereafter as well. In the conventional setting, the universal set of capital generation is not yet completed because it‘s one cell is empty, that is, the religious capital. However, in the system of Islam through virtuous actions one also generates religious capital besides psychological, social and human capital. Therefore, Islamic system generates more resources as compared to the conventional system in the light of aove mentioned thoughts mainly because of the existence of extra sub-set of capital, the religious capital. The level of happiness, satisfaction and utility will develop the personality in the domain of conventional setting and in addition to the religious domain7. There is a consensus among the Muslim scientists that religion as an informal institution plays a very important role in building the socio-psycho-eco-religious structure of an Islamic community. In contrast to the great society or Tribal society, Islam builds up a moral economy that covers all the dimensions - sociopsycho-eco-religious - where everyone is morally bound to look after the others and is responsible for unknown or known members of the moral economy. All different sets of capital interact with each other, so community survives in an optimal standard. The best example of brotherhood was established at the time of migration from Makkah to Medina. According to teachings of Islam, all Muslims are brothers and they are just like one body; if one part of the body feels pain the other feels the same, naturally. Interest, gambling, hoardings, etc. are not allowed because they exploit the other members of the moral economy. Zakāt, charity, law of inheritance promote the optimal way of income distribution. In this way, the moral economy deals with the philanthropy and market values side by side and both complement each other. Where market ethics promote philanthropy and philanthropy supports market's ethics, we observe that the religious orientation of the receiver is highly influenced by the religious domination of the donor. As such, the degree of religiosity in the community leaves impact on the growth of the personalities as well on the degree of happiness, satisfaction, gratification and utility. It is generally opined if religion of Islam is not established in a Muslim society, then issues like social disintegration, poverty, crime, unemployment and many psychological concerns are developed. In fact, philanthropy combined with the religious values has strong economic, social and psychological motivations (Khawaja et 6 Since the early days, philanthropy has become the basic Islamic economy, where philanthropy which means "love of people" had been successfully practiced by the Prophet and the companions accompanied by moral motivation to achieve the glory of Islam, social justice and remove economic oppression. Philanthropy in Islam has been based on a clear legal, either from the al-Qur'an also al-Hadith. (Ismail et al., 2013) 7 "We can describe in terms of sociology, there is name of satisfaction and dissatisfaction, in the people society will feel the sense of satisfaction when someone has given something useful for others. In relationship with psychology, it is described by a psychologist, "If someone wants to get happiness in this life, he should take part take part in a benefit to others. Because the pleasure one can depend on other people pleasure and enjoyment of others depend on her pleasure" (Ismail et al., 2013, p.12). It can be dealt with quite easily in utility theory by considering the utility of one person a function not only of his own wealth or his own income, but a function of the wealth and income of others ((Boulding 1962) "Altruism toward others or toward future generations may be a motivator in giving, and gifts are made to maximize a utility function that includes the benefits to others or to society in general. People may get utility–a ―warm-glow‖– from the act of giving." (Andreoni 2006: p.1-2) 56 Book 2.indd 84 10/16/17 4:57 PM
  85. al . 2015). Among the Islamic norms, almsgiving is very much appreciated while on the other hand Islam condemns begging. Prophet Muhammad (SAW) is reported to have helped a beggar finding a way of sustainable income, instead of giving him charity. The main objective of the donations is to develop the social, human, psychological and religious capital that will enhance the productivity and efficiency of the community. In this respect, philanthropy is a tool to mitigate the pitfalls of the market and a helping hand to promote virtuous cycles of market mechanism. Table 1 compares commerce and philanthropy with the Islamic system. Table 1: Philanthropy, Commerce and Islam Commerce Philanthropy Adam Smith Aristotle Great Society (modern, open, cosmos, catallaxy) Tribal Society (ancient, closed, taxis, community) Modern Morality (Serving unknowns via markets) Tribal Morality (serving others via gift and solidarity) Islamic System Quran and Traditions of the Prophet (SAW) Moral Economy (a set of all the dimensions of life), sense of brotherhood, moral values, Muslim Ummah Moral Morality (serving other via markets and gifts, known and unknown, more importance to one‘s own earnings) Source: First two columns are from Garnett Jr. (2008) Zakāt is an obligatory duty for the Muslims if they are Sahib-i-Niṣāb. However, Muslim scholars have also allowed `Zakāt‘ to be given towards relief operations, which has made a big difference in responding to humanitarian disasters. For example, in 2007, Egypt‘s Grand Mufti pronounced that contributions by way of Zakāt to a civil society campaign - including fundraising by text message - to open a new children‘s cancer hospital would be legitimate. The hospital, financed completely through donations, is now the second largest in the world dedicated to paediatric cancer care. He further said, ―We need a revolution in all the sectors,‖ and ―We need a revolution, not only in leaders, but in the mind-set itself.‖ Current State of Philanthropy in the Muslim World: Some Examples The magnitude of philanthropic giving in Muslim communities is estimated between USD 250 billion and USD 1 trillion annually. For example, the Charity Commission responsible to collect annual returns for 1,332 registered Muslim charities situated in the United Kingdom provides an indication of the scale of funds raised each year by Muslims for charitable causes. The total income on this account amounted to £214.7 million in 2006 across 1,076 charities that filed returns, compared with £203.6 million raised during the previous year. Total expenditure amounted to £176.6 million against £159.8 million in the previous year. According to an estimate, Waqf boards in India own property worth Rs 70,000 crore or USD 18 billion (Alam 2010)8. 8 Source: All India Muslim Personal Law Board: AIMPLB. 57 Book 2.indd 85 10/16/17 4:57 PM
  86. Since about a quarter of the Muslim population lives on less than $1.25 a day, the above situation represents a huge potential in the world of aid funding. But Islamic finance experts, researchers and development workers argue that much of the money spent in `Zakāt‘ (mandatory alms) and `Ṣadaqah‘ (charity) is mismanaged, wasted and remains ineffective. The main question that needs to be raised relates to the current state of Muslims all over the world. It is observed that wealth is growing in the Muslim world, so is the poverty, then where have we gone wrong?‖ Another question is also raised as to how the sustainability and accountability on account of donations can be instituted? There is a need to bring a paradigm shift in the culture; from conventional to strategic giving. The huge accumulation of funds needs to be channelled towards development. Habib Ahmed (2004) observes that effective collection and strategic utilization of all potential `Zakāt‘ in Muslim countries may help one-third to onehalf of their poor to come out of poverty. However, most of the countries do not use ‗Zakāt‘ to the high leverage strategic options. Identifying the reasons, he opines that people do not trust government as she has a history of mismanagement, and consequently they prefer to give Zakāt by themselves. An example of good Zakāt management has been presented by the Malaysian government. In 2010, the Malaysian government collected 1.4 billion Malaysian Ringgit (US$443 million) in `Zakāt‘as compared to about US$95 million ten years ago. By using ‗Zakāt‘ funds, a Sharīʿahcompliant financial institution called KOPSYA finances cooperatives through interest free loans. In 2010 the Egyptian government estimated, for the first time, the amount of money Egyptians donate to charity that amounted to about 4.5 billion Egyptian pounds ($745 million) in 2009. We understand that the government estimate may be enough to pull nearly all of Egypt‘s poor out of poverty. We advocate that the Arab world also needs a paradigm shift from a charity culture to a humanitarian action business. The academics discuss the role of `Zakāt‘ in an egalitarian society and suggest a variety of workable models. However it requires political will at the government level to bring an objective structural change in the society. At the individual level, people just go to the poor, give them money and feel that they have fulfilled their duty of paying ‗Zakāt‘. At the group level, Muslim NGOs that generally get up to 80% of their funding from `Zakāt‘ and `Ṣadaqah‘ are now gradually moving away from direct assistance and increasingly turning to sustainable development projects like Islamic (interestfree) micro-finance to support income generating activities. In Egypt, a non-profit organization called Misr-al-Kheir led by the Grand Mufti of Egypt and funded by `Zakāt‘ and `Ṣadaqah‘ has pioneered the use of `Zakāt‘ for sustainable end like investment in microfinance projects and scientific research aimed at improving human development. Further, we observe several concerted efforts to involve the $1 trillion Islamic finance industry to cater sustainable livelihood for the poor, or use Islamic capital market instruments to create `Awqāf‘. The recent trends we now observe in Muslim community at individual and group level suggest a realisation at both the levels of the complimentary role of ‗Zakāt‟, ‗sadqat‟ and philanthropy to supplement and magnify the virtuous cycle of the market forces. 2.2. Philanthropy, Market and Islam Karl Polanyi developed the idea of double movement in 1944. He suggests that a double movement characterizes economic liberalization. As the first leg of the movement, actors tend to reduce every social relation to the only calculation production and exchange that interacts with human beings solely on the basis of the commodity logic . As the second leg of the double 58 Book 2.indd 86 10/16/17 4:57 PM
  87. movement , new webs of solidarity emerge to cope with the impoverishment that this marketization fosters . Polanyi thus proposes an alternative ethnographic approach called "substantivism" in opposition to "formalism", both the terms coined by Polanyi9. In his opinion the act of philanthropy or serving known or protecting their own groups or tribe is the reaction of the evils of marketization. He added that marketization abolishes traditional communities, therefore, up-to-date methods are evolved for protection of the society from the market. In this sense market and serving the community are considered as opposite poles that work against each other. Polanyi assumes that whenever market attempts to harm the society through its notorious outcomes like inequity, persistent unemployment, exploitation of the poor segment of the society, and severe chaos in the financial market then society reacts and develops the modern methods for for its protecting and restructure itself (Richards and Waterbury 2007; Stiglitz 2002; Block 2003; Somers 2008). Thus, one can deduce an axiom from the above discussion: ―philanthropist groups represent a counter-movement to marketization.‖ Block and Somers (2014) commented on Polanyi‘s approach and stated "the ideology that free markets can replace government is just as utopian and turns dangerous". However, we observe that Polanyi wrongly presents the double movement. We argue that philanthropy and market are complementary and can operate side by side. This complementarity assumes that if the donor associations are able to provide a proper training to the poor and develop their personality and skills to empower them, they become the responsible, productive and effective market agents. In that, we do not see any conflict between them. Donors are also legitimating their wealth as well and in return they enjoy the loyalty of the receivers (Bourdieu 1980, 1990). Bellah (2011) comments that philanthropy is not a reaction to the marketization rather it is human nature to share, communicate, please and form community. The debate of social capital guides us that market and community are complement to each other (Annette 2011) whereas for others giving increases the level of morality and brings positive social change with higher degree relative to the market (Bartkowski and Regis 2003). However, Atia (2012) discusses that new forms of Islamic giving and reports that the giving, on one hand, helps the poor and, on the other, the beneficiaries become more pious and neoliberal. It stimulates them to improve management proficiencies, productivity and entrepreneurialism as a part of their moral training to improve the moral structure10. We may conclude that charity activities indeed embed the market if they subordinate individualizing and disciplining activities to social drives and philanthropy in the Islamic system to correct the pitfalls that we have in the Substantivism is a position, first proposed by Karl Polanyi in his work The Graet Transformation, which argues that the term ‗economics‘ 'has two meanings. The formal meaning, used by today's neoclassical economists, refers to economics as the logic of rational action and decision-making, as rational choice between the alternative uses of limited (scarce) means, as 'economizing,' 'maximizing,' or 'optimizing.' The second, substantive meaning presupposes neither rational decision-making nor conditions of scarcity. It refers to how humans make a living interacting within their social and natural environments. A society's livelihood strategy is seen as an adaptation to its environment and material conditions, a process which may or may not involve utility maximization. The substantive meaning of 'economics' is seen in the broader sense of 'provisioning.' Economics is the way society meets material needs. 9 10 Islam provides the equal opportunity to everyone in the market through its religious instruments, like prohibition of Interest Black Marketing and, type of monopoly which is not in the interest of community and society, and improving the state of philanthropy which promotes the efficiency of the market through the peaceful and stable environment. 59 Book 2.indd 87 10/16/17 4:57 PM
  88. current era of marketization . In Islam, maximization of reward in the life hereafter11, happiness, satisfaction and utility (the complete set is known as Falāḥ) is not only related to material needs and their fulfilment but it is also based on the expected reward which someone will get in the life hereafter, which maximizes or optimizes one‘s happiness, satisfaction and utility. 2.3. Philanthropy and Islamic Financial Institution It is clear from the above discussion that not only the market and communitarian oriented philanthropy but also the religious orientation is very helpful in developing the ways to transform the poor segments of the society into ―empowered‖ players in the fight against their impoverishment. Islam does not allow the poor to become the passive and just to receive the donations. Table 2 briefly depicts this phenomenon. Table 2: The (hypothetical) dispositions of market-oriented, communitarian benevolent and religious oriented organizations Market-oriented associations Communitarian associations Religious associations Explanation of Poverty 1. Individual failure (of 1. Immorality (among 1. Non-existence of God the poor) both the rich and poor) fearing behaviour of 2. Governmental blockage 2. The rich‘s and the rich as well as poor of voluntary government‘s failure to level activities and individual care 2. Failure of Government initiative and Community (lack of brotherhood) Expectation from the poor More Productivity More Moral Lives More moral, piousness, productivity, right mentality Career of Staff and managers Competitive Social Competitive, social and pious Main Activities Training Provision Training (moral and professional) and provision Source: First two columns are taken from Tuğal, C. (2013) Religious associations not only create the proper funds, appropriate social, moral and psychological environment but also the right mentality which is the corner stone for the healthy economic and political structure of the country. Alms in Islamic system have the different layers and each one has its own characteristics, e.g. obligatory and voluntary. However, the main objective of every layer is to help this enormous wealth from being lost in never-ending circles of charity that in the long run create dependence and neither achieves any development nor attempts to solve issues of community development12. Islamic society has a long and rich tradition of philanthropy and developing social, educational, cultural as well as religious institutions. For example, Sullivan (1994) notes that many Islamic associations in Egypt provide job training (sewing, carpentry, etc.). Jonathan Benthall and Jérôme Bellion-Jourdan (2003) 11 In the system of Islam the benefits are not observed but these are based on the believer that how he is expecting the reward from Allah (SWT) in the life hereafter) 12 A number sayings of Prophet (SAW) and Quantic injunctions explain it. 60 Book 2.indd 88 10/16/17 4:57 PM
  89. reported that in the philanthropic organization in the Muslim countries , CVs, degrees (especially MBA, banking, etc.) have started to be central to recruitment of staff, rather than the ideology of applicants. Now question arises that how these philanthropic funds can be used that will be able to improve the market norms and its efficiency. Generally, it is assumed that philanthropic funds in the Muslim countries are not properly served their objectives. Alam (2010) explained as: "A recent study by the Aga Khan Foundation on Pakistan finds that giving by Pakistanis is four times the amount of foreign aid that Pakistan receives. However, the muzzling of endowments (Awqāf) has thwarted the philanthropic capability and aspiration of the Muslim communities". It has become the need of the time to use these funds in an appropriate way. Therefore, we need an established institution which will use these funds according to its objectives and also to keep them in a flow instead of a stock. In most of the Muslim countries, people do not trust their governments. In this situation, Islamic financial institutions (IFIs) can play a significant role to properly channelize these funds. The conventional literature recognizes venture philanthropy as the central point among sociologists, economists and psychologists. The Institute for Social Entrepreneurs defines venture philanthropy as follows: ―The use by grant-makers and investors of certain principles traditionally associated with venture capitalists to either build the capacity of a non-profit organization or to invest in asocial purpose business venture. Key elements include long-term relationships (three to six years), development of business plans, provision of cash and expertise, and an exit strategy. Donors and/or investors make long-term funding commitments, closely monitor performance objectives through pre-defined measurement tools, and problemsolve jointly with the leadership team on a regular basis” (Alam 2010). Similarly, Social Venture Partners define venture philanthropy as: “Venture Philanthropy takes some of the principles of venture capitalism and applies them to philanthropy. Venture Philanthropy is the process whereby, (usually wealthy) individuals invest time and money in voluntary organisations and social enterprises. Venture Philanthropy means funding organizations with not only financial resources, but also management and technical support. This support is focused on enabling non-profits to build greater organizational capacity and infrastructure via long term, engaged relationships with investees.” (Alam 2010) As Ismail et al (2013) states "Since the early days, philanthropy has become the basic Islamic economy, where philanthropy which means "love of people" had been successfully practiced by the Prophet and the companions accompanied by moral motivation to achieve the glory of Islam, social justice and remove economic oppression. Philanthropy in Islam has been based on a clear legal, either from in line with Qur'an and Sunnah". Such Islamic financial institutions are very supportive if they use these funds for the Sharīʿah Compliant venture philanthropy, ensuring sustainability and proper uses of these funds. The above discussion enables us to develop the circular flow of philanthropy where Islamic Financial Institutions can play their intermediary role. 2.4. Circular Flow of the Philanthropy From the original sources of Islam [Quran and Tradition of the Prophet (SAW)], we learn that intention is very much important for the good deeds. The Prophet (SAW) said that all the deeds are dependent on intentions. The same is also true about philanthropy. If intention is only to earn 61 Book 2.indd 89 10/16/17 4:57 PM
  90. the reward from Allah (SWT) and worldly benefit is involved then it creates the religious capital and generates the resources which render the benefit to the community, especially to the Muslim ummah. This becomes irrelevant that recipient is known or unknown and goods are private or public, or the benefit is derived by the individual, the local community, or the whole ummah. The cycle starts from the intention of donors and almsgiving transfers into the religious capital generating resources for the community and increases the sense of Falāḥ. The incremental change into philanthropy enters into the second stage increasing the psychological capital, its impact on the similar directions as we observe after the creation of religious capital, enhances further the resources and increases the happiness of both the donors and receivers. Subsequently it enters into the third stage where the incremental change generates the social capital and new resources increasing the satisfaction that is higher than the second stage. Fourth stage observes the creation of human capital that is based on the religious, psychological and social capital. This positive change in the human capital increases the utility of the donors as well as the receivers. These four stages are part of the universal set of philanthropy. As a result, the universal set of philanthropy becomes bigger and bigger. It is a big question mark that how this new set of philanthropy will be channelized without any waste and how it can be used properly for the welfare of the individuals, local community and the Muslim Ummah. At this stage, Islamic Financial Institutions should play their role and invest this amount of philanthropy in the Sharīʿah compliant venture philanthropy. Their profit may be used for the training of the members of the lower income group, for the provision of education and health facilities, and other services to the society. Consequently, a nexus will be built up with universal set of philanthropy and IFIs for Sharīʿah compliant venture philanthropy. This step leads towards the marketization of the whole cycle. IFIs will provide training to the receivers and produce the market oriented products and services. And then this will flow towards the set of philanthropist. Resultantly, size of the set of philanthropy will also increase because the generation of new resources. Through this process the receivers would understand the importance of sharing and the value of alms giving from all the aspects of the life (religious, psychological, social and economic). In this process we are unable to see any crux Hayek‘s theory or any root of Polany‘s double movement. Table 3 explains the circular flow of philanthropy. Table 3: Circular flow of Philanthropy Universal Set of Philanthropy: originated from the Set of Philanthropist Stages of Philanthropy Stage 1 Type of Capital Impact Change Religious Reward in the life hereafter Generation of resources Stage 2 Psychological Happiness Stage 3 Social Satisfaction Generation of resources Generation of resources Stage 4 Human Utility Generation of resources Islamic Financial Institutions (IFIs) Sharīʿah Compliant Venture Philanthropy, e.g. cash waqf (as trustee), partnership, etc. Function of IFIs Training Improving the social environment reinvestment Provision of education and health facilities Disbursement of philanthropy 62 Book 2.indd 90 10/16/17 4:57 PM
  91. Moral Economy ∑ Final Output Producing the new set of market oriented product and services Increasing the size of Philanthropists Set and again enters in the stage 1 Flah Incremental Change in the resources generation of new profit 3. Conclusion We may conclude that, in the Islamic framework, the set of Islamic system is needed to be redefined because their structure and sub-sets are structurally different than the conventional system. Universal set of philanthropy has an additional sub-set, i.e., religious capital. We understand that every action is based on its intention in this system. The basic intention is to earn the reward from Allah (SWT). Literature in the conventional system covers the moral aspects but rarely included the religious aspects as we can see in the Islamic literature. The concept of Falāḥ is a comprehensive one and all the feelings, and level of satisfaction are the sub-set of Falāḥ. It is also worthwhile to note that it is the moral duty of Islamic financial institutions to support the virtuous actions through their own financial systems. We have proposed in line with Alam (2010) that IFIs should start to work on the Sharīʿah compliant venture philanthropy. And then serve the community through its moral, social and specific managed programs. The established link of universal set of philanthropist and IFIs will improve the market process. Ultimately this marketization has the positive impact on the size of philanthropist set. We have depicted that both the philanthropy and market are not substitute to each other but these are fairly complement to each other. Therefore, we are unable to segregate the effects of both. Both are operating side by side and philanthropy is not only concentrated to knowns but it also has the same consideration for the unknowns. The above discussion negates the Hayek‘s hypothesis. Similarly, it is also not the reaction of the pitfalls of market mechanisms and is also not following the Polanyi‘s double movement hypothesis. 63 Book 2.indd 91 10/16/17 4:57 PM
  92. References Alam , N. 2010. Islamic Venture Philanthropy: A Tool for Sustainable Community Development SSRN Electronic Journal · March. Andreoni, J. 2006. Philanthropy, in Handbook of Giving, Reciprocity and Altruism: Applications, Vol (2), L.-A. Gerard-Varet, Serge-Christophe Kolm and Jean Mercier Ythier, (ed.) Elsivier/North-Holland. A series Handbooks in Economics, Kenneth Arrow and Michael D. Intriligator, General Editors. Annette, J. 2011. Faith communities, communitarianism, social capital and youth civic engagement. Ethnicities 11(3): 383–397. Atia, M. 2008. Building a house in heaven: Islamic charity in neoliberal Egypt, Unpublished dissertation, University of Washington, Seattle. Bartkowski, J. P. and Regis, H. A. 2003. Charitable choices: Religion, race, and poverty in the post-welfare era. New York: New York University Press. Bellah, R. N. 2011. Religion in human evolution: From the Paleolithic to the Axial Age. Cambridge: Belknap Press of Harvard University Press. Boulding, E. K. 1962. Notes on a Theory of Philanthropy, in Philanthropy and Public Policy, Frank G. Dickinson, (ed.), NBER. USA, p.57 – 72 Bourdieu, P. 1990 [1980]. The logic of practice. Stanford: Stanford University Press. Block, F. 2003. Karl Polanyi and the writing of the Great Transformation, Theory and Society, 32(3): 275–306. Block, F. and Somers, M. R. 2014. The Power of Market Fundamentalism: Karl Polanyi's Critique. Harvard University Press. Chamlee-Wright, E. 2004. Local Knowledge and the Philanthropic Process: Comment on Boettke and Prychitko.‖ Conversations on Philanthropy 1:45–51. Chamlee-Wright, E. 2006. After the Storm: Social Capital Regrouping in the Wake of Hurricane Katrina, presented in Southern Economic Association Meetings: Charleston, S.C. November. Chamlee-Wright, E. 2008. The Structure of Social Capital: An Austrian Perspective on Its Nature and Development.‖ Review of Political Economy, 20 (January): 41–58. Chamlee-Wright, Emily, and Myers, J. A. 2008. Discovery and Social Learning in Non-Priced Environments: An Austrian View of Social Network Theory.‖ Review of Austrian Economics, 21(2–3):151–66. Cornuelle, R. C. 1993. Reclaiming the American Dream: The Role of Private Individuals and Voluntary Associations. New Brunswick, N.J.: Transaction Publishers. (Orig. pub. 1965.) Ealy, L. T. 2005. The Philanthropic Enterprise: Reassessing the Means and Ends of Philanthropy, Economic Affairs, 25(2): 2–4. Gable, S. L., and Haidt, J. 2005. What (and Why) Is Positive Psychology?‖ Review of General Psychology, 9(2):103–10. Garnett Jr., R. F. 2008. Philanthropy, Markets, and Commercial Society: Beyond the Hayekian Impasse, Journal of Markets & Morality, 11(2): 205–219 64 Book 2.indd 92 10/16/17 4:57 PM
  93. Gunderman , Richard B. 2005. Giving and Human Excellence: The Paradigm of Liberal Philanthropy, Conversations on Philanthropy 2:1–10. Haidt, J. 2006. The Happiness Hypothesis: Finding Modern Truth in Ancient Wisdom. New York: Basic Books. Hayek, F. A. 1967. Opening Address to a Conference at Mont Pérèlin, in Studies in Philosophy, Politics, and Economics. Edited by F. A. Hayek. Chicago: University of Chicago Press, 148–59. (Orig. pub. 1947.) Hayek, F. A. 1976. Law, Legislation, and Liberty, Volume II: The Mirage of Social Justice. Chicago: University of Chicago Press. Hayek, F. A. 1978. New Studies in Philosophy, Politics, Economics and the History of Ideas. Chicago: University of Chicago Press. Hayek, F. A. 1979. Law, Legislation, and Liberty, Volume III: The Political Order of a Free People. Chicago: University of Chicago Press. Hayek, F. A. 1988. The Fatal Conceit: The Errors of Socialism. Edited by W. W. Bartley III. Chicago: University of Chicago Press. Ismail, A. G., Zaenal, M. H. and Shafiai, H. (2013) Philanthropy in Islam: A promise to Welfare Economics System, WP No. 1435-03, IRTI Working Paper Series, Islamic Development Bank, Jeddah, Saudi Arabia. Kass, Amy A. 2005. Comment on Gunderman, Conversations on Philanthropy, 2:19– 24. Keyes, C. L. M., and Haidt, j. 2003. Flourishing: Positive Psychology and the Life Well-Lived (eds.). Washington, D.C.: American Psychological Association. Khawaja, M. J., Shareef, F. and Azid, T. 2015. Institution of religion, Intergenerational of Transmission of Religious Capita and Islamic State: A Case Study of District Council Multan, paper presented in 10th International Conference of Economics and Finance, held in Doha, Qatar, organized by Qatar Foundation and Islamic Development Bank. Lewis, P. and Chamlee-Wright. E. 2008. Social Embeddedness, Social Capital, and the Market Process: An Introduction to the Special Issue on Austrian Economics, Economic Sociology, and Social Capital.‖ Review of Austrian Economics, 21 (Spring): 107–18. McCloskey, D. N. 2006. The Bourgeois Virtues: Ethics for an Age of Commerce, Chicago: University of Chicago Press. Polanyi, K. (2001). The Great Transformation: The Political and Economic Origins of Our Time, 2nd ed. Foreword by Joseph E. Stiglitz; introduction by Fred Block. Boston: Beacon Press Richards, A, and Waterbury, J. 2007. A political economy of the Middle East. Boulder, CO: Westview Press. Seligman, M. E. P. 2002. Authentic Happiness. New York: Free Press. Seligman, M. E. P. 2003. Foreword: The Past and Future of Positive Psychology, in Flourishing: Positive Psychology and the Life Well-Lived, xi–xx. Edited by Corey L. M. Keyes and Jonathan Haidt. Washington, D.C.: American Psychological Association. 65 Book 2.indd 93 10/16/17 4:57 PM
  94. Somers , M. 2008. Genealogies of citizenship: Markets, statelessness, and the right to have rights, New York and London: Cambridge University Press. Stiglitz, J. E. 2002. Globalization and its discontents. Norton & Company: W. W. Sullivan, D. J. 1994. Private voluntary organizations in Egypt: Islamic development, private initiative, and state control. Gainesville: University Press of Florida. Tuğal, C. 2013. Contesting Benevolence: Market Orientations among Muslim Aid Providers in Egypt, Qual Sociol, 36:141–159 66 Book 2.indd 94 10/16/17 4:57 PM
  95. SECTION 2 FINANCIAL INCLUSION (Section 2) Financial Inclusion 67 Book 2.indd 95 10/16/17 4:57 PM
  96. 68 Book 2 .indd 96 10/16/17 4:57 PM
  97. 5 Financial Inclusiveness in Islamic Banking : Comparison of Ideals and Practices Based on Maqāṣid al-Sharīʿah Abdul Ghafar Ismail1, Mohd Adib Ismail2, Shahida Shahimi3,and Salman Ahmed Shaikh4 The paper attempts to document the progress in Islamic banking industry of Pakistan towards fostering an egalitarian and equitable financial intermediation. A set of quantitative indicators has been used to objectively asses the performance of Islamic banks towards fostering participative, inclusive, cost effective and real sector oriented financial intermediation. The paper highlights that the current performance of Islamic banks on these fronts leaves much to be desired. At the same time, the low finance to deposit ratio and high average cost of financing turns inconsistent with Maqāṣid al-Sharīʿah. The paper also identifies various categories of poor people who need finance for their health, education and small business working capital needs, but they cannot be served by Islamic banks by using the available product structures. But, the geographical presence of Islamic banks shows that they are located mainly in urban centers. The paper argues that most of the debt based products offered by Islamic banks are close, but relatively expensive substitutes. Further, the distinctive and true alternative product structures like equity based financing are not acceptable to the majority of the real sector industries, as well as, to the Islamic banking stakeholders, i.e. depositors and shareholders in their current form. Finally, the paper concludes emphasizing the Islamic banks to extend their presence in rural and remote areas and provide access of the banking services to the underprivileged class by devising products and mechanisms suiting to the needs of agricultural, SMEs, and micro-financial clients. Keywords Islamic Banking, Islamic Finance, Financial Inclusion, Microfinance. JEL Classification: A1, H2, G0, B5 1. Introduction It is well established in literature that financial development complements economic growth. Countries with greater degrees of financial development – as measured by aggregate measures of bank development and market development – experience greater economic growth rates. We give a brief account of studies that establish this relationship. North (1990) and Neal (1990) conclude that regions that developed the relatively more sophisticated and well-functioning financial systems were the ones that were the subsequent leaders in economic development of their times. Odedokun (1998) also concludes that growth of financial aggregates in real terms has positive impacts on economic growth of developing countries, irrespective of the level of 1 Islamic Research and Training Institute, Islamic Development Bank, 8111, King Khalid Street, Al Nuzlah Yamania District, Unit No. 1, Jeddah 22332-2444, Kingdom of Saudi Arabia, and Research Center for Islamic Economics and Finance School of Economics, Universiti Kebangsaan Malaysia, Bangi, 43600 Selangor D.E., Malaysia. 2 Research Center for Islamic Economics and Finance, School of Economics, Universiti Kebangsaan Malaysia, Bangi, 43600 Selangor D.E., Malaysia. 3 Research Center for Islamic Economics and Finance, School of Economics, Universiti Kebangsaan Malaysia, Bangi, 43600 Selangor D.E., Malaysia. 4 School of Economics, Universiti Kebangsaan Malaysia, Bangi, 43600 Selangor D.E., Malaysia, 69 Book 2.indd 97 10/16/17 4:57 PM
  98. economic development attained . Levine (2002) using cross country data argues that financial development is strongly linked with economic growth. Hassan et al. (2011) find positive relationship between financial development and economic growth in OIC (Organization of Islamic Cooperation) developing countries. Further, the component of financial development explained by the legal rights of outside investors and the efficiency of the legal system in enforcing those rights is strongly and positively linked with long-run growth. Levine et al. (2000) evaluate whether cross-country differences in legal system, for example creditor rights and contract enforcement, and accounting system explain differences in the level of financial development. They conclude that crosscountry differences in legal and accounting systems help account for differences in financial development. This suggests that legal and accounting reforms that strengthen creditor rights, contract enforcement, and accounting practices can boost financial development and accelerate economic growth. However, the access to the financial services is quite limited in the developing countries. Voluntary exclusion due to faith based reasons creates yet another hindrance in the way of financial inclusion in Muslim majority countries. Surveying 65,000 adults from 64 economies, Demirgüç-Kunt et al. (2013) find that Muslims are significantly less likely than non-Muslims to own a formal account or save at a formal financial institution after controlling for other individual- and country-level characteristics. For instance, in countries like Afghanistan, Morocco, Iraq, Niger and Djibouti, the percentage of adult population with no bank accounts for religious reasons stands at 33.6%, 26.8%, 25.6%, 23.6% and 22.8%, respectively. Naceur et al (2015) mention that the share of adults citing religious reasons for not having a bank account is as high as 34% in Afghanistan, 26% to 27% in Iraq and Tunisia, and 23% to 24% in Djibouti and Saudi Arabia. This highlights the need for Islamic banking in these Muslim-majority regions. The savings-investment gap in Muslim countries, as depicted from Table 1, leads to the understanding that a number of Muslim-majority countries experience very low savings ratio, owing partly to the reason that people abstain from interest-based investment options. The evidence for this argument is the sustained increase in deposits growth in Islamic banking wherever it is being offered. Hence, if Islamic banks increase their outreach, these economies will also benefit by reducing their savings–investment gap. 70 Book 2.indd 98 10/16/17 4:57 PM
  99. Table 1 : Savings Investment Gap in Muslim Countries Country Investment to GDP (%) Savings to GDP (%) Gap (%) Afghanistan 25.4 -19.8 -45.2 Jordan 24.5 2.8 -21.7 Albania Kyrgyz Republic Lebanon Morocco Mozambique Pakistan Senegal Sierra Leone Tajikistan Tunisia Turkey Uganda 25.3 3.1 24.4 -2.9 30.6 21.5 11.5 8.0 32.0 24.3 6.4 -22.2 -27.3 -25.6 -9.1 7.8 -16.5 30.6 10.9 -19.7 18.7 -2.8 -21.5 14.9 4.6 24.0 24.0 24.4 13.8 21.8 Source: Statistical Monograph 2013, IDB. 14.9 -3.5 -10.3 0.0 -6.9 -10.6 In addition, due to the absence of formal financial services in less privileged areas of the developing countries, certain non-market institutions have also started appearing. Besley (1995) presents evidence on non-market institutions that have developed in many areas to deal with risk exposure and provide different forms of credit. These include credit cooperatives, informal credit and insurance arrangements, rotating savings and credit associations. Studying certain constraints of the poor farmers in India, Rosenzweig & Wolpin (1993) reveal that sales of bullocks increase significantly in adverse weather conditions yielding low incomes whereas purchases of bullocks increase when rainfall is ample and incomes are above average. This phenomenon underscores the problems created from lack of financial services in rural settings. Distress sale of a non-divisible asset like bullocks is an inefficient and costly way of coping with income shocks but may have negative effects on productivity since bullocks are an important capital input in the rural agriculture. Similarly, Janzen and Carter (2013) discover that households are often forced to choose between preserving assets and consumption when natural disasters strike in developing countries. Their results show that insured households are on average 36% points less likely to anticipate drawing down assets, and 25% less likely to anticipate reducing meals upon receipt of a payout. Using the Indonesian Family Life Survey, Berloffa & Modena (2009) suggest that while nonpoor farmers‘ smooth consumption relative to income, poor households use labor supply to compensate the income loss and, on average, they save half of this extra income. Constrained households consume less and work more than as if they were unconstrained, hence these effects turn even more pronounced in the face of a negative shock. Non-poor households are more likely 71 Book 2.indd 99 10/16/17 4:57 PM
  100. to run down assets and to use savings to manage the negative income shocks while the asset-poor households are more likely to increase their labor supply to deal with income shocks . Exploring the extent of consumption smoothing between 1981 and 1985 in rural Burkina Faso, Kazianga and Udry (2006) report that livestock sales, grain storage and inter-household transfers are insufficient in achieving consumption smoothing. Hence, it signifies the importance of formal financial services in rural areas enabling the households obtaining liquidity without selling their assets and incur heavy transaction costs. Also, Dubois (2000) establishes that households participating in sharecropping contracts manage to better insure themselves against agricultural income risk. Rosenzweig (2001) states that proximity of formal financial institutions increases financial savings and crowds out informal insurance arrangements. Therefore, the poor financial markets can have significant implications on real sector and production methods as concluded by Morduch (1995) that the households are more likely to choose lower mean and lower variance production methods in certain areas where credit markets have been poorly developed. Hence, we understand that inclusive finance can assist people to achieve income and consumption smoothing, higher social mobility and financial stability. However, due to the prohibition of interest, Muslims, in particular, need financial solutions that are Sharīʿah compliant. Particularly, to cater this need, Islamic banking institutions were established in various parts of the world since the 1960s. With the beginning of the twenty first century, the Islamic banking industry has achieved uninterrupted growth and currently the Islamic banking assets constitute a $2 trillion market. These institutions have been established in Middle East, East Asia, South Asia, Central Asia. The non-Muslim majority countries in Europe and North America are also keen to establish Islamic banking institutions due to their financial and economic merit and for increased demand among Muslim populations residing there. Being Islamic institutions, Islamic banks are also expected to help in financial inclusion by providing a Sharīʿah-compliant set of financial services to include voluntarily excluded households in the financial network. On the other hand, their vision and link with ethical precepts of Islam creates an additional expectation for making an egalitarian contribution in the society. Islamic banking so far has shown resilience, stability and growth during and after the recent financial crisis; however, it also operates within the macroeconomic framework where the banks are debt based financial intermediaries that match savers and investors for intertemporal consumption and investment decisions. In that framework, interest is the price of money capital as well as the prime instrument through which monetary system is managed and regulated by the central banks. Islamic banking is marketed, supported and defended as being participatory, inclusive and balanced in its scope, operations and goals. This paper, accordingly, attempts to assess as to how far this vision of Islamic banking matches up with reality. The study is expected to help the industry reviewing its performance based on financial inclusiveness, social norms, need fulfillment and equitable income distribution. We proceed to review stylized facts of Islamic banking in Pakistan and discuss as to how Islamic banking is assessed by the front seat scholars and practitioners behind Islamic banking and by the pioneer Islamic economists who envision Islamic banking to be truly distinct in philosophy, operations and products. The front seat Islamic banking practitioners hold a more practical and evolutionary view of Islamic banking. While the Islamic economists hold strictly their view to the vision of egalitarianism, real sector based participation and inclusiveness as the fundamental distinctive features of Islamic banking and as guide for institutional operations. We then present empirical evidence from Pakistan to focus a more objective assessment of Islamic banking in 72 Book 2.indd 100 10/16/17 4:57 PM
  101. Pakistan with regard to cost competitiveness and operational efficiency . Finally, we extend our discussion by analyzing the performance of Islamic banking towards effective and comprehensive financial intermediation, outreach and financial inclusiveness. 1.1. Objectives of the Study We set forth following objectives in this study:     To document the progress in Islamic banking in Pakistan with regards to growth in assets, deposits, financing, investments, market share and profitability. To document the areas of concern in Islamic banking industry which are hampering its assimilation and realizing its egalitarian vision. To highlight areas of improvements in Islamic banking industry with regards to outreach, product structures, financing mix, financing cost and effective utilization of deposit funds. To evaluate the progress of Islamic banking in enhancing socio-economic mobility, financial inclusiveness and fostering equitable distribution of income. 1.2. Research Methodology The research utilizes various quantitative indicators focusing discussion and evaluating the role of Islamic banking towards enhancing financial inclusion for socio-economic mobility. Before we proceed further, it becomes pertinent to sketch salient features of an inclusive financial system. Firstly, an inclusive financial system would cater to the financial needs across all sections of the society. Islamic banks, through their egalitarian vision of banking, are expected to offer products and services suiting to the bottom 40% people of the income distribution and reach them where they are. Secondly, the banks are expected to offer products which could enhance socioeconomic mobility. If the products pertain to the top income class only, then the task of socioeconomic mobility would not be achieved. Thirdly, the scope of the products should include fulfilling people‘s financial needs for commercial expansion, as well as, financial needs for meeting necessary personal expenditure like education and health. Furthermore, since Islamic banks are expected to be egalitarian in their operations and equitable in their distributional effects, it will be important to note that how far they contribute towards circulation of wealth, reducing financial costs, use participatory equity based modes of financing and achieve equitable profit distribution among depositors and the shareholders in contrast with conventional banks. We use following indicators to discuss these issues: 1) 2) 3) 4) 5) Province wise branch network of Islamic banks. Mapping branch network with income class geography. Financing mix for different types of clients. Advances to deposit ratio. Islamic banking spreads vis-à-vis conventional banks. 73 Book 2.indd 101 10/16/17 4:57 PM
  102. 6 ) Capital to assets ratio of Islamic banks vis-à-vis conventional banks. 7) Mapping target market for major consumer products offered to different income brackets. 2. The Stylized Facts about Islamic Banking in Pakistan The first phase of Islamic banking in Pakistan started during the 1980s under the patronage of the then President Zia-ul-Haq but could not succeed. However, with increased participation of Sharīʿah scholars in the policy making, product design, audit and supervision, the second phase has seen impressive and consistent growth since 2002. Now, Islamic banking in Pakistan is an established industry with 11% market share. Out of 44 commercial banks operating in Pakistan, there are 5 full-fledged Islamic banks and 17 conventional banks operating Islamic banking branches, the total branch network being 1,597. Table 2 presents brief account of Islamic banking industry in Pakistan. Table 2: Facts about Islamic Banking Industry in Pakistan (As at March 31, 2015) Total Assets (billion Rs.) Total Deposits (bilion Rs.) Net Financing & Investments (billion Rs.) Total Islamic Banking Institutions (No.) Total Islamic Banking Branches (No.) 1,302 1,122 768 22 1,597 Source: State Bank of Pakistan, Islamic Banking Bulletin In the more recent statistics published by State Bank of Pakistan (SBP), the return on equity in Islamic banking has reached 18%, more than the industry average of 17% in Pakistan. Besides, SBP is committed to promote Islamic banking in the country. Recently established centers of excellence in Islamic banking across the major academic institutions in Pakistan would ensure adequate and quality supply of human resources to serve the growing industry in the future. Figure 1 presents the trend in total assets, total deposits and total financing & investments by Islamic banking based on quarterly data for the period 3QCY06-1QCY15. It can be seen that the growth is uninterrupted and more pronounced since 3QCY10. Figure 1: Total Assets, Total Deposits and Total Financings & Investments for the Period 2006-2015 (Million Rupees) 74 Book 2.indd 102 10/16/17 4:57 PM
  103. Assets Fin & Inv Deposits Source: State Bank of Pakistan, Various Issues of Islamic Banking Bulletin The structure of Islamic banking as explained in Ibrahim & Ismail (2015) can be summarized as follows. First, an Islamic bank creates an asset pool which consists of bank‘s equity and deposits. Deposits include two further classifications, i.e. remunerative deposits and non-remunerative deposits. Remunerative deposits are mobilized using partnership mode ‗Muḍārabah‟ with bank‘s management while the depositors and shareholders become the partners. Profit sharing ratio is agreed at the start of this partnership. Non-remunerative deposits are mobilized through Qarḍ (non-compensatory loan). This pool of assets is used to provide asset backed financing through different underlying contracts like Ijārah, Diminishing Mushārakah, Murābaḥah, Istiṣnāʿ etc. In certain contracts like lease and sale, the Islamic banks deliver the assets to their clients once they are owned by them. Income stream is generated either through profit on credit sale or rental for the use of asset. However, Islamic banks do not extend Qarḍ. Currently, Islamic banks use Karachi Interbank Offered Rate (KIBOR) to bench mark their profit rates and rental enabling to competitively price their assets. Income from the sale or lease of real assets is distributed among the contributors in the asset pool, that is, depositors and bank‘s shareholders. To realize spread for financial intermediation, bank shares profit with the depositors and shareholders as per the pre-agreed profit sharing ratio. The productivity of Islamic banks, as shown in Figure 2, reveals that Return on Equity (ROE) and Return on Assets (RoA) during 2006-2015 were steady in the initial periods as some banks took time to consolidate and break even in Pakistan. But in later periods, they have registered strong growth with ROE reaching even 18% and sustaining in double digit despite the security, energy and fiscal crisis in the country. Figure 2: Profitability Growth in Islamic Banking (2006-2015) 75 Book 2.indd 103 10/16/17 4:57 PM
  104. ROE ROA Source : Islamic Banking Bulletin, SBP, Various Issues Asset backed nature of financing has also helped Islamic banks to contain non-performing loans comparatively at alevel lower than the conventional banks. Ahmed (2010) highlights that Islamic banking links credit expansion to the growth of the real economy by allowing credit primarily for creating real goods and services owned and possessed by the seller. It also requires the creditor to bear the risk of default by prohibiting the sale of debt, thereby ensuring that the risk is evaluated more carefully. Revealing the growth of NPLs as proportion of Advances in case of Islamic banks, Figure 3 presents that NPLs rose sharply during the period of credit crunch and low economic growth (2008-2011). However, the NPLs are declined latter and remained at less than 5% that is considerably lower than the 12.8% ratio for the overall banking industry. Figure 3: NPLs to Advances Ratio – 2006-2015 Sep-06 Oct-06 Nov-06 Dec-06 Jan-07 Feb-07 Mar-07 Apr-07 May-07 Jun-07 Jul-07 Aug-07 Sep-07 Oct-07 Nov-07 Dec-07 Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Source: Various Issues of Islamic Banking Bulletin, SBP. 2.1. Islamic Banks: Idealism Versus Realism 76 Book 2.indd 104 10/16/17 4:57 PM
  105. Islamic banks use Shar īʿah compliant contract structures to design and offer financial products. However, they work as commercial financial intermediaries. Pioneer scholars envisioned Islamic banks to be not only Sharīʿah compliant, but also distinctively contributing towards achievement of equitable income distribution, enhancing social mobility, achieving broad based financial inclusion and fostering need fulfillment. However, the demands of the industry hamper in achieving these ideals on priority basis. This has created a wedge between the realists and the idealists. The realists are the executioners of Islamic banking on ground and who have to compete alongside conventional banking within same legal, governance and market conditions. Hence, they are obliged to pursue an evolutionary assimilation of Islamic banking to penetrate from scratch into the mainstream and dominant conventional banking system. As such, the Sharīʿah compliant products are structured to compete with mainstream conventional banking. The idealists want a more revolutionary assimilation of Islamic banking to create a distinctive mark on financial landscape right from the beginning. In what follows, we give a brief sketch of how the idealists and the realists assess the performance of Islamic banking practices so far. Laldin & Furqani (2013) explicate three specific ends (Maqāṣid) in Islamic finance, namely wealth circulation, fair and transparent financial practices and justice at the micro- and macrolevel. They argue that fulfilling minimal Sharīʿah legal compliance in product structuring is insufficient to make progress towards these specific ends. In defense, Khir (2013) explains that mainstream Muslim scholars supporting Islamic finance movement contend that Islam recognizes the legitimacy of the time value of money in Islamic financial transactions such as deferred sale and bilateral rebate. Khan (2014) forwards that critics of Islamic banking do not appreciate how important debt financing is for value creation in an economy and especially for inclusive growth and economic development rendering financial services accessible for asset acquisition. Chapra (2007) holds that even if debt financing is predominantly used in Islamic banking practice, asset backed financing does not allow the debt to exceed the growth of the real economy. He argues that the introduction of such a discipline would ensure greater stability as well as efficiency and equity in the financial system. On the other hand, Islamic economists require the more egalitarian vision. Siddiqi (2014) argues that the role of debts should be drastically reduced and replaced by participatory modes of finance. But, perceiving the ground reality, Kayed (2012) observes that the experiences of Islamic banking in various Muslim countries have shown that the profit and loss sharing (PLS) model has been marginalized. Hassan and Bashir (2003) explain that Islamic banks‘ loan portfolio is heavily biased towards short-term trade financing. Contrary to this, Siddiqi (2007) expects a lot from Islamic banks than just acting as financial brokers like conventional banks that unless Islamic banking gradually moves away from debt like financing, it cannot claim to be a true alternative of conventional banking system. On the practical difficulties of moving towards PLS modes, Khan (1989) notes that informational asymmetry and higher monitoring costs constrain widespread use of equity contracts. Khan and Bhatti (2006) explain that banks do not find it feasible to enter into the PLS relationship with business people whose majority maintains double sets of accounts for the sake of avoiding exorbitant tax payments. The absence of a just and speedy judicial system also discourages banks to adopt the PLS system. Business people also show high reluctance to enter into the PLS relationship in order to preserve privacy of their business operations from outside stakeholders. Other critics of Islamic banking dismiss the notion that the current models and institutional structure can result in any real and meaningful transformation of the way the banks function. 77 Book 2.indd 105 10/16/17 4:57 PM
  106. Choudhury (2012) remarks that Islamic banking is a mainstream enterprise, good for the rich shareholders in the narrow pre-conceived notion of avoidance of financial interest, while not understanding the epistemological meaning underlying this principle. Haniffa and Hudaib (2010) argue that Maqāṣid al-Sharīʿah (higher purposes of the Islamic law) have been unduly used to justify the innovation of financial products to compete and converge with conventional banking. Another staunch critic of practiced Islamic finance, El-Gamal (2005) observes that Islamic Finance as it exists today is a prohibition-driven industry, which attempts to provide Muslims with permissible analogues of conventional financial services and products that are generally deemed impermissible in Islamic jurisprudence. El Gamal (2007) again contends that growth in Islamic finance over the past three decades has been led by rent-seeking Sharīʿah arbitrageurs who continue to focus on synthesizing contemporary financial products and services from classical nominate contracts, without regard to corporate structure of financial institutions. 3. Financial Inclusion and Islamic Banking The financial inclusion in Pakistan is quite limited as only around 18% of the people hold bank accounts. This proportion is even lower in case of women where only 3% of the women keep the formal bank accounts. On the other hand, financial credit is available to a meager proportion of 3% of the total population. Table 3 reports some results from a World Bank financial inclusion survey conducted for 1,000 respondents in Pakistan. The results show that people mostly borrow from informal sources for health and education due to limited asset ownership required for collateral based bank loans and lack of formal sector employment that could generate consistent income. Table 3: Proportion of Respondents by Nature & Source of Borrowing Nature of Borrowing Percent of Respondents With 15+ Years Age Borrowings in past year 49.75 Borrowed for health or medical purposes 22.65 Borrowed for education or school fees 6.30 Borrowed to start, operate, or expand a farm or business Source of Borrowing 10.70 Percent of Respondents With 15+ Years Age Borrowed from a financial institution 1.50 Borrowed from a store by buying on credit 25.05 Borrowed from family or friends 33.96 Borrowed from a private informal lender Borrowed from an employer 5.29 5.90 Source: World Bank Financial Inclusion Database (FINDEX 2014) The World Bank survey reveals that arranging emergency finance is quite difficult for the people in general and for relatively poor respondents in particular as shown in Table 4. The respondents were asked as to how convenient it was to expect the possibility of financing 1/20th of GNI per capita within the next month. Strikingly, almost half of the poor and one-third rich respondents stated that it was not possible to arrange financing of even this small amount. 78 Book 2.indd 106 10/16/17 4:57 PM
  107. Table 4 : Emergency Finance Possibility Emergency Finance Possibility (5% of GNI Per Capita Within a Month) Overall Poorest 40% Richest 60% Not at all possible 37.1 45.2 31.4 Not very possible 12.2 13.4 11.4 Somewhat possible 39.2 35.3 42.0 Very possible 10.8 4.9 14.9 Source: World Bank Financial Inclusion Database (FINDEX 2014) The National Financial Inclusion Strategy (NFIS) aims 50% growth in bank accounts by adult population by the year 2020. Recently, the central bank has asked the banks to open bank accounts even with a nominal deposit equivalent to one dollar and without requiring proof of source of income to facilitate students, housewives, self-employed technicians, small entrepreneurs and teachers. Sustained growth in branchless banking is required to allow extended outreach and to avoid the scale disadvantage in underprivileged areas. Naveed & Ali (2012) conclude that as many as 58.7 million people in Pakistan are living in multidimensional poverty with 46% of rural and 18% of urban households falling below the poverty line, while only 2.35 million people are served with microfinance. The situation reflects that only 4% of the potential market is currently served with microfinance. Islamic banks and conventional banks with Islamic banking branches in urban areas can use their existing network to cater to microfinance needs in urban areas. Documentation, collateral and contract enforcement problems are also less challenging in urban as compared to the rural areas. It is also striking that less than 1% of Islamic financing assets are engaged in microfinance. When currently, there is no Islamic microfinance bank in Pakistan, the other institutions have taken initiative in the absence of scale and liquidity advantage that Islamic banks enjoy. These institutions have proved that the task can be handled with resolve, vision and commitment. Akhuwat, Wasil, Farz Foundation and Naymet are the examples offering Islamic microfinance through Qarḍ Ḥasan and other Islamic modes of financing which include mostly Murābaḥah, Ijārah and Salam. Unfortunately, the Islamic banks, despite huge profits, liquidity and scale advantages, are not coming up to serve the major part of population through appropriate product mix. Further, most of the Islamic banking branches are located in big urban cities. The geographic spread of Islamic banking branches is shown in fostering Figure 4. It is revealed that Punjab and Sindh provinces host 85% of the total branches. The other two provinces with higher incidence of poverty and lesser per capita income host only 15% of total Islamic banking branches. Figure 4: Province Wise Branch Network of Islamic Banking 79 Book 2.indd 107 10/16/17 4:57 PM
  108. Share of Branches ; KPK; 11.43%; 11% Share of Branches; Balochistan; 4.24%; 4% Punjab Sindh KPK Share of Branches; Sindh; 34.50%; 35% Balochistan Share of Branches; Punjab; 49.83%; 50% Source: Various Issues of Islamic Banking Bulletin, SBP. Total branches in only two major cities, Karachi and Lahore, constitute 46% of the total branch network. The number of branches in Karachi alone is almost two times of the total number of branches in Baluchistan and KPK. Karachi city hosts 84% of total branches in the Sindh province. Lahore, Quetta, and Peshawar cities host, respectively, 34%, 64%, and 33% of total branches located in Punjab, Baluchistan, and KPK province. This means that the four provincial capitals host 52% of all branches in Pakistan. This geographical distribution of branch network goes hand in hand with the income distribution, that is, the Islamic banks concentrate more in in high-income regions. As regards pattern of income in Pakistan‘s labor market, Labor Force Survey 2013-14 reveals important information. Table 5 presents the percentage distribution of employed population by average monthly payments. It can be seen that only a quarter of employed population of Pakistan earns monthly income in excess of Rs 15,000. Around half of these people live in Punjab and one-third in Sindh. If we compare the last column of Table 5 with Figure 4, it is apparent that branch network is concentrated in high income areas where people are able to save and earn sufficient income and qualify to be financed from banks. Table 5: Distribution of Employees by Average Monthly Payments (Rs.) Area Monthly Income ˃ Rs. 15,000 (%) Pakistan 24.31 Punjab 11.49 Baluchistan 2.01 KPK Sindh Distribution - Province Wise (%) 3.47 14.72 7.35 30.23 47.26 8.27 Source: Labor Force Survey 2013-14 In line with neoclassical economics, Diamond (1984) provides a plausible view of the role of intermediary in intertemporal finance. As such, Islamic banks as financial intermediaries can centralize expensive monitoring and avoid the duplication of effort in monitoring of borrowers 80 Book 2.indd 108 10/16/17 4:57 PM
  109. by small investors . Banks monitor debt (loan) contracts, and issue unmonitored debt (deposit) contracts. Diversification is the financial-engineering technology that makes monitoring of deposit contracts unnecessary when monitoring of loan contracts is necessary. This allows banks to deliver delegated monitoring services. From the financial economics perspective, the banking model of Islamic banks is similar to that of conventional banks. Capital to total assets ratio is even lower in Islamic banks as compared to the conventional banks, that is, 6.6% as compared to 10%, respectively. Most of the funds used to build assets are contributed by the deposits. The underlying philosophy and operating framework of fractional reserve banking is followed by both types of institutions. On overall deposits, only one-third of the deposits are placed in fixed deposits category in Islamic banking. Current accounts are already interest free. In respect of saving accounts, the central bank has directed all banks to pay a minimum rate of return. Islamic banks bypass this requirement through reverse engineering and calculate returns by assigning weights that takes care of time value of money. Hence, due to regulatory and competitive pressures, it is almost impossible to hope for any transformative change in assets towards meaningful use of equity based financing. As regards normative concerns, circulation of wealth is a desirable objective discussed in theoretical Islamic economics literature. Even from a pure economic perspective, it is has become an important end in order to achieve economic stabilization and inclusiveness, as well as, sustainable growth. However, Islamic banks are relatively less active in providing finance as a proportion of deposits (35%) as compared against conventional banks as shown in Figure 6. Figure 6: Financing to Deposits Ratio – 2006-2015 Advances to Deposits Ratio Sep-06 Oct-06 Nov-06 Dec-06 Jan-07 Feb-07 Mar-07 Apr-07 May-07 Jun-07 Jul-07 Aug-07 Sep-07 Oct-07 Nov-07 Dec-07 Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Source: Islamic Banking Bulletin, SBP, Various Issues In Islamic banking, deposit mobilization has much less contractual frictions than creating a Sharīʿah compliant financing asset. In providing finance, it is important that finance is provided for genuine purchase of an asset whose ownership, possession and risk has to be borne by the bank so as to be able to earn any sale premium or rents. While ease in deposit mobilization is a salient plus, it is also a challenge when financing operations have limited product alternatives, contractual frictions and noncompliance risk. 81 Book 2.indd 109 10/16/17 4:57 PM
  110. Even then , the dismally inactive financing operations are primarily concentrated in providing finance to the corporate elite, well-to-do-professionals and business executives in the urban localities of Pakistan. In Pakistan, agriculture provides employment to 43% of the people in the labor force. Out of these 43% employed people in agriculture, approximately 41.5% employment is in rural areas and only 1.5% is in urban areas. If we look at sector wise financing mix of Islamic banks, they provide only 1.4% financing to this sector. The banking industry average for agriculture finance (8%) is five times more than Islamic banks. This reflects that Islamic banks are yet to make significant contribution to this critical sector that hosts almost half of the labor force. Banks usually place most funds in financing corporate clientele especially in developing countries. However, if there is anything objectionable about this practice on egalitarian grounds, then Islamic banks are no different than conventional banks in practice. In Pakistan, more than three-fourth of the Islamic banks‘ financing portfolio is provided to the corporate sector. As against the overall banking industry, the share of SME finance is only half of the share of conventional banks as shown in Table 6. As against the overall banking industry, the share of agriculture finance is not even 10% of share of conventional banks. Apart from corporate sector, the ‗individuals‘ is the only other segment to which Islamic banks provide more financing relative to conventional banks. Here too, no financing product is available to finance education, health, utility bills and basic food requirements. 82 Book 2.indd 110 10/16/17 4:57 PM
  111. Table 6 : Client Wise Financing Portfolio (%) - March 2015 Client Wise Financing Portfolio (%) - March 2015 Islamic Banks Industry Corporate Sector 76.6 67.9 SMEs 3.4 5.9 Agriculture 0.4 5.8 Consumer Finance 12.4 6.4 Commodity Finance 2.9 11.8 Staff Financing 1.7 2.1 Others 2.7 0.1 100 100 Total Source: Islamic Banking Bulletin, SBP, Various Issues Even though these financial services are provided less efficiently by Islamic banks than by conventional banks. Islamic banking spreads had been consistently higher than conventional banking spreads. The difference has also remained consistently above 1.5% in the 2010-2014 period as shown in Figure 7. Figure 7: Banking Spreads Comparison – 2009-2014 Islamic Banking Spreads Industry Spreads Source: Islamic Banking Bulletin, SBP, Various Issues 83 Book 2.indd 111 10/16/17 4:57 PM
  112. Lastly , we present who qualifies for financing from Islamic banks as an individual. Table 7 reports the minimum monthly income required to qualify for car and home financing from fullfledged Islamic banks. Per capita income in Pakistan is around Rs 10,000 per month. However, only a quarter of employed people in Pakistan earn monthly income in excess of Rs 15,000 (Table 5). But, the minimum monthly income required for car and home financing is much above the per capita income and income of most people of Pakistan except the people in the top income quintile. Table 7: Distribution of Employees by Average Monthly Payments (Rs.) Minimum Monthly Income Required Banks Car Finance (Rs.) Home Finance (Rs.) Salaried Businessperson Salaried Businessperson Meezan Bank 40,000 40,000 40,000 75,000 Dubai Islamic Bank 25,000 25,000 40,000 40,000 Bank Islami Al-Baraka Bank Burj Bank 5 40,000 35,000 35,000 50,000 35,000 35,000 35,000 Not Offered 65,000 50,000 Not Offered 65,000 Source: Official Websites of These Banks While it is not surprising to see these numbers since banks usually work like this, but it is inappropriate for Islamic banks to claim any distinction when their proportion of urban branches is greater than rural branches as compared to conventional banks and their debt based financing products results in the same cash flows and exclude and include similar types of clients as in conventional banks, except that the banking spreads in Islamic banking are as much as 150 basis points higher on average. On the products side, Islamic banks do not have complete product alternatives for all conventional finance solutions. According to the World Islamic Banking Competitiveness Report, there are 38 million customers globally with Islamic banks with average product holding of 2.1, which is significantly lower than class leading average of 4.9. This represents untapped cross-selling potential in Islamic banking with existing and growing customer base. While it is indeed appreciable that not all conventional practices are replicated as in case of the Islamic banks, especially in Pakistan, however, such lacking in solutions and alternatives cannot completely be attributed to this factor alone. Distress financing, educational financing, health financing and microfinance are areas where Islamic alternatives need to be developed and adequately marketed to help increasing the size, penetration and inclusiveness. 5 It is computed on lowest cost car for highest possible tenor. 84 Book 2.indd 112 10/16/17 4:57 PM
  113. 4 . Conclusions and Way Forward The return on equity in Islamic banking has reached 18% and is now more than the industry average of 17% in Pakistan. The total Islamic banking branch network has also swelled to reach 1,600. Islamic banking share in Pakistan‘s total banking industry stands at 11%. However, we note that there are other aspects in which there is still room for improvement. Operating efficiency is still lower in Islamic banks as compared to the industry standard. The finance to deposit ratio is also lower and below 40% despite the start of economic revival period since 2013. In Pakistan, agriculture provides employment to 43% of the people in the labor force. But, if we look at the sector wise financing mix of Islamic banks, they provide only 1.4% financing to this sector. This represents an opportunity for Islamic banks to focus on this critical sector where almost half of the labor force is directly dependent for their livelihoods. The persistence of higher banking spreads as compared to the overall banking industry also deserves attention. Narrowing of this spread will result in faster growth and assimilation of Islamic finance products and services in the economy. In the geographical expansion of Islamic banking branches, there is opportunity and need for expansion of branches in the peripheral and less privileged areas of Pakistan as well. Percent of branches in Karachi and Lahore city combined constitute 46% of the total Islamic banking branch network. The number of branches in Karachi city alone is almost two times more than the total number of branches in two of the four provinces of Pakistan, i.e. Baluchistan and KPK. Taken together, the four federal capitals of Pakistan host 52% of all branches in Pakistan. Hence, there is still an ample opportunity for expansion and outreach in Islamic banking in small cities and rural areas. In the months and years to come, it is expected that Islamic banks would give equal priority to agriculture finance, SME finance and in ensuring their presence in less privileged areas of the country. With lowering of both policy rate as well as inflation in the country, it is expected that demand for financing from banks will increase. Hence, it will help the Islamic banking sector to improve their finance to deposit ratio, narrow the banking spreads and revisit the financing portfolio mix to give renewed emphasis to agriculture finance and SME finance in the future. 85 Book 2.indd 113 10/16/17 4:57 PM
  114. References Ahmed , Adel (2010). ―Global Financial Crisis: An Islamic Finance Perspective‖, International Journal of Islamic and Middle Eastern Finance and Management, 3(4), pp. 306 – 320. Berloffa, G., & Modena, F. (2009). ―Income Shocks, Coping Strategies & Consumption Smoothing: An Application to Indonesian Data‖, Dipartimento Di Economia, Discussion Paper No. 1. Besley, Timothy (1995). ―Nonmarket Institutions for Credit & Risk Sharing in Low-Income Countries‖, The Journal of Economic Perspectives, pp. 115 – 127. Chapra, Umer (2007). ―The Case Against Interest: Is It Compelling?‖, Thunderbird International Business Review, 49(2), pp. 161 – 186. Choudhury, MasudulAlam (2012). ―The ‗Impossibility‘ Theorems of Islamic Economics‖, International Journal of Islamic and Middle Eastern Finance and Management, 5(3), pp. 179 – 202. Demirgüç-Kunt, Asli, Klapper, L. & Douglas, R. (2013). ―Islamic Finance & Financial Inclusion: Measuring Use of & Demand for Formal Financial Services among Muslim Adults‖, Policy Research Working Paper No. 6642. Dubois, P. (2000). ―Consumption Insurance with Heterogeneous Preferences: Can Sharecropping Help Complete Markets?‖, In Econometric Society World Congress. El-Gamal, Mahmoud A. (2005). ―Limits and Dangers of Sharīʿah Arbitrage‖, in S. Nazim Ali, Islamic Finance: Current Legal and Regulatory Issues, Cambridge, Massachusetts: Islamic Finance Project, Islamic Legal Studies, Harvard Law School., pp. 117 – 131. El‐Gamal, Mahmoud A. (2007). ―Mutuality as an Antidote to Rent‐seeking Sharīʿah Arbitrage in Islamic Finance‖, Thunderbird International Business Review, 49(2), pp. 187 – 202. Haniffa, Roszaini & Hudaib, Mohammad (2010). ―Islamic Finance: From Sacred Intentions to Secular Goals?‖, Journal of Islamic Accounting and Business Research, 1(2), pp. 85 – 91. Hassan, M. Kabir & Bashir, A.H. (2003). ―Determinants of Islamic Banking Profitability‖, ERF Paper, 10, pp. 3 – 31. Hassan, M. Kabir, Sanchez, B., & Yu, J. S. (2011). ―Financial Development & Economic Growth in the Organization of Islamic Conference Countries‖, Journal of King Abdul Aziz University: Islamic Economics, 24(1), pp. 145 – 172. Ibrahim, W.H.W., & Ismail, A.G. (2015) Conventional Bank and Islamic Banking as Institutions: As Many Similarities as Differences. Humanomics, 31 (3), pp. 272 – 298. Janzen, S. A., & Carter, M. R. (2013). ―The Impact of Micro insurance on Consumption Smoothing & Asset Protection: Evidence from a Drought in Kenya‖, University of California at Davis. Kayed, Rasem N. (2012). ―The Entrepreneurial Role of Profit & Loss Sharing Modes of Finance: Theory & Practice‖, International Journal of Islamic and Middle Eastern Finance and Management, 5(3), pp. 203 – 228. 86 Book 2.indd 114 10/16/17 4:57 PM
  115. Kazianga , H., & Udry, C. (2006). ―Consumption Smoothing? Livestock, Insurance & Drought in Rural Burkina Faso‖, Journal of Development Economics, 79(2), pp. 413 – 446. Khan, M. Mansoor & Bhatti, M. Ishaq (2006). ―Why Interest-free Banking and Finance Movement Failed in Pakistan‖, Humanomics, 22(3), pp. 145 – 161. Khan, Tariqullah (2014). ―Comment on: Islamic Economics: Where From, Where To?‖,Journal of King Abdul Aziz University: Islamic Economics, 27(2), pp: 95 – 103. Khan, Waqar Masood (1989). ―Towards an Interest-Free Islamic Economic System‖, Journal of King Abdul Aziz University: Islamic Economics, 1(1), pp. 3 – 38. Khir, M. F. A. (2013). ―The Concept of the Time Value of Money: A Sharīʿah Viewpoint‖, International Journal of Islamic Banking & Finance, 3(2), pp. 1 – 15. Laldin, M. Akram, & Furqani, H. (2013). ―Developing Islamic Finance in the Framework of Maqāṣid al-Sharīʿah: Understanding the Ends (Maqāṣid) and the Means (Wasa‘il)‖, International Journal of Islamic and Middle Eastern Finance and Management, 6(4), pp. 278 – 289. Levine, Ross (2002). ―Bank-Based Versus Market-Based Financial Systems: Which Is Better?‖, Journal of Financial Intermediation, 11(4), pp. 398 – 428. Levine, Ross, Loayza, Norman & Beck, Thorsten (2000). ―Financial Intermediation and Growth: Causality and Causes‖, Journal of Monetary Economics, 46(1), pp. 31 – 77. Morduch, J. (1995). ―Income Smoothing & Consumption Smoothing‖, The Journal of Economic Perspectives, 9(3), pp. 103 – 114. Naceur, S. B., Barajas, A., & Massara, A. (2015). ―Can Islamic Banking Increase Financial Inclusion?‖, IMF Working Paper, WP/15/31. Neal, L.D. (1990). ―The Rise of Financial Capitalism: International Capital Markets in the Age of Reason‖. Cambridge, UK: Cambridge University Press. North, D. (1990). ―Institutions, Institutional Change, and Economic Performance‖. Cambridge, UK: Cambridge University Press. Odedokun, M.O. (1998). ―Financial Intermediation & Economic Growth in Developing Countries‖, Journal of Economic Studies, 25(3), pp. 203 – 224. Rosenzweig, M. R. (2001). ―Savings Behavior in Low-income Countries‖, Oxford Review of Economic Policy, 17(1), pp. 40 – 54. Siddiqi, M. Nejatullah (2014). ―Islamic Economics: Where From, Where To?‖, Journal of King Abdul Aziz University: Islamic Economics, 27(2), pp: 59 – 68. Siddiqui, S. A. (2007). ―Establishing the Need and Suggesting a Strategy to Develop Profit and Loss Sharing Islamic Banking‖. In IIU Malaysia Conference on Islamic Banking and Finance at Kuala Lumpur. World Bank (2014). ―Global Financial Inclusion (Global Findex) Database‖. World Bank Data Division. 87 Book 2.indd 115 10/16/17 4:57 PM
  116. 6 RECONSTRUCTING THE ‘BANK FOR POOR FAMILY’ THROUGH ISLAMIC LINKAGE PROGRAM: A CASE STUDY OF INDONESIA Khairunnisa Musari1 and Rusli Simanjuntak2 Indonesia is renowned for its large scale micro enterprises sector. However, this sector does not have adequate access to bank financing, particularly in rural areas. It is the microfinance institutions that take on this role. Bank for Poor Family (Bank Gakin) is one of the institutions initiated by local government in Indonesia and uses the principle of joint responsibility among its members. Bank Gakin has gained positive response from the poor because of easier access to obtain loan for venture capital. But, in Islamic perspective, the practices of Bank Gakin still are not Sharīʿah compliant. Bank Gakin provides loans against interest although it looks cheaper and does not burden the borrowers. Therefore, this paper attempts to: (1) introduce the Bank Gakin as a policy of local government in Indonesia to finance the working capital for poor family; (2) reconstruct the scheme of Bank Gakin into Islamic linkage program that bridges the Islamic banks and microfinance institutions; and (3) propose an institutional arrangement for the Bank Gakin and Islamic banks to issue Ṣukūk as a tool for managing theie liquidity. Finally, this study proves that demand for Islamic microfinance services is huge. In order to enhance the financial inclusion, Islamic banking should be encouraged to assist the needs of the very poor and micro enterprise sector. If Islamic banks have not assisted in financing these enterprises, then there is no doubt that Islamic microfinance has been missing element in their operation. Keywords: Poor Family, Linkage Program, Islamic Bank, Islamic Microfinance JEL Classification: G21, G23, I31, 017 1. Introduction Indonesia is renowned for its large scale micro enterprise sector. However, many of these do not have adequate access to the bank financing that is needed by them to grow their businesses, particularly in rural areas. A wide variety of microfinance institutions (MFIs) provide financial intermediation for micro and small scale borrowers in Indonesia. The Asia Foundation (2003) mentions that non-bank MFIs are an alternative for the micro enterprises and/or the poor to obtain financial services. Banks are considered too bureaucratic by a majority of the micro enterprises. Banks are also unable to provide services to the poorest strata because the cost of servicing small loans was exorbitant. This consideration of profitability is believed to influence banks‘ unwillingness to channel microfinance. 1 Department of Islamic Economics, Faculty of Islamic Economics and Business (FEBI), IAIN Jember, Indonesia khairunnisamusari@yahoo.com 2 Doctoral Program, Islamic Economic and Finance, Trisakti University, Jakarta, Indonesia simanjuntak.rusli@gmail.com 88 Book 2.indd 116 10/16/17 4:57 PM
  117. According to the definition of the Asian Development Bank (ADB, 2000), microfinance is the provision of a broad range of financial services such as deposits, loans, payment services, money transfers, and insurance to poor and low-income households and, their micro-enterprises. Microfinance services are provided by three types of sources: (1) formal institutions, such as rural banks and cooperatives; (2) semiformal institutions, such as nongovernment organizations; and (3) informal sources such as money lenders and shopkeepers. Microfinance is a powerful poverty alleviation tool. It implies provision of financial services to poor and low-income people whose low economic standing excludes them from formal financial systems (Obaidullah and Khan, 2008). Microfinance is constituted by a range of financial services for people who are traditionally considered non bankable, mainly because they lack the guarantees that can protect a financial institution against a risk of loss. The true revolution of microfinance carries a chance to people who were denied the access to the financial market, it opens new perspectives and empowers people who can finally carry out their own projects and ideas with their own resources, and, at the same time, escape assistance, subsidies and dependence. Microfinance experiences all around the world have now proved that the poor demand a wide range of financial services, are willing to bear the expenses related to them and are absolutely bankable. The target group of microfinance is not constituted by the poorest of the poor who need other interventions such as food and health security. But, those poor who live at the border of the so called poverty line and who possess entrepreneurial ideas and could reach more easily a decent quality of life lack access to the formal finance (Segrado, 2005). However, microfinance and Islamic finance actually have the same goals and objectives to an extent. Both aim to reduce poverty and income disparities and encourage equitable distribution of income and sustainable income growth for the poor (Ali, 2011). The objectives of microfinance and Islamic finance carry objectives that have many commonalities because they are socially oriented and intended to promote economic development and cooperation (Ali, 2007). Range (2004) underlines as to how the prohibition of Ribā in Islamic finance does not constitute an obstacle in building sound microfinance products; on the contrary, the additional benefits of an Islamic system could probably enhance it. These benefits are: the high rate of return (compared to a fixed interest rate), the holistic approach in supporting businesses and productive activities, a more effective mobilization of excess resources, and a fairer society. Abdelkader and Salem (2013) state that Islamic microfinance has been growing progressively in the world, particularly in poor countries as credible alternative that allows poor populations to have access to basic financial services at low cost. The integration of Islamic finance concepts to microfinance is one of the valuable reasons in attracting poor to get advantage of these services. In Nigeria, Muhammad (2013) finds that Islamic micro-investment model has great potential of fighting poverty, providing employment opportunities, mobilizing resources, achieving public interest (Maṣlaḥah), as well as, promoting social harmony in the society. Islamic microinvestment model can be employed by Islamic microfinance institutions (IMFIs) to achieve the dual objectives of fighting poverty and fulfilling the faith requirement of Muslim microinvestors. In fact, the microfinance intuitions alter the practices of Islamic finance followed by Islamic banks to serve the cause of ‗have nots‘, that is, the microenterprises as the later have concentrated to serve the affluent. 89 Book 2.indd 117 10/16/17 4:57 PM
  118. 2 . Overview of Islamic Microfinance Institutions in Indonesia A study of Wijono (2005) shows that MFIs play a role in supporting the activities of micro, small, and medium enterprises (MSMEs), despite the proportion of alternative financing is still smaller than the formal financial institutions. However, the study found the development of MFIs in line with the development of MSMEs. Based on a report published by Banking with the Poor Network (BWTP, 2009), Indonesia was one of the first countries successfully developing commercial microfinance in Asia by regulating the microfinance service providers in all regions. In addition to the success in the provision of commercial microfinance services, Indonesia was also the most attractive country to develop the government subsidized programs, local financial institutions and community-based, cooperative and non-governmental organizations (NGOs). Although the development of microfinance in Indonesia grew favorably, some studies indicate that there are still lack of demand in microfinance services. Especially, the majority of rural households do not have access to sources of funding from semi-formal or formal institutions. A survey of micro industry by the Central Statistics Agency of Indonesia (BPS) in 2010 implied that the sources of micro business capital were dominated by their own capital (up to 80.90%), informal sources of funds (13.86%), and formal sources of funds (5.24%). Such information indicates that micro businesses in connection with financial institutions including banks and MFIs, are still less developed and insignificantly contribute to the economy. It also shows that bank financing to micro business sector is still very limited and to increase and improve the contribution of micro-enterprises to the economy specially to absorb labor in Indonesia. Based on data from the Ministry of Cooperatives and Small and Medium Enterprises (SMEs) (2014), micro-enterprises had a 99.99% share of the total 56.54 million business units and absorbed up to 90.12% of the total 110.81 million labor force during 2011-2012. Whilst, the large enterprises had only a share 0.01% of all business units and absorbed 2.84% of the labor force. These figures indicate that the MFI and IMFIs have a large market opportunity and microfinance market in Indonesia needs more involvement of financial institutions to serve the micro businesses. In Indonesia, most IMFIs existed as Bayt al-Māl wa-al-Tamwīl (BMT) or Islamic cooperatives (Musari and Zainuri, 2014). Muftie (2014) has reported that the number of BMTs stand around 5,500 that is less than the number of MFIs and conventional cooperatives as around 600,000. Previously, the legal status of BMT was of cooperative vide Act No. 25 of 1992. After the promulgation of Act No. 1 of 2013 of MFIs, the MFI is defined as a special financial institution to provide business development services and community empowerment, either through loans or financing to micro-enterprises and community members, management of deposits, as well as provision of business development consulting services without merely looking for commercial advantage. As for the financing, the Act stipulated that the provision of funds by the MFIs to the people, needs to be returned in accordance with the agreement based on Islamic principles. Ismal (2012) mentions that distinctive character of the Islamic financial system in Indonesia is the diversity of institutions focusing to the real sector so that the practice conforms to the philosophy of Islamic economics and finance. In Indonesia, SMEs financing could be organized by Islamic Banks (BUS), Sharīʿah Business Unit (UUS), Sharīʿah Rural Bank (BPRS), Bayt alMāl wa-al-Tamwīl (BMT), Islamic Service Finance Cooperative (KJKS), Islamic finance companies, and Takāful. BMT and KJKS are categorized as Islamic microfinance institutions (IMFIs) in Indonesia. 90 Book 2.indd 118 10/16/17 4:57 PM
  119. 3 . Lessons Learned from Bank for Poor Family in Indonesia Bank for Poor Family (Bank Keluarga Miskīn/Gakin) is actually a conventional MFI for Society (Lembaga Keuangan Mikro Masyarakat/LKMM). The term ‗Bank Gakin‘ is given due to the poor people who become its members and then used by the administrators and many people in Jember. Bank Gakin is the best alternative for poor people rather than formal banks or moneylenders. The Bank Gakin was established by the Department of Cooperatives and Micro SME (Dinkop & UMKM) in 2005. Its main target is productive women. In the beginning, this institution operated at the village level. However, the working area of Bank Gakin narrowed down to backwoods because the village level is still too broad. The narrower working area is predicted to be more effective. There were two backwoods selected as to begin with because the people in these areas had been in blacklist by banking institutions. The Department of Cooperatives and SMEs funded the twenty-five million rupiahs for each Bank Gakin. Bank Gakin served about 30 groups with more than 150 households. As Grameen Bank, Bank Gakin in Jember also uses the principle of joint responsibility among its members. Business group consisting of 5-10 people can apply for unsecured business loans between Rp 50,000 to Rp 1 million. People who apply for credit do not have to submit business proposals, especially through a difficult survey. Proposals can be submitted orally. Funds can be directly disbursed after a survey of the businesses is conducted. With credit disbursement period of 10 weeks, the installments are paid every week with a rate of 0.5 percent. This mechanism is very helpful for the group of micro-enterprises. Each Bank Gakin consists of a maximum of 200 poor people with predominantly 90 percent women becoming administrators while 46 percent of them are elementary school graduates and 5 percent had never undergone a formal school education. However, they showed a good performance for Bank Gakin. In 2008 and 2009, Jember obtained Autonomy Award from The Jawa Pos Institute of Pro-Autonomy (JPIP) due to impressive financial performance with 90 percent performing loans, 8 percent non-performing loans, only 2 percent as loss. This performance continued from year to year (Sukarno and Damayanti, 2012). This was reflected by the positive financial ratio from period to period which also met the performance standards of MFIs issued by the International Fund for Agricultural Development (IFAD). Bank Gakin has gained positive response from the poor because it makes them easier to obtain loan for venture capital. In addition, the members feel their lives becoming better because their incomes increased. However, due to mismanagement, approximately 10-15% of total Bank Gakin in Jember closed down. According to the evaluation result of DInkop & UMKM Jember, most of the failures occurred in areas with lack of infrastructure, such as electricity, roads, bridges and no financial institution altogether. Further, in the perspective of Islamic finance, Bank Gakin‘s practice is not Sharīʿah compliant but earns very low rate of interest that does not burden the borrower. Range (2004) mentions that the Islamic culture supports microfinance in many ways. With its micro and macro perspectives and their omnipresence in the day-to-day life, especially in rural developing areas, many risks relevant to the products of Islamic microfinance can be overcome. The implementation of direct and indirect financial accommodation is very compatible with sound microfinance practices. MFIs have also to be sustainable; they have to diversify their products and they will have to promote these products. They have to be aware of the social norms and to adjust their products to the demand and consequently to the social norms. To minimize risks, especially in direct 91 Book 2.indd 119 10/16/17 4:57 PM
  120. financial accommodation with high potential profit where profit and loss are shared and the potential of a moral hazard is very high , MFIs have to build up a trustworthy relationship. They have to form a sense of family and trust among and with their borrowers. Table 1 shows the progress of Bank Gakin during 10 years. At the end of 2014, the number of Bank Gakin branches reached 454 which have 6,424 community groups with a total membership 29,410 people. Total fee and administrative income reached USD 2,165 million, and current earnings were Rp 1,060 million. This institution with its own funds even contributed to the government through the establishment of integrated health program. Although the administrators of Bank Gakin are dominated by women up to 90 percent, but the turnover of Bank Gakin is growing is serving maximum of 200 poor people in each institution. Table 1: Progress of Bank Gakin during 10 Years Hal The Number of 'Bank' GAKIN The Number of Community (Group) The Member (People) The Amount of Loan (Million) Fee and Administration (Million) Current Earning (Million) 2006 13 330 1,652 1,011 30.4 17 2007 31 817 4,080 6,222 327 127 2008 37 997 4,834 14,568 763 336 2009 41 1,023 5,034 65,522 343 164 Year 2010 218 3,873 17,856 12,582 573 339 2011 298 4,748 22,008 25,999 1,380 666 2012 353 5,511 25,094 35,509 1,259 618 2013 2014 433 454 5,863 6,411 26,980 29,410 46,245 52,912 1,780 2,165 755 1,060 Source: Dinkop UMKM Range (2004) reminds that MFIs have to be professional and should adopt many business approaches to minimize risks, for example, to be able to predict the potential of a suggested business and provide technical support to increase the likelihood of success. Efforts, which may be brought in by these additional practices are simple to implement by using typical microfinance tools (e.g. ―group lending‖ and ―weekly meetings‖). Similarly, the study of Hassan & Sanchez (2009) suggests that MFIs need to increase their pure technical efficiencies in order to maximize social wealth. Hassan (2010), Suggests the challenges of conventional microfinance can be resolved if it is designed in an integrated manner by incorporating the two basic and traditional institutions of Islam, the Waqf and the Zakāh into a single framework for Islamic microfinance. Such an integrated model may reduce the chances of loan default because the basic inherent tendency of the poor to use the loan fund for consumption purpose will be met. As their basic consumption needs are covered, the poor people and micro-entrepreneurs may be in better position to focus on their business alone. Moreover, the IMFIs may initiate financing through different Islamic Sharīʿah compliance modes. Since Islamic financing modes are based on principle of social justice and equity and Ribā is prohibited, Islamic MFIs are likely to yield better benefit if they are properly designed. In addition, borrowers will have lower refundable loan as a result of utilization of Zakāh funds, it will result in less financial burden on the poor. Finally, Bank Gakin as MFI based-cooperatives is a representation of the people's economy in line with the economy constitution of Indonesia. Cooperatives are the main pillar of the economy in Indonesia and are the most concrete form of enterprise based on mutualism. Swasono (2008) mentions that Indonesia‘s economic democracy is an economic doctrine that advocates 92 Book 2.indd 120 10/16/17 4:57 PM
  121. mutualism and brotherhood in the nation ‘s economic life, wherein the societal-interest is eminently paramount without neglecting the individual preference. Economic democracy fosters participatory and emancipatory approach to economic development to assure economic justice, equity, and equality. 4. Islamic Linkage Program mutualism and brotherhood in the nation‘s economic life, wherein the societal-interest is eminently paramount without the individual Economic fosters The humanitarian mission likeneglecting the Bank Gakin for verypreference. micro financing needsdemocracy support from the participatory and emancipatory approach to economic to assureinstitution. economic justice, government. The Bank Gakin can be transformed intodevelopment the Islamic financial Musari equity, and equality. (2015b) states that true Islamic micro financing is not just taking care of lending but also to care 4. poor Islamic Linkage Program for the with a proactive attitude and do not wait to be asked. Sharīʿah recognizes Qarḍ Ḥasan on priority mission than Infāq Qarḍ Ḥasan bringsmicro the borrower andfrom induces The humanitarian likebecause the Bank Gakin for very financingself-respect needs support the government. The Bank Gakin can betotransformed into theUsamah Islamic that financial institution. Musari for the struggle and effort. Referring the history of Abu the Prophet Muhammad (2015b) states true Islamic micro financing is not of lending butrewarded also to care SAW said thatthat charity was rewarded by as much as just ten taking times, care and the loan was as for the poor with a proactive attitude and do not wait to be asked. Sharīʿah recognizes Qarḍ much as eighteen times. This is because the borrower does not come unless he is in a state of Ḥasan on priority than Infāq because Qarḍ Ḥasan brings the borrower self-respect and induces need, Infāqand is given recipientstowho may notofnecessarily needthat it. the Prophet Muhammad for thewhile struggle effort.toReferring the history Abu Usamah SAW said that was rewarded by as much as ten times, and the loan was rewarded as Bank Gakin andcharity Islamic Banks much as eighteen times. This is because the borrower does not come unless he is in a state of need, given to recipients who may not necessarily it. of Islamic finance. This to the inclusiveneed spirit Bank while GakinInfāq is a is MFI which is well-becoming institution has mission Bank Gakin and Islamicagainst Banks moneylenders, targets the low income community with super micro loan, allows a liable payment mechanism, and charges relatively low interest. However, in Bank Gakin is a MFI which is well-becoming to the inclusive spirit of Islamic finance. This Islamic finance perspective, themoneylenders, practice of Bank Gakin is still not the Sharīʿah with compliant institution has mission against targets the low income community super because of allows the interest onpayment loans, although at very low rate. Therefore, micro loan, a liable mechanism, and charges relatively low Islamic interest. banking However,and in Islamic finance perspective, the practice Bank Gakin is still notZakāt the Sharīʿah compliant institution of Zakāh, Infāq, Ṣadaqah, Waqf of (ZISWAF) or Badan Amil (BAZNAS) should because of thetointerest on loans, although at very low rate. Therefore, banking and be encouraged work together in order to back up institutions such as the Islamic Bank Gakin through institution of Zakāh, Infāq, Ṣadaqah, Waqf (ZISWAF) or Badan Amil Zakāt (BAZNAS) should linkage program to mobilize low-cost funds, disbursement in the form of return bearing be encouraged to work together in order to back up institutions such as the Bank Gakin through financing, and return financing or charity. According to Ascarya (2006), of bearing Islamic linkage program to free mobilize low-cost funds, disbursement in the form products of return banks can be forfree return bearingorfinancing, return free to financing charityproducts financing financing, andused return financing charity. According Ascaryaor (2006), of through Islamic variouscan modes vis.for channeling investment and public deposits to theorreal sectorfinancing with productive banks be used return bearing financing, return free financing charity through various vis.form channeling investmentbased and public deposits the real sector with productive purposesmodes in the of investments on profit andtoloss sharing (Muḍārabah and purposes in the form of investments based on profit and loss sharing (Muḍārabah and Mushārakah), trade financing (Murābaḥah, salam, and istishna‟), and lease financing (Ijārah Mushārakah), trade financing (Murābaḥah, salam, and istishna‟), and lease financing (Ijārah and Ijārah Muntahiyah bi-al-Tamlīk). and Ijārah Muntahiyah bi-al-Tamlīk). of Based on on above above discussion, discussion, this this paper paper provides provides the the proposed proposed model model to to reconstruct reconstruct the the scheme scheme of Based Bank Gakin Gakin into into Islamic Islamic linkage linkage program program that that bridges bridges the the Islamic Islamic banks banks and and MFIs. MFIs. Super Super micro micro Bank financing and poor family is the area of MFIs/IMFIs (Figure 1). Through linkage program, these institutions institutions may may have have funds funds from from Islamic Islamic Banks Banks (BUSs) (BUSs) and and Sharīʿah Sharīʿah Business Business Units Units (UUSs). (UUSs). Figure 1: Proposed Islamic Linkage Program Figure 1: Proposed Islamic Linkage Program 93 93 Book 2.indd 121 10/16/17 4:57 PM
  122. Micro Tak āful should be hand to hand with micro consultant to do mentoring (Musari, 2015a). Microinsurance is also microfinance product that provides important benefits to the institutions and clients, especially to protect the borrower‘s business in agricultural which is exposed to climatic factors (Mokhtar, Nartea and Gan, 2012). In this context, the micro business and poor family are the vulnerable communities that need micro consultant and micro Takāful to back up. 5. Institutional Arrangements of Ṣukūk for Microfinance Ṣukūk is a good alternative Islamic instrument for IMFIs (Ali, 2007). In Indonesia, Ṣukūk-based financing schemes for agriculture sector are highly needed innovation (Beik & Hafidhuddin, 2008). With regard to financing activities, Ṣukūk is claimed to be a better financing alternative than debt financing because of its feature of investment cooperation, sharing of risk, and engagement of assets or the real project as its underlying issuance (Ismal and Musari, 2009a). Ṣukūk can can be used to finance the economy and reduce the government's dependence on foreign debt through utilization of idle funds in the domestic market. For Islamic bank and finance industry, Ṣukūk can serve as an instrument to manage liquidity and portfolio (Ismal and Musari, 2009c). To finance the micro-enterprises, funds generated through issuance of Ṣukūk shall be used to provide financing on the basis of profit sharing modes by the special purpose entity (Ali, 2011). In fact, Ṣukūk is a certificate of ownership of an asset or real project. According to the principle in Islamic economics, Ṣukūk should be the instrument of wealth distribution and equalization. However, the biggest challenge of Ṣukūk today is how Ṣukūk can link financial sector with the real sector especially to utilize excess liquidity in the economy. Specifically, as a potential tool to manage excess and lack of liquidity, Ṣukūk may link Islamic banks with IMFIs. Ali (2007) states that Ṣukūk provide an opportunity for IMFIs. In this case, IMFIs may receive funds from Islamic banking to be extended to finance micro projects or businesses. In Indonesia, the Ṣukūk has been found as a local wisdom of Association of Farmer Groups (Gapoktan) to finance the working capital of the cocoa farmers. The one of the interesting local wisdoms of Gapoktan3 is its ability to cope with the capital constraints through securities (Musari, 2010, 2012, 2013 and 2015a and, Simanjuntak and Musari, 2014). To overcome the difficulties in bank financing, primarily to avoid the high interest-based loan, the Gapoktan issues an investment certificate. This certificate is an ownership paper to finance the cocoa farming businesses based on profit sharing contract. According to the terms of Islamic economics and finance, the investment certificate issued by the Gapoktan is named as Ṣukūk. This is cooperative Ṣukūk, an example of local wisdom of Indonesian farmers. 3 The Association of Farmer Groups (Gapoktan) is Guyub Santoso. The location at Jl. Banteng Blorok No. 18, Plosorejo Village, Kademangan Sub-District, Blitar Regency, East Java Province, Indonesia. In fact, Guyub Santoso was an organization which was awarded as the Runner Up of Pro Poor Award 2011 from the Governor of East Java, Indonesia. Currently, the members of Guyub Santoso are 26 farmer groups in Blitar and 78 farmer groups outside Blitar. Total number of farmers in Blitar 4,240 people and outside Blitar 17,774 people. Gapoktan Guyub Santoso concerns on the management of cocoa, starting from breeding, maintaining, marketing and improving the quality of the sale proceeds to harvesting cocoa beans for local markets and export. Gapoktan Guyub Santoso in Blitar has land area which covers Productive Plants area of 1,897 hectares and Immature Crops covers 647 hectares. While outside Blitar, land area covers Productive Plants 5,692 acres and Immature Crops 9,281 hectares. The quota of cocoa purchasing for Gapoktan Guyub Santoso is around 343.2 tons per month or 11.4 tons per day. 94 Book 2.indd 122 10/16/17 4:57 PM
  123. Since Islamic banks have not addressed the needs of financing among the poor and micro entrepreneurs , Islamic microfinance was argued as a missing component in Islamic banking (Rahman, 2007). Ṣukūk is able to be used as an instrument to manage excess liquidity among Islamic banks and IMFIs through linkage program to finance the poor and micro entrepreneurs. So, one option for IMFIs to finance micro business sector by issuing Ṣukūk. Ṣukūk can be issued based on partnerships in the form of a linkage program where IMFIs can position Islamic banks as the owner of the funds (Rabb al-Māl) and IMFIs are the managers of the funds (Muḍārib). In this context, Ṣukūk stands for a rational instrument to manage excess liquidity with the Islamic banks to be productively occupied by the real sectors in the micro business (Musari, 2015a). Finally, the proposed institutional arrangement for the Bank Gakin and Islamic banks to issue Ṣukūk as a tool for managing, respectively, the lack and excess of liquidity can be viewed in Figure 2. The scheme is inspired by a conventional cooperative of Gapoktan Guyub Santoso which issues investment certificates to retail investors to finance the working capital of cocoa farmers through Muḍārabah contract.4 Figure 2: Scheme for the Bank Gakin and Islamic Banks/Sharia Business Units Muḍārabah Ṣukūk can be instrumental in enhancing public participation in investment activities in any economy. These are certificates that represent projects or activities managed on Muḍārabah principle by appointing any of the partners or any other person as Muḍārib for management of the business (Ayub, 2005). So, the proposed models of a linkage program in this paper is to position Bank Gakin/MFIs/IMFIs as a special purpose vehicle (SPV) to issue Ṣukūk and to absorb liquidity of Islamic banks (BUS)/Sharīʿah Business Unit (UUS) as Rabb al-Māl to distribute to the members of Bank Gakin/MFIs/IMFIs as Muḍārib. BUS/UUS may use the fund of ZISWAF to buy Muḍārabah Ṣukūk from Bank Gakin/MFIs/IMFIs. 4 The formula used by Gapoktan Guyub Santoso for calculating a monthly profit sharing to each holder of sukuk is Capital times Rp 75 or Price of cocoa per kg times Frequency of deposit or approximately 1.56% or 18.72% per year. This rate of return is not fixed, but fluctuates depending on the outputs of Guyub Santoso. However, the real value is not far from the expected range of outputs. All of the assets owned by Guyub Santosa are used as the underlying assets of the sukuk and with this approach. Guyub Santoso has proven that bank financing is not the only way for the farmers to have financing access. Through cooperative investment with some people, strengthening networks, and intensive coaching, Gapoktan Guyub Santoso has raised the wealth distribution of its member since 2009. Every month, Guyub Santoso gives the profit-sharing to the investors (Musari, 2015a). 95 Book 2.indd 123 10/16/17 4:57 PM
  124. 6 . Conclusion Bank Gakin is one of the MFIs in Jember that plays very important role in lending funds to poor family. Bank Gakin has gained positive response from the poor because they find it easier to obtain loan for venture capital. Bank Gakin as MFI based-cooperatives is a representation of the people's economy that is in line with the economy constitution of Indonesia. Cooperatives are the main pillar of economy in Indonesia and are the most concrete form of enterprise based on mutualism. But, Bank Gakin‘s practice is still not Sharīʿah compliance. Bank Gakin finances against very low rate of interest which is not regarded as burden on the borrowers. The role of Bank Gakin and its performance, as well as, help to the poor borrowers brings every opportunity to ransform this institution into a IMFI. Through linkage program, we may reconstruct the scheme of Bank Gakin into Islamic system and bridg the Islamic banks and MFIs to finance super micro business and poor families. The Ṣukūk has been found a good alternative to raise funds for IMFIs through a linkage program. For Islamic banks and finance industry, Ṣukūk can serve as an instrument to manage liquidity and portfolio. Muḍārabah Ṣukūk can be floated to enhancing public participation in investment activities. So, the proposed model of a linkage program has mission to place Bank Gakin/MFIs/IMFIs as a SPV to issue Muḍārabah Ṣukūk and to absorb liquidity of Islamic banks and then distribute the funds to the members of Bank Gakin/MFIs/IMFIs. 96 Book 2.indd 124 10/16/17 4:57 PM
  125. REFERENCES Book /Journal/Proceeding/Working Paper Abdelkader, Ines Ben & Asma Ben Salem, 2013. Islamic vs Conventional Microfinance Institutions: Performance Analysis in MENA Countries. International Journal of Business and Social Research (IJBSR), Volume -3, No.5. May. Pp. 219-233. ADB, 2000. Finance for the Poor: Microfinance Development Strategy. Asian Development Bank (ADB). Ali, Salman Syed, 2007. New Ṣukūk Products, A Case for Microfinance Sector. A presentation at Islamic Financial Markets Conference and Specialized Workshops at Marriot Hotel, Karachi. Islamic Research and Training Institute (IRTI). 24-25 January. Ascarya, 2006. Akad dan Produk Bank Sharʿīyah: Konsep dan Praktek di Beberapa Negara. Jakarta: Bank Indonesia. Ayub, Muhammad, 2005. Securitization, Ṣukūk and Fund Management Potential to be Realized by Islamic Financial Institutions. A paper presented at 6th International Conference on Islamic Economic and Finance. Jakarta. 21-24 November. Beik Irfan, Syauqi & Didin Hafidhuddin, Enhancing The Role Of Ṣukūk On Agriculture Sector Financing In Indonesia: Proposed Model, dalam Ali, Salman Syed, 2008. Islamic Capital Markets: Products, Regulation & Development. Proceedings of International Conference. Islamic Research and Training Institute, Islamic Development Bank (IDB) & Muamalat Institute. Pp. 85-96. Chapra, M. Umer, 1999. Islam dan Tantangan Ekonomi, Islamisasi Ekonomi Kontemporer. Terjemahan dari Islamic and the Economic Challenge. Surabaya: Risalah Gusti. Agustus. Hassan, Kabir M. and Benito Sanchez, 2009. Efficiency Analysis of Microfinance Institutions in Developing Countries. Networks Financial Institute Working Paper 2009WP-12. October 1. Mokhtar, Suraya Hanim, Gilbert Nartea and Christopher Gan, 2012. The Malaysian Microfinance System and a Comparison with the Grameen Bank (Bangladesh) and Bank Perkreditan Rakyat (BPR-Indonesia). Journal of Arts and Humanities, Vol. 1, No. 3. Pp. 60-71. Muhammad, Aliyu Dahiru, 2013. Islamic Micro-Investment Model As An Alternative To Conventional Microfinance In Nigeria. International Journal of Islamic Banking & Finance, Vol. 3, Issue 2. September. Musari, Khairunnisa, 2010. Money Creation vs Money Velocity: Ṣukūk Menjaga Stabilitas Perekonomian Nasional. A paper presented at Sharīʿah Economic Day (SEconD) 2010, The National Conference on Islamic Economics and Finance ―Ṣukūk and Development Challenge in Indonesia‖. Fakultas Ekonomi Universitas Indonesia (FE UI). Depok. 2-3 Februari. Musari, Khairunnisa & Zainuri, 2014. Menggagas Ṣukūk BMT untuk Pembiayaan Mikro Sharʿīyah melalui Linkage Program dalam Sunarko, Bagus Sigit & Zakaria bin Bahari, 2014. Ekonomi Syari‟ah Terkini: Perspektif, Metodologi, dan Praktek. Jember: University 97 Book 2.indd 125 10/16/17 4:57 PM
  126. of Jember & Center for Islamic Development Management Studies (ISDEV) Universiti Sains Malaysia. Pp. 481-494. Musari, Khairunnisa, 2015a. Ṣukūk for Microfinance through Linkage Program: Case Study in Indonesia. A paper presented at THE 10th International Conference on Islamic Economics And Finance (ICIEF). Doha, Qatar. 23-23 March. Mufti, Aries, 2011. Pemberdayaan Microfinance Sharʿīyah dalam Pengembangan UMKM. A paper presented at Seminar Bulanan Masyarakat Ekonomi Sharʿīyah (MES) at Gedung BRI I, Auditorium Lt. 21. Jakarta. Mufti, Aries, 2011. APEX BMT Menuju Kemandirian BMT dalam Lembaga Ombudsman Swasta DIY, 2011. Membangun Gerakan BMT Indonesia: Sebuah Bunga Rampai. 1st Edition. Desember. Pp. 124-143. Mufti, Aries, 2014. Strenghtening Zakāt & Waqf Institution for Financial Inclusion. A paper presented at International Conference ―Syari‘ah Economics and Islamic Development‖ held by University of Jember & Center for Islamic Development Management Studies (ISDEV) Universiti Sains Malaysia. Jember. 17-18 September. Mughni, Abdul, 2009. Keuangan Mikro Islam Upaya Dalam Pengentasan Masalah Sosial. A paper presented at The 9th Annual Conference on Islamic Studies (ACIS). Surakarta, 2-5 November. Obaidullah, Mohammed, 2008. Introduction to Islamic Microfinance. India: The Islamic Business and Finance Network (IBF Net). Obaidullah, Mohammed & Tariqullah Khan, 2008. Islamic Microfinance Development: Challenges and Initiatives. Policy Dialogue Paper No. 2. Jeddah: Islamic Research and Training Institute (IRTI). Rahman, Abdul Rahim Abdul, 2007. Islamic Microfinance: A Missing Component in Islamic Banking. Kyoto Bulletin of Islamic Area Studies, 1-2. Pp. 38-53. Range, Matthias, 2004. Islamic Microfinance. Thesis. Research Center of ―International Technical and Economical Co-operation‖ Faculty of Business Administration. RWTH Aachen University. Segrado, Chiara, 2005. Islamic Microfinance and Socially Responsible Investments. Meda Project. University of Torino. August. Soeleman, Sugiharto & Setyani Dwi Lestari, 2014. The Role of Ṣukūk Financing for Sustainable Development of Smallholder Farmers. Australasian Accounting, Business and Finance Journal, 8(5). Research Online, the open access institutional repository for the University of Wollongong. Pp. 79-92. Sukarno, Hari & Dila Damayanti, 2012. Bank Gakin: Telaah Kinerja Lembaga Keuangan Mikro di Jember. Proceeding of Seminar & Konferensi Nasional Manajemen Bisnis. 26 May. Pp. 73-79. Swasono, Sri-Edi, 2008. Islamic Economics Within The Pancasila. A mini book presented at the International Seminar on Implementation of Islamic Economics, PPS University of Airlangga & Annual Meeting of Indonesian Association of Islamic Economist. Surabaya, 1-3 August. 98 Book 2.indd 126 10/16/17 4:57 PM
  127. Wijono , Wiloejo Wirjo. 2005. Pemberdayaan Lembaga Keuangan Mikro sebagai Salah Satu Pilar Sistem Keuangan Nasional: Upaya Kongkrit Memutus Mata Rantai KeMiskīnan. Jurnal Kajian Ekonomi dan Keuangan. Special Edition for December. Pp. 735-751. Articles at Newspaper/Magazines Ali, Suleman Muhammad, 2011. Islamic Microfinance Securitization: Structuring a Ṣukūk Mushārakah. Islamic Finance News. Pp. 20-22. 7 September. Handayani, Ririn, 2010. Bangkit Bersama Bank Gakin. Gemari Magazine. Edition 114/Year XI/July. Pp. 66-67. Musari, Khairunnisa, 2015b. Kang Emil, Mari Ke Jember!. Perspektif. Jawa Pos Radar Jember. 26 Agustus. Pp. 1, 11. Ismal, Rifki & Khairunnisa Musari, 2009a. Menggagas Ṣukūk sebagai Instrumen Fiskal dan Moneter. Opini. Bisnis Indonesia. Pp. 4. 1 April. Ismal, Rifki & Khairunnisa Musari, 2009b. Ṣukūk, Menuju Instrumen Fiskal dan Moneter. Wacana. Majalah Ekonomi Bisnis Sharʿīyah - Sharing. Edisi 28 Tahun III April. Hlm. 58. Ismal, Rifki & Khairunnisa Musari, 2009c. Ṣukūk Menjawab Resesi. Ekonomia. Republika. 23 March. Musari, Khairunnisa, 2013. Belajar Ṣukūk dari Blitar. Majalah Ekonomi Bisnis Sharʿīyah. Sharing. Edisi 73 Tahun VII Maret-April. Musari, Khairunnisa, 2012. Apakabar Penggiat Kakao Jember?. Jawa Pos Radar Jember. 12 November. Pp. 34. Internet Kementerian Koperasi & UKM, 2014. Data UMKM. Diakses http://www.depkop.go.id/ index.php?option=com_phocadownload&view=category&id=109:data-umkm2012&Itemid=93 dari Bank Indonesia, 2014. Net Ekspansi Kredit Usaha Mikro Kecil Menengah Menurut Klasifikasi Usaha Tahun 2011-2012. Diakses dari http://www.bi.go.id/ id/umkm/kredit/data/Pages/ Perkembangan%20Kredit%20UMKM%20dan%20MKM%20November%202013_NE.pdf Asia Foundation, 2003. Microfinance Services in Indonesia: A Survey of Institutions in 6 Provinces. https://asiafoundation.org/resources/pdfs/Indomicrofinancesurvey.pdf Bank Indonesia, 2014. Net Ekspansi Kredit Usaha Mikro Kecil Menengah Menurut Klasifikasi Usaha Tahun 2011-2012. Diakses dari http://www.bi.go.id/ id/umkm/kredit/data/Pages/ Perkembangan%20Kredit%20UMKM%20dan%20MKM%20November%202013_NE.pdf http://www.jpip.or.id/artikelview-345.html http://www.jemberpost.com/ekonomi-bisnis/bank-gakin-tak-dilirik-anggaran-pemkab-tapimela ju-kencang/ 99 Book 2.indd 127 10/16/17 4:57 PM
  128. http ://m.beritajatim.com/ekonomi/223772/bank_orang_Miskīn_tumbuh_di_tengah_layuny a_koperasi.html#.VTBZYvmsW3M http://www.prosalinaradio.com/2013/09/13/omset-bank-keluarga-Miskīn-gakin-jembercapai-rp-36-milyar-lebih.html http://jaringnews.com/politik-peristiwa/umum/48979/perangi-rentenir-jembermaksimalkan-peranan-bank-gakin http://surabaya.tribunnews.com/2013/02/02/umkm-jember-bentuk-160-bank-gakin-baru 100 Book 2.indd 128 10/16/17 4:57 PM
  129. 101 Book 2 .indd 129 10/16/17 4:57 PM
  130. 7 REDUCING POVERTY THROUGH PROMOTING FINANCIAL INCLUSION , SHARED PROSPERITY AND SOCIAL SOLIDARITY: THE ROLE OF ISLAMIC FINANCE AND QARḌ ḤASAN Amin Mohseni-Cheraghlou1 1. Introduction The growing volume of theoretical and empirical findings over the past decade shows that access to diverse forms of financial services has positive impacts on economic development and growth, and if done in an equitable and responsible manner, it can also reduce poverty and inequality and boost shared prosperity (Beck, Demirgüç-Kunt, and Levine 2004; Beck and Demirgüç-Kunt 2008; Levine 2005; World Bank 2007). It is estimated that globally more than 50 percent of the world‘s adult population or 2.5 billion adults don‘t have access to formal financial institutions and majority of them reside in emerging market and developing economies (EMDEs) (Demirguc-Kunt and Klapper, 2012). The picture is substantially grimmer for member countries of the Organization of Islamic Cooperation (OIC). According to Global Findex dataset, 40 out of the 48 OIC member countries represented in this dataset have formal account penetration rates2 that were less than the world average of 50 percent. The median account penetration rate among the OIC member countries was 20 percent, a figure that is significantly less than the global average. Also, in comparison to other regions, Middle East and North Africa (MENA) region had the lowest penetration rate of 18 percent (Figure 1). Figure 1: Account Penetration Rates by Regions, 2011 Percentage of adult population (age 15+) with an account at a formal financial institution (%) 100% 89% 80% 55% 60% Global Average = 50% 45% 40% 39% 33% 24% 20% 0% High Income East Asia & Pacific Europe & Central Asia Latin America & Caribbean Source: Global Financial Inclusion (Global Findex) Dataset. South Asia 18% Sub-Saharan Middle East & Africa North Africa 1 American University, Washington DC. Account penetration rate is measured as the percentage of adults age 15 and above with account(s) in formal financial institutions. 2 102 Book 2.indd 130 10/16/17 4:57 PM
  131. Furthermore , according to Global Findex, 75 percent or about 1 billion adults among selfidentified Muslims don‘t have an account in a formal financial institution. Put differently, about two in every five adults without a formal account around the world are Muslims. This may be one reason as to why efforts for reducing poverty or enhancing shared prosperity in many of the MENA and other Muslim majority countries are not as successful as one would have desired them to be.3 Islamic teachings pay particular attention to (a) eliminating absolute poverty and (b) reducing inequality, relative poverty, and marginalization of the poor; and (c) enhancing inclusive growth, social solidarity and shared prosperity. Islamic financial institutions (IFIs) play a central role in materializing these objectives through providing a diverse set of Sharīʿah compliant financial instruments that are designed to address the heterogeneous needs of their clients including those of the vulnerable and the poor. One such instrument is Qarḍ Ḥasan (QH). Often overlooked and not appropriately practiced by formal IFIs in most of the Muslim majority countries, QH is an interest-free loan that is also characterized by elements of goodwill, benevolence, and generosity (or Iḥsān). This work suggests that if implemented appropriately, QH is potentially an effective mechanism to pave the path for a group of the financially prudent and deserving poor Muslim population who are unbanked or financially excluded to eventually become bankable and gain access to various forms of financial services and the many benefits associated with them. Additionally, QH could: 1. Distribute the limited financial resources designated for the poor (such as Zakāt and Ṣadaqah) in a more productive and suitable manner. 2. Target the heterogeneous needs of the poor more effectively. 3. Encourage financial responsibility, creativity, and austerity among the receivers of QH (i.e. the vulnerable and the poor) as well as among the donors of QH (i.e. the non-poor). 4. Facilitate the transfer of knowledge and skills from the lender to the receivers of QH. 5. Increase the human capital, pride, and self-confidence of the receivers of QH. 6. Promote social solidarity and harmony between lenders and receivers of QH. The rest of the essay is organized as follows. Through an empirical analysis based on data from Findex, Bankscope, and World Development Indicator databases, first part of this paper shows that overall access to Islamic financial assets is positively correlated with levels of financial inclusion in Muslim majority countries. Therefore, this part provides support for the hypothesis that Islamic financial instruments can help reduce poverty and increase shared prosperity by enhancing financial inclusion among Muslim communities. The second part of the paper will focus on the specific case of QH. First, a theoretical discussion around QH is presented and its position vis-à-vis Qarḍ, Zakāt and Ṣadaqah is analyzed in some detail. This theoretical discussion is important as it will have significant practical implications for the sustainable 3 It is important to note here that while lacking an account at a formal financial institution is not always tantamount to lacking access to financial services, it is nevertheless a good proxy for measuring access to financial services. This is because most if not all forms of formal financial services are often linked to formal accounts. Therefore, individuals or firms without a formal account are often forced to address their financial needs through informal financial markets, which are often associated with higher costs and risks and little to no legal protections against frauds or breaches in the contract. 103 Book 2.indd 131 10/16/17 4:57 PM
  132. operation of QH funds , an issue that is discussed next in this part of the paper. The third part will present a detailed case study of Akhuwat. Akhuwat is an Islamic microfinance institution in Pakistan that has been operating successfully based on a genuine QH model since 2002 and has been able to assist more than 900,000 poor families in various parts of the country. A short conclusion finalizes this paper. PART I 1.1. Islamic Finance and Financial Inclusion Before analyzing the relationship between Islamic finance and financial inclusion, it is appropriate to provide a very brief overview of the fact that, financial inclusion, if promoted responsibly, can result in significant benefits in terms of inclusive and equitable growth and poverty reduction. A 2013 World Bank report entitled Financial Inclusion4 provides a rich and comprehensive synthesis of the existing literature as well as World Bank‘s own detailed research on this issue. The report concludes that: - There is a notable level of inequality in access to financial services. ―The poor, women, youth, and rural residents tend to face greater barriers to access financial services. Among firms, the younger and smaller ones are confronted by more binding constraints. For instance, in developing economies, 35 percent of small firms report that access to finance is a major obstacle to their operations, compared with 25 percent of large firms in developing economies and 8 percent of large firms in developed economies‖.5 - Financial inclusion is important for equitable growth and poverty reduction. ―Considerable evidence indicates that the poor benefit enormously from basic payments, savings, and insurance services. For firms, particularly the small and young ones that are subject to greater constraints, access to finance is associated with innovation, job creation, and growth‖.6 - Financial inclusion must be done responsibly to benefit the targeted population. This does not mean finance for all at all costs. ―Some individuals and firms have no material demand or business need for financial services. Efforts to subsidize these services are counterproductive and, in the case of credit, can lead to over-indebtedness and financial instability‖.7 Therefore, it should not come as a surprise that access to financial services is strongly correlated with productivity, income, and wealth, both in a country and also across countries. 1.2. Reasons for Financial Exclusion The reasons for financial exclusion, defined here as not having an account at a formal financial institution or being unbanked, are rooted in a complex set of economic, legal, social, political, cultural, and personal factors but can be classified into two main categories: voluntary and involuntary reasons. As shown in Figure 2, some adults are financially excluded and voluntarily so because of religious considerations. 4 http://www.worldbank.org/financialdevelopment http://go.worldbank.org/GWESKFYMY0 6 Ibid. 7 Ibid. 5 104 Book 2.indd 132 10/16/17 4:57 PM
  133. A 2011 survey , the Global Findex dataset,8 is the first international database that makes it possible to get a first glimpse at the various aspects of financial exclusion at the individual level. In addition to many other questions, this survey asks the unbanked respondents (i.e. adults lacking a formal account) about the reason(s) as to why they do not have an account at a bank, credit union or other formal financial institution. The respondents in turn could choose one or more of the following reasons: a. b. c. d. e. f. g. They are too far away. They are too expensive. You don‘t have the necessary documentation (ID, wage slip). You don‘t trust them. You don‘t have enough money to use them. Because of religious reasons. Because someone else in the family already has an account. Figure 2: Financial Exclusion Source: Global Financial Development Report 2014 Two notes are in order here. First, one can think of many more reasons for an individual not to have an account that are not part of the above seven reasons. For example one can think of concerns with government taxes and identification of wealth, no need, preferences in using informal financial services, being illiterate and not knowing how to open an account as some other valid reasons for not having an account. Second, while allowing to select multiple reasons provides a more complete picture of the reasons behind an individual‘s preference to not have an account, this makes it impossible to identify the ultimate binding constraint facing the unbanked individuals who have provided more than one reason. For example if a person has pointed to distance and costs (options a and b above) as her reasons for being unbanked, then we would have no way of knowing if she will remain unbanked if one of the obstacles (either distance or cost) is removed, presenting policymakers with a certain level of uncertainty. 8 See http://go.worldbank.org/1F2V9ZK8C0. The 11 out of 18 MENA countries included in this survey are Algeria, Djibouti, Egypt, Iraq, Jordan, Lebanon, Morocco, Syria, Tunisia, West Bank and Gaza, and Yemen. 105 Book 2.indd 133 10/16/17 4:57 PM
  134. Acknowledging these two caveats , this question nevertheless provides a valuable entry point for analyzing the reasons for which 2.5 billion adults around the globe are unbanked. According to this question, not having enough money is the most cited reason for being unbanked, followed by cost, another family member having an account, and distance (Figure 3) while exclusion for religious reasons is the least cited reason. Figure 3: Reasons for Financial Exclusion, 2011 Lack of Money 65% Too expensive 25% Family member already has one 23% Too far away 20% Lack of necessary documentation 18% Lack of Trust 13% Religious 5% 0% 10% 20% 30% 40% 50% 60% 70% Percent of unbanked adults (%) Source: Global Financial Inclusion (Global Findex) Dataset. Author’s Calculation. Note: Respondents could choose more than one reason. Reasons of exclusion vary across regions (Figure 4). While lack of sufficient funds was by far the most frequently cited reason for not having an account for unbanked adults in all regions, there was no other common similarity in reasons of exclusion among all regions. For example, lack of trust was second most frequently cited reason for being unbanked in Europe and Central Asia (ECA), while being too expensive occupied the second position in Latin America and the Caribbean (LAC), Middle East and North Africa (MENA), and Sub-Saharan Africa (SSA). Also, while religious factor was the third highest reason for not having an account in MENA (12 percent), this reason was cited least frequently by the unbanked adults in other regions. 106 Book 2.indd 134 10/16/17 4:57 PM
  135. Figure 4 : Reasons for Financial Exclusion by Regions, 2011 Lack of Money Too far away Religious Too expensive Lack of necessary documentation Family member already has one Lack of Trust 100% Percent of unbanked adults (%) 80% 60% 40% 20% 0% East Asia and Pacific Europe and Central Asia High Income Latin America & the Caribbean Middle East and North Africa South Asia Sub-Saharan Africa Source: Global Financial Inclusion (Global Findex) Dataset. Author’s Calculation. The complex combination of social, economic, political, demographic, historical, security, and legal factors in countries would make reasons of exclusion to also vary widely across countries. A look at Annexure 1 highlights the stark differences between different countries even when they are in the same income group or region. For example, one can point to Afghanistan and Bangladesh, two South Asian low income economies that have widely different account penetration rates and differ widely on reasons of exclusion. As an example, 32 percent of unbanked adults in Afghanistan reported religious reasons for not having an account, while this figure is only at 4 percent in Bangladesh. This is despite the fact that both countries have comparable ratios of Muslim population (98 % and 90 % in Afghanistan and Bangladesh, respectively) and religiosity levels9 (97 % and 99 % in Afghanistan and Bangladesh, respectively). 1.3. Financially Excluded for Religious Reasons: Who and Where? About five percent (or 125 million) of the unbanked adults around the world reported religious reasons for not having an account. But who are these adults, which religion they adhere to, and in which region and countries they reside in? As the following examples demonstrate, all three Abrahamic religions (Judaism, Christianity, and Islam) appear to prohibit interest based financial transactions, also referred to as ‗usury‘. However, it can sometimes be unclear whether usury refers to the excessive charging of interest or the charging of any interest at all. The following 9 Religiosity level represents the percentage of adults in a given country who responded affirmatively to the question, ―Is religion an important part of your daily life?‖ in a 2010 Gallup poll. See http://www.gallup.com/poll/142727/religiosity-highest-world-poorest-nations.aspx 107 Book 2.indd 135 10/16/17 4:57 PM
  136. examples from among many are from Old Testament , which is a key text for both Jews and a Christians, and the Qur‘ān that prohibit interest/usury (in Arabic Ribā):10 Deuteronomy 23/19: Thou shalt not lend upon interest to thy brother: interest of money, interest of victuals, interest of anything that is lent upon interest. Qur’ān 2/275: Those who charge usury are in the same position as those controlled by the Satan‘s influence. This is because they claim that usury is the same as commerce. However, God permits commerce, and prohibits usury. Thus, whoever heeds this commandment from his Lord, and refrains from usury, he may keep his past earnings, and his judgment rests with God. As for those who persist in usury, they incur Hell, wherein they abide forever. Furthermore, one can find demeaning references to usurers in the sacred texts of Hinduism and Buddhism: ―For example, Vasishtha, a well-known Hindu law-maker of that time, made a special law which forbade the higher castes of Brahmanas (priests) and Kshatriyas (warriors) from being usurers or lenders at interest. Also, in the Jatakas, usury is referred to in a demeaning manner: ‗hypocritical ascetics are accused of practicing it‘‖ (Visser and McInstosh 1998, 176). Therefore, at the very least the original teachings of world main religions with 84 percent of world‘s religious adults as their followers11 look down on usury as a demeaning practice unfitting for honorable and dignified individuals or forbid it altogether while considering it a grave sin. However, in the current times, Muslims seem to be more conscious of this prohibition than the followers of other religions. A review of Annexure 1 shows that compared to other countries, the unbanked adults in Muslim majority countries tend to have higher likelihood of citing religious reasons for not having an account. This information in summarized in Figure 5. As evident from this figure, 28 out of 47 countries where religious reasons were chosen by at least 4 percent of the unbanked adults are countries where Muslims constitute majority of the total population (highlighted in green and red bars). From these 28 countries, 11 are located in the MENA region (highlighted in red bars). It important here to realize that while about 5% of adults worldwide cited religious reasons for not having an account, financial exclusion rates because of religious reasons are above 20% for eight OIC countries, six of which are located in the MENA region. Furthermore, 13 OIC countries (which includes eight MENA countries) have financial exclusion rates because of religious reasons at 10% or more. Overall, based on Global Findex, about 12% of unbanked individuals in the Arab MENA (or 17 million) and 7% of the unbanked in OIC member countries (or 47 million) reported not having an account because of religious reasons.12 10 With respect to charging interest on monetary loans, some Islamic scholars have argued that interest rates indexed to inflation are not Riba and are therefore are sanctioned in Islam. Using the famous concept of Laa Dharara wa Laa Dheraar (one should not be harmed and should not harm) in the Islamic legal system, it has been argued that money is solely a measure of account and medium of exchange, the value of which is not fixed. Therefore, if interest is not paid to the lender on money loaned in line with the rate of inflation the lender would be harmed as their purchasing power would be diminished over time, and ever more so in a high inflation environment. Others though, have looked at money as a commodity and have banned collecting interest altogether, no matter the inflation rates. 11 World Fact Book (2012). 12 The 17 million estimate is on the conservative side as it does not include countries such as Algeria, Bahrain, Iran, Qatar, Somalia, and the United Arab Emirates which are home to about 140 million Muslim (about 10 percent of the global Muslim population). 108 Book 2.indd 136 10/16/17 4:57 PM
  137. 109 Source : Global Financial Inclusion (Global Findex) Dataset. Author’s Calculation. Note: Green and red bars refer to countries where followers of Islam constitute at least 60% or more of the population. Red bars refer to countries in the MENA region. 0% 5% 10% 15% 20% 25% 30% 35% Figure 5: Financially Excluded Due to Religious Reasons, 2011 Percent of unbanked adults (%) Book 2.indd 137 10/16/17 4:57 PM
  138. Figure 6 also confirms that self-identified Muslims are about twice less likely to have an account as their non-Muslim counterparts (24% vs. 44%) where this gap is about 13 percentage points in the MENA region. Figure 6: Differences in Financial Inclusion between Muslims and non-Muslims, 2011. Non-Muslim 100% Account penetration rate (%) Muslim 96% 90% 83% 80% 70% 60% 50% 50% 48% 44% 40% 40% 30% 24% 21% 20% 37% 26% 24% 28% 14% 13% 10% 0% World High income East Asia & Pacific Europe & Central Asia Middle East & North Africa South Asia Sub-Saharan Africa Source: Demirguc-Kunt, Klaper, and Randall (2013). Note: The difference between Muslims and non-Muslim is statistically significant at 1% level. Analysis is based on 64 countries. Countries with less than 1% and more than 99% Muslim population are excluded from the analysis. Cross-country regression analysis also supports the idea presented in tables and figures above. Regression results in Table 113 and a close look at changes of R-squared between different models and the size and significance of coefficients suggest that being in the MENA region followed by share of Muslim population in a given country are the most important determining factor for being financially excluded because of religious reasons. Overall then, the available data, albeit limited in scope, suggest that financial exclusion due to religious reasons is a phenomenon that is predominantly associated with Muslim majority countries and especially those in the MENA region. In other words, in comparison to other religious and non-religious community around the world, the followers of Islam are more likely to altogether avoid formal financial institutions because of religious reasons as the operation of vast majority of those institutions are primarily based on interest. 1.4. Islamic Finance and Financial Inclusion Based on the evidence presented thus far it could be argued that enhancing the size of and access to Sharīʿah compliant Islamic financial products can reduce voluntary financial exclusion because 13 All models include GDP and GDP per capita to control for different levels development in economic, legal, social, and governance fronts. This is based on the fact that legal, social, and political developments are often strongly correlated with levels of economic development and the size of an economy. 110 Book 2.indd 138 10/16/17 4:57 PM
  139. Book 2 .indd 139 10/16/17 4:57 PM 133 0.361 133 0.024 102 0.071 102 0.364 102 0.455 0.536 83 -0.0964 -2.991 0.459 102 -0.116 -2.382 2.044 5.906* 0.978 -2.071 -1.953 -0.0172 0.0755*** -0.0256 Model 7 0.00032* 0.500 86 -0.00142 -1.318 2.789 9.447** 0.915 -1.487 -1.674 -0.0209 0.0624*** -0.123 Model 8 0.00054*** 0.546 86 0.00791*** -1.322 2.982 8.926** 0.646 -1.695 -1.802 -0.0190 0.0626*** -0.0666 Model 9 0.00036* 111 Note: OLS regression with robust standard errors. * p<0.10, ** p<0.05, *** p<0.01. Dependent variable is the percentage of adults reporting religious reason for not having an account which is taken from Global Findex. GDP and GDP per capita are used as proxies for the quality of institutions. R-Squared Observations Commercial Bank Branches per 1000 km2 Commercial Bank Branches per 100,000 Adults Life Expectancy at Birth Literacy Rate (% people 15+) Sub-Saharan Africa Dummy -0.224 -3.642 3.018 South Asia Dummy 7.997** 6.493* Middle East and North Africa Dummy 0.499 -0.233 -1.907 -0.00866 0.0512*** -0.0892 Model 6 0.00158 1.291 -0.0160 0.0762*** -0.0416 Model 5 0.00034* Latin America & the Caribbean Dummy 0.0258 0.0914*** 0.0236 Model 4 0.00028* -1.476 0.0745*** 0.0152 Model 3 0.000091 Europe and Central Asia Dummy 0.0927*** -0.0110 Model 2 0.000255 -1.480 -0.0694* 0.000061 Model 1 East Asia and Pacific Dummy Religiosity (% adults) Muslim Population (% total population) (2005 international thousand USD) GDP (2005 Billion USD) GDP per Capita, PPP Table 1: Determinants of Financial Exclusion Due to Religious Reasons
  140. of religious reasons . In other words, if the earlier findings are true, one should expect to see a negative relationship between the density of Sharīʿah compliant financial services and the percentage of adults that are unbanked due to religious reasons. Table 2, provides some evidence supporting this hypothesis. The negative and statistically significant coefficients for two different measures of density of Sharīʿah compliant assets show that, after controlling for other relevant factors, the percentages of people who report religious reasons for not having an account in formal financial institutions are lower in countries where Islamic finance has stronger presence in the banking sector of the economy. Put differently, one could expect that as the density of Sharīʿah compliant assets increase, the share of unbanked people because of religious reasons decrease. Table 2: Density of Sharīʿah Compliant Assets and Financial Exclusion Due to Religious Reasons GDP (2005 Billion USD) GDP per Capita, PPP (2005 international thousand USD) Religiosity (% adults) Muslim Population (% total) Middle East and North Africa Dummy Commercial Bank Branches per 1000 km2 Ratio of Sharīʿah Compliant Assets to Total Assets (%) Sharīʿah Compliant Assets per Adult (1000s USD) Observations R-Squared Model 1 0.000527*** Model 2 0.000420*** -0.0791* 0.00559 0.0718*** 11.97*** 0.00748** -0.296*** -0.0405 0.0102 0.0623** 11.31*** 0.00636* 85 0.588 -0.563*** 86 0.557 Note: OLS regression with robust standard errors. * p<0.10, ** p<0.05, *** p<0.01. Dependent variable is the percentage of adults reporting religious reason for not having an account which is taken from the Global Findex. Only those variables that were significant in at least one of the models in Table 1 were included in these regressions. Sharīʿah compliant (Islamic) assets and total assets are from BankScope. This suggests that increasing the presence of formal Sharīʿah compliant financial services in countries with considerable Muslim population could reduce the level of voluntary exclusion from formal financial institutions due to religious considerations. At the very minimum, this is certainly true for at least 13 million adults who, according to Global Findex Dataset, cited only and only religious reasons for not having an account, more than 11 million of which reside in OIC member countries. Furthermore, Table 3 provides some anecdotal evidence that increasing the share of Sharīʿah compliant assets vis-à-vis total banking assets in a country can help reduce the percentage of small firms who cite access to finance as a major obstacle in their operations. This is in line with the fact that small firms are often managed and operated by members of a family, where religious considerations are more likely to enter their financing decisions than larger firms which are often operated by professional executives who might also be from non-Islamic backgrounds and thus have lesser or no care towards Sharīʿah compliant financing. 112 Book 2.indd 140 10/16/17 4:57 PM
  141. Table 3 : Density of Sharīʿah Compliant Assets and Financial Obstacles of Firms GDP (2005 Billion USD) GDP per Capita, PPP (2005 international thousand USD) Religiosity (% adults) Muslim Population (% total) East Asia and Pacific Dummy Europe and Central Asia Dummy Latin America & the Caribbean Dummy Middle East and North Africa Dummy South Asia Dummy Sub-Saharan Africa Dummy Commercial Bank Branches per 1000 km2 Ratio of Sharīʿah Compliant Assets to Total Assets (%) Observations R-Squared All Firms 0.00527 Small Firms 0.00256 Medium Firms 0.00437 Large Firms 0.0117 -0.648* 0.0449 -0.0107 -7.151 6.191 2.243 14.63 -2.692 17.36* 0.0419 -0.670** 0.0903 -0.0219 -4.761 8.228 3.251 21.39*** -1.287 20.30** 0.169 -0.466 -0.0282 0.00266 -0.674 6.648 5.120 22.01 3.233 19.21* -0.0225 -0.578 0.0311 0.00703 -14.36 4.250 -6.898 38.76 -7.182 0.186 -0.214 -0.0723 68 0.475 -0.157*** 68 0.482 -0.389 68 0.375 -0.744 68 0.384 Note: OLS regression with robust standard errors. * p<0.10, ** p<0.05, *** p<0.01. Dependent variable is the percentage of firms reporting access to finance as a major obstacle in their operations which is from World Bank Enterprise Survey. Only those variables that were significant in at least one of the models in Table 1 were included in these regressions. Sharīʿah compliant (Islamic) assets and total assets are from BankScope. 1.5. Islamic Finance and Financial Inclusion in other Studies and Reports In addition to the empirical results above, several recent case studies from other regions have also highlighted the potential role of Islamic finance in reducing voluntary financial exclusion among the Muslim population in both Muslim majority and minority countries. For example, Adeyemi, Pramanik, and Meera (2012) shows that Islamic microfinance can in fact provide financial services to a considerable segment of Nigerian society whom for religious reasons avoid dealings with conventional financial institutions. Also, according to the 2006 Sachar Committee Report on the status of minorities in India, share of Muslims in amount outstanding is about 4.6% while that of other minorities is about 6.5%, which is disproportionate to their share in India‘s population (13.4% for Muslims and 5.6% for other minorities). Therefore, in a joint report prepared by Infinity Consultants and Ethica Institute of Islamic Finance, it is proposed that only through increasing the presence of Islamic Finance in India‘s financial fabric, the Indian government can increase the use of financial services by its largest minority group, the 180 million Muslims residing in India,48 adding to the economic growth of India while at the same time increasing the wellbeing of and reducing poverty among its poverty-ridden Muslim population. 48 See http://www.ethicainstitute.com/webinar/Achieving_Financial_Inclusion_For_Indian_Muslims.pdf. 113 Book 2.indd 141 10/16/17 4:57 PM
  142. Over the past few years an increasing number of Muslim and non-Muslim policymakers , bank governors, and politicians have also shown growing interest for a more pronounced presence of Islamic finance in the global financial architecture because of its potentially important role in enhancing financial inclusion. In her Islamic Development Bank (IDB) Prize Lecture On November 2013, Governor Zeti Akhtar Aziz, Governor of the Central Bank of Malaysia (Bank Negara Malaysia), referred to the potential role of Islamic financing models in enhancing financial inclusion. 49 Again, in November 2013, the governor of Central Bank of Nigeria, Mr. Lamido Sanusi, identified Islamic finance as having the capacity of increasing financial inclusion among a large segment of population in Nigeria.50 In September 2013, Mr. Nestor Espenilla, deputy governor of the Bangko Sentral Pilipinas (BSP), Philippines' central bank, laid out one of the most ambitious efforts in the world in introducing Islamic finance in a Muslim-minority country, in an effort to enhance financial inclusion among the Muslim population of Philippines.51 Finally, on December 2013, IMF‘s Director of Middle East and Central Asia Department, Mr. Masood Ahmed, highlighted the fact that if properly regulated, faster expansion of Islamic finance in MENA can lead to higher levels of financial inclusion among religiously minded population.52 1.6. Concluding Remarks Based on the above, it is therefore safe to suggest that Islamic (aka Sharīʿah compliant) finance can play an important role in enhancing financial inclusion among the unbanked adults in OIC member countries. For example risk-sharing contracts (such as Murābaḥah, Mushārakah, and Muḍārabah) as well as wealth redistribution instruments in the Islamic financial system (such as Zakāt, Ṣadaqah, and Qarḍ Ḥasan) are the two main mechanisms through which Islamic finance could promote financial inclusion, boost shared prosperity, and reduce poverty and inequality. Sharīʿah compliant risk-sharing contracts can provide access to finance and insurance (Takāful) for micro, small and medium enterprises (MSMEs). This is crucial because as pointed by World Bank‘s Enterprise Survey somewhere between 30 and 40 percent of all small and medium sized firms in MENA countries identify access to finance as a major constraint in their operations. Furthermore, built in the Islamic law and code of ethics is mandatory and voluntary almsgiving known as Zakāt and Ṣadaqah respectively, with Qarḍ Ḥasan falling between the two (as discussed below). Through analyzing the available data for nine MENA countries, Mohieldin et al. (2012) find that if implemented effectively, Zakāt funds in all these countries, is more than sufficient to eliminate the extreme poverty measured as having an income of less USD 1.25 a day.53 49 See http://www.bis.org/review/r131129b.htm. See http://www.tribune.com.ng/news2013/index.php/en/business-package/2012-10-29-11-3627/maritime/item/25771-islamic-finance-has-potential-for-financial-inclusion-sanusi.html. 51 http://www.gmanetwork.com/news/story/328419/economy/moneyandbanking/bangko-sentral-s-islamic-bankingbid-to-boost-financial-inclusion-of-muslims 52 See http://www.imf.org/external/mmedia/view.aspx?vid=2916041477001. 53 These countries are Algeria, Djibouti, Egypt, Iran, Iraq, Jordan, Morocco, Syria, and Yemen. 50 114 Book 2.indd 142 10/16/17 4:57 PM
  143. It must however be pointed out that while increasing the availability of Islamic finance is a necessary ingredient for increasing access to finance and insurance for the poor households and MSMEs , other supporting factors such as adequate physical, legal, financial, regulatory, and educational infrastructure must also be in place for Islamic finance to operate effectively and efficiently. It is a reality, that most OIC member countries lack many of these necessary prerequisite, creating extra hurdles for growth and efficient operation of Sharīʿah compliant financial institutions in OIC member countries. As a result community based local financing schemes seem to be the most appropriate avenue for boosting financial inclusion among the estimated 700 million poor residing in OIC member countries. Murābaḥah (cost plus mark-up sale contract) and Qarḍ Ḥasan (i.e. benevolent interest free loan) are examples of such locally oriented Islamic financing programs which are also the most popular forms of Islamic microfinance schemes in the MENA region and other Muslim majority countries such as Indonesia, Pakistan, and Bangladesh (Figure 7). These schemes are practically risk-free financial instruments suitable for the vulnerable and the poor who would otherwise have no other form of access to financial services, increasing their chance to move out of poverty by potentially providing a temporary financial breathing space, increasing financial literacy and capability, and building credit history. Figure 7: Islamic Microfinance Schemes, Number of Active Clients, by Product Type Source: El-Zoghbi and Tarazi (2013). Note: Countries included are Afghanistan, Bangladesh, Burkina Faso, Cambodia, Cameroon, Côte d'Ivoire, Egypt, Iraq, Indonesia, Jordan, Kosovo, Lebanon, Pakistan, Palestine (West bank and Gaza), Saudi Arabia, Sri Lanka, Sudan, Syria, and Yemen. PART II 2. Qarḍ Ḥasan In order to gain a better understanding of Qarḍ Ḥasan (QH), it is necessary to juxtapose this financial instrument with some of the other main Islamic financial instruments. Therefore, a brief list and explanation of each of the main Islamic financial instruments is provided below: Muḍārabah (Profit-Sharing). Supplier of capital contracts with a working partner on the basis of sharing the resulting profits. Losses, if any, are considered loss of capital and borne by the owner 115 Book 2.indd 143 10/16/17 4:57 PM
  144. of capital . The working partner, in that case, goes unrewarded for its efforts. This is the ‗loss‘ borne by the working partner, a feature of Muḍārabah which has made some to characterize it as profit and loss sharing (PLS). The sharing contract when applied to farming is called Muzāraʿah or share-cropping. Sharikah or Mushārakah (Partnership). In partnership two or more parties supply capital as well as work/effort. They share the resulting profits according to agreed proportions, but losses are to be borne in proportion to respective capitals. Murābaḥah. A sale agreement under which the seller purchases goods desired by a buyer and sells it to him/her at an agreed marked up price, payment being deferred. It is also referred to as Bayʿ Mu‟ajjal or Bayʿ bi-Thaman Ājil. It is a modern adaptation of an earlier contract in which deferment was not necessarily involved. The higher price paid would leave a margin for the seller in order to reward him/her for expertise in bargaining, better knowledge of market conditions, etc. Wakālah (Agency). Business is managed by an agent appointed by the principal-owner. Agent‘s compensation may take different forms. Juʿālah. Reward which is given on successful completion of a specified job. There is no compensation in case of failure. Ijārah. It refers to the leasing of a property, capital good, or any other good. Salam (Future Contract). Payment is extended now for agricultural products to be delivered at a specified time in future with the price being agreed now. Istiṣnāʿ. Salam applied to manufactured goods, with the possibility of payment in installments as the goods are delivered. ʿUrbūn. Depositing a small fraction of price in a deal to be concluded in future. It binds the seller to wait but allows the buyer to back out of the deal, with the seller keeping the deposit. Qarḍ (Interest-free Loan). The only acceptable loans in IFIs are interest free loans. Qarḍ Ḥasan (The Benevolent Loan). It is a charitable loan which, in addition to being a Qarḍ (interest-free loan), also contains elements of goodwill, benevolence, and generosity. Zakāt (Mandatory). Money or any form of capital donated to the poor on a mandatory basis, the rates and conditions of which are stipulated by the Sharīʿah. Ṣadaqah (Voluntary Alms). Money or any form of capital donated to the poor on a voluntary basis. From the above list, it become immediately clear that the instruments of Qarḍ, Qarḍ Ḥasan, 116 Book 2.indd 144 10/16/17 4:57 PM
  145. Zak āt, and Ṣadaqah are particularly fitting to address the financial needs of the vulnerable54 and the poor. This is because the poor are often highly risk averse and are therefore unwilling to participate in business contracts such as Muḍārabah and Mushārakah that have some elements of risk associated with them. Furthermore, the poor usually lack the necessary physical and human capital as well as basic financial literacy and capability to establish and maintain successful business and financial partnerships. As a result, Qarḍ, Qarḍ Ḥasan (QH), and Zakāt, and Ṣadaqah are the most appropriate financial instruments to address the consumption and investment needs of the vulnerable and the poor. 2.1. Qarḍ Ḥasan: Qarḍ and Iḥsān QH is composed of two elements that are clearly laid out in its name: Qarḍ (interest-free loan) and Iḥsān (goodwill, benevolence, and generosity). Mirakhor and Iqbal (2007) provide a detailed discussion of QH terminology and the relevant Quranic verses referring it. Below, some of the main Sharīʿah guidelines of QH as it pertains to its elements of Qarḍ and Iḥsān are highlighted separately. First, let‘s highlight the main Sharīʿah requirement for the Qarḍ component of QH: 1. A contract is completed in accordance to Islamic guidelines. 2. The lender may ask the borrower for collateral or guarantee. 3. While the borrower has to repay the principle, s/he is not obligated to make any form of interest payments for the loan. 4. The lender cannot request a payment from the borrower prior to the agreed date stipulated on the contact. 5. If the borrower manages to make positive profits, the lender should not expect to receive any portion of it. 6. The borrower may only use the loan for the agreed activity(s) stated in the contract. If the borrower fails to do so, the contract is voided and the lender can request for an immediate repayment of the principle. 7. In the case of borrower‘s default, the lender may not take possession of the borrower‘s basic living needs (shelter, cloth, food, and the capital by which the borrower makes a living for himself and his dependents). Now, some of the features associated with the Iḥsān element of QH are highlighted. All of these features are rooted in the Islamic code of conduct (Akhlāq) that is driven from many Quranic verses and traditions of the Prophet Muhammad (i.e. Aḥādīth): 1. The lender is willing to extend a QH loan without requesting a collateral and/or guarantor. 2. If the borrower, due to factors beyond his control, fails to adhere to the terms of contract, the lender is willing to be benevolent and flexible towards the borrower. Furthermore, if the borrower, because of unexpected events and factors beyond his control, defaults on the loan, the lender is willing to forgive or restructure the debt. This would essentially convert a QH into Ṣadaqah. 54 In this study the vulnerable are referred to those group of technically non-poor people whom if not assisted can slip into poverty. 117 Book 2.indd 145 10/16/17 4:57 PM
  146. 3 . The lender is expected to reserve the usage of social55 and legal enforcement mechanisms only for scenarios where the borrower is using the QH funds in an irresponsible and wasteful manner and in ways that is contrary to the original QH contract. 4. In cases of default or latency in the payment, if the lender does not forgive the debt, the borrower is expected to abide by the terms of the contract as soon as he is able to do so. An intentional failure in this regard by the borrower is considered to be a sinful (Haram) act and must be avoided. From the above one can safely argue that QH is an Islamic financial instrument that stands somewhere between Qarḍ and Ṣadaqah. In other words, when Iḥsān (or goodwill, benevolence, and generosity) is applied to a Qarḍ contract, it will convert Qarḍ into a QH. Furthermore, in case of unexpected and genuine financial hardships of the part of the borrower, through forgiving some or all of the QH loans, a QH can in turn be turned into Ṣadaqah; in such a scenario, Iḥsān is clearly applied at its maximum level of forgiving the debt. It must be emphasized here that Iḥsān elements of QH must not explicitly be written in the QH contract and are practiced on purely volunteer basis by the lender. Therefore, a QH contract starts as regular interest-free loan (Qarḍ) agreement and only when the lender relaxes some or all of the terms of the Qarḍ contract and acts in a charitable manner towards the borrower, the original interest-free loan (Qarḍ) would be converted to QH and possibly Ṣadaqah (Figure 8). Figure 8: Relationship between Qarḍ, Qarḍ Ḥasan, and Ṣadaqah Qarḍ (Interest-Free Loan) Iḥsān (Lender’sْ Benevolence) Qarḍ Ḥasan (Benevolent Loan) Maximum Iḥsān (More Lender’sْ Benevolence) Ṣadaqah (Voluntary Charity) It therefore becomes clear that there is a common misunderstanding in the literature where Qarḍ is often seen and treated as synonymous to QH. While every QH, because of being an interestfree debt is a Qarḍ, the reverse is not true. Farooq (2010) discusses this issue in length and emphasizes the fact that an interest-free loan is simply a Qarḍ and not a QH because Sharīʿah requires every loan or Qarḍ to be interest-free in the first place. In other words, Sharīʿah does not recognize interest bearing lending as Qarḍ. Such lending are termed as Qarḍ Ribawī highlighting the fact that the term Qarḍ in Sharīʿah is referring to interest-free lending, making QH to be something beyond interest-free lending (Figure 9). So, in a nutshell: Qarḍ Ribawī: is an interest-bearing loan that is considered as a grave sin by Sharīʿah and thus forbidden. Qarḍ: is an interest-free loan that is recognized as lawful by Sharīʿah. Qarḍ Ḥasan: is an interest-free loan (Qarḍ) that has elements of Iḥsān or benevolence. 55 Shame and reputation. 118 Book 2.indd 146 10/16/17 4:57 PM
  147. 119 Book 2 .indd 147 10/16/17 4:57 PM
  148. Figure 9 : Venn Diagram of All Lending: Qarḍ Ribawī, Qarḍ, and Qarḍ Ḥasan All Lending Qarḍ (Interest-Free QarḍْRibawī Lending) (Interest-bearing Lending) Qarḍ Ḥasan (Benevolent Interest-Free Lending) Forbidden by Sharīʿah Allowed by Sharīʿah Therefore, the majority of the so-called formal QH funds and institutions in Muslim countries actually operate on Qarḍ principles as the elements of Iḥsān are widely missing through the application of different kinds of fees including late repayment fees and the requirement of collateral. 2.2. Financial Needs of the Poor: Qarḍ Ḥasan vs. Qarḍ and Zakāt/Ṣadaqah The poor are heterogeneous in the factors leading to their poverty and needs.56 Given the specific conditions and circumstances, one or more of Qarḍ, Qarḍ Ḥasan, and Zakāt/Ṣadaqah can be more effective in addressing the needs of the poor and vulnerable. It is therefore necessary to have a general understanding as to which of these instruments are more suitable in a certain set of conditions and economic and cultural contexts. 2.3. Qarḍ Ḥasan vs. Zakāt/Ṣadaqah 56 Some factor that contribute to the heterogeneity of the poor are:  Biological/Physiological The poor have different needs and capabilities based on their gender, age, health condition, and genetics.  Geographical Geography imposes its own constraint on the available options to the poor and explains some of the causes of poverty.  Cultural Poverty is defined, interpreted, and looked at differently across cultures. Furthermore, different cultures have different mechanism for fighting poverty. Therefore, cultural differences play major role in the heterogeneity of the poor population.  Durational Protracted poverty leads to highly different needs than temporary and unexpected poverty. Therefore, the duration of poverty is yet another characteristic that adds to heterogeneity of the poor.  Personal Each person‘s background, personal experiences, outlook on life, and future goals is different from others. Therefore, even if a group of poor people were homogenous based on the above mentioned factors they are not homogenous at personal level. 120 Book 2.indd 148 10/16/17 4:57 PM
  149. Besides the many legal and contractual differences between Zak āt/Ṣadaqah and QH, there are many differences between these two instruments in as far as their applicability and efficiency are concerned. First is related to the heterogeneous nature of poverty and characteristics of the poor. Given that QH funds are often much larger in size and less frequent than Zakāt/Ṣadaqah, they are suitable to finance human capital investment and entrepreneurial activities of the poor or those who are threatened by poverty in the near future if not financially supported now. As a result QH is and Zakāt/Ṣadaqah is not a suitable financing mechanism for those poor and vulnerable who are financially savvy and have financial and entrepreneurship capabilities but lack the initial capital. Furthermore, in cases where one‘s poverty is a direct result of lack of access to education and formal financial institutions or because of sudden adverse shocks,57 QH is again a better form of financing, because in such cases the borrower has a better chance to grow out of poverty in near future and repay the debt in a timely manner. Moreover, QH is and Zakāt/Ṣadaqah is not an appropriate instrument to prevent potential poverty in the future among those people who are not currently poor but have high likelihoods of slipping into poverty if not financially assisted now. This is because, in the Islamic legal system, Zakāt/Ṣadaqah funds are not to be allocated to those who are not currently poor. Student with little or no income or financial support are one clear example. If not financially supported throughout their schooling years, many borderline poor students would have to drop out of school and join the labor force, significantly jeopardizing their future income trajectory and economic wellbeing, the negative impacts of which may also pass to future generations. Zakāt/Ṣadaqah are appropriate forms of financing for those poor who have little to no outlook, at least in the near future, to become economically productive and overcome poverty. Such people include the elderly, the children, the refugees, and the permanently ill and the mentally or physically challenged. Second, while QH and Zakāt/Ṣadaqah both depend on the benevolence and goodwill of the lenders and donors, when compared to Zakāt/Ṣadaqah, QH is associated with a number of advantages as it motivates a more responsible set of decisions and behaviors on the part of the borrowers as well as the lenders. In comparison to Zakāt/Ṣadaqah, QH is more likely to encourage financial responsibility, productivity, and hard work on the part of the borrower while there is no such mechanisms in Zakāt/Ṣadaqah. The recipients of the QH, in order not jeopardize their image and honor in the local community and credit worthiness for future financial contracts, would be more motivated to abide by the terms in a QH contract to the best of their ability. As a result, they will be more inclined to exert more effort and to be more cautious and prudent in their expenditures, investments, and other economic activities. On the other hand, such motivations are lower or altogether missing for Zakāt/Ṣadaqah recipients as they have no financial and contractual obligations towards the donors, leaving them with no external pressures and monitoring. Therefore, while in the long-run QH increases financial responsibility, prudence, and independence among its recipients, Zakāt/Ṣadaqah may perpetuate financial dependence and recklessness. QH may also encourage the benevolently minded donors or lenders to act in a more responsible 57 Such as national/global economic shocks, unfavorable family circumstances, medical situations, natural disasters, accidents, loss of employment, theft, and simply a bad business decision. 121 Book 2.indd 149 10/16/17 4:57 PM
  150. manner . This is so because a QH lender is entering an interest-free lending (Qarḍ) contract with a borrower and therefore expects to be paid back in full and timely manner. This expectation motivates the QH lender to be cautious in his benevolent lending practices and is more likely to extend QH loans to only those individuals who seem to be financially dependable and responsible with a high probability of repaying the principle and abiding by the terms of the contract. As a result a QH lender will be motivated to acquire as much information about a borrower as possible, his particular economic conditions and needs, and the ways in which he is envisioning to use the QH funds. In the case of Zakāt/Ṣadaqah, however, because the donors do not expect repayments, they take little to no care on who the recipients are and how the Zakāt/Ṣadaqah are to going to be utilized. As a result of this lower level of care and prudence on the part of the recipients and donors, Zakāt/Ṣadaqah donations, which are often much smaller in size but more frequently distributed than QH, have higher probability of being inefficiently handed out and utilized or even end up in the hands of those who are not truly deserving of alms. This fact is highlighted in a Ḥadīth from the Prophet Muhammad (peace be upon him and his progeny) where he considers Qarḍ (and by extension QH) as more preferable to Zakāt/Ṣadaqah. In this Ḥadīth reported by Imam Ja‟far Ibn Muhammad al-Sadiq as well as by Ibn Hisham & Ibn Majah, the Prophet (peace be upon him and his progeny) is reported to have said:58 ْ،ْ‫ْالٌْانًستقزضْالٌْستقزضْاالْيٍْحاجح‬،ْ‫ْْٔاًَاْصارْانقزضْأفضمْيٍْانصدقح‬،ْ‫ْْٔانقزضْتثًاٍَحْعشز‬،ْ‫ْانصدقحْتعشزج‬:ْ‫يكتٕبْعهىْتابْانجُح‬ ‫ْٔقدٌْطهةْانصدقحْيٍْالٌْحتاجْإنٍٓا‬ It is written on the gate of the paradise: The reward for Ṣadaqah is tenfold and the reward for Qarḍ is eighteen times; and Qarḍ bas become superior to Ṣadaqah because a borrower will not borrow except because of need while a person who does not need Ṣadaqah may ask for it. Third, compared to Zakāt/Ṣadaqah, QH develops stronger sense of solidarity between lenders and borrowers. This is because QH lenders, in an effort to increase the probability of full repayment, are more motivated to get to know the borrowers at personal levels and to keep an open communication channel with the borrowers throughout the duration of the contract. Overcoming the communication gap that often exists between the ―haves‖ and ―have-nots‖ will inevitably lead to the development of stronger solidarity between these two groups, reducing or altogether removing social barriers that have often perpetuated poverty and inequality in a community. Fourth, QH can be more conducive for economic development and poverty reduction than Zakāt/Ṣadaqah. This is because QH recipients are more likely to be financially deserving, prudent, and responsible than Zakāt/Ṣadaqah recipients. Therefore, one could expect for QH to result into better allocation of scare financial resources than Zakāt/Ṣadaqah which as argued above run higher risks of misallocation and inefficient usage. Moreover, the repayment element of QH would make it possible for these generously motivated funds to be circulated among several individuals or families in need. Finally, being larger in size, the recipients of QH could benefit from the economies of scale. As a result, QH is more suitable for the purposes of human capital development as well as financing of small business ventures while Zakāt/Ṣadaqah are 58 See Mustadrak al-Wasaa‘il. volume 12. page 363. 122 Book 2.indd 150 10/16/17 4:57 PM
  151. often used for immediate consumption needs . Fifth, in an effort to increase the likelihood of full and timely repayment of the loans, the lenders of QH are more likely to be motivated to assist the borrowers through other financial and nonfinancial means such as knowledge transfer, marketing and networking, and financial/technical consultation. These elements can make QH a better instrument than Zakāt/Ṣadaqah in contributing to more robust and stable long-run economic growth, while at the same time reducing the incidence and severity of poverty and inequality among current and future generations. Finally and probably most important of all, is the issue of protecting the honor and dignity of the poor. There is little disagreement on the importance of protecting the honor and pride of the poor and in fact many Aḥādīth also refer to it as a central element for human capital of individuals. Contrary to Zakāt/Ṣadaqah, QH has the advantage of protecting the honor and dignity of its recipients, as they consider themselves borrowing on favorable terms and not receiving alms and charity. Only in unfavorable conditions beyond ones control where the lender converts the QH into Zakāt/Ṣadaqah by forgiving the debt, this advantage of QH may become less applicable. Overall then, from the several angels discussed above, QH is a more effective financial instrument to address the needs of those who are likely to move into poverty if not financial assisted now or those poor who have a higher likelihood of moving out of poverty if financial helped now. On the other hand, Zakāt/Ṣadaqah funds should mainly be channeled to those poor who have little or no likelihood of moving out of poverty and have survival needs (such as food, medical care, and shelter) that must be immediately addressed. 2.4. Qarḍ Ḥasan vs. Qarḍ As mentioned earlier Qarḍ refers to an interest-free loan contract that may also include other mutually agreed conditions such as the necessity of collateral and guarantor and penalties for late payments. Therefore, the element of Iḥsān in QH makes this instrument more attractive to the poor than a pure Qarḍ contract because in cases of unpredictable financial hardships the poor can expect to receive a benevolent treatment from a QH lender whereas such expectations are absent in a purely Qarḍ contract. As a result, some of the poor who shy away from Qarḍ or other financial contracts may in fact welcome QH. Qarḍ is most suitable for the non-poor who are financially more stable and need extra sources of financing to cover unexpected expenditures or undertake a planned economic activity such as purchasing a real estate or starting or expanding a business. Also, many of the poor lack adequate collateral or guarantor, creating obstacles for them to access Qarḍ contracts. To sum, for the vulnerable and poor, QH has many economic, social, and psychological advantages over Zakāt/Ṣadaqah and Qarḍ. Keeping in mind the heterogeneous nature of poverty and economic vulnerability, QH and Zakāt/Ṣadaqah are complements rather than substitutes. Each of these instruments is effective and efficient in addressing certain financial needs of specific groups of the poor and those who are socially and financially marginalized. However, while QH is associated with many economic, social, and psychological advantages, it is not practiced at a wide scale potential tool for reducing or preventing poverty in Muslim majority 123 Book 2.indd 151 10/16/17 4:57 PM
  152. countries . Instead, what is being widely practiced in the name of QH is Qarḍ where various elements of Iḥsān are altogether missing making such financing schemes inaccessible to the poor and vulnerable. In turn, Zakāt and Ṣadaqah have been the dominant forms of assisting the poor and the vulnerable regardless of heterogeneous causes of their poverty and differences in the level of their human capital and capabilities, leading to serious misallocations of scarce resources that are set aside for the poor. It can therefore be concluded from this discussion that QH, through the various reasons highlighted above, has the potential of paving the path for the unbanked population to eventually become bankable. In other words, while QH can increase financial inclusion among the poor and the vulnerable, Zakāt/Ṣadaqah don‘t have such mechanisms built into them. This is because QH has the potential of increasing human and physical capital of the less privileged and reduce their social marginalization, making them better positioned to engage in Qarḍ and other financial transactions in the future. 2.5. Sustainable Mechanism for the Implementation of Qarḍ Ḥasan Funds While the above theoretical outcomes make QH an attractive instrument for implementation through formal channels, serious practical challenges have hindered this to materialize. The first main obstacle relates to the above discussed misunderstandings surrounding QH and its widespread confusion with Qarḍ. As a result, when extending ―Qarḍ Ḥasan”, majority of formal IFIs in reality are offering Qarḍ and therefore often collect processing fees and require collaterals and guarantors. Not only are these policies in clear contradiction with the element of Iḥsān (benevolence and generosity) highlighted above, they discourage or make it difficult for the vulnerable and the poor to enter a QH contract, therefore increasing their dependence on Zakāt and Ṣadaqah and reducing their chances of ever becoming financially included and independent. To address this issue, IFIs and Islamic finance training centers need to engage in concerted training and information disseminating campaigns to clearly and more accurately present QH to policy makers, financial institutions and the general public and highlight its various features and potentials for the vulnerable and the poor while also explicitly distinguishing it from Qarḍ. The second challenge relates to the distinguishing element of QH from Qarḍ: Iḥsān. As discussed earlier, in genuine QH contracts the lenders are willing to act benevolently and generously towards the receivers of the QH funds who face financial hardships beyond their control and are incapable to keep up with the initial terms of the contract. This will clearly undermine the long-run sustainability and operation of QH funds as the sums lent out may not get fully recovered in timely manner, posing liquidity challenges for QH funds. Also, one cannot ignore the effect of inflation on sustainability and effectiveness of QH lending, where the purchasing power of the sums lent out as QH are reduced in inflationary environments, which is characteristic of many majority Muslim populated countries. The following few paragraphs will address some of this issues. First, the novel definition of QH presented above, will permit Zakāt and Ṣadaqah funds to also be employed for QH lending to the poor who have the potential of moving out of poverty if provided with adequate financial assistance to boost their human capital or jump start their 124 Book 2.indd 152 10/16/17 4:57 PM
  153. entrepreneurial activities . It is important here to emphasize here that QH lending using Zakāt and Ṣadaqah funds is only applicable to the poor and not the non-poor who run the risk of moving into poverty. QH lending to the non-poor facing risks of poverty, needs to be funded through other source of charitable lending. Donors of Zakāt and Ṣadaqah don‘t expect to get paid back and their intention is to assist the poor through financial transfers. However, as discussed earlier, a group of poor, if financially assisted, have the potential of moving out of poverty and returning the financial assistance they have received. Considering this fact, Zakāt and Ṣadaqah funds could be transferred to this group of poor in form of QH. Thereafter, the portion of QH loans that are recovered can again be transferred to other poor families in packages of more QH loans and the portions that are not recovered are simply forgiven and translated into Zakāt and Ṣadaqah from operational and Sharīʿah perspective (Figure 10). Through such QH lending process, a portion of Zakāt and Ṣadaqah funds can reach more than one poor individual or family, not only increasing the coverage of the limited Zakāt and Ṣadaqah funds, but also increasing their effectiveness in boosting human and physical capital through the channels highlighted earlier. Thus, the usage of Zakāt and Ṣadaqah to fund QH lending to the poor will enhance the sustainability of QH lending to poor families in the long-run. Figure 10: Transfer of Zakāt and Ṣadaqah through Grant and QH Lending Pool of Zakāt and Ṣadaqah Funds Transfer as QH to those poor who have a good probability of moving out of poverty Move out of Poverty Remain in Poverty Full or Partial Repayment of QH No Repayment, Writing-off QH Transfer as grants to those poor who have little or no probability of moving out of poverty Second, in an effort to protect the purchasing power of QH funds against inflation and therefore increasing the sustainability of such funds in the long-run, these loans could be delivered in real terms in form of goods and services. The recipients of QH loans could then be requested to refund the monetary equivalent of those goods and services. Although, this may seem equivalent to charging nominal interest rates equivalent to the rate of inflation, it is perfectly permissible under the Sharīʿah. Furthermore, some Sharīʿah scholars have permitted the charging of nominal interest rates up to the rate of inflation, arguing that money is not a commodity and is simply a medium of exchange and it would be unjust for the donor of Qarḍ or QH to experience loss of purchasing power due to inflation. Not only these measure would protect the QH funds against 125 Book 2.indd 153 10/16/17 4:58 PM
  154. inflation , it will also encourage the borrowers to start repayment as soon as they are able to do so, therefore increasing the rate of recovery of QH funds. Third, considering the multifaceted benefits of QH and its advantageous position over Zakāt and Ṣadaqah to prevent and reduce poverty, local and central governments should establish publicly funded but locally operated QH institutions. In this scenario, some of the funds allocated to public welfare programs can be channeled through QH lending to the poor and vulnerable who are already qualified to receive public welfare assistances. Fourth, efforts should be undertaken to change public‘s behavior and perception towards Ṣadaqah, Qarḍ and QH. Namely, the public should be actively informed of two facts: a. In as far as Islamic teachings is concerned, Qarḍ and QH is superior to Ṣadaqah, and carries more rewards with Allah (SWT). b. QH is a more effective form of financial assistance to the poor and vulnerable and it has a better potential to reduce and/or prevent poverty in a more sustainable manner. Indisputably, religious scholars play a crucial role in this front. A shift of public perception in favor of QH over Ṣadaqah, will channel some of the Ṣadaqah donations towards QH funds, increasing its funding base and therefore its sustainability. Fifth, borrowers of QH are usually non-banked and don‘t have access to formal financial services for various reasons including lack of credit history. In such a scenario, if QH loans are considered and recorded as part of one‘s credit history, it can be employed as a gateway to access other formal financial services. Therefore, in an effort to protect their social as well as financial reputation and credit worthiness to gain access to future loans, borrowers of QH are motivated to abide the terms of the contract and try to limit the feature of Iḥsān of QH as much as possible. The establishment of agencies that keep track of borrowers‘ credit and financial history would be an additional source of motivating for borrowers to keep their credit history clear from any contract britches, therefore increasing the recovery rate of QH loans. Sixth, Waqf funds dedicated for social welfare programs, could be utilized to fund QH institutions and fill the funding gaps arising from default or late payments. For example, if a Waqf is to finance the education of the needy, a portion of that Waqf could be transferred in the form of educational QH to those poor and vulnerable who have a good likelihood of repaying the loan. Finally, the recovery rate of QH loans can be increased through increasing human capital of QH recipients and reducing their marginalization in the society. Being financial excluded is strongly correlated with social exclusion and marginalization. Individuals that are social excluded will be less responsive to social pressures and less worried about loss of social reputation and therefore might feel less compelled to abide by the term of a QH contract. Considering that the recipient of QH are more likely to be social excluded, any effort to increase their social inclusion will also lead to increasing their willingness and ability to abide by the terms of a QH contract, therefore increasing their likelihood for also becoming financially included in the future. 126 Book 2.indd 154 10/16/17 4:58 PM
  155. Many of the suggested solutions above for increasing the sustainability of QH funds are actually being implemented in at least one Islamic microfinance institution that has been offering QH loans to more than 900 ,000 families over the past decade and a half. The next part provides a brief case study of this institution which is headquartered in Pakistan, namely Akhuwat. PART III 3. Islamic Microfinance Based on Qarḍ Ḥasan in Pakistan: A Case Study of Akhuwat Similar to the ratio of Islamic finance to conventional finance, globally Islamic Microfinance constitutes less than 1% of the overall microfinance sector and so it is in its embryonic stages.59 By the end of 2014, Pakistan‘s Microfinance Industry had assets above USD 983 million, getting close to the milestone of 3 million active borrowers. The active borrowers have increased from 1.6 to 2.8 million with more than half of the borrowers being women. Operating Self-Sufficiency (OSS) and Financial Self-Sufficiency (FSS) increased by 121% and 120% respectively whereas the Portfolio at Risk (PAR>30) ratio has fallen to 1.1%.60 In 1998, Pakistan Microfinance Network was set up to represent and regulate the emerging Microfinance Institutions. In 2000 Pakistan Poverty Alleviation Fund (PPAF) was established with the help of World Bank to provide wholesale refinancing to Microfinance Institutions. The first microfinance bank, Khushali bank was established in 2000. Three different platforms followed in Pakistan are, Microfinance Banks, Microfinance Institutions and Rural Support Programs.61 With only 14 Islamic microfinance institutions operating in Pakistan, this industry is still in its infancy stages.62 However, in Pakistan, the microfinance industry charges interest. Because of Sharīʿah requirements and also the fact that interest-free loans reduce the financial burden on the poor, such loans are more popular among Pakistani society. Programs such as Punjab Rural Support Program loses the spirit of helping the poor when it charges interest rate of up to 20%, making the repayment of the loan impossible by many of the needy borrowers. On the other hand, for the institutions giving out interest-free loans, sustainability becomes a major issue. The extensive growth strategy adopted by the sector results in huge investments in physical infrastructure and rapid increases in recruitment. This has led to high costs per borrower and low efficiency ratios, creating challenges for the sustainability of these institutions.63 To fill in the gap, a few organizations has been established with the primary objective of serving the poor through offering interest-free loans. Microfinance institutions providing Sharīʿah 59 See http://www.cgap.org/blog/islamic-microfinance-pakistan-experience-so-far. See Pakistan Microfinance Network (2014). 61 See Rauf and Mahmood (2009). 62 See http://www.gifr.net/gifr2012/ch_25.pdf. 63 See Rauf and Mahmood (2009). 60 127 Book 2.indd 155 10/16/17 4:58 PM
  156. compliant Microfinance products in Pakistan , among others, are Akhuwat and Wasil Foundation. The sources of financing for these intuitions include Waqf , Zakāt, and Ṣadaqah. In the following paragraphs the case of Akhuwat is introduced in some detail. Akhuwat is an organization that came into existence in 2001 in Pakistan by a group of civil servants. Dr. Amjad Saqib who was then working for a Government project named Punjab Rural Support Program, was extremely disappointed by the exorbitant interest rates that were being charged on loans extended to the poor. Therefore, he and a few of his close circle of colleagues decided to extend interest-free loans to deserving poor and vulnerable population, through founding the Akhuwat. Improving the welfare of the poor through social philanthropy is Akhuwat‟s main objective which is accomplished through the following channels:  To provide interest free microfinance services to poor families enabling them to become self-reliant.  To promote Akhuwat‟s interest-free loans as a viable model and a broad-based solution for poverty alleviation.  To provide social guidance, capacity building and entrepreneurial training.  To institutionalize the spirit of brotherhood, compassion, and volunteerism.  To transform Akhuwat borrowers into donors.  To make Akhuwat a sustainable, growth-oriented and replicable organization. In 2003, the non-profit organization was formally registered with the name of Akhuwat. The name meant brotherhood that was practically seen in Islamic history when Prophet Muhammad (PBUH) migrated from Mecca to Madina. During that time, Madina locals shared their wealth and property with the immigrants to help them settle down. Akhuwat has the same underlying model in which the public is asked to help their poor brothers and sisters in which brotherhood and sisterhood becomes means to achieving the goal of reducing poverty. Akhuwat started its operations in Lahore but to date it has expanded to Rawalpindi and Faisalabad with the help of Chambers of Commerce and Industry and philanthropists willing to work with them. It has also opened branches at Multan, Gujrat and Karachi and smaller towns like Sharq pur, Dijkot, Samundri, Chiniot, Lodhran, Jehanian, Duniyapur, Krore Pacca and Khairpur. Few more branches are under process for Rahim Yar Khan, Sarghoda and Farooqabad. It is also looking for partner organizations to help them establish branches in other cities.64 A board of ten members, consisting of philanthropists, civil servants and businessmen governs Akhuwat and mobilizes funds for Akhuwat. Moreover, every branch consists of a steering committee that undertakes initiative at the branch level such as organizing fund-raising events especially before the holy month of Ramadan. Awareness regarding the Akhuwat services is created through campaigns in poor localities, market places, previous borrowers, and local press. Marketing campaigns are delivered at local mosques and churches in between congregational prayers. Any poor household is eligible for completing an application for a loan regardless of his/her religion, gender, disability, and political bias. To keep the cost low and operations effective, the personnel are from local communities as they can identify the truly deserving poor in a more efficient and effective manner in their own communities. 64 http://akhuwatonline.org/about_us_akhuwat-works.php. 128 Book 2.indd 156 10/16/17 4:58 PM
  157. First loan was given to a woman and it was approximately USD 1 ,000 that was donated by one of the fellow members of the group. This was successfully recovered after 6 months, after which the fund‘s pool expanded to approximately USD 40,000 within two years. These sums were recycled into USD1,000,000 worth of loans extended to 900 men and women with no defaults at all. Initially everyone worked for Akhuwat voluntarily, giving out his or her leisure time to the organization; but by 2003, due to its rapid growth and high demand for its services, it became impossible to manage the organization on voluntary basis.65 After formalizing the system, an administration fee of 5% of the loan were started being charged to cover the cost of operations. This is a fixed fee, irrespective of the repayment period. Grants received are not used to cover these costs and are only used for extend lending. This fee also provides access to other services provided through Akhuwat, such as medical camps and educational support to clients‘ offspring. Borrowers are also required to pay an obligatory one percent insurance fee, covering death or critical illness, whereby unsettled loans are dismissed. Their poor family members are then compensated an equivalent of three monthly payments along with a onetime cash payment of about USD 50. In Pakistan 80% of microloans are lent through group lending methodology. Initially, Akhuwat followed the same model and loans were given to groups of approximately 10 people with a designated leader. However, it was soon realized that often times group leaders exploited their powers in selecting group members and extorted illicit payments from them. Hence, in 2006 as a policy the group loans were discontinued and replaced with household loans which were in the name of couples in a given household. Over time it is was observed that individual household loans had a 99.9% recovery rate which was substantially larger than the recovery of group loans, which had a lower recovery rate mainly because of frictions between member of a group. In addition to being interest-free, four other element make Akhuwat loans genuine Qarḍ Ḥasan loans. First, its sources of funding are from charitable donations. In other words donors of Akhuwat‟s fund don‘t expect to get paid back. Second, in case of defaults that could have been avoided, there is no financial penalties apart from the awareness that privileges for future loans will be removed. Third, collateral is not required; and fourth in addition to financial lending, Akhuwat attempts to increase social and human capital of the borrowers and bridge the social and cultural gap between the poor and non-poor. Donors are generally residents of Pakistan, but a handful of them are living abroad who are motivated to remit funds to make a difference in their local communities in Pakistan. One does not have to be wealthy to be a donor. In fact, so many of the poor who have managed to move out of the vicious circle of poverty through Akhuwat‟s financial assistance, have turned into donors themselves as they have a sense of identification with the institution. The board avoids taking donation from official foreign sources as they often come with ‗strings attached‘.66 65 66 http://www.akhuwat.org.pk/pdf/Akhuwat.pdf http://www.akhuwat.org.pk/akhuwatcaseStudy.asp 129 Book 2.indd 157 10/16/17 4:58 PM
  158. Akhuwat not only provides monetary support but also helps training its clients with the required skills and updates them with the latest market information to make them more effective and successful in their business endeavors . Moreover, it organizes activities in collaboration with other NGOs and social welfare organizations. Other successful projects Akhuwat is working on are as follows: 1. Akhuwat Cloth Bank: where used clothes from are collected, repaired, washed and packed to be distributed amongst the poor families. 2. Akhuwat Health Services: which aims at improving the health conditions among Pakistani poor by raising awareness, providing training, and focusing on preventive measures. Akhuwat‟s lending procedure does not use collateral. Potential borrowers start by submitting an application form stating the amount of loan required and the potential business idea they want to invest in. Then Akhuwat‟s staff members carefully screen them, making sure that their income is not greater than approximately USD10 per household member in a given month. The unit manager visits the applicant‘s house and interviews the family members, people in his/her neighborhood, and colleagues at work place to have a better sense of the credibility, skill level, and the reputation of the individual. Next step is to ensure the borrower would be able to pay back the loan in timely manner. In this step, if the loan is to be used for micro or small business purpose, the Akhuwat staff will study the feasibility and profitability of the business and provide expert consultation to the applicant. The loan is approved only after the mutual consent of the couple in a family, ensuring that both of the couple are aware of the financial obligation the family is undertaking and supports it. Hence, both of the spouses are legal signatories. After the approval of the credit committee, the loan is disbursed in a mosque. It has been Akhuwat‟s experience that borrowers will be more in complaint with the loan contract when the contract is signed in a place of religious sanctity. The disbursement of the loan has to be within 30 days from the day the application is submitted. Loans are disbursed twice a month in the local mosque where the applicant is accompanied by his/her guarantor(s).67 Guarantors need not be wealthier. It would suffice for them to be respectable member of the community who are willing to stand behind the borrowers in case they have difficulty making payments. Not requiring collateral as part of the loan application, has made it possible for the poorest of the poor in Pakistan to gain access to the much needed Akhuwat‟s interest-free loans. After the loan disbursement, the applicant and his business is monitored with regular visits by the Akhuwat staff to keep a record of the progress being made. The payments are due on the 7th of every month and if delayed beyond the 10th, the guarantors are contacted. The above procedures and setup which is mainly based the concept of social reputation, has made the loan recovery rate to be at 99.9% which the highest in the industry. Three observations can be made here. First, maintaining social capital, reputation, and credibility creates a strong motivation for families to pay their loan installment in a timely manner. Second, awareness of the fact that future loans are 67 http://akhuwatonline.org/about_us_akhuwat-works.php 130 Book 2.indd 158 10/16/17 4:58 PM
  159. possible but are contingent on the timely repayment of the current loan makes borrowers more likely to abide the terms of the contract and make timely payments . Finally, in comparison to interest bearing loans, interest-free loans reduce the financial burden of the poor borrowers, therefore reducing the possibility of their default. In 2015, average loan size was about USD 200. The loans are renewed only if the previous loan was used appropriately and the borrowers have made repayments in timely manner. The maximum amount of loan is USD 250. Loan terms are flexible with maximum of 18 months, but on average loans are paid within 11 months with an approximate payment of USD 10 per month. Loans are taken out for various reasons: family business loans, education loans, emergency loans, health loans, housing loans, liberation loans, and marriage loans (Table 4). As seen from Table 4, between 2006 and 2015, family business loans comprise 97% of Akhuwat‟s total lending portfolio and are mainly used to set up or expand the business. Liberation loans are extended when the applicant has taken interest-based loans from other sources and is stuck with paying exorbitant interest amounts. In this case Akhuwat pays off the loan on behalf of the applicant and the applicant compensates Akhuwat in installments. Housing loans are given once a year of approximately USD 400 – USD 500 and needs to be repaid in two years. These loans are used towards rent, purchase, or repair of applicants‘ house. The QH loans given for education, health, emergency, and marriage (only for girls) are part of Akhuwat‟s multidimensional efforts to prevent or reduce poverty. Another type of QH loan, called the silver loans, refers to loans given to increase the size of an existing business. Akhuwat recently launched this new product. The average size of this loan is about USD 500 and is given to those who have successfully completed three or more cycles of borrowing from Akhuwat and are interested to further expand their business. 131 Book 2.indd 159 10/16/17 4:58 PM
  160. 6 ,209 2006 8,470 2007 11,103 2008 13,036 2009 19,219 2010 31,425 2011 64,786 2012 153,486 2013 228,296 2014 329,489 2015 865,519 Total Total 2,529 27 1,982 6,081 7,824 5,984 2015 865,519 386 11 292 780 970 900 889,946 2014 329,489 795 8 497 1,350 2,353 1,584 332,828 2013 228,296 633 1 459 1,041 2,040 1,478 234,883 2012 153,486 229 1 243 870 748 806 159,138 2011 64,786 198 3 235 1,193 627 513 67,683 2010 31,425 147 1 142 681 519 364 34,194 2009 19,219 88 2 58 100 366 171 21,073 2008 13,036 33 0 24 33 100 95 13,821 2007 11,103 16 0 23 27 81 57 11,388 2006 8,470 4 0 9 6 20 16 8,674 Table 4: Composition of Akhuwat Loans (Number) (2006-2015) Type of Loan Family Business Loans Education Loans Emergency Loans Health Loans Housing Loans Liberation Loans Marriage Loans 6,264 6,209 2,529 27 1,982 6,081 7,824 5,984 889,946 386 11 292 780 970 900 332,828 795 8 497 1,350 2,353 1,584 234,883 633 1 459 1,041 2,040 1,478 159,138 229 1 243 870 748 806 67,683 198 3 235 1,193 627 513 34,194 147 1 142 681 519 364 21,073 88 2 58 100 366 171 13,821 33 0 24 33 100 95 11,388 16 0 23 27 81 57 8,674 4 0 9 6 20 16 6,264 Table 4: Composition of Akhuwat Loans (Number) (2006-2015) Total Source: Akhuwat Total Type of Loan Family Business Loans Education Loans Emergency Loans Health Loans Housing Loans Liberation Loans Marriage Loans Source: Akhuwat 132 10/16/17 4:58 PM Book 2.indd 160
  161. As seen from Table 5 , the scale of Akhuwat‟s operation and the number of families it has managed to reach has been continuously and rapidly increasing over the past decade, pointing to its sustainability and effectiveness of its model. Below are some highlight of Table 5:      As of May 2015, Akhuwat has 355 branches in more than 200 cities and towns in Pakistan. To this date about 900,000 families have benefited from Akhuwat‘s QH loans with recovery rate of 99.9%.68 Every year Akhuwat has been able to reach more and more families. Just between 2013 and 2015 it has been able to reach twice more people, while its reach increased by a whopping 16 folds between 2010 and 2015. Since 2002, it has made USD160 million worth of QH loans, much of which was recycled from previous borrowers returning the sum they had borrowed. Number of branches increased by about 10 folds between 2010 and 2015. Just between 2013 and 2015 the number of its branches increased by 100 from 254 to 355, an increase of 40%. Furthermore, more than 75% of Akhuwat‟s clients have been able to increase their monthly income by 30%-40%, which is an important step in achieving its objective of moving the poor out of poverty.69 One can highlight several factors (some of which already mentioned earlier) that have contributed to Akhuwat‟s success, sustainability, and effectiveness thus far. First is keeping the operation cost as low as possible so that more and more of the donations are used towards extending loans to the poor. Cost to loan ratio is around 7%, one of the lowest observed in the industry. The 5% application fee only helps cover 76% of the expenses and the remaining shortfall is covered by the board of directors. While this may be a source of concern for the sustainability of Akhuwat in the long run, Harper (2008) thinks otherwise and argues ―Akhuwat is sustainable in the sense of being able to survive and grow very fast…..It depends on the continuation of people‘s generosity rather than their greed. There is no reason to believe that generosity will wither away any more than greed will, we all share both sources of motivation‖. Infrastructural costs are kept low by operating at mosques therefore avoiding utility bills and rents. Furniture is minimal and sitting on the floor is encouraged. The institution owns no cars and the staff are encouraged to use public transportation or motorbikes for visiting households and work places of the applicants. As for the cost of human resources, the senior management gets no remuneration and the organizational set up has been kept simple. The staff hired are from the same community as the borrowers. Apart from that, the volunteer force working at Akhuwat is large and a lot of students are trained as volunteers.70 All of this combined with continuous generosity of donors, have contributed to Akhuwat‟s low cost of operation and thus rapid growth rates in the past decade. 68 http://www.akhuwat.org.pk/progress_report.asp See Civil Services Pakistan & District Management Group (2007). 70 http://akhuwatonline.org/about_us_akhuwat-works.php 69 133 Book 2.indd 161 10/16/17 4:58 PM
  162. Number of Branches Outstanding Loan Porftfolio ('000s USD) Active Loans Precentage Recovery (%) Cumulative Due ('000s USD) Average Loan Size (USD) Amount Disbursed ('000s USD) Benefiting Families NA 1 12.9 154 100 18.9 166 31.8 192 2002 NA 1 24.7 271 100 23.7 172 48.4 282 2003 NA 4 90.9 802 100 55.4 176 146.2 832 2004 NA 7 303.8 2,862 100 231.6 171 535.4 3,124 2005 NA 11 631.6 6,156 100 465.6 175 1,097.2 6,264 2006 NA 18 831.1 8,734 100 650.5 171 1,481.6 8,674 2007 NA 20 988.0 12,129 100 750.4 153 1,738.8 11,388 2008 NA 22 1,173.1 14,599 100 834.3 145 2,007.9 13,821 2009 NA 36 1,744.1 19,562 100 1,211.6 140 2,956.2 21,073 2010 NA 77 2,801.9 31,573 100 2,041.3 142 4,845.5 34,194 2011 NA 153 7,824.0 67,337 100 3,867.9 173 11,696.1 67,683 2012 NA 254 15,249.3 163,215 100 10,116.4 159 25,375.8 159,138 2013 200 289 24,442.8 235,517 100 15,811.1 171 40,269.7 234,883 2014 210 355 45,796.0 387,174 100 18,725.4 196 65,111.7 332,828 2015 Table 5: An Overview of Akhuwat (2002-2015). Number of Cities and Towns Source: Akhuwat 134 10/16/17 4:58 PM Book 2.indd 162
  163. Second , ―Akhuwat has managed to mobilize all members of the society to play their part Second, in ―Akhuw poverty alleviation in order to create a vibrant and economically strong society based on sharing poverty alleviatio resources‖ (Benedetto and Bengo 2014, 68). One important example is that Akhuwat has been resources‖ (Bene able to transform ex-borrowers to donors. In fact it is the only microfinance model known in the able to transform world that encourages the borrower to become a donor and take part in uplifting the overall world that encou community. This is because Akhuwat goes beyond simply extending financial assistance. Rather, community. This it engages with the borrowers throughout the life of the loan and establishes a trust-based it engages with relationship with them, similar to brotherhood, making the borrowers feel part of the Akhuwat‟s relationship with extended community. extended commu Akhuwat‟s mandate extends beyond financial transactions as it makes every effort to guide, Akhuwat‟s mand support and empower the poor by providing social guidance, capacity building and support and em entrepreneurial and marketing training to the poor. Therefore, when an ex-borrowers moves out entrepreneurial a of poverty as a result of Akhuwat‟s financial, social, and technical assistances, he/she has the of poverty as a r urge to support Akhuwat‟s cause in helping the other poor member of the community. urge to support Furthermore, in addition to financial donations, the better-off people in a community, also Furthermore, in volunteer their time, energy, and other resources and skills to advance the cause of Akhuwat. volunteer their tim All of the above bridges the often existing gap between the ―haves‖ and ―have-nots‖ ofAll a of the above community, therefore reducing marginalization of the poor and increasing social solidarity, allcommunity, of there which help towards Akhuwat‟s objective of alleviating poverty through the help of locals inwhich a help towa community. community. Third, Akhuwat employs a ―mosque-centric‖ model where all transactions including loan Third, Akhuwat appraisals, disbursements and collections take place at the local mosque and other religious appraisals, disbu centers. Hence, all activities revolve around the mosque and involve close interaction with the centers. Hence, a community. Moreover, faith-based activities create enduring social cohesion and bounded community. Mo solidarity and inclusion in such activities itself is a reward for inclusion. Furthermore, Akhuwat solidarity and inc requires respectable community members to get involved in the organization‘s activities requires as respecta guarantors of loan application. All of these elements increase the sanctity of the contract and guarantors of loa raises the social and reputational stakes for the borrowers therefore increasing their motivationraises to the social a abide by the terms of the contract to the best of their ability. abide by the term Fourth, Akhuwat continuously seeks similarly-minded local partners who support the objectives Fourth, Akhuwat of Akhuwat and are willing to setup a local branch in their local community mosque or other of Akhuwat and religious centers. In such cases, Akhuwat provides training to the local staff, and assists in setting religious centers. up the branch. Leaving the operations to the partner organization, Akhuwat acts as a monitoring up the branch. Le organization. A team from Akhuwat‟s head office regularly visits the branches for monitoring organization. A t and training purposes. As a result of this inclusive and flexible view, it has been able to expand and training purp its branches by 10 folds in the past five years from 36 in 2010 to 355 in 2015. its branches by 10 Fifth and as we saw from Table 4 above, 97% of Akhuwat‟s QH loans are extended for the Fifth and as we purpose of setting up a micro or small family business. Considering that a comprehensive purpose of settin analysis of the business plan is part of Akhuwat‟s pre-lending procedure and that providing analysis of the b technical assistance, client referral, and marketing services are part of the Akhuwat‟s posttechnical assistan lending strategy, almost all of the business that are established through Akhuwat‟s lending end lending up strategy, 131 Book 2.indd 163 131 10/16/17 4:58 PM
  164. being successful enterprises . This makes it possible for the borrowers to repay the loan in a timely manner. This has also set up an ever growing network of Akhuwat assisted businesses that support each other, be it through marketing, client referral, using each other‘s services, or through information dissemination and mutual financial assistances. At the end, although Akhuwat has shown strong signs of success over the past decade in meeting its objective of improving the welfare of the poor communities it is serving, one cannot assume that future will be as promising for Akhuwat as the past has been for this organization. The success of Akhuwat in future decades will depend on its ability to make its growing operations and demand sustainable in the long run. In this sense, Akhuwat needs to tap into new sources of funding and offer new financial products to cater to the diverse needs of the communities it is serving. The implementation of products such as micro-Muḍārabah, micro-Mushārakah, microMurābaḥah, and micro-Takāful may prove to increase Akhuwat‟s funding sources while also helping the plight of the poor and vulnerable. Nevertheless, Akhuwat‟s thus far successful case demonstrates one fact that if Qarḍ Ḥasan is genuinely and appropriately practiced, it can achieve much of the theoretical results highlighted earlier in this study: reducing poverty, promoting shared prosperity, increasing social solidarity, and in a nutshell improving the overall wellbeing of individuals and societies. 4. Conclusions PART IV According to the 2011 Global Findex Database, more than 125 million adults around the world avoid interactions with formal financial institutions for religious reasons. The first part of this paper and also Demirguc-Kunt, Klapper, and Randall (2013) show that Muslims and especially those residing in the MENA region are more likely to be financially excluded for religious reasons. The result presented here shows that percentage of unbanked adults due to religious reasons is positively correlated with being situated in the Arab Middle East and North Africa (Arab MENA) region and with the share of Muslim population in a given country and negatively correlated with the density of Sharīʿah complaint financial assets in an economy. These findings point to the potential role of Islamic finance in enhancing financial inclusion, leading to its many benefits for reducing poverty and inequality among Muslim communities around the world and especially in some of the OIC countries where financial exclusion due to religious reasons is among the highest in the world. The presence of this relatively large population that has opted out of currently available financial services provides a great business opportunity for Islamic Financial Institutions (IFIs) to service their financial needs. However, several obstacles have hindered the growth of this industry, the most important of which has been the lack of transparency and the absence of a broadly accepted standardized process for assessing the compliancy of financial institutions with Sharīʿah guidelines. This has made it difficult for many individuals to distinguish between financial institutions that are genuinely operating based on Sharīʿah specifications and those institutions that are not. The establishment of Islamic Financial Service Board (IFSB) in 2003, as an internationally recognized body of regulators and supervisors for developing and disseminating 132 Book 2.indd 164 10/16/17 4:58 PM
  165. Shar īʿah compliant standards in Islamic Finance has been a significant positive step in this regard.71 Another main difficulty has been the lack of information and training on Islamic finance. For example, only about 48 percent of adults in five MENA countries (i.e. Algeria, Egypt, Morocco, Tunisia, and Yemen) have heard about Islamic banks (Demirguc-Kunt, Klapper, and Randall 2013). Here the recent opening of Global Center for Islamic Finance housed in Borsa Istanbul (or Istanbul Stock Exchange) which is envisioned to act as a global knowledge and research hub for the development of Islamic finance can prove to be beneficial.72 Also the growing number of higher education institutions offering certification as well as undergraduate and graduate degrees in Islamic economics, banking, finance, insurance and investment, will increase awareness towards and understanding of Islamic Financial industry around the globe. One such newly established but highly promising institution that has become globally recognized for the quality of its program and its famed faculty is the International Centre for Education in Islamic Finance (INCEIF).73 At the end, similar to their conventional counterpart, Sharīʿah compliant financial institutions and markets do not operate in a vacuum and their performances are affected by the economic, political, legal, educational, and social contexts within which they operate. Therefore, increasing the presence of Islamic finance is only a necessary but not the sufficient factor in boosting financial inclusion among the religiously minded Muslims in the OIC member countries and these countries need to build the necessary financial, social, legal, and educational infrastructure to support the creation, growth, sustainability of the IFIs. Qarḍ Ḥasan, which is more than simply being an interest-free loan (Qarḍ), seems to be the most effective instrument in Islamic finance industry to address the financial needs of the poor and the vulnerable and pave the path for their inclusion in and access to formal financial services. However, as of now, genuine Qarḍ Ḥasan is not being widely practiced by IFIs and therefore its potential benefits for reducing/preventing poverty are not being fully realized. Through presenting a novel definition and view of Qarḍ Ḥasan and its multifaceted benefits for the vulnerable and poor and the long-run health of an economy, this work hopes to start a theoretical and operational discussion around this widely misunderstood and misapplied lending instrument in Islamic finance industry. The successful case of Akhuwat, presented in this study, confirms much of the theoretical discussion herein and shows that if implemented in ways that are in accordance with its spirit, Qarḍ Ḥasan can achieve much in reducing/preventing poverty and enhancing shared prosperity and social/financial inclusion. 71 See http://www.ifsb.org/. See http://www.worldbank.org/en/news/press-release/2013/10/30/turkey-and-world-bank-group-reinforcecooperation-on-improving-islamic-finance-and-the-country-investment-climate 73 See http://www.inceif.org/. 72 133 Book 2.indd 165 10/16/17 4:58 PM
  166. References Beck , Thorsten and Asli Demirgüç-Kunt. 2008. "Access to Finance: An Unfinished Agenda." World Bank Economic Review, World Bank Group, vol. 22(3), pages 383-396, November. Beck, Thorsten, Asli Demirguc-Kunt, and Ross Levine. 2004. "Finance, inequality, and poverty: cross-country evidence." Policy Research Working Paper Series 3338, World Bank, Washington, DC. Demirguc-Kunt, Asli, Leora Klapper and Douglas Randall. 2013. ―Islamic Finance and Financial Inclusion: Measuring Use of and Demand for Formal Financial Services among Muslim Adults.‖ Policy Research Working Paper 6642, World Bank, Washington, DC. El-Zoghbi, Mayada, and Michael Tarazi. 2013. ―Trends in Shari‗a-Compliant Financial Inclusion.‖ CGAP Focus Note 84, Consultative Group to Assist the Poor, Washington, DC. Farooq, Mohammad Omar. 2010. ―Qarḍ Ḥasan, Wadi‘ah/Amanah and Bank Deposits: Application and Misapplication of some Concepts in Islamic Banking‖. Arab Law Quarterly, Vol. 25, No. 2. Levine, Ross. 2005. ―Finance and Growth: Theory and Evidence.‖ In Handbook of Economic Growth, Vol. 1, edited by Philippe Aghion and Steven Durlauf, 865-934. Amsterdam, the Netherlands: North-Holland Elsevier. Mirakhor, Abbas and Zamir Iqbal. 2007. ―Qarḍ Ḥasan microfinance‖. New Horizon, April-June 2007. pp.18-20. Mohieldin, Mahmoud, Zamir Iqbal, Ahmed Rostom, and Xiaochen Fu. 2011. ―The Role of Islamic Finance in Enhancing Financial Inclusion in Organization of Islamic Cooperation Countries‖. Policy Research Working Paper 4435, World Bank, Washington, DC. Visser, Wayne A.M. and Alastair Macinto. 1998. ―A Short Review of the Historical Critique of Usury‖. Accounting, Business and Financial History, Volume 8, Number 2. pp. 175-89. World Bank. 2007. ―Finance for All? Policies and Pitfalls in Expanding Access‖. Washington, D.C: World Bank. World Bank. 2013. ―Global Financial Development Report 2014: Financial Inclusion‖. Washington DC: World Bank. 134 Book 2.indd 166 10/16/17 4:58 PM
  167. Annexure 1 Reasons of Financial Exclusion by Country , 2011 Country Afghanistan Albania Angola Argentina Armenia Australia Austria Azerbaijan Bangladesh Belarus Belgium Benin Bolivia Bosnia and Herzegovina Botswana Brazil Bulgaria Burkina Faso Burundi Cambodia Cameroon Canada Chad Chile China Colombia Comoros Congo, Dem. Rep. Congo, Rep. Costa Rica Croatia Cyprus Czech Republic Denmark Djibouti Dominican Republic Ecuador Egypt, Arab Rep. El Salvador Estonia Finland France Gabon Georgia Germany Too far away (% unbanked adults) 39% 11% 18% 5% 8% 0% 0% 5% 13% 20% 0% 23% 35% Too expensive (% unbanked adults) 37% 14% 30% 36% 23% 0% 4% 16% 30% 14% 3% 26% 41% Lack of necessary documentat ion (% unbanked adults) 37% 14% 37% 20% 17% 0% 1% 22% 10% 13% 5% 37% 15% Lack of Trust (% unbanked adults) 37% 12% 21% 27% 24% 0% 3% 20% 9% 28% 1% 24% 34% Lack of Money (% unbanked adults) 40% 49% 48% 62% 74% 34% 20% 68% 71% 65% 0% 91% 52% Religious (% unbanked adults) 32% 7% 11% 1% 0% 0% 0% 5% 4% 3% 0% 2% 2% Family member already has one (% unbanked adults) 13% 17% 15% 13% 5% 24% 8% 6% 23% 24% 34% 5% 14% 43% 70% 44% 47% 87% 93% 96% 85% 4% 91% 58% 36% 70% 78% 14% 36% 15% 10% 30% 15% 15% 24% 20% 40% 10% 13% 10% 9% 14% 35% 42% 12% 28% 39% 10% 27% 30% 37% 45% 8% 47% 15% 13% 46% 25% 11% 21% 9% 10% 11% 1% 42% 23% 7% 17% 22% 19% 19% 19% 25% 9% 7% 15% 29% 11% 23% 37% 3% 30% 10% 53% 89% 62% 83% 90% 87% 87% 79% 16% 60% 65% 57% 61% 82% 1% 5% 1% 0% 1% 2% 4% 1% 0% 9% 2% 0% 2% 6% 36% 9% 29% 20% 2% 1% 2% 1% 44% 13% 11% 31% 15% 6% 96% 91% 50% 11% 15% 34% 11% 9% 10% 3% 26% 13% 19% 11% 7% 22% 26% 16% 20% 1% 23% 9% 20% 13% 8% 71% 81% 33% 53% 34% 2% 0% 2% 0% 1% 1% 2% 21% 36% 29% 19% 0% 87% 11% 0% 20% 45% 0% 31% 10% 30% 24% 41% 0% 18% 69% 30% 69% 3% 0% 22% 46% 30% 13% 62% 63% 4% 18% 15% 38% 14% 21% 11% 29% 73% 53% 1% 4% 6% 14% 90% 86% 3% 0% 2% 81% 67% 1% 1% 16% 16% 9% 17% 20% 7% 4% 13% 29% 14% 9% 3% 32% 18% 4% 5% 24% 6% 0% 21% 30% 17% 20% 2% 19% 8% 0% 0% 15% 12% 16% 95% 38% 36% 0% 21% 84% 80% 17% 3% 3% 2% 0% 5% 1% 1% 0% 2% 7% 40% 9% 51% 2% 9% 28% Adults with no account (% age 15 +) 91% 72% 60% 67% 83% 1% 1% 85% 60% 41% 2% 90% 72% 135 Book 2.indd 167 10/16/17 4:58 PM
  168. Ghana Greece Guatemala Guinea Haiti Honduras Hong Kong SAR , China Hungary India Indonesia Iraq Ireland Israel Italy Jamaica Japan Jordan Kazakhstan Kenya Korea, Rep. Kosovo Kuwait Kyrgyz Republic Lao PDR Latvia Lebanon Lesotho Liberia Lithuania Luxembourg Macedonia, FYR Malawi Malaysia Mali Malta Mauritania Mauritius Mexico Moldova Mongolia Montenegro Morocco Mozambique Nepal Netherlands New Zealand Nicaragua Niger Nigeria Oman Pakistan Panama Paraguay Peru Philippines 71% 22% 78% 96% 78% 79% 28% 7% 18% 22% 25% 20% 21% 10% 31% 22% 35% 24% 22% 4% 28% 26% 34% 19% 17% 21% 24% 7% 31% 21% 83% 73% 61% 89% 67% 52% 2% 2% 5% 5% 9% 4% 5% 44% 14% 2% 8% 13% 11% 27% 65% 80% 89% 6% 9% 25% 27% 2% 75% 57% 58% 7% 55% 13% 31% 10% 23% 37% 15% 16% 6% 0% 3% 6% 3% 12% 35% 13% 12% 2% 37% 39% 24% 43% 17% 31% 26% 19% 12% 0% 23% 13% 43% 9% 17% 15% 46% 6% 17% 27% 13% 10% 28% 5% 20% 26% 4% 16% 25% 14% 12% 32% 27% 29% 8% 9% 32% 9% 21% 9% 12% 0% 1% 20% 12% 7% 12% 3% 77% 70% 63% 83% 66% 35% 60% 32% 51% 7% 70% 58% 88% 30% 40% 32% 14% 0% 8% 1% 24% 4% 3% 0% 3% 0% 10% 2% 4% 0% 10% 2% 57% 27% 41% 9% 10% 53% 37% 29% 9% 39% 27% 22% 5% 45% 33% 81% 96% 73% 10% 63% 82% 81% 26% 4% 32% 21% 11% 2% 49% 36% 6% 2% 18% 13% 4% 27% 51% 29% 12% 5% 11% 8% 4% 1% 33% 43% 11% 4% 21% 7% 13% 7% 14% 30% 28% 5% 73% 85% 64% 82% 84% 71% 71% 32% 7% 1% 0% 7% 3% 6% 0% 2% 3% 8% 38% 19% 11% 12% 40% 59% 26% 83% 33% 92% 5% 83% 20% 71% 82% 22% 49% 61% 60% 74% 0% 0% 86% 98% 70% 26% 89% 75% 78% 79% 73% 15% 13% 27% 35% 1% 31% 7% 19% 12% 18% 5% 18% 13% 25% 0% 13% 17% 68% 30% 13% 14% 20% 9% 24% 34% 19% 25% 16% 21% 5% 29% 8% 47% 29% 5% 13% 49% 18% 25% 8% 0% 25% 54% 37% 17% 13% 28% 11% 55% 51% 25% 17% 35% 23% 2% 23% 19% 21% 12% 8% 18% 36% 27% 9% 0% 0% 27% 59% 40% 21% 14% 40% 8% 16% 42% 22% 10% 3% 8% 9% 24% 8% 29% 28% 7% 19% 22% 10% 6% 0% 75% 18% 37% 13% 19% 8% 34% 20% 37% 14% 58% 89% 56% 87% 38% 66% 66% 35% 87% 61% 65% 60% 78% 71% 8% 13% 36% 92% 83% 56% 71% 33% 72% 54% 78% 7% 1% 0% 3% 0% 16% 2% 2% 2% 0% 5% 25% 2% 1% 0% 0% 10% 23% 3% 15% 7% 10% 5% 2% 7% 43% 2% 26% 2% 32% 13% 31% 12% 7% 49% 32% 32% 10% 18% 26% 75% 11% 4% 8% 54% 9% 22% 14% 11% 26% 136 Book 2.indd 168 10/16/17 4:58 PM
  169. Poland Portugal Romania Russian Federation Rwanda Saudi Arabia Senegal Serbia Sierra Leone Singapore Slovak Republic Slovenia South Africa Spain Sri Lanka Sudan Swaziland Sweden Syrian Arab Republic Taiwan , China Tajikistan Tanzania Thailand Togo Trinidad and Tobago Tunisia Turkey Turkmenista n Uganda Ukraine United Kingdom United States Uruguay Uzbekistan Venezuela, RB Vietnam West Bank and Gaza Yemen, Rep. Zambia Zimbabwe 29% 15% 55% 11% 1% 11% 24% 9% 19% 15% 2% 12% 24% 10% 23% 68% 23% 69% 1% 1% 0% 27% 11% 13% 51% 67% 53% 94% 37% 85% 2% 12% 24% 5% 28% 10% 37% 0% 15% 38% 12% 37% 18% 44% 16% 13% 19% 13% 34% 22% 42% 0% 38% 6% 10% 13% 17% 20% 6% 69% 88% 45% 84% 58% 82% 71% 4% 1% 23% 6% 1% 9% 0% 22% 7% 51% 5% 35% 7% 28% 20% 3% 46% 7% 31% 93% 71% 1% 15% 5% 34% 19% 26% 23% 30% 0% 44% 24% 40% 30% 17% 45% 34% 19% 11% 21% 23% 19% 13% 27% 38% 39% 29% 6% 18% 32% 12% 13% 13% 10% 75% 63% 73% 52% 67% 82% 72% 10% 0% 0% 3% 9% 2% 4% 6% 0% 41% 66% 12% 42% 27% 15% 10% 0% 77% 12% 97% 83% 27% 90% 9% 7% 28% 48% 13% 27% 33% 9% 18% 46% 9% 20% 0% 10% 22% 35% 4% 32% 4% 7% 21% 13% 3% 17% 27% 43% 78% 78% 57% 91% 15% 6% 8% 4% 1% 1% 2% 44% 4% 8% 47% 2% 21% 68% 42% 4% 15% 13% 35% 25% 26% 38% 17% 21% 13% 18% 26% 67% 73% 48% 1% 26% 7% 10% 20% 20% 100% 80% 59% 36% 42% 24% 12% 54% 19% 21% 38% 11% 10% 23% 55% 52% 85% 67% 10% 3% 4% 3% 7% 18% 2% 11% 76% 77% 20% 14% 7% 19% 29% 28% 26% 7% 10% 17% 8% 16% 32% 46% 19% 15% 21% 49% 70% 60% 6% 7% 0% 6% 13% 19% 5% 9% 55% 78% 8% 13% 16% 8% 3% 13% 16% 9% 75% 50% 0% 1% 15% 12% 81% 96% 79% 60% 3% 13% 21% 14% 23% 17% 50% 39% 5% 9% 32% 27% 12% 8% 9% 20% 67% 86% 85% 82% 24% 9% 1% 1% 18% 3% 6% 8% Source: Global Financial Inclusion (Global Findex) Dataset. Author’s Calculation. (Note) OIC countries are in bold 137 Book 2.indd 169 10/16/17 4:58 PM
  170. 138 Book 2 .indd 170 10/16/17 4:58 PM
  171. 8 THE REGULATORY AND SUPERVISORY ROLE OF CENTRAL BANK OF NIGERIA IN ENHANCING INCLUSION THROUGH ISLAMIC FINANCE Nurudeen Abubakar Zauro74 , Ram Al Jaffari Bn Saad75, and Norfaiza Bnt Sawandi76 The aim of the paper is to discuss various regulatory and supervisory roles of Central Bank of Nigeria (CBN) in Islamic Finance as a means for enhancing financial inclusion in Nigeria. This shall be achieved by using descriptive study that is based on secondary data sourced from publications of CBN and other key stakeholders within the industry. Similarly, the contribution of other regulatory institutions such as Nigeria Deposit Insurance Corporation (NDIC), National Insurance Commission (NAICOM), National Pension Commission (PENCOM), Debt Management Office (DMO), Federal Inland Revenue Service (FIRS), Securities and Exchange Commission (SEC), and Nigeria Stock Exchange (NSE) were reviewed. The paper identifies major challenges inhibiting the effort of CBN and the other institutions, and comes up with recommendations that would deepen Islamic Finance practices in Nigeria as a means for enhancing financial inclusion. The paper concludes that this will assist the bank in achieving its vision of reducing the exclusion rate to 20% by the year 2020 in order to foster inclusive growth and development in Nigeria. Keywords: Islamic Finance, Financial Inclusion, Financial Exclusion, Inclusive Growth, Central Bank of Nigeria, Nigeria 1. Introduction The promotion and maintenance of monetary stability, sound and efficient financial system in Nigeria is part of the core mandates of the Central Bank of Nigeria (CBN) as contained in the CBN Act, 2007. The Bank is also charged with other responsibilities such as supervising and regulating banks and other financial institutions across the country. These tasks can be achieved through effective regulation and supervision of the Nigeria financial system and promotion of effective and efficient payments system. The promulgation of CBN Act 2007 (as amended) and the Banks and Other Financial Institutions Act (BOFIA) 1991 was a landmark achievement for CBN as it gained some measures of autonomy to effectively carry out its core mandates (Momodu, 2013). Consequently, CBN introduced some reforms in order to strengthen the Nigeria‘s financial system among which was the introduction of Islamic Banking in Nigeria. 74 Central Bank of Nigeria, Central Business District, Garki Abuja Nigeria nazauroacca@gmail.com; nazauro4u@yahoo.co.uk Correspondence author. 75 School of Accountancy, College of Business, Universiti Utara Malaysia, Malaysia, Sintok, Kedah, Malaysia. 76 School of Accountancy, College of Business, Universiti Utara Malaysia, Malaysia, Sintok, Kedah, Malaysia 139 Book 2.indd 171 10/16/17 4:58 PM
  172. Aliyu (2012) noted that the structure of financial intermediation globally witnessed a radical shift over the last few decades. The monopoly status enjoyed by the conventional system of banking and finance changed with the emergence of modern Islamic banking system, which most essentially is based on the principles of the Sharīʿah (Islamic law). This was further alluded by Ibrahim & Mustafa (2011) that “The emergence of Islamic banking in the Muslim world has remained the most inspiring and outstanding financial and economic phenomenon of the 20th century”. Hence, many continents such as Asia, Middle East and some parts of Africa adopted the Islamic financial system as the mainstream for their banking and economic activities. Among the countries that have embraced the dual banking system vigorously are Malaysia, Bahrain, Saudi Arabia, Egypt, Algeria and Nigeria, among others. Nigeria‘s introduction of Islamic Banking was premised on the fact that a significant proportion of its Muslims populace which constitutes more than 50% (NBS, 2013) avoids the conventional financial services as a result of their religious belief of prohibition of interest (Ribā) and uncertainty (Gharar) attributed to it. The evolution of modern Islamic banking in Nigeria dates back to 1991 with the enactment of the Banks and Other Financial Institutions Decrees (Sanusi, 2011). Subsection 61 of Section 23 of the decree recognizes banks based on profit and loss sharing. The Decree also recognizes 'specialized' banks and includes in the definition ―such other banks as may be designated from time to time‖. The designation of non‐interest banks as specialized banks in framework for the regulation and supervision of Institutions offering Non-Interest Financial Services in Nigeria referred to as Non-Interest Financial Institutions (NIFI) issued by CBN in 2010 was based on this provision in which Islamic banks form part of it (Aliyu, 2012; Ibrahim & Mustafa, 2011; Sanusi, 2011). Investors started applying for banking license to operate Islamic banks since 1993 but could not materialize due to non‐compliance with CBN requirements by the investors. Though Habib Bank Plc was able to open a non‐interest banking window and started offering a limited number of Sharīʿah‐compliant products in 1996, but others could not succeed till 2004 when an Approval‐in‐Principle (AIP) was granted to Ja‘iz International Plc to establish Ja‘iz Bank upon meeting mandatory capital requirement (Aliyu, 2012; Al‐Zoubi, Al‐Zu‘bi, & Ishaq Bhatti, 2008; CBN, 2011; Dauda, 2013; Ibrahim & Mustafa, 2011; and Sanusi, 2011). It is against this background that this paper discusses the various regulatory and supervisory roles of CBN in enhancing financial inclusion through Islamic Finance. This objective was achieved by using secondary data sourced from the publications of the CBN and other stakeholders within the industry. The findings highlighted the challenges and variables that are militating against the efforts of CBN and its regulatory allies towards reducing the exclusion rate to 20% by the year 2020 ((CBN, 2012). To this end, this paper is divided into four sections. This section deals with the introductory part. Section two presents the literature review; while the third section discusses the key challenges facing the practice of Islamic Finance in Nigeria. The fourth section presents the conclusions and recommendations. 2. Literature Review 2.1. An Overview of Financial Inclusion in Nigeria The concept of Financial Inclusion has been increasingly attracting global attention since its manifestation in the early 2000s. This could be attributed to the publication of the research findings by the World Bank on Measuring Financial Inclusion that emphasized poverty as a direct consequence of financial exclusion (Abiola, Adegboye, & Alexander, 2014;Demirguckunt & Kiapper, 2012). Financial inclusion has been defined as: ―the delivery of financial services at affordable costs to sections of disadvantaged and low-income segments of society‖ 140 Book 2.indd 172 10/16/17 4:58 PM
  173. (Mohseni-Cheraghlou, Mohieldin, Iqbal, Rostom, & Fu, 2012). These services include access to Account at a Formal Financial Institution, Access to Formal Accounts, Use of Formal Accounts, Mobile Payments, Savings, Credit and Insurance and pensions (Allen et al., 2014; CBN, 2012; Demirguc-kunt & Kiapper, 2012; World Bank, 2014; Mohieldin, Iqbal, Rostom, & Fu, 2012). The United Nations (UN) defines the goals of financial inclusion as: (1) access at a reasonable cost for all households to a full range of financial services, including savings or deposit services, payment and transfer services, credit, and insurance; (2) sound and safe institutions governed by clear regulation and industry performance standards; (3) financial and institutional sustainability to ensure continuity and certainty of investment; and (4) Competition to ensure choice and affordability for clients (World Bank, 2014). Different views were expressed as to the relationship between Financial Inclusion, poverty eradication, economic growth, and development. According to (Chiedu et al., 2013) ―The main reason for this is the promise which financial inclusion holds in addressing global poverty, income inequality, under development and welfare. It is believed that when everybody in the world has access to financial services, their joint contributions to the entire development process will create faster and more quantitative impact‖. While the former UN Secretary-General Kofi Annan, on 29 December 2003, said: ―The stark reality is that most poor people in the world still lack access to sustainable financial services, whether it is savings, credit or insurance. The great challenge before us is to address the constraints that exclude people from full participation in the financial sector. Together, we can and must build inclusive financial sectors that help people improve their lives‖. A survey conducted in Nigeria in 2008 by Enhancing Financial Innovation and Access (EFInA) revealed that about 53.0% of adults were excluded from financial services. As at 2014 the exclusion rate remained 39.5% despite several effort by the CBN to improve the situation (EFInA, 2014). Nigeria has 28.6 million bank accounts with a population of over 168 million people, and 89.7 million adults (Abiola et al., 2014; CBN, 2012; EFInA, 2012; Sanusi, 2012). CBN in collaboration with other stakeholders launched the National Financial Inclusion Strategy (NFIS) on 23rd October, 2012 aimed at reducing the exclusion rate to 20% by 2020. Specifically, adult Nigerians with access to payment services is to increase from 21.6% in 2010 to 70% in 2020, while those with access to savings should increase from 24.0% to 60%; and Credit from 2% to 40%, Insurance from1% to 40% and Pensions from 5% to 40%, within the same period (Abiola et al., 2014; CBN, 2012; Kama & Adigun, 2013; and Sanusi, 2012). To achieve these targets, Nigeria joined other 20 developing countries and made financial inclusion commitment referred to as the ―MAYA DECLARATION‖, in Mexico. The number of countries increased to 35 in September 2012, which culminated into the Alliance for Financial Inclusion, Global Policy Forum in Cape Town, South Africa. Nigeria through CBN, targeted to increase branches of Deposit Money Banks (DMBs) from 6.8 units per 100,000 adults in 2010 to 7.6 units per 100,000 adults in 2020, microfinance bank branches to increase from 2.9 units to 5.5 units; ATMs from 11.8 units to 203.6 units, POSs from 13.3 units to 850 units, Mobile agents from 0 to 62 units, all per 100,000 adults between 2010 and 2020 (CBN, 2012). Among the efforts to reach out to the financially excluded adults in Nigeria, was the introduction of Islamic Banking referred to as Non-Interest Financial Services (Adeola, 2009; Sanusi, 2011). They engage in the provision of different Sharīʿah compliant Islamic financial services and products 141 Book 2.indd 173 10/16/17 4:58 PM
  174. such as Muraabahah , Mushaarakah, Muḍārabah, Bai Salaam, Ijārah, etc (CBN 2011 and Sanusi 2011). The aim is to attract the financially excluded Nigerians especially Muslims who refused to patronize conventional financial services on the basis of their religious belief. This paper focused on the regulatory and supervisory roles of CBN in Islamic Finance with a view to enhancing Financial Inclusion. 2.2. The Development and Legal Framework for Islamic Finance in Nigeria Policy formulation in the Nigerian financial system to protect the interest of all Nigerian public is part of the CBN regulatory functions. The objectives includes; (1) to promote healthy competition in the financial system that is geared towards providing efficient and reliable services, (2) to protect interest of depositors and customers (3) to ensure the health of individual financial institutions for the development of sound and stable financial system, and (4) to promote good market practice and higher standards of corporate governance. Enactment of the BOFIA in 1991 supports the CBN regulatory role to achieve these objectives in which the Islamic Banking was considered. Despites the establishment of Islamic bank window by Habib Bank, absence of regulation from the CBN to effectively supervise and regulate the operation of Islamic banks crippled the success of its operation. The CBN by virtue of its position as an apex Bank charged with the responsibility of regulation and supervising Banks and other Financial Institutions in Nigeria must provide an enabling environment for the smooth running of Islamic Banks. The emergence of Islamic banks in several Muslim and Non-Muslim countries ignited the desire for its establishment in Nigeria considering its overwhelming Muslim population. This led to CBN issued several guidelines and governance structures for the establishment, regulation and continuous supervision of Islamic Banks termed as non-interest (Islamic) Financial Services in the Nigeria. These guidelines are issued pursuant to the Non-Interest banking regime under Section 33 (1a) of the CBN Act 2007; Sections 23(1) 52; 55(2); 59(1a); 61 of BOFIA 1991 (as amended), and Section 4(1c) of the Regulation on the Scope of Banking Activities and Ancillary Matters No. 3, 2010 (Daud 2013, Sanusi 2011 and Mustapha et-al 2011). It shall be read together with the provisions of other relevant sections of BOFIA 1991 (as amended), the CBN Act 2007, Companies and Allied Matters Act (CAMA) 1990 (as amended) and circulars/guidelines issued by the CBN from time to time. Specifically, section 4 (1c) of CAMA ‘90 on the ―Regulations on the Scope of Banking Activities and Ancillary Matters, No. 3, 2010‖ defines specialized banks to ―include non-interest banks‖. In 2004, demand for the establishment of full‐fledged non‐interest banks continue from interested investors. An Approval‐In‐Principle (AIP) was granted to Ja‘iz International Plc to establish Ja‘iz Bank upon meeting mandatory capital requirement (Sanusi, 2011). In 2005, Nigeria launched the Financial System Strategy (FSS) 20:2020, which aims to engineer Nigeria's evolution into Africa's major International Financial Centre (IFC) and enable Nigeria's transformation into one of the 20 largest economies in the world by 2020. Some initiatives were introduced in the sector to attract the huge un‐banked informal sector and to create non‐interest banking instruments to capture huge unbanked Muslim segments of the society. Supported by EFInA, Islamic Finance Working Group was formed in 2008 which brought together the main stakeholders in the Nigeria‘s financial system. This includes the Nigeria Deposit Insurance Corporation (NDIC), National Insurance Commission (NAICOM), National Pension Commission (PENCOM), Debt Management Office (DMO), Federal Inland Revenue Service (FIRS), Securities and Exchange Commission (SEC), Nigeria Stock Exchange (NSE), market 142 Book 2.indd 174 10/16/17 4:58 PM
  175. operators interested in offering Islamic finance products , and a representative of the Central Bank as an observer (Sanusi, 2011). EFInA was conceived and funded by the UK Department for International Development (DFID), the Ford Foundation, and the Bill and Melinda Gates Foundation to promote financial development in Nigeria. Similarly, the CBN joined the Islamic Financial Services Board (IFSB) as a full‐council member and issued the Draft Framework for the Regulation and Supervision of Non‐Interest (Islamic) Financial Institutions in Nigeria for comments and suggestions by stakeholders in 2009. In line with FSS 2020, major reforms were introduced in the Nigeria‘s banking sector in the year 2010. Among others, the CBN abolished Universal Banking and introduced new banking model which categorized banks into: Commercial, Specialized and Merchant Banks (see the organogram below in Figure 1). Figure 1: Organogram of Banking System in Nigeria Source: Guidelines for the Regulation and Supervision of Institutions offering NIFS in Nigeria NIFIs were categorized under specialized banks. Under the new banking model, non-interest banking and finance models are broadly categorized into two: (1) Non-interest banking and finance based on Islamic commercial jurisprudence; and (2) Non-interest banking and finance based on any other established non-interest principle. A license to undertake Islamic banking business operations may be issued by the CBN upon such terms and conditions, which authorize the operation of a NIFI on a regional or national basis for banks, or any other basis for other financial institutions. This new banking model categorized non-interest banks as specialized banks which could be national non-interest bank with the capital base of N10 billion and shall operate in every state of the federation including the Federal Capital Territory (FCT). The second category is regional non-interest bank with capital base of N5 billion and shall operate in a minimum of six states and maximum of twelve contiguous states of the federation (Dauda, 2013; A. Ibrahim, Ibrahim, & Ar-raniry, 2010). According to this guideline, a NIFI is defined as: ―a bank or Other Financial Institution (OFI) under the purview of the CBN, which transacts banking business, engages in trading, investment and commercial activities as well as the provision of 143 Book 2.indd 175 10/16/17 4:58 PM
  176. financial products and services in accordance with Shar īʿah principles and rules of Islamic commercial jurisprudence‖ (CBN, 2011). In 2010, 12 central banks including Central Bank of Nigeria and 2 multilateral organizations formed the International Islamic Liquidity Management Corporation (IILM). The IILM based in Malaysia is aimed at providing treasury instruments that are Sharīʿah compliant to address the liquidity management issue of Islamic banks and serve as instruments for open market operations involving Islamic financial institutions. Similarly, in November 10, 2010 Ja‘iz Bank Plc was granted final license to operate as a non-interest (Islamic) bank with regional authorization, and Stanbic IBTC Bank to operate non- interest (Islamic) banking window. Dauda (2013) rightly said; “Experience shows that in countries where the regulators recognized the uniqueness of Islamic banking as against conventional banking and creates a separate regulatory framework for it, results in accelerated growth in the industry”. This prompted CBN to issue various frameworks and guideline for the regulation and supervision of Non-Interest (Islamic) Financial Institutions (NIFI). This includes: a) Guidelines for the Regulation and Supervision of Institutions Offering NonInterest Financial Services in Nigeria in 2010, b) Guidelines on Sharīʿah Governance for Non-Interest Financial Institutions in Nigeria in 2010 c) Guidelines on Non-Interest Window and Branch Operations of Conventional Banks and Other Financial Institutions in 2010 d) Framework for the Regulation and Supervision of Institutions Offering NonInterest Financial Services in Nigeria in 2011. e) Guidelines on the Governance of Financial Regulation Advisory Council of Experts (FRACE) on Non-Interest (Islamic) Institutions in Nigeria in 2015, and f) Guidelines on the Governance of Advisory Committees of Experts (A.C.E) for Non-Interest (Islamic) Financial Institutions in Nigeria in 2015. 3. The CBN Framework for the Regulation of Non‐Interest Banks The framework and guidelines issued by CBN have provided minimum standards for the operation of institutions offering Islamic banking and financial services in Nigeria. This will enhance effective regulation and supervision of NIFIS in Nigeria. The framework defines NIFIs as ―a bank or other financial institution (OFI) under the purview of the Central Bank of Nigeria (CBN), which transacts banking business, engages in trading, investment and commercial activities as well as the provision of financial products and services based on an established non‐interest principle‖. In this context, NIFIs refer to wide‐ranging types of financial institutions identified as: (1) a full‐fledged non‐interest deposit money bank or subsidiary; (2) a full‐fledged non‐interest microfinance bank or subsidiary; (3) a full‐fledged non‐interest merchant bank or subsidiary; (4) a non‐interest branch of a conventional bank or financial institution under the purview of the CBN; (5) a non‐interest window of a conventional bank or financial institution under the purview of the CBN; (6) a development finance institution registered with the CBN to offer non‐interest financial services either full‐fledged or as a subsidiary; (7) a primary mortgage institution registered with the CBN to offer non‐interest financial services either full‐fledged or 144 Book 2.indd 176 10/16/17 4:58 PM
  177. as a subsidiary ; and (8) a finance company registered with the CBN to provide non‐interest financial services, either full‐fledged or as a subsidiary. A NIFI shall be licensed in accordance with the requirements issued by the CBN from time to time. Applications for the grant of license shall be accompanied by evidence of a technical agreement executed by the promoters of the proposed institution with an established and reputable Islamic bank or financial institution. The agreement shall explicitly specify the role of the two parties and shall subsist for a period of not less than 3 years from the date of commencement of operations of the licensed NIFI. A license to undertake Islamic banking business operations may be issued by the CBN upon such terms and conditions which authorize the operation of a NIFI on a regional or national basis for banks, or any other basis for other financial institutions. NIFI shall transact business using only financing modes or instruments that are compliant with the principles under the model and approved by the CBN. NIFI may charge such commissions or fees as may be necessary in accordance with the principles under the model and the Guide to Bank Charges. The funds received as commissions and fees shall constitute the bank's income and shall not be shared with depositors. Conventional banks and other financial institutions operating in Nigeria may offer or sell products and services in line with the principles under the model through subsidiaries, windows or branches only. An Islamic subsidiary of a conventional bank or financial institution shall be established in line with the licensing requirements for the establishment of a full-fledged non-interest financial institution. Islamic window or branch of a conventional bank or financial institution shall be established and operated in line with the guidelines on windows/branches issued by the CBN. The Islamic subsidiaries, windows or branches are permitted to operate using the existing facilities or branch network of the conventional bank but cannot sell products/services that do not comply with the principles under the model. Conventional banks or other financial institutions with Islamic subsidiaries, branches or windows shall execute Service Level Agreements (SLA) in respect of shared services with their subsidiaries and branches. All transactions and exposures between an Islamic subsidiary, window or branch of a financial institution and the parent shall be in accordance with the principles and practices under the model. 3.1. Corporate Governance All licensed NIFIs shall be subject to: (1) Guidelines on corporate governance for non-interest financial institutions issued by the CBN; (2) The provisions of the Code of Corporate Governance for Banks in Nigeria issued by the CBN and any subsequent amendments thereto; and (3) All relevant provisions of BOFIA 1991 (as amended) and CAMA 1990 (as amended). All licensed NIFIs shall have an internal review mechanism that ensures compliance with the principles under the model. They shall also have an Advisory Committee of Experts (ACE) as part of their governance structure (CBN, 2011; Sanusi, 2011). For appropriate disclosure of financial information, NIFI shall ensure that relevant disclosures are made to Profit Sharing Investment Accounts (PSIA) holders in a timely and effective manner and also ensure the proper implementation of investment contracts. As part of risk management, NIFI with PSIAs may maintain a Profit Equalization Reserve (PER) which would serve as an income smoothing mechanism and risk mitigation tool to hedge against volatility of returns to investment account holders. They may also maintain an Investment Risk Reserve (IRR) to cushion against future losses for PSIA holders. The basis for computing the amounts to be appropriated to the PER and IRR should be pre-defined and disclosed. 145 Book 2.indd 177 10/16/17 4:58 PM
  178. 146 Book 2 .indd 178 10/16/17 4:58 PM
  179. Audit , Accounting and Disclosure Requirements The framework provided clear guidelines on the disclosure requirements for NIFI. It is stated that all NIFI shall comply with relevant provisions of the circular issued by the CBN on disclosure requirement by financial institutions and other disclosure requirements contained in CAMA 1990 (amended) and BOFIA 1991 (as amended). In addition, they shall comply with the relevant standards on disclosure issued by standards-setting organizations such as: Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI); Islamic Financial Services Board (IFSB); and Nigerian Accounting Standards Board (NASB) now known as Financial Reporting Council of Nigeria (FRCN). This has further required all NIFI to comply with the requirements of section 29 of BOFIA 1991 (as amended) and applicable guidelines/directives issued by the CBN as well as the relevant provisions of CAMA 1990 (as amended) regarding the appointment, re-appointment, resignation, rotation, change and removal of auditors. Similarly, they shall comply with the Generally Accepted Accounting Principles (GAAP) codified in local standards issued by the Financial Reporting Council of Nigeria (FRCN) and the International Financial Reporting Standards (IFRS) issued by International Accounting Standards Board (IASB). For transactions, products and activities not covered by these standards, the relevant provisions of the financial accounting and auditing standards issued by the AAOIFI shall apply. 3.2. CBN Prudential Laundering for NIFIs Guidelines, Risk Management and Money All NIFI shall maintain a minimum Capital Adequacy Ratio (CAR) as may be prescribed by the CBN from time to time and shall be consistent with the prevailing CAR as may be prescribed for conventional banks and other financial institutions. NIFI are equally required to put in place appropriate policies, strategies and procedures which ensure that they maintain adequate liquidity at all times to fund their operations. They are required to invest their funds in eligible instruments for the purpose of meeting the CBN prescribed minimum liquidity ratio but are not permitted to invest their funds in interest-bearing securities or activities. Liquid assets shall be held in line with the provision of section 15 of BOFIA 1991 (as amended), provided they comply with the principles under this model. Similarly, they are required to comply with other Prudential Requirements on exposure and concentration limits as may be prescribed by the CBN from time to time and standards of best practices. All NIFIs are required to put in place appropriate policies, systems and procedures to identify, measure, monitor and control their risk exposures. In addition, they are required to put in place a risk management system that recognizes the unique risks faced by NIFI such as displaced commercial, fiduciary, transparency, reputational, equity investment and rate of return risks. Other guidance issued by the CBN and international standard setting organizations includes: CBN Prudential Guidelines; Risk Management Guidelines issued by the Basel Committee on Banking Supervision; and IFSB Guiding Principles of Risk Management for Institutions Offering Only Islamic Financial Services. All NIFI and their promoters are required to screen shareholders, customers, counterparties, transactions, products and activities against the proceeds of crime, corruption, terrorist financing and other illicit activities using legal and moral filters. They are equally required to have effective AML/CFT policies and procedures and comply with relevant statutes and guidelines for 147 Book 2.indd 179 10/16/17 4:58 PM
  180. combating money laundering and the financing of terrorism issued by the CBN and other relevant agencies . 3.3. Inter‐agency Collaboration and Cooperation with CBN on Islamic Finance Given the multi‐sector dimension of Islamic banking, the CBN has been engaging other stakeholders whose role is considered as critical for the successful implementation of Islamic banking in Nigeria to incorporate the Islamic banking concept in their mode of operations. Noticeable among them are: FIRS, SEC, NAICOM, NDIC, DMO, FRCN etc. In this regard, NDIC has released a draft framework for a Non‐Interest (Islamic) Deposit Insurance Scheme (Takāful) for stakeholder comments and inputs. FIRS had issued Guidelines on Tax Implications of Non-Interest Banking in Nigeria in March 2013. Similarly, the CBN in collaboration with the DMO has developed an Islamic bond (Ṣukūk) in Nigeria. There is also a concurrent effort to engage with the fiscal authorities in Nigeria with a view to addressing the tax neutrality and other level playing field issues that would foster the successful operation of Islamic banks in Nigeria. 4. Challenges Facing Islamic Banking in Nigeria Having successfully achieved the full implementation of Islamic Banking and finance in Nigeria, the following are among the notable challenges confronting the sub-sector, the regulators and other stakeholders in the industry as noted by many scholars such as: Alao (2012) Aliyu, (2012); Dauda, (2013); Ibrahim & Mustafa, (2011); Sanusi, (2011) and others. 1) Deficiency of knowledge, skills and other technical capacity to regulate, and supervise Islamic banks, Islamic insurance (Takāful) and other components of Sharīʿah‐complaints Islamic finance products in Nigeria. This is critical and is in line with the views of Aliyu, (2012) that says “Organizations that invest so much in human resources training and retraining are more likely to ascend and attain their long term objectives faster than those that spend less”. 2) Lack of product standardization, this is a challenge facing not only Nigerian NIFIs, but, the entire Islamic banking and finance industry globally. A number of Islamic banking products, for instance, are conceived and packaged differently, and while some are available in some countries/regions, others are not approved-off by the Sharīʿah council of experts across the globe. 3) Lack of Sharīʿah‐compliant liquidity management instruments. Islamic banks cannot invest their excess liquidity in interest‐based instruments, which are the liquidity management instruments in the market. Consequently, that places them at a competitive disadvantage as against their conventional counterparts. Similarly, other instruments such as those of the Open Market Operations etc and interbank market used by the Central Bank for monetary policy operations are majorly interest‐based with no equivalent Sharīʿah‐compliant instruments or other government securities that are essential to avoid a liquidity bottleneck for Islamic banks. 148 Book 2.indd 180 10/16/17 4:58 PM
  181. 4 ) Although an effort is currently on the way to introduce the Islamic insurance (Takāful) but it is currently not available to protect investments of Islamic banks against unforeseen vulnerabilities such as deposit insurance scheme to protect the depositors of Islamic banks. 5) The sound knowledge of accounting and auditing standards applicable to the Islamic financial institutions is equally lacking. The financial reporting system of Islamic banks varies with the conventional one. Hence the need for an intensive knowledge driven training on accounting standards such as the once developed by AAOIFI, and other Islamic standards setters for effective reporting. 6) Absence of full blown regulatory authority or a Department in CBN to regulate the Islamic banking. This will make the regulator (s) more serious in developing capacity and technical knowhow in the concept of Islamic Banking. 7) Lack of a robust and comprehensive legal framework, especially at the level of adjudication of conflicts involving Islamic finance contracts, products or entities. 8) Interest based intervention/bailout funds to banks at times of liquidity crunch. Islamic banks cannot legitimately benefit from such a facility because such funds are usually provided on the basis of interest. There is therefore, the need to devise and implement an interest‐free framework for such assistance. 9) Lack of enough awareness and full understanding of the Islamic Finance that led to a lot of misperception about Islamic Finance in Nigeria coupled with the ethno-religious diversity of Nigeria. 5. Conclusions and Recommendations The fact that the CBN recognizes the viability of non-interest banking is a demonstration of its being an alternative system to the conventional interest based system which has failed to rescue the world from its present economic mess Aliyu (2012). The study appreciated the effort of CBN and its regulatory allies in developing a frameworks and guidelines for the smooth implementation and continuous operation of Non-Interest (Islamic) Financial Institutions (NIFIs) in Nigeria. However, there are still challenges that need to be surmounted in the system. The paper emphasized the urgent need for CBN to address those challenges identified, especially the issue of capacity building for effective and efficient supervision of these institutions. Other challenges include but not limited to: knowledge/skills deficiency, lack of product standardization, lack of Sharīʿah‐compliant liquidity management instruments, lack of sound legal system to support the operation Islamic Finance, lack of Islamic Insurance to protect investors funds, lack of robust accounting and auditing standards, cut-throat competition among the conventional banks, and lack of full awareness/understanding of the Islamic finance coupled with the ethnoreligious diversity of Nigeria. The study recognized the need for social consideration in the Islamic finance industry to avert the persistent failures in the conventional banking system in the country. The Islamic banking should be operated in Nigeria devoid of interest (Ribā), speculations, gambling, uncertainty (Gharar), and non-permissible businesses such as pork selling and should be in line with the dictates of Islamic commercial jurisprudence. The study agrees with Alao (2012) that Islamic banking ―is a means of catering for the neglected downtrodden and helpless majority who may never have access to fund for developmental purposes. It can go 149 Book 2.indd 181 10/16/17 4:58 PM
  182. a long way to address youth restiveness and crime as long as its operation is not discriminatory ‖. The NIFIs should consider products such as Qarḍ Ḥasan (benevolence loan) to support the masses for inclusive financing in Nigeria. The researchers strongly recommend that the regulatory institutions should strive to put in place appropriate measures for effective monitoring and surveillance of NIFIs for compliance with the regulations in Nigeria. The CBN and its regulatory partners in the banking industry should propose the amendments of the applicable laws affecting the NIFIs to the lawmakers with a view to strengthen its smooth operations in Nigeria. The paper also noted the success of Ṣukūk in the Nigeria‘s capital market issued by Osun state government, and hence urged the government to hasten its bid to become the hub of Islamic finance of Africa by providing an enabling environment for trading of Islamic capital market instruments – Ṣukūk and other halal (permissible) investments. Furthermore, the accounting and auditing standards setters in the country such as Financial Reporting Council (FRC) should formulate the applicable standards in line with the global best practice. In doing this, they should liaise with bodies such as AAOIFI and IFSB for support and necessary technical assistance. Finally, ―it becomes imperative for policy makers and practitioners in Islamic finance to come together for the purpose of building strong theoretical and practical foundations for the relatively new field in Nigeria‖ (Aliyu, 2012). The statement, the researchers believe, will assist the CBN to achieve its vision towards reducing the exclusion rate to 20% by the year 2020 and to foster inclusive growth and development in Nigeria. 150 Book 2.indd 182 10/16/17 4:58 PM
  183. References Abiola , B. a, Adegboye, F. B., & Alexander, O. (2014). Financial Inclusion and Economic Growth in Nigeria. Vision 2020: Sustainable Growth, Economic Development, and Global Competitiveness, Vols 1-5, 5(3), 3137–3156. Adeola, H. (2009). ISLAMIC FINANCE : The Answer to Financial. Adewusi, Y. (2011) ―Non-Interest Banking and Financial Inclusion‖, a paper presented at an International Conference on Non-Interest Banking organized by the Central Bank of Nigeria in Collaboration with the Islamic Development Bank (IDB), Jeddah held at Transcop Hotel, Abuja, Nigeria on 4th July, 2011. Alao, D. O. and Alao, E. M. (2012) ―Islamic Banking: The Controversy Over Non-Interest Banking System in Nigeria‖ Babcock University, Ilishan-Remo. Ogun State, Nigeria: Arabian Journal of Business and Management Review (Nigerian Chapter) Vol. 1, No. 1, 2012 Aliyu, S. U. R. (2012) ―Islamic Banking and Finance in Nigeria: Issues, Challenges and Opportunities‖ International Institute of Islamic Banking and Finance, Bayero University, Kano available Online at http://mpra.ub.uni-muenchen.de/42573/ Munich Personal RePEc ArchiveMPRA Paper No. 42573, posted 13. November 2012 03:09 UTC Allen, F., Carletti, E., Culle, R., Qian, J., Senbet, L., & Valenzuela, P. (2014). The African Financial Development and Financial Inclusion Gaps. Journal of African Economies, 23(5), 614– 642. http://doi.org/10.1093/jae/eju015 Al‐Zoubi, H. a., Maghyereh, A., Al‐Zu‘bi, B., & Ishaq Bhatti, M. (2008). Does issuing government debt needed as a Ponzi scheme in Islamic finance. Managerial Finance, 34(10), 726–736. http://doi.org/10.1108/03074350810891038 Basiru, O. F. (2012) ―Can Islamic Banking Work In Nigeria?‖ Journal of Sustainable Development in Africa (Volume 14, No.2, 2012), Clarion University of Pennsylvania, Clarion, Pennsylvania Beck, T., A. Demirguc-Kunt, and M. S. Martinez Peria. (2007). ―Reaching out: Access to and Use of Banking Services across and within Countries.‖ Journal of Financial Economics 85. CBN. (2012). National Financial Inclusion Inclu sion Strategy; Summary Report by Roland Berger Strategy Consultants. Summery Report, (January 2012), 1–117. Central Bank of Nigeria-CBN. (2012). Guidelines on the Governance of Financial Regulation Advisory Council of Experts for Non-Interest (Islamic) Financial Institutions in Nigeria. Available Online at http://www.cbn.gov.ng Central Bank of Nigeria-CBN. (2012). Guidelines on the Governance of Advisory Committees of Experts for Non-Interest (Islamic) Financial Institutions in Nigeria. Available Online at http://www.cbn.gov.ng Central Bank of Nigeria-CBN. (2011). Framework for the Regulation and Supervision of Institutions Offering Non-Interest Financial Services in Nigeria. Available Online at http://www.cbn.gov.ng Central Bank of Nigeria-CBN. (2011). Guidelines for the Regulation and Supervision of Institutions Offering Non-Interest Financial Services in Nigeria. Available Online at http://www.cbn.gov.ng Central Bank of Nigeria-CBN. (2012). ―National Financial Inclusion: Summary Report‖ Roland Berger Strategy Consultants in collaboration with EFInA Cull, R., A. Demirguc-Kunt, A. and Morduch, J. (2008). Forthcoming, Banking the World: Empirical Foundations of Financial Inclusion. Cambridge, MA: MIT Press 151 Book 2.indd 183 10/16/17 4:58 PM
  184. Daud , M. (2013). ―Legal Framework for Islamic Banking and Finance in Nigeria‖ Electronic Journal of Islamic and Middle Eastern Law (EJIMELEL), The Center for Islamic and Middle Eastern Legal Studies (CIMELS), University of Zurich, Zurich, Switzerland, Vol. 1 (2013), pages, http://www.ejimel.uzh.ch Demirguc-kunt, A., & Kiapper, L. (2012). Measuring financial inclusion. The Global findex database.‘'. Policy Research Working Paper, 6025(April), World Bank, Washington, DC. pp1– 61. http://doi.org/10.1596/978-0-8213-9509-7 Demirguc-Kunt, A. Klapper, L. and Randall, D. (2013). ―Islamic Finance and Financial Inclusion: Measuring Use of and Demand for Formal Financial Services among Muslim Adults‖. Policy Research Working Paper 6642, World Bank, Washington, DC EFInA, (2013). ‗What does the CBN‘s Cash-less policy mean for financial inclusion in Nigeria?‖ a publication of Central Bank of NigeriaNo 33 Tafawa Balewa Way Central Business District, Garki, Abuja, Nigeria EFInA. (2014). EFInA Access to Financial Services in Nigeria 2012 Survey Key Findings, 2012(November 2012), 1–71. Retrieved from http://www.efina.org.ng/assets/ ResearchDocuments/A2F-2014-Docs/Updated/EFInA-Access-to-Financial-Services-in-Nigeria2014-Survey-Key-FindingswebsiteFINAL.pdf Fu, X., M. Mohieldin, I. Zamir, and A. Rostom.nd X. Fu. (2011). ―The role of Islamic Finance in Enhancing Financial Inclusion in Organization of Islamic Cooperation (OIC) countries.‖ Policy Research Working Paper 5920, World Bank, Washington, DC. Ibrahim, A., Ibrahim, A., & Ar-raniry, F. S. I. (2010). Income Smoothing dan Implikasinya terhadap Laporan Keuangan Perusahaan dalam Etika Ekonomi Islam A . Pendahuluan Kegiatan ekonomi merupakan salah satu dari aspek muamalah dalam sistem hukum Islam , sehingga kaidah fiqh yang digunakan dalam mengidentifikas, XII(24), 102–119. Ibrahim, M. Y., & Mustafa, D. (2011). The Perceptions of Nigerian Muslim Youths in Malaysia on the Establishment and operation of Islamic banks in Nigeria. International Journal of Business and Social Science, 2(10), 151–166. Retrieved from http://ehis.ebscohost.com/ehost/pdfviewer/ pdfviewer?sid=f02a82ac-5762-4bc6-a7eb8eeeb1e9b864@sessionmgr11&vid=2&hid=7 INCEIF and World Bank, (2012). ―Explore, Experience, Engage Islamic Finance‖ Presentation at the work shop in collaboration with ISRA and IBFIM Kama, U. and Adigun, M. (2013). ―Financial Inclusion In Nigeria: Issues and Challenges‖ Occasional Paper No. 45, a publication of Central Bank of Nigeria, No 33 Tafawa Balewa Way Central Business District, Garki, Abuja, Nigeria Moghalu, K. C. (2013). ―A global view on financial inclusion: Perspectives from a frontier market‖ at Operation HOPE Global Financial Dignity Summit 2013 (Theme - Global Economic Recovery: How the Poor Can Help Save Capitalism), Atlanta, Georgia, USA Mohieldin, M. (2012). ―Op-Ed; Islamic Finance Unbound.‖ Project Syndicate. 6 January 2012. http://www.project-syndicate.org/commentary/islamic-finance-unbound. Mohseni-Cheraghlou, A., Mohieldin, M., Iqbal, Z., Rostom, A., & Fu, X. (2012). The Role of Islamic Finance in Enhancing Financial Inclusion in Organization of Islamic Cooperation (OIC) Countries. Islamic Economic Studies, 20(2), 55–120. http://doi.org/10.1596/1813-9450-5920 Mustapha, D. Ibrahim, M. Y. and Adewale, A. (2011) The Establishment and Operation of Islamic Banks in Nigeria: Perception Study on the Role of the Central Bank of Nigeria: Australian Journal of Business and Management Research Vol.1 No.2 152 Book 2.indd 184 10/16/17 4:58 PM
  185. Sanusi , L. S. (2010). ―The Nigerian Banking Industry: What Went Wrong and the Way Forward‖ a Convocation Lecture delivered by The Governor, Central Bank of Nigeria at the Convocation Square, Bayero University, Kano, on Friday 26 February, 2010 to mark the Annual Convocation Ceremony of the University Sanusi, L. S. (2011). ―Islamic Finance in Nigeria: Issues and Challenges‖ Lecture Delivered by the Governor, Central Bank of Nigeria on 17 June 2011, at Mark field Institute of Higher Education (MIHE), Leicester, UK Sanusi, L. S. (2012). ―Launching of the National Financial Inclusion Strategy‖ Lecture Delivered by The Governor, Central Bank of Nigeria, on 23 October 2012 at Transcorp Hilton Hotel, Abuja, Nigeria. Soludo, C. C. (2009). ― Fifty Years of Central Banking in Nigeria (July 1959 – July 2009), The Journey so far and the Road Ahead‖ Lecture delivered by The Governor, Central Bank of Nigeria at the Conference on the 50th Anniversary of the CBN, 4th May, 2009. Warsame, M. H. (2009). ―The role of Islamic finance in tackling financial exclusion in the UK‖ Doctoral thesis, Durham University. Available at Durham E-Theses Online: http://etheses.dur.ac.uk/23/ World Bank. (2012 )―The Little Data Book on Financial Inclusion‖ by the International Bank for Reconstruction and Development/THE WORLD BANK 1818 H Street, N.W. Washington, D.C. 20433. U.S.A.World Bank. (2014). GLOBAL FINANCIAL DEVELOPMENT REPORT: Financial Inclusion (Vol. 133). http://doi.org/10.1016/j.sbspro.2014.04.203 153 Book 2.indd 185 10/16/17 4:58 PM
  186. SECTION 3 SOCIAL SECTOR DEVELOPMENT (Section 3) Social Sector Development 154 Book 2.indd 186 10/16/17 4:58 PM
  187. 155 Book 2 .indd 187 10/16/17 4:58 PM
  188. 9 Socioeconomic Policy Making and Maq āṣid al-Sharīʿah based Socioeconomic Variables Azim Ali77 This study identifies the important indicators that can help construct a Maqāṣid alSharīʿah based socioeconomic index‘. The study further elaborates that how the identified indicators may tie with one or more objectives of the Sharīʿah. The study explores the data availability across various countries on relevant indicators that may be found useful in the construction of such index. The study finally evaluates suitability of the variables by highlighting the multi-dimension of Maqāṣid to examine the extent and relevancy of variables to avoid overlap of the variables. Keywords: Maqāṣid al-Sharīʿah indicators; socioeconomic variables; index; evaluation JEL Classification: G15, G21 1. Introduction Maqāṣid al-Sharīʿah is an important and yet somewhat neglected science of the Sharīʿah. In Muslim countries today, the Maqāṣid have become the focus of attention to provide a convenient access to the Sharīʿah. This can be achieved with the development of framework that helps create Maqāṣid al-Sharīʿah based socioeconomic index. Maqāṣid al-Sharīʿah is the objective of Islamic law, of which Maqāṣid are goals and Sharīʿah is the law that Allah revealed to Muhammad (PBUH). Maqāṣid al-Sharīʿah can be defined as a constituent part of the goal and objectives, which are reason for legislation of the rule of Islam. Imam Al Ghazali classified Maqāṣid into five major categories viz. faith, self, intellect, posterity and wealth. A detailed description of these objectives is essential to achieve the objectives of the study. This study aims at exploring the indicators of Maqāṣid al-Sharīʿah by suggesting various indicators that discover their nexus with socioeconomic parameters to create an appropriate index and policy oriented pioneering work. This qualitative study finds that most of the countries prepare data on socioeconomic indicators that can be mapped with Maqāṣid al-Sharīʿah. For sustainable and effective socioeconomic policies, the study provides the countries‘ web-addresses to facilitate researchers to acquire data on finalized parameters. Future studies can use these parameters for the examination of performance of socioeconomic polices in the light of fulfilment of Maqāṣid alSharīʿah. It is the need of the time to develop an index that researchers and policymakers for defining the role of Maqāṣid al-Sharīʿah for the welfare of the society. For this, it is necessary to explore the availability of date on the variables, at country level, that assist create Socioeconomic index and translates Maqāṣid al-Sharīʿah for the benefits of human beings. Imam Al Ghazali classified Maqāṣid into five major categories viz. faith, self, intellect, posterity and wealth. These five fundamentals of Maqāṣid al-Sharīʿah were entirely analyzed as the 77 State Bank of Pakistan 156 Book 2.indd 188 10/16/17 4:58 PM
  189. objectives of Islamic economics and finance . Islamic banks‘ goals should support the tasks of Islamic economics as well Maqāṣid al-Sharīʿah in their precise bearings. Modern Muslim scholars have altered their attention on the Maqāṣid approach to Islamic finance and Islamic economics. For instance, Al-Najjar (2008) has analysed the legal perspective of Al-Maqāṣid al-Sharʿīyah in the context of its contemporary economic application. Furthermore, there are some prominent economists including Chapra (1985; 2004), Al-Allaf (1999), Siddiqi (2000), Hasan (2004), Ahmad (2000), and Larbani and Mohammed (2009) who have written on the subject. Their works, however, relate Maqāṣid to the discipline of economics in a broad theoretical framework. Dusuki (2005) related Maqāṣid to Corporate Social Responsibility. Hameed et al. (2005) tried to develop what they termed as ‗Islamicity Disclosure Index‘ to measure and compare the performances of two Islamic banks. Al-Allaf (1999) discussed Maqāṣid theory and gave Maqāṣid model as the circles of the essentials, complementarities and embellishments. Larbani and Mohammed (2009) developed a model from the elements of Maqāṣid al-Sharīʿah. There are some prominent economists including Kuznets (1956), Boserup (1965) and Simon (1981), Kendrick (1977), Hamid (2005), Szirmai (2005), Linden (2012) and Crawford and Greaves (2013) who studied the dynamics of socioeconomic development. The present study explores the possible links between five elements of Maqāṣid al-Sharīʿah classified by Imam Al Ghazali and several socioeconomic indicators. The main contribution of the study lies in translating the Maqāṣid al-Sharīʿah from the theoretical level down to the operational level. It filters the important variables from the comprehensive list of more than 400 variables based on Al-Maqāṣid al-al-Sharʿīyah for the help of team to propose policy for Maqāṣid al-Sharīʿah for the social economic development. The following are the objectives of this study. 1. To indentify the important indicators out of 400 indicators of socioeconomic indicators. 2. To discusses how the identified indicators may tie with one or more objectives of the Shari‘ ah. 3. To discover data availability across various countries, means and sources to help construct the Maqāṣid al-Sharīʿah based socioeconomic index. Lists the addresses of various countries that have such indicators and help construct Maqāṣid al-Sharīʿah based socioeconomic index. 4. To evaluate extent and suitability of filtered indicators for the measurement of the multi-dimensions of Maqāṣid al-Sharīʿah. Circumvents any overlie between Maqāṣid alSharīʿah and socio economic development indicators. 5. Provide recommendations to propose policy for Maqāṣid al-Sharīʿah for social economic development. The main issues of interest of the study are: 157 Book 2.indd 189 10/16/17 4:58 PM
  190. a . Contributing directly in the efforts to create an appropriate index of Maqāṣid alSharīʿah in Socioeconomic indicators. b. Identification of variables that help create Maqāṣid al-Sharīʿah based socioeconomic index for the development of socioeconomic policies. c. Construction of nexus sheet that helps the measurement of the socioeconomic important variables in achieving Maqāṣid al-Sharīʿah. d. Analysing and gauging the socioeconomic policies in the light of extent of the Maqāṣid al-Sharīʿah indicators identified in the study. e. Discussing the methods to identify the most suitable one that can be helpful in the construction of Maqāṣid al-Sharīʿah based socioeconomic index. 2. Literature Review Al-Allaf (1999) discussed Maqāṣid theory and gave Maqāṣid model as the circles of the essentials, complementarities, and embellishments. The circle of the essentials (Daruriyyat) is further defined as procreation, life, religion, intellect, and property. These five requirements are originated from Sharīʿah as essential and central for human existence. Therefore, every society should safeguard and watch these five goals; or otherwise human life would be cruel and miserable here and in the hereafter. The authors further gave a brief sketch of Maqāṣid alSharīʿah as they are designed to ―promote benefits and repel harms and mentioned Imam Shatibi view on the objectives as ―... to free man from the grip of his own whims and fancy, so that he may be the servant of Allah by choice, as he is one without it.‖ Chapra (2008) has the vision by focussing Maqāṣid Al-Shari‗ah for the socioeconomic development in the light of and pointed out how Imam Abu Hamid al-Ghazali (d.505AH/1111AC) classified the Shari‗ah Maqāṣid into five major categories. The author further stated that the well-being of the human beings is the very fundamental objective of the Sharīʿah. Explaining the five objectives, he said that the welfare of the persons lies in the protection of their faith, self, intellect, posterity, and wealth. Robert and Crane (2009) talked about Maqāṣid al-Sharīʿah in details and summarized it by the verses of surah al an ‗am, wa tama ‗at kalimatu Rabika sidqan wa ‗adlan, ―And the Word of your Lord is fulfilled and completed in truth and in justice.‖ The study further explains that Abu Ishaq al Shatibi educated us that the Maqāṣid are part of the art of ‗Ilm al Yaqin‘. Maqāṣid al-Sharīʿah can also be considered as the sub-category ‗Ilm al ‗Adl. Similarly, by defining features of religious code and social ethics the authors described Maqāṣid al-Sharīʿah as a plan to rehabilitate religion in America. Larbani and Mohammed (2009) explained the decision making tools for resource allocation that are based on Maqāṣid alSharīʿah. The study also explains the levels of tools of Malaah for the managers of firms to use in allocating their investible resources to vital sectors of the economy. They developed a model (MSB model – Maqāṣid al-Sharīʿah Based model) from the elements of Al-Maqāṣid al-alSharʿīyah that can be used as a decision making tool for prioritizing the allocation of investible resources. The five elements of Al-Maqāṣid and the three levels of Malaah form the theoretical components of the model are linked to prepare an index. The main features of MSB are 158 Book 2.indd 190 10/16/17 4:58 PM
  191. simplicity and comprehensiveness . Al-Mubarak and Osmani (2010) analyzed the contemporary Islamic banking products and practices under Maslaha and Maqāṣid al-Sharīʿah framework in order to propose a better banking system for the Muslims. The authors also show how the preference of ‗macro-Maqāṣid‘ over the ‗micro-Maqāṣid‘ is not a perfect justification for many such Islamic banking practices. According to Asutay (2010), Islamic banking aims to analyze deeply the inspirational objectives such as community banking and responsible finance can be achieved. However, a critical examination reveals that the realities are outlying the objectives. The author further argued that there is no unanimously established regulatory body that methodically examines Islamic financial providers. Dusuki and Bouheraoua (2011) discussed the structure of Maqāṣid al-Sharīʿah and its inferences to Islamic finance. They inspected the meanings of Maqāṣid al-Sharīʿah on literal and technical basis and scrutinised the situation of its perception in Islamic law. They also presented Maqāṣid al-Sharīʿah‘ essential elements and explained the contribution of this approach to clarify the diverse Islamic finance issues and challenges. Mohammad and Shahwan (2013) critically examined the tasks of Islamic banking and Islamic economics under Maqāṣid al-Sharīʿah. Adopting the exploratory content analysis and inductive method approach, the study achieved its goals and concluded that the five fundamentals of Maqāṣid al-Sharīʿah were completely experimental as the Sharīʿah objectives. The authors finally suggested that Islamic banks‘ objectives should endorse the objectives of Islamic economics in achieving Maqāṣid al-Sharīʿah in their holistic path. These objectives, though not expressed clearly, are indicated in every law in the Sharīʿah, as have been mentioned about the benefits of Ṣalāt, Jihad, qisas and others. They concluded that, Sharīʿah has also come up with solutions and alternatives to those contracts. Home financing, car loans, and other loan contracts can be based on diminishing partnership instead of the debated contract. Similarly, credit cards can be issued under the Qarḍ Ḥasan or even Rahn contract (without charging for the custodianship fee). The term socio defines the social condition of a person including culture and society while economic refers to financial status of a person. The combination of these two as socioeconomic illustrates the condition of an individual in a society. Accordingly socioeconomic status measures a person's work experience, income, education level, and parental occupation. Similarly, socioeconomic factors are the process of social and economic development that measures GDP, life expectancy, literacy, and levels of employment of any country. This measure also considers the changes in the less-tangible factors, such as personal dignity, freedom of association, personal safety, freedom from fear of physical harm, and the extent of participation in the civil society. Danev and Contributor (1999) discussed the socioeconomic issues such as lack of cultural and religious Issues, education, unemployment, and corruption. The authors further explained that since the industry of diverse states necessitates capable professionals, edification is necessary for the economic expansion of countries. Accordingly, the cultural and religious issue is also important that contradicts terrorism activity, which is negative for the development of the economy. Overpopulation is another serious socioeconomic problem in the developing countries of the world. Similarly, unemployment affects social disparity as members of the public undergo from 159 Book 2.indd 191 10/16/17 4:58 PM
  192. a decreased earning capability . Further, corruption is one of the most serious issues that hinder countries from sustainable economic development. Szirmai (2005) examined historical, institutional, demographic, sociological, political and cultural factors and compared date from a sample of twenty-nine developing countries. Hamid (2005) found that to sustain the socioeconomic indicators, among other things, creation of employment opportunities and earnings of rural and urban poor are necessary. For this, financial assets should be used to lessen hard times, to widen investment facilities for carrying out finance activities and for creating selfemployment, particularly for the unemployed youths. Linden (2012) in his thesis answered the basic query ―are the effects of population growth on economic growth in Asian Developing countries positive or negative?‖ and showed how population growth rate influences GDP per capita in these countries. He summed up the literature on the findings of Kuznets (1956), Boserup (1965), and Simon (1981) that suggested that population growth can actually assist the economy to revolve from unproductive into productive state. Crawford and Greaves (2013) compared generally used socioeconomic parameters and their association with the educational shortcoming and significance. They suggested that the portion of pupils who have been qualified for free school meals seems to be both a good proxy for classifying eligible schools and as a good forecaster of educational shortcoming. Maqāṣid al-Sharīʿah can be defined as the objectives of Islamic law. However, in linguistic meaning Maqāṣid is defined as a goal or as an inspiration while Al-Sharīʿah defined as the law that God revealed to Muhammad (PBUH) involving all aspects of life such as family institution, in finance or it can say the way of a Muslims live their life. Maqāṣid al-Sharīʿah specifies the fundamental nature of human life and the basis of all human actions and activities. In this regard, Mustafa (2009) has listed three specific Maqāṣid al-Sharīʿah based on Abu Zahararh‘s classification (1997) viz. as educating individuals, establishing justice, and public interest. Islam provides a green light for business activities as derived in many verses in Al-Quran, ―there must be Maqāṣid al-Sharīʿah implicitly and explicitly meant by the creator‖. Muamalat in general has a positive correlation with Maqāṣid al-Sharīʿah and in terms of its application, Wajid (2009) has pointed out an important issue in translating Maqāṣid alSharīʿah in Islamic banks; referring to a proper understanding of Maqāṣid al-Sharīʿah and its various concepts. Further, Islamic economics is the father of Islamic banking by referring to human dealings and the main stream of Islamic economics is based on the socio economic justice. Hence, this study also considers Islamic economics issues while excavating the nexus between Maqāṣid al-Sharīʿah and the numerous variables of socioeconomic development. 160 Book 2.indd 192 10/16/17 4:58 PM
  193. 3 . Methodology To achieve the main objective, first, this study filters out important indicators from 400 indicators of socioeconomic development. Secondly, the study identifies those indicators that may relate to the one or more objectives of Shari‘ ah and further, the study analyses how they can be interrelated with the objectives of the Maqāṣid al-Sharīʿah. This can be achieved by evaluating the suitability of finalized variables, highlighting their multi-dimension of Maqāṣid to desist from overlapping of the predictors. Finally, the study identifies the the most suitable method that can be efficiently helpful in the construction of Maqāṣid al-Sharīʿah based socioeconomic index. 4. Analysis and Elucidation Prior to the identification, this study gives brief discussions on the five categories of Maqāṣid alSharīʿah classified by Imam Al Ghazali and gives their relevant sub-elements for proper mapping. As discussed above, Imam Al Ghazali has placed immense importance on the safeguarding of five Maqāṣid: faith, the human self, intellect, posterity and wealth. Al-Raysuni (1992) argued that while the five primary Maqāṣid have been commonly authorized by other scholars, all of them have not necessarily bound to al-Ghazali sequence. Following discussion therefore does not stick to any such sequence 4.1. Enrichment of ‘Human Self’ The enrichment of the human self is one of the five primary objectives of the Sharīʿah. For this, it is essential to depict how this goal can be grasped. Hence it is required to identify the chief wants of human beings that must be fulfilled to not only hoist and maintain their development and comfort, but also facilitate them to play their roles successfully. The framework by which this objective can be achieved is the mapping of Maqāṣid al-Sharīʿah sub-elements with the socioeconomic development parameters. Table 1 gives identified important variables of socioeconomic indicators that can be mapped with the sub-predictors of first primary objective of the Sharīʿah. Table 1: Enrichment of the Human Self predictors Maqāṣid al-Sharīʿah Predictors Freedom Important Socioeconomic Development Indicators Migration, Student per 1000 population, Population Below $1 (PPP)/day, Research Institutes, S&T Expenditures as (% of GDP), Magazines/Journals production, Number of Courts, Education Crimes, Recorded Murders, Number of Police stations, Road Accidents, Suicide cases, Zakāt Receipts, Social Welfare Good Governance Cases, Beneficiaries of Government Grants, Wheat, Maize, Cotton, Textile, Production of meat, egg and Milk, Emission Security of life and property of Hazardous Gasses(CO, SO,NO), Waste Water Generation, No of Orphanage, Both sex-basic education, Pupil-teacher Self respect, human brotherhood ratio, Expenditure on Education (%),Vocational\Technical dignity, and social equality education, Religious Education, No. of Universities/Colleges, Energy Resources & Potential Justice Reserves, Electricity production (kw), Distribution (water) (Mn Galloon), Construction work (%),Vehicles (per km of Moral uplift road), Govt. Revenue % GDP (48 indicators ) 161 Book 2.indd 193 10/16/17 4:58 PM
  194. 4 .2. The Role of Faith All Muslim scholars in the world have emphasized the upbringing reforms of human beings and what part faith executes in such processes. One may assume whether the insertion of faith into this representation would lead to the restriction of human liberty. The answer must be not. Basically, the human beings are still free to wish and choose. Enjoying this freedom, human beings may either survive up to the requirements of their faith or refuse them. This study tries to answer this question with the help of filtered parameters of socioeconomic indicators linking with Maqāṣid al-Sharīʿah predictors. Table 2: Faith Predictors Maqāṣid al-Sharīʿah Predictors Religious worldview Values Proper motivation Moral and material education Role of the state Equitable distribution of Income Socioeconomic Development Parameters Marriage rate, Divorce rate, Number of widows, Household income/expenditure, Consumer price/wholesale price indices, GDP per capita, Net export of goods and services, Gross domestic savings, Gross national savings, Money (M2)(current LCU), Net Domestic Assets, Net Foreign Assets, Change in Inventories, Avg. per capita Income, Index Gini, Daily Mosque visitors per 1000 Muslims, Fasting per 1000 Muslims, Hajj per 1000 Muslims, Zakāt per 1000 Muslims, Charitable Fund per 1000 Muslims, Corruption/violence rate (28 indicators ) 4.3. The Role of ‘Intellect’ A human being‘s distinguishing characteristic is known as Intellect. It is needed to improve and enrich the knowledge and technological stand constantly to encourage the socio development for human beings. Whilst the ‗intellect‘ necessitates supervision from faith to be of service to mankind, faith also entails the service of intellect to sustain its enthusiasm, to reply productively to the varying socioeconomic and intellectual surroundings. It is also needed to build up the relevant technology that can speed up development in spite of scarceness of resources, and to play a crucial role in the realization of the Maqāṣid. How this objective can be achieved by mapping its sub-objectives with the socioeconomic development parameters with Intellect parameters can be understood from the nexus given in Table 3. Maqāṣid al-Sharīʿah Predictors Science education and high quality of religious at affordable prices Library and research facilities Table 3: Intellect Predictors Socioeconomic Development Parameters Human Development Index ( HDI), Personal Computer (100 pers), Internet Users (1000 pers), Researchers in R&D, Technicians in R&D, Expenditures in R&D, Research Institutes (S & T), No. of Public Libraries, No. of books in Public Libraries, Patent applications filed, Childhood dependency, Aging dependency, Divorce (per 000 162 Book 2.indd 194 10/16/17 4:58 PM
  195. Freedom of thought and expression Reward for creative work Finance Importance of the Maq āṣid in the interpretation of texts marriages), Services as % of GDP, Manufacturing as % of GDP, Industry as % of GDP, Agriculture as % of GDP, Electricity production from coal (% of total), Electricity production from oil sources (% of total), Electricity production from natural gas (% of total), Govt. expenditure, Capital/Current expenditure, No. of Scheduled banks, Stock Exchange Index, Oil revenues (Mns), Total Trade Exchange, Zakāt Receipts (LCU billion), Crimes Against Persons, Crimes Against Properties, Beneficiaries of Government Grants (32 indicators ) 4.4. The Role of Posterity (Nasl) Civilization cannot survive if the upcoming generations are religiously, bodily, and spiritually of a subordinate feature than the preceding generations. For the survival, there must be uninterrupted development in the quality of the future generations. This quality comprises many dynamics, of which, one is the parental upbringing approach of the children that helps them become physically, religiously and spiritually powerful. This approach help them discover from their very early days to be candid, honest, meticulous, liberal and able to get along with others peaceful, regular, enthusiastic, economical, polite, civilized, courteous and willing to fulfill all their responsibilities towards others, specifically their subordinates, the deprived and the underprivileged. To accomplish the task, this study has identified the indicators of socioeconomic development and mapped them with the relevant Maqāṣid al-Sharīʿah predictors of posterity. See Table 4. Table 4: Posterity Predictors Maqāṣid al-Sharīʿah Predictors Moral and intellectual development Proper upbringing and family integrity Healthy environment Need fulfillment Freedom from insecurity, fear conflict and anxiety of debt servicing burden Marriage and stable family life Socioeconomic Development Parameters Health rate, % share of Government Expenditure, live Birth (000), Nursing Homes for Elderly & Disables, Outpatient Clinics, Child Labor (age 10-14) % age group, Sex Ratio, Population Growth Rate (% of total), Population Density (per sq km), Pop below nourishment%, Surface Area (Sq Km), Total Fertility Rate, Legally Induced Abortions, Physician per population, Infants Immunization (%),Children Immunization (%),Breast Feeding (months), Temperature (FH), Rainfall (cm), Carbon Dioxide Emissions (MT), Access to Safe drinking Water (%),Prevalence/Sterilization rate (%),User of Condoms, Circumcision rate, Expatriate, Total, No. of housing units, Home Ownership rate, Domestic Debt (LCU bln), Total Debt Servicing (LCU bln), Debt outstanding % of GDP, Long Term Liabilities, Worker Remittances-Country, Net Transfers, Male-basic education, Female-basic education, Adult Literacy (45 indicators ) 163 Book 2.indd 195 10/16/17 4:58 PM
  196. 4 .5. The Role of Wealth Poverty and wealth can be viewed in relative terms. Wealth is a faith form God and necessities to be obtained and used candidly and carefully for eliminating poverty, satisfying the needs of all, making life as stress-free as possible for everyone, with the impartial allocation of income and wealth to human beings. For the purpose of understanding the Maqāṣid, its possession as well as utilization should primarily be considered. It is because, faith has a crucial role to play through its values and its motivating system and the growth of wealth is vital for realizing the fundamental Islamic goal of lessening the disparities between income and wealth. Table 5 depicts this mapping. Table 5: Wealth Predictors Maqāṣid al-Sharīʿah Predictors Improvement in technology and management Security of life, property and honor Enterprise freedom Opportunities of employment Mutual trust and social solidarity Investment, saving and expenditure Development supreme rate Socioeconomic Development Parameters No. of oil producing wells/ oil refineries/mining sites, No. of factories, Population ages 65 & above (% of total), Natural increase (per 1,000 people), Maternal Death Rate, Convicts in prison, Total Registered Enterprises, Total workers, professional firms, Reserved Area for National Parks (% total), No. of licensed banks/Insurance cos., Int'l Tourism, Expenditure, Int'l Tourism, No. of arrivals, Unemployment Rate (% Labor), Employed in Private, Total, Employed in Public, Total, Two wheelers (per 1000 people), No. of Airports/Railway stations/Ships, Merchandise Exports / Imports (mln) / Re–export /Import, Balance of Trade, Balance of Payments, Common Exp by major countries, Common Imp by major countries, Monthly Wage & salary, 20% of Pop with highest Income, 20% of Pop with lowest Income, Education, % Share of Govt. Expenditure, Per capita Aid (million), GNI per capita (55 indicators ) To identify those indicators that may relate to the one or more objectives of Shari‘ ah the study uses Anto‘s (2011) dimension method. Anto (2011) stated that development in Sharia‘ ah view point is to achieve ‗Maslaha‘. He identified seven dimensions and formulated an index to measure each dimension. Each index has certain variables, which were more specific than those in Chapra‘s framework. Following Anto (2011) procedure, Table 6 presents the dimension of five elements of Maqāṣid Al-Shari‘ ah, which are related with 208 socioeconomic variables. Table 6: Dimension and Development Maqāṣid al-Sharīʿah FAITH, SELF, INTELLECT, POSTERITY WEALTH Dimension Indexes Faith index Self index Intellect index Posterity index Wealth index Most Suitable Socioeconomic Indicators Found 48 indicators (see Table 1) Found 28 indicators (see Table 2) Found 32 indicators (see Table 3) Found 45 indicators (see Table 4) Found 55 indicators (see Table 5) 164 Book 2.indd 196 10/16/17 4:58 PM
  197. The study now analyses how these indicators can be related with the objectives of the Maq āṣid al-Sharīʿah. This could be done by evaluating the suitability of finalized variables highlighting their multi-dimension of Maqāṣid to desist from overlapping of the predictors. For this, the study assigned weight to the selected 208 indicators (see Annex 2) and seeks the consensus of formal/official roundtable discussion (30-31 April, 2015) on the assigned weights. The mathematical expressions of these Indices are as follows; Faith Index = ʄ Fth (x01, x30, x31,…, x48) ……..……….. (1) Self index = ʄ Slf (x49, x50, x51,…, x76) …………..….. (2) Intellect Index = ʄ Inl (x77, x78, x79,… ,x108) ……..…….. (3) Posterity Index = ʄ Psy (x109, x110, x111,… ,x154) ………. (4) Wealth Index = ʄ Wth (x155, x156, x157,…, x208) ….…... (5) We now formulate the mathematical function of the Maqāṣid al-Sharīʿah Composite Index (CMSI) based on equations [1] to [5]; CMSI = ʄ (ʄ Fth, ʄ Slf, ʄ Inl, ʄ Psy, ʄ Wth) …………… (6) An illustration of the computation of CMSI for a hypothetical Country X, using 15 indicators, three for each Maqsad is given in Table 7: Table 7: Computation of CMSI for Hypothetical Country X Maqsad Self Faith Intellect Posterity Wealth Indicator X1: Proportion of Social Welfare cases/100 people X2: Proportion of expenditure on education to GDP X3: Proportion of People attending five-time Prayer X4: Proportion Country Muslims‘ life expectancy X5: Proportion of Marriages rate per 100 people X6: Proportion of Divorce rate per 100 people X7: Proportion of R&D Expenditure per 1000 people X8: Proportion of R&D Tertiary education/1000 people X9: Proportion of people living above poverty line X10: Proportion of Heath expenditure by Government X11: Proportion of Circumcision per 1000 adult people X12: Proportion of infant mortality per 1000 people X13: Proportion of Unemployment rate/1000 people X14: Proportion of oil producing wells/total area X15: Proportion of debt servicing to real GDP Ratio 0.25 0.15 0.75 0.65 0.85 0.25 0.35 0.65 0.45 0.56 0.40 070 0.50 0.49 0.55 The computation of individual indexes for Country-X: Slf Index = 0.25 x 0.15 x 0.75 = 0.028125 Fth Index = 0.65 x 0.85 x 0.25 = 0.138125 Inl Index = 0.35 x 0.65 x 0.45 = 0.102375 Psy Index = 0.56 x 0.40 x 0.70 = 0.156800 Wth Index = 0.50 x 0.49 x 0.55 = 0.134750 165 Book 2.indd 197 10/16/17 4:58 PM
  198. CMSI = ʄ (ʄ Fth, ʄ Slf, ʄ Inl, ʄ Psy, ʄ Wth) = (ʄ Fth + ʄ Slf + ʄ Inl + ʄ Psy + ʄ Wth) /5 = (0.028125 + 0.138125 + 0.102375 + 0.156800 + 0.134750)/5= 0.560175/5 166 Book 2.indd 198 10/16/17 4:58 PM
  199. CMSI = 0.112035 In this hypothetical example, Country X has a CMSI of 0.112035. Country X performs best in the preservation of Faith with an index of 0.138125 while performs worst in the preservation of Self with an index of 0.028125. Country X needs to focus on Maqsad of Faith in order to increase socioeconomic prosperity. Socioeconomic prosperity status of country X needs improvements because CMSI is 0.112035, which is even less than 15%. Based on the literature review, among different methods used by the authors discussed in literature for the development of such index, this study tries to identify the suitable method that can efficiently be used in the construction of Maqāṣid al-Sharīʿah based socioeconomic index. The study prefers to use a rather transparent and dynamic method to conceptualize and develop the analytical framework that integrates and complements the existing approaches to model distributional aspects of socioeconomic issues by providing a broader and longer-term perspective. Critical analysis of the following methods will provide an inner approach to develop an efficient and useful model for the development of Maqāṣid al-Sharīʿah based socioeconomic index. Availability of data on identified indicators in more than 50 countries strengthens the development of a generalized model for the index. Method 1 The dimension of Posterity Development Index (PDI) based on Chapra et al. (2008) showed the socioeconomic conditions based on the posterity dimension of Maqāṣid al-Sharīʿah to comprehend human well-being of the next generation, based on the selected indicators. This provides a benchmark to compare it across countries. Based on the various dimensions of posterity, different indicators have been set to represent each dimension. There are also other indicators which can represent the selected dimensions, but these indicators have been chosen by the following factors; 1. Standardization across the conventional and Islamic literature. 2. Ability of quantification and calculation of the indicators. 3. Compatibility with the Millennium Development Goals (MDGs) The selected indicators, corresponding to each dimension, will be then transformed into dimensional indices. The minimum and maximum values for each selected indicator have been set in order to transform the indicators into indices between 0 and 1. The maximum is the highest observed value for a given period. The minimum value represents the observed minimum value for the given period. After defining the minimum and maximum values the next step is to calculate sub-indices: Dimensional Index = ........................... (7) Data for which a large variation can be expected across the countries such as CO2 emission, life expectancy, employment rate and per capita income will be used in logarithm form. 167 Book 2.indd 199 10/16/17 4:58 PM
  200. Dimensional Index = .......... (8) As the data measured in terms of deprivations, the high dimensional index value will represent a deteriorated situation on that dimension and vice versa. If dimensional index approaches to 1 this implies deteriorated situation and if dimensional index approaches to 0 this implies a desired situation. Dimensional indices will be then aggregated to form PDI. If two or more indicators such as upbringing of children represent a dimension, then the geometric mean of the indicators will represent the whole dimension. Method 2 System Dynamics (SD) is a computer-aided method that provides mathematical modelling to frame and understand complex dynamic problems for policy analysis and design. Contrary to the modelling approach used in econometrics, SD not only explicitly incorporates the causal feedback relationships that intertwine various agents to define a complex dynamic system but also enables the modeller to bring in relevant qualitative factors. The iterative modelling process dictates the modeller to iteratively refer to the relevant literature and/or experts to capture the organic structural causal relationships found in a system. The inherent advantage of such a process is a gradual understanding of the bigger picture of the overall system structure. Such a learning process not only challenges the existing mental models about the system that shape the current policy frameworks but also helps identify the high leverage points in the existing structure or possible structural changes to better achieve policy objectives. Method 3 The study extends the model developed for an earlier study (Pedercini and Qureshi 2010). The hundred homogeneous groups of households possess homogeneous physical capital (K) and human capital (H). The K is quite obvious, but H is based on the level of education and skill acquired by the group, the level of health attained by the group which is an outcome of their access to food and health services. They use K and H to generate income which not only provides for their dignified living but also helps accumulate wealth if they produce surplus. The organic relationships depicted the main module of the model structure, as well as commonly found in literature (Pedercini and Qureshi 2010; Qureshi 2007; Qureshi 2008; Qureshi 2009). Method 4 In this model, the five elements of UM, namely religion (al-Din), life (al-Nafs), intellect (al-Aql), progeny (al-Nasl), and wealth (al-Mal) are used as constant variables. The research then adopts content analysis to identify suitable and relevant Higher Intents to match the five elements at three levels, namely Darurah (D) necessity, Hajiyah (H) complement and Tahsiniyyah (T) embellishment. The researchers then make use of Sekaran (2010) behavioral science to translate these Higher Intents into indicators units by cascading them into dimensions and elements, and then identify the relevant data to measure them. The study tried to stimulate interest towards a very significant new frontier in research, a multi-dimensional theorization of al-Maqāṣid. This was a small step in the right direction. The UM-HI theoretical framework presented is robust, 168 Book 2.indd 200 10/16/17 4:58 PM
  201. simple and practical . Its sophistication will depend on the nature of the higher intents, operationalization, method of computation and the data used. Method 5 Measurement of CIBEST model is based on the CIBEST Quadrant. As there are four CIBEST quadrants, CIBEST model is constructed from these four quadrants. The model is composed from four indices, namely, welfare index, material poverty index, spiritual poverty index, and absolute poverty index. The sub section attempts to formulate these indices mathematically. The first is the welfare index. This index is symbolized by W. Formula of the index is as follows: where W w N = Welfare Index; 0 < W < 1 = the number of prosperous households (spiritually and materially rich) = total number of observed households In this index, researchers simply calculate the number of households whom are spiritually and materially rich (w). It will then be divided by the number of total population in order to get welfare index. The value of welfare index is between 0 and 1. It is because of the impossibility of having all population in the same welfare quadrant. The second index is Material Poverty Index. This index is symbolized by Pm. Formula of Pm can be observed below. where Pm Mp N = Material Poverty Index; 0 < Pm < 1 = the number of materially poor but spiritually rich households = total number of observed households Researchers simply count the number of households living in the second quadrant of CIBEST in order to get the value of Mp. Furthermore; the third index is spiritual poverty index (Ps). Formula of this index is as follow. where Ps Sp N = Spiritual Poverty Index; 0 < Ps < 1 = the number of spiritually poor but materially rich households = total number of observed households The value of Sp could be identified when the number of spiritually poor households living in the third quadrant of CIBEST is known. Lastly, the fourth index is absolute poverty index, which is symbolized by Pa. Formula of this index is as below. 169 Book 2.indd 201 10/16/17 4:58 PM
  202. where Pa Ap N = Absolute Poverty Index; 0 < Pa < 1 = the number of absolute poor households (materially and spiritually poor) = total number of observed households This index requires calculation of the number of absolute poor households (Ap) in order to find out the value of Pa. Nevertheless, the values of w, Mp, Sp and Ap cannot be computed unless we know the standard determining material poor and spiritual poor. This study has strict limitations. Unless the Muslim minority living in non-Islamic countries attempt to use this model in order to observe their actual poverty and welfare level, CIBEST model may only be applied in the Islamic countries. Future research on the possibility to implement Islamic concept of poverty and welfare level should be prioritized as an important agenda. 4.6. Exploration of Data Availability in Various Countries and their Addresses The major objective of this study is to develop index by identifying country-wide socioeconomic development indicators that are the representative of five major elements of Maqāṣid al-Sharīʿah. For this, the study browsed countries web-sites and list down more than 490 socioeconomic development indicators. Table 1 to Table 5 have shown the sub classifications of the five main elements of Maqāṣid al-Sharīʿah (left column) and main heads of the numerous socioeconomic parameters (right column) from the countries web-sites (most of these countries are Islamic Development Bank member countries). The details of these variables are given in the annex-01 to annex-05 while complete web-site address list of these countries are given in the annex-06. These countries produce data on the parameters identified by this study and can help the team in the development of Maqāṣid al-Sharīʿah based socioeconomic index. The link between Maqāṣid al-Sharīʿah and socioeconomic characteristics of different countries can be improved by statistical transformation of the variables. 5. Conclusion and Recommendations This study has used the five major elements of Maqāṣid al-Sharīʿah identified by Imam AlGhazali and explored their various sub-indicators that have nexuses with socioeconomic development predictors that can help develop Maqāṣid al-Sharīʿah based socioeconomic index. The study enthusiastically indentified the availability of the indicators across various countries (mainly from member countries of Islamic Development Bank (IsDB)). Accordingly, the study identified more than 490 socioeconomic indicators. These indicators include health, education, freedom, justice, marriage, divorce, suicide, circumcision, contraception, transport, agriculture, banking & finance, employment, trade, Zakāt, Takāful, risks, inflation etc. etc. Details on more than 490 socioeconomic development variables are given in the annexes. The study analysed the relevancy of these identified indicators with the Sharīʿah objectives and provided the countries‘ web-addresses that can help construct Maqāṣid al-Sharīʿah based socioeconomic index. 170 Book 2.indd 202 10/16/17 4:58 PM
  203. Future research is recommended with an objective to explore the Maq āṣid al-Sharīʿah based socioeconomic parameters for the development of IsDB‘s own database. It is expected that this research can help IsDB to lay down a milestone to serve Muslim ummah by disseminating important data originated from Muslim countries. 171 Book 2.indd 203 10/16/17 4:58 PM
  204. References Adam Szirmai (2005), the Dynamics of Socioeconomic Development: An Introduction, pp- 1-24. Ahmad Khurshid (2000). Islamic Finance and Banking: The Challenge and Prospects. Review of Islamic Economics, No.9, 2000, pp.57-82. Al-Najjar, U. Abd al-Majid (2008), Maqāṣid al-Sharīʿah Bi Ab‘adin Jadidah: Beirut, Dar al-Gharb al-Islami. Al-Shatibi (2005) Al-Muwafaqat fiq Usul al-Sharīʿah, A. Darraz and M. Darraz, Vol. 2, Dar alKutub al-Islamiyyah, Lubnan. Asutay, M. (2010, 5-9 July 2010), An Introduction to Islamic Moral Economy, paper presented at the Durham Islamic Finance Summer School 2010, School of Government and International Affairs, Durham University. Chapra, M. U. (1992). Islam and the Economic Challenge, Leister UK: The Islamic Foundation. Chapra, M. Umer (2000), The Future of Economics: An Islamic Perspective .Leicester, The Islamic Foundation. Chapra, M. U. (2004). The Case Against Interest: Is it Compelling? Paper presented at the International conference on Islamic Banking and Finance. Chapra, M. U. (2007). Challenges Facing the Islamic Financial Industry, in K. Hassan & M. K. Lewis (Eds.): Edward Elgar. Chapra, M. U. (2008a). The Global Financial Crisis: Can Islamic Finance Help? IIUM Journal of Economics and Management, 16(2), 118-124. Chapra, M. U. (2008b, 19-20 April 2008). The Maqāṣid Al-Shari'ah and The Role of the Financial System In Their Realization. Paper presented at the Eighth Harvard University Islamic Finance Forum Harvard University. Claire Crawford and Ellen Greaves (2013), a comparison of commonly used socioeconomic Indicators: their relationship to educational disadvantage and relevance to Teach First, pp-1-57. Crawford, C., Greaves, E. and Parey, M. (2013), Peer composition and risky behavior: evidence from the school starting age discontinuity, Institute for Fiscal Studies (IFS), Working Pape. Dr. Mashhad Al-Allaf (2003), the Objectives of the Islamic Divine Law, 2. Dusuki, Ashraf W. (2005), Corporate Social Responsibility of Islamic Banks in Malaysia: A Synthesis of Islamic and Stakeholders‘ Perspectives. Doctoral Dissertation, Loughborough University, Loughborough, U.K. Dusuki and Bouheraoua (2011), the framework of Maqāṣid al-Sharīʿah (Objectives of the Sharīʿah) and Its Implications for Islamic Finance. Ghazali, A.H. (1973). Al-Mustafa Cairo; al-Maktabah al-Tijariyyah, Pp-2-18 Hameed, Shahul, Sigit Pramano, Bakhtiar Alrazi and Nazli Bahrom (2004), Alternative Performance Measures for Islamic Banks. 2nd International Conference on Administrative Sciences, King Fahd University of Petroleum and Minerals, Saudi Arabia, 19-21 April 2004. 172 Book 2.indd 204 10/16/17 4:58 PM
  205. Hamid , M. A. (2005). The Role of Islamic Bank in the Development of Small entrepreneurs, Journal of Islamic Economics, Banking and Finance, 1(1). Hasan Zubair (2004), Measuring the Efficiency of Islamic Banks: Criteria, Methods and Social Priorities, Review of Islamic Economics, Vol.8, No.2, pp.5-30. Johan Linden (2012), effects of population growth on economic growth in Asian developing countries pp-1-35. Kamali, M. H. (1999), Maqāṣid al-Sharīʿah: The Objectives of Islamic Law. Islamic Studies, Occasional Papers 33. Islamabad: Islamic Research Institute, International Islamic University (Islamabad: Islamic Research Institute, International Islamic University Kuznets, Simon (1956), Quantitative Aspects of the Economic Growth of Nations. I. Levels and Variability of Rates of Growth, Economic Development and Cultural Change, 5, 1-94. Kendrick, John W., and Elliot S. Grossman (1980), Productivity in the United States: Trends and Cycles. Baltimore: Johns Hopkins University Press. Kendrick, John W, and Ryuzo Sato (1977), Factor Prices, Productivity, and Growth, American Economic Review 53, no. 5 (December): 974-1003. Linden (2012), effects of population growth on economic growth in Asian developing countries pp-23-39. Mustafa Omar Mohammad and Shahidawati Shahwan (2013), the Objective of Islamic Economic and Islamic Banking in Light of Maqāṣid al-Sharīʿah: A Critical Review pp-75-84. Moussa Larbani and Mustafa Omar Mohammed (2009), Decision Making Tools for Resource Allocation Based on Maqāṣid Al- Sharīʿah pp.51-68. Siddiqi, M. Nejatullah (2000), Islamic Banks: Concept, Precept and Prospects, Review of Islamic Economics, No.9, 2000, pp.21-35. Simon, J., da Vanzo, Julie and Peter Lindert (Eds.) (1981), Research in Population Economics. Vol. 1–4. Greenwich: JAI Press. 173 Book 2.indd 205 10/16/17 4:58 PM
  206. 174 Book 2 .indd 206 10/16/17 4:58 PM
  207. 10 Market Orientation and Accountability of Islamic Microfinance Institutions in Financial Sustainability : A Case Study of TEKUN Soheil Kazamian78, Rashidah Abdul Rahman79, Zuraidah Mohd. Sanusi80, and Adewale Abideen Adeyami81 Poverty, as the most significant moral challenge in the last century, still tortures most of the developing countries. Among several proposed solutions that have been tried, microfinance is known as a very efficient and useful one for fighting poverty. This study aims at providing insights into how the three dimensions of market orientation, namely, customer orientation, competitor orientation and inter-function coordination, affect the most important aspect of sustainability of Islamic MFIs, which is financial performance sustainability of Tabung Ekonomi Kumpulan Usaha Niaga (TEKUN) as one of the largest Islamic microfinance institution in South East Asia. For achieving this objectives, the current study targets management level of TEKUN, who have two criteria; being for the decision maker level and been informed about the overall guidelines of TEKUN. Therefore, as a primary method of data collection, questionnaires were administrated on top management of TEKUN. The obtained data was subjected to statistical analyzing using PLS-SEM, on a convenience sample of 190 TEKUN‘s top management level. The results provided empirical evidence that the financial sustainability of TEKUN is only influenced by customer orientation significantly. However, neither competitor orientation nor inter functional coordination has significant effects on management sustainability of TEKUN. The results of the paper enhanced further the literature in understanding the long-term sustainable financial performance-based market orientation. The findings are useful for policy makers, management of microfinance institutions, practitioners and academics to enhance microfinance system. Keywords: Financial sustainability; market orientation; microfinance. 1. Introduction In response to the need by the international community to design a comprehensive and fullsupportive financial package for helping the poor, Muhammad Yunus developed the Grameen Bank model (microcredit and microfinance that provides small loans to poor entrepreneurs) in Bangladesh in 1976 (Li & Rouyih, 2007). The Grameen Bank model has flourished in the past four decades all over the world. Likewise, in Malaysia, the Amanah Ikhtiar Malaysia (AIM) was established in September 1987, using the Grameen Bank model with some modifications. Followed by Yayasan Usaha Maju (YUM) and Economic Fund for National Entrepreneurs Group (TEKUN) established in 1987 and 1998, respectively (Ramli, 2001). Microfinance has been demonstrated to be a valuable tool in increasing the productivity of the poor and aiding in economic development (Comim, 2007). However, conventional microfinance 78 Universiti Teknologi Mara, Malaysia Universiti Teknologi Mara, Malaysia 80 80 Universiti Teknologi Mara, Malaysia 81 81 Universiti Teknologi Mara, Malaysia 79 175 Book 2.indd 207 10/16/17 4:58 PM
  208. and loans , which are based on interest (pre-determined interest), may create new financial problems for borrowers, especially for the poor ones. For instance, the loan provider never bears any risks and also never loses, because all of the risk and losses are held by the borrower. In addition, paying back the interest of loans may create another heavier loan for the borrower (ElKomi & Croson, 2007), so the necessity of using interest free loans (the method that is applied in Islamic microfinance) was felt more and more. Besides, because of the issue of high predetermined interests of the loans and its consequences, many of the clients cannot repay the gotten loans, so the microfinance providers face another issue which is uncollected loans and the clients who are not able to make their payment. Furthermore, following the Sharīʿah, interest based transactions are forbidden, and it is estimated that over 1/3 of the world‘s poor are Muslims (Economist, 2008); it means conventional microfinance does not have any appeal for many of its potential clients (Muslims) and even many non-Muslim clients because of its repayment problems. Based on Islamic concepts, if every person in an Islamic society does their duties well, poverty will disappear. Some concepts like ―Brotherhood‖ and ―al-ʿAdl‖, which means every Muslim must be responsible for others‘ conditions and getting Allah‘s satisfaction (and not financial benefits) as the most important benefit, refer to this valuable point (Shirazi, 2008). After adopting microfinance with Sharīʿah rules, most problems of paying predetermined interest and bearing risk only by the loan users have been solved (Akhter, Akhtar, & Jaffri, 2009). As clearly seen, there are many people in Muslim countries who are in need of a financial supportive package like Islamic microfinance. An estimated 72% of people living in Muslim countries cannot access formal financial services (Honohan, 2008). Thus, the demand for Islamic microfinance among Muslim countries is growing rapidly in recent years. The Consultative Group Assist Poor (CGAP82) has done an international survey on Islamic microfinance, collecting information on over 125 institutions and contacted experts from 19 Muslim countries. The results have shown that Islamic microfinance has an estimated total global outreach of only 380,000 customers and accounts for only an estimated one-half of one percent83 of total microfinance outreach. For instance, in Kenya only less than 70,000 people out of an estimated 9 to 10 million poor have access to microfinance products (Hulme, 2000). The supply of Islamic microfinance is quite high in some countries like Indonesia and Bangladesh, accounting for 80% of the global outreach; in some other countries like Malaysia and Pakistan, it is more than 50% and in Jordan, Algeria and Syria, it is at 20-40 percent (Karim, Tarazi, & Reille, 2008). Although the Islamic microfinance business has a great market in Malaysia, still one of the most remarkable issues of Islamic microfinance institutions (IMFIs) in Malaysiais their unsustainability which makes lack of outreach and consequently, diminishing poverty alleviation. The IMFIs in Malaysia are mostly not able to manage themselves financially and are severely dependent on governmental grants(Ahmad, 2003). It could be the reason for the low number of microfinance providers despite the high demand for the microfinance services. Despite of all valuable conducted efforts poverty line in Malaysia still is remarkable. Nevertheless poor people in Malaysia need to use microfinance services, but Islamic microfinance institutions are suffering by bankruptcy. In other terms, microfinance has been known as an efficient tool for poverty alleviation, but microfinance providers need to be sustained first. Therefore, for fighting with 82 An independent policy and research center dedicated to advancing financial access for the world's poor (www.cgap.org) 83 Based on an estimated 77 million microcredit clients (microfinance information exchange, 2007) 176 Book 2.indd 208 10/16/17 4:58 PM
  209. poverty as the most significant moral challenge in last century , reaching sustainability for IMFIs seems necessary. Although, sustainability has got the same meaning in all markets, it has been defined specifically in each business, in particular. According to Cheney, Nheu, and Vecellio (2004) and Fontaine, Haarman, and Schmid (2006), and the stakeholder theory, sustainability is a complex and multifaceted concept, covering a broad spectrum of areas and topics from habitat conservation to energy consumption, and to stakeholder satisfaction and financial results. The original or literal meaning of the term is equivalent to permanence and implies the notion of durability, stability, and eternalness. On the other hand, sustainability in microfinance business means achieving sustainable financial and social performance (Qayyum & Ahmad, 2006). Therefore, the sustainability of the IMFIs and the issue of outreach and sustainable financial performance are strongly linked. Accountability in IMFIs is about achieving these two main organizational objectives (outreach and sustainable financial performance). Consequently, it seems necessary for IMFIs to sustain current clients and attract new ones as their financial and social resources in order to reach sustainability and meet accountability objectives. Thus, in order to achieve this goal, IMFIs need to follow a valid and reliable plan, which contains guidelines in; attracting and saving clients, taking proper decisions in confrontation to competitors and finally taking proper internal interaction, enhancing the organization in the market. This is exactly where concept of market orientation can assist the IMFIs to get survived and nourished. Kohli and Jaworski (1990) defined market orientation as ―Market orientation is the organization wide generation of market intelligence pertaining to current and future customer needs, dissemination of the intelligence across departments, and organization wide responsiveness to it‖. Market orientation has three dimensions; Customer orientation, Competitor orientation and inter-function coordination. Customer orientation is related to whatever corporations do for attracting clients and then retaining them by keeping them satisfied. Competitor orientation includes knowing the business environment well. Monitoring, analyzing and responding to the market changes are related to this. Inter-function coordination involves inter-departmental regulations to make the organization more efficient. In other words, organizations adopt various market orientation strategies to enhance the business market in keeping current clients and attracting more future clients (Kohli & Jaworski, 1990; Narver & Slater, 1990). This study aims to investigate whether the nature of market orientation can affect the financial sustainability of IMFIs or otherwise, applying the concept of sustainability at the micro level of the organization in the microfinance business. Most of previous study in this area are assessing either performance or efficiency of microfinance institutions, and are about the conventional type of microfinance and not Islamic one. More, limited empirical research has been done examining influences of market orientation on the different aspects of sustainability of IMFIs. Furthermore, in Malaysia, almost no empirical research has been conducted, investigating the issue of unsustainability of the IMFIs and providing solution for that. The current study determines the influences of market orientation on financial sustainability of TEKUN as one of the oldest and largest Islamic microfinance providers in Malaysia, to clarify how accountability in financial sustainability of TEKUN is affected by each three dimension of 177 Book 2.indd 209 10/16/17 4:58 PM
  210. market orientation . Further, two control variables namely sustainability of customer and employee are used to determine the relationship between independent and dependent variables. 2. Sustainability of Microfinance Institutions According to Sebhatu (2009), having long-term financial and social performance are the most important characteristics of sustainable organizations. In fact, the most important measurement of sustainability is having sustainable financial performance. Because, in general, organizations can think about providing better services and developing their market only when they are be able to meet their current expenses that is a part of financial sustainability definition. Financial sustainability of MFI can be measured by some key items such as increasing or decreasing ―Surplus earning before provisions‖, ―Total net income‖, ―Rate of Return‖, ―Market share‖ (number of clients that MFI hoped to capture at the beginning of the financial period) and ―Debt to asset ratio‖ (Almazan, Hartzell, & Starks, 2005; Barr, 2005; Lafourcade, Isern, Mwangi, & Brown, 2005). Further, the relationship between top management attitude in terms of saving clients and sustainability of the organization could be affected by some more variables like having sustainable customers and employees. As it is clear, customers as financial resources play the main role in the survival of each business, so saving current customers and attracting new ones is a very important objective for all organizations (Churchill & Halpern, 2001; Junaidi & Rizkiyah, 2011). In addition, saving and training employees could make corporations more efficient and sustainable (Heriyati & Ramadhan, 2012; Kazemian, Abdul Rahman, & Ibrahim, 2014). Therefore, the relationships between independent (dimensions of market orientation) and dependent variable (financial sustainability of IMFIs) in this study may could get affected by two control variables namely sustainability of customer and employee. 2.1 Market Orientation and Islamic Microfinance Institutions The concept of market orientation indicates that success will come to the organizations that best determine the perceptions, needs, and wants of target markets and satisfy them through the design, communication, pricing, and delivery of appropriate and competitively viable offerings (Kotler, 1997). In contrast to a market orientation, most MFIs possess a ―product orientation,‖ which holds that success will come to those organizations that bring to market goods and services they are convinced will be good for the public (Kotler & Anderson, 1996). In fact, the transition from product orientation to market orientation is a long process that has occurred in virtually all mature businesses. However, surprisingly, the microfinance industry is unique only in that it is relatively young and immature and it has yet to pass through this phase. However, pass through this phase it must, if it is to survive and prosper. The main question which MFIs should find an appropriate answer for is how to take an abstract concept like market orientation and give it real managerial/operational relevance (Wright, Cracknell, Mutesasira, & Hudson, 2003). In fact, the increasing level of being market oriented (moving from product orientation to market orientation) for the Islamic MFIs should be taken step by step. As widely discussed earlier, since the concept of market orientation put customers at the center of attention and designs future plans based on their demands, so the first step taken should be being customer oriented. In this regard, Gutiérrez-Nieto and Serrano-Cinca (2010) studied the factors that affect decisions to fund microfinance institutions. The proposed model of this study mostly focused on creating customer superior value and its influences on the quality and sustainability of the 178 Book 2.indd 210 10/16/17 4:58 PM
  211. microfinance institutions . Data was gathered from 116 managers of microfinance institutions in the US, in 2007. The results proved that both outreach and sustainability of microfinance institutions are important for microfinance institutions funders. In addition, the findings showed that creating customers superior value (being customer oriented) through focusing on some aspects like mutual trust, loyalty and transparency, affects sustainability and outreach of microfinance institutions, significantly. Next stage is monitoring the business environmental elements, such as competitors‘ action and assessing competitive intensity in order to show appropriate reactions, aiming to save current clients and attract more new ones. Finally, for being market oriented, the Islamic MFIs should manage internal interactions, for instance, in the matters of inter-departmental connectedness and conflicts, management emphasizes in terms of being innovative and so on. Overall, after taking all the mentioned steps, the Islamic MFIs will be considered as a market oriented organization. 2.2 Microfinance in Malaysia Despite the World Bank classifying Malaysia as an upper middle-income country, it has got one of the fastest economic growths among Asian countries. According to the World EconomicOutlook (2012), Malaysia increased its GDP growth rate from 0.5% in 2001 to 7.2% in 2010. In addition, the World Bank (2012) confirmed that the poverty rate in Malaysia has also been reduced; the proportion of people whose income is below USD1.25 (RM5) per day decreased from 2.1%in 1995 to 0.5% in 2004. Furthermore, based on SME (2011), in 2010, Small and Medium Enterprises (SMEs), as the main users of microfinance services (Shailender Singh & Janor, 2013), comprises of 80% microenterprises, 18% small enterprises, and 2% medium enterprises. The SMEs constitute 99.2% or 548,247 of total business establishments; contribute about 32% of GDP, 59% of total employment and 19% of total exports. Nevertheless, Malaysia is still challenged by the problem of poverty. In 1997, there were 10.9% of households in rural areas of which 56,000 were under the poverty line. Despite reducing the poverty rate, because of the worldwide economic slowdown and declining commodity prices, the percentage of people in poverty increased in recent years (Li & Rouyih, 2007). The poverty rate in Malaysia in 2010 was 3.8%, and almost 34% of 1.4 million workers earned below the poverty line of RM720 monthly (BNM, 2011). As mentioned before, eradicating poverty through microfinance is nothing new in Malaysia. Since the 1970s, when Muhammad Yunus and Grameen Bank of Bangladesh redefined and established microfinance in South Asia, it was also rapidly developed in other countries in this region (Chowdhry, 2008). Microfinance in Malaysia has been actively operated by co-operative banks, credit unions and some specialized bank organizations. It provides financial services that may range up to about RM10,000 (USD 3,225), mostly for objectives, such as agricultural loans, loans for poverty reduction and financing of small businesses (Li & Rouyih, 2007). In Malaysia, Majlis Amanah Rakyat (MARA), Council of Trust to the Bumiputera and Credit Guarantee Corporation (CGC) were among the pioneers in introducing microfinance loans to its borrowers. 2.3 The Economic Fund for National Entrepreneurs Group (TEKUN) The second largest microfinance institution in Malaysia is The Economic Fund for National Entrepreneurs Group (TEKUN) established on 9 November 1998. TEKUN is different from AIM and YUM. It provides loans to both poor and not-so-poor people. The main objective of TEKUN is to provide easy and quick loans to Bumiputra and Indian entrepreneurs. Since 2008, TEKUN has expanded its services to provide business opportunities and business skills training 179 Book 2.indd 211 10/16/17 4:58 PM
  212. to its borrowers and to develop networking among innovative and progressive entrepreneurs from all over Malaysia . TEKUN is under the purview of Ministry of Agriculture and Agro-Based Malaysia. However TEKUN receives soft loans from its funders, but these soft loans must be repaid back at the end of each financial year and that is exactly why TEKUN needs to be financial sustained. 3. Theoretical Framework and Hypothesis of Study The previous literature shows that market orientation appears as an important factor in leading organizations to the main objectives of sustainability (accountability to superior long-term social and financial performance)(Bhuian & Habib, 2005). Market oriented firms are more likely to achieve long-term profit by providing superior value to the customers by identifying their current and future needs, knowing the strengths and plans of competitors, showing coordinated and just in time reactions and presenting new services in order to affect the market environment (Narver & Slater, 1990). Several studies have been conducted, examining the capabilities of market orientated organizations in reaching superior long-term performance (Jaworski & Kohli, 1993; Narver & Slater, 1990; Ruekert, 1992; Safarnia, Akbari, & Abbasi, 2011). Based on this positive linkage between market orientation and institutional sustainability in various industries, the proposed model emphasizes on the role of market orientation for achieving high financial performance by microfinance providers. In addition, two more control variables namely, having sustainable customers and employees are considered as effective factors on the relationship between dimensions of market orientation and aspects of sustainability. Figure 1 shows the key components of the framework. As can be seen, the framework posits market orientation of a firm as an independent variable and its financial sustainability as the dependent variables. Figure 1: Theoretical framework of the study According to the existing literature, it is expected that following market orientation‘s strategies lead organizations to reach superior financial sustainability. This argument is fully supported by the ―stakeholder theory‖. According to Freeman (2004), using market orientation strategies in 180 Book 2.indd 212 10/16/17 4:58 PM
  213. order to create superior value for customers , supporting customer failures, adherence to social responsibilities can help MFIs to attract more customers and stay sustainable, and consequently affect on the financial sustainability, positively . As mentioned above, market orientation has three dimensions: customer orientation, competitor orientation and inter-function coordination. Customer orientation means driving corporations based on the current and future needs of customers, which requires knowledge of the customer target market (CU1), knowing and analyzing their current demands and predicting future demands (CU2), and creating customer superior value by focusing on meeting their needs in order to make them satisfied (CU3)(Jaworski & Kohli, 1993; Kohli & Jaworski, 1990; Noor & Muhamad, 2005). According to Singh and Ranchhod (2004), organizations are able to attain competitive advantages and reach superior organizational performance, through creating superior customer value and analyzing current and future customer‘s needs. In addition, since market orientation places the customer at the centre of all the activities of an organization, it aims to achieve customer satisfaction by offering products based on customer‘s desires and expectations. A study by Reichheld and Sasser (1990) found that firms can improve profits from 25% to 85% by making an improvement of only 5% in their customer retention. Furthermore, they have found that if 2-5 percent of the additional customers are retained, it has the same effect as cutting costs by 10%, which will increase the profit. Thus, this study hypothesizes that: H1: Customer orientation has a positive and significant influence on financial sustainability of microfinance institutions. The second characteristic of market-oriented organizations is being competitor orientated. By definition, competitor oriented organizations monitor and analyze the actions and capabilities of competitors for making just in time decisions in order to show the best reactions (Narver & Slater, 1990). A competitor-oriented organization firstly should be informed about the level of competitive intensity by knowing the competitive environment (CO1). It should be able to evaluate its own ability and power as well as that of its competitors. This organization should have a systematic procedure for gathering all the relevant data (CO2) and transferring this information from the competitors to top management (CO3) for making suitable and just in time decisions (CO4)(Armstrong & Collopy, 1996; Kohli & Jaworski, 1990; Tortosa, Moliner, & Sánchez, 2009). Some studies suggest that competitor-oriented firms, which continuously monitor progress about rivals, gain opportunities by creating products or marketing programs that are differentiated from those of competitors (Im & Workman Jr, 2004) or by adopting an effective ‗second-but-better‘ approach, which assists them to gain long-term performance (Frambach, Prabhu, & Verhallen, 2003). Similarly, according to the mentioned literature, the current study hypothesizes that: H2: Competitor orientation has a positive and significant influence on financial sustainability of microfinance institutions. Inter-function coordination is reflecting level of interactions and communications that assists organizations to provide better quality of services (Grinstein, 2008). Generally, market-oriented organizations should have something new for presenting such as innovations to impress the market and customers in order to persuade them to stand by the organization. Inter-function coordination is directly related to the top management attitude of whether they want to be the best in the market or otherwise (IC1). If so, how much is their risk tolerance (IC2)? Alternatively, do they have the capability for being innovative? (Gresham, Hafer, & Markowski, 181 Book 2.indd 213 10/16/17 4:58 PM
  214. 2006 ). On the other hand, ‗Too much‘ collaboration and information sharing, innovation and risk taking however, often have a negative effect (Johari, Yean, Adnan, Yahya, & Ahmad, 2012; Szymanski & Henard, 2001). Still, at the heart of inter-functional coordination lies the sharing of market information that is crucial for new product development and that is why internal connectedness (IC3) and conflicts (IC4) may have remarkable affects (Im & Workman, 2004). Similarly to other dimensions of market orientation, the following hypotheses are considered: H3: Inter-function coordination has a positive and significant influence on financial sustainability of microfinance institutions. Further, the current research measures financial sustainability of microfinance institutions through its definition (Crittenden, Crittenden, Ferrell, Ferrell, & Pinney, 2011; Cull & Morduch, 2007; Sebhatu, 2009; Tucker, 2001). Generally speaking, As León (2001) stated financial sustainability is the ability to secure stable and sufficient long-term financial resources, and to allocate them in a timely manner and appropriate form, to cover the full costs of protected areas (direct and indirect) and to ensure that organizations‘ incomes are managed effectively and efficiently. In other terms, financial sustainability is not only about the amount of money, but also about how effectively money is spent, how well benefits are provided to local stakeholders, and other factors. Financial sustainability of microfinance providers is measured by some measurements like long-term and short-term profitability (FS1), liquidity (FS2) and efficiency (FS3). 4. Research Methodology The main objective of the current study is to empirically test the level of influences of three dimensions of market orientation as independent variables on financial sustainability of TEKUN as the dependent variable similar to the approach used by Narver and Slater (1990a). For measuring the level of a firm‘s market orientation, the 14 items MKTOR scale developed by Narver and Slater (1990a) and the 32-item scale of market orientation originally developed by Jaworski and Kohli (1993) were used. The Narver and Slater‘s (1990) measurement scale (MKTOR) has been used extensively in studies on market orientation and has been widely recognized for its validity and reliability (Ngai & Ellis, 1998; Ngansathil, 2001; Pelham & Wilson, 1995). The reported reliability coefficient of the scale has been reported to be above the 0.7 threshold as recommended by Nunnally (1978). The unit of analysis in this study is all the active branches of TEKUN, providing services for more than 5000 clients. Based on the general rule, the minimum number of respondents or sample size is five-to-one ratio of the number of independent variables to be tested. However, Hair et al. (2010) proposed that the acceptable ratio is ten-to-one. Non-probability purposive sampling was used in this study. Since we could not get a list of all the elements of the population, we used a non-probability sampling of purposive sampling whereby only the large branches were chosen and the medium and small branches (with less than who 5000 clients) were excluded from the sample. 4.1 Data Collection The study was based on a survey of one of one of the biggest microfinance providers in Malaysia, Economic Fund for National Entrepreneurs Group (TEKUN). Questionnaire protocol was used as the primary means for data collection. Three hundred self-administered questionnaires were used for gathering data from the respondents. A multiple method of data collection was employed, whereby some questionnaires were mailed to the respondents and 182 Book 2.indd 214 10/16/17 4:58 PM
  215. some were personally administered top management during monthly meeting in the main branch . The survey field work started in August 2012 and continued to July February 2013. A total of 190 questionnaires were received and used for this analysis, which translates to about a 63% response rate. The next section presents the assessment of the goodness of measure of these constructs in terms of their validity and reliability within the research framework. 183 Book 2.indd 215 10/16/17 4:58 PM
  216. 4 .2 Measures and Assessment of Goodness of Measures A questionnaire using a seven-point Likert scale was used to gather data for each construct of the research model. All instruments were adapted from previous literatures and were modified to measure the performance. The questionnaires were designed based on a multiple item measurement scale adapted from previous research namely (Crittenden et al., 2011; Gresham et al., 2006; Jaworski & Kohli, 1993; Kohli & Jaworski, 1990; Kumar, Jones, Venkatesan, & Leone, 2011; Micheels & Gow, 2008; Mitchell, Wooliscroft, & Higham, 2010). 4.3 Goodness of Measures The two main criteria used for testing goodness of measures are validity and reliability. Reliability is a test of how consistently a measuring instrument measures whatever concept it is measuring, whereas validity is a test of how well an instrument that is developed measures the particular concept it is intended to measure (Sekaran & Bougie, 2010). 4.4 Construct Validity In order to test how well the results obtained from the use of the measure fit the theories around which construct validity is designed (Sekaran & Bougie, 2010). The question here is does the instrument tap the concept as theorized? This can be accessed through convergent and discriminant validity. First, we looked at the respective loadings and cross loadings from Table 1 to assess if there are problems with any particular items. We used a cutoff value for loadings at 0.5 as significant (Anderson, Babin, Black, & Hair, 2010). As such, if any items which has a loading of higher than 0.5 on two or more factors then they will be deemed to be having significant cross loadings. From Table 1 we can observe that all the items measuring a particular construct loaded highly on that construct and loaded lower on the other constructs thus confirming construct validity. Table 1: Loading and cross loadings CO1 CO2 CO4 CU1 CU2 CU3 FS1 FS2 FS3 IC1 IC2 IC3 IC4 Competitor Orientation 0.6754 0.6634 0.7964 0.5031 0.6138 0.6055 0.4185 0.4773 0.5173 0.4715 0.491 0.4293 0.4165 Customer Orientation 0.1236 0.2366 0.7183 0.888 0.948 0.9164 0.5169 0.5802 0.6508 0.4696 0.4914 0.5622 0.3979 Financial Sustainability 0.1925 0.2974 0.4943 0.6325 0.5605 0.5442 0.92 0.9283 0.9213 0.5511 0.4521 0.3761 0.4787 Bold values are loadings for items, which are above recommended value of 0.5. Inter-function Coordination 0.2100 0.2742 0.5201 0.5519 0.4524 0.5036 0.4948 0.5343 0.489 0.9127 0.9275 0.6732 0.8929 184 Book 2.indd 216 10/16/17 4:58 PM
  217. 4 .5 Convergent Validity Next, we tested the convergent validity which is the degree to which multiple items to measure the same concept are in agreement. As suggested by Hair, Ringle, and Sarstedt (2011) we used the factor loadings, composite reliability, and average variance extracted to assess convergence validity. The loadings for all items exceeded the recommended value of 0.5. Composite reliability values (see Table 2), which depict the degree to which the construct indicators indicate the latent, construct ranged from 0.663 to 0.948 which almost exceeded the recommended value of 0.7 (Hair, Sarstedt, Ringle, & Mena, 2012). The average variance extracted (AVE) measures the variance captured by the indicators relative to measurement error, and it should be greater than 0.50 to justify using a construct (Barclay, Higgins, & Thompson, 1995). The average variances extracted were in the range of 0.51 and 0.852. Table 3 summarizes the results of the measurement model. The results show that all the four constructs, namely customer orientation, competitor orientation, inter-function coordination and management sustainability, are all valid measures of their respective constructs based on their parameter estimates and statistical significance (t-value should be greater than 1.96) (Chow & Chan, 2008). Table 2: Results of measurement model Model construct Measurement item Loading CRa AVEb Competitor orientation CO1 0.675 0.756 0.51 CO4 0.796 0.941 0.842 0.945 0.852 0.916 0.735 Customer Orientation Financial Sustainability CO2 CU1 0.888 CU3 0.916 CU2 FS1 a 0.948 0.92 FS2 0.928 IC1 0.912 IC3 0.673 FS3 Inter-function coordination 0.663 IC2 IC4 0.921 0.927 0.892 Composite reliability (CR) = (square of the summation of the factor loadings)/((square of the summation of the factor loadings) ? (square of the summation of the error variances)) b Average variance extracted (AVE) = (summation of the square of the factor loadings)/((summation of the square of the factor loadings) ? (summation of the error variances)) 185 Book 2.indd 217 10/16/17 4:58 PM
  218. Table 3 : Summary results of the model construct Model construct Competitor Orientation Measurement item CO1 CO2 CO4 Standardized estimate 0.675 0.663 0.796 T-values 3.265 3.279 7.547 Customer orientation CU1 CU2 CU3 0.888 0.948 0.916 28.697 53.654 17.968 Financial Sustainability FS1 FS2 FS3 0.92 0.928 0.921 23.258 29.616 38.3 Inter-function coordination IC1 IC2 IC3 IC4 0.912 0.927 0.673 0.892 38.286 39.330 5.127 32.333 4.6 Discriminant Validity Next we proceeded to test the discriminant validity. The discriminant validity of the measures (the degree to which items differentiate among constructs or measure distinct concepts) was assessed by examining the correlations between the measures of potentially overlapping constructs. Items should load more strongly on their own constructs in the model, and the average variance shared between each construct and its measures should be greater than the variance shared between the construct and other constructs (Compeau, Higgins, & Huff, 1999). Table 4: Discriminant validity of constructs Constructs Competitor Orientation 0.51 Customer Orientation 2. Customer Orientation 0.353 0.842 3. Financial Sustainability 0.364 0.428 0.852 4. Inter-function coordination 0.468 0.513 0.603 1. Competitor Orientation Financial Sustainability Inter-function Coordination 0.735 Diagonals (in bold) represent the average variance extracted while the other entries represent the squaredcorrelations As shown in Table 4, the squared correlations for each construct are less than the average variance extracted by the indicators measuring that construct indicating adequate discriminant validity. In total, the measurement model demonstrated adequate convergent validity and discriminant validity. 186 Book 2.indd 218 10/16/17 4:58 PM
  219. 4 .7 Reliability Analysis We used the Cronbach‘s alpha coefficient to assess the inter item consistency of our measurement items. Table 5 summarizes the loadings and alpha values. As seen from Table 5, all alpha values are above 0.6 as suggested by Nunnally and Bernstein (1991). The composite reliability values also ranged from 0.688 to 0.913. Interpreted like a Cronbach‘s alpha for internal consistency reliability estimate, a composite reliability of 0.70 or greater is considered acceptable (Fornell & Larcker, 1981). As such we can conclude that the measurements are reliable. Table 5: Results of reliability Constructs Competitor Orientation Customer orientation Financial Sustainability Measurement items CO1, CO2, CO3 Cronbach‘s α 0.688 Loading rang 0.663-0.796 Number of items a 3(4) CU1, CU2, CU3 0.906 0.888-0.948 3(3) FS1, FS2, FS3 0.913 0.92-0.928 4(4) 0.875 0.673-0.927 3(3) Inter-function Coordination IC1, IC2 ,IC3, IC4 a Final items numbers (initial numbers) 4.8 Hypotheses Testing In this reaction we proceeded with the path analysis to test the six hypotheses generated. Figure 2 and Table 6 illustrates the results. The R2 value for management sustainability was 0.467, suggesting that 46.7% of the variance in extent of financial sustainability can be explained by customer orientation, competitor orientation and Inter-function coordination. As Hair et al. (2011); Hair et al. (2012) point out, each path coefficient greater than 0.2 reflects significant relationship between two respected variables. Therefore, a close look shows that customer orientation and inter-function coordination were positively related to extent of financial sustainability, (β = 0.422, p<0.01) and (β = 0.256, p<0.01), respectively. However competitor orientation was not significant predictors of extent of financial sustainability (β = 0.116, p<0.01). Therefore, H1 and H2of this study were supported while H3 did not receive statistical support. In this study it was found that the higher the extent of customer orientation, the better is the microfinance institution‘s financial sustainability. 187 Book 2.indd 219 10/16/17 4:58 PM
  220. Figure 2 : Results of the path analysis Table 6: Coefficients and hypothesis testing Hypothesis H1 Relationship CU → FS Coefficient 0.422 t value 2.632 Supported YES H2 CO → FS 0.116 0.984 NO H3 IC → FS 0.255 2.071 YES 5. Discussion The sustainability literature has focused on the notion that a proper implementation of market orientation leads to superior sustainable performance. Yet to date, a limitation of this mentioned fact is the lack of research about the relationship between market orientation‘s dimensions and management sustainability of organizations (O'Cass & Ngo, 2007). Two main objectives of accountability in MFIs are first, to reach more clients in the poorer strata of the population (outreach or social performance), and second, financial sustainability (Mersland & Øystein Strøm, 2009). Based on the stakeholder theory, managing stakeholders is about creating as much value as possible for stakeholders, without resorting to tradeoffs (Freeman, 2004). Thus, the top management of each organization should pay attention to every appropriate guideline for improving the organization‘s financial and social performance in order to create as much financial benefits as possible for the stakeholders. The central argument of this research is that microfinance is known as an efficient tool for poverty alleviation, but in order to maximizing their efficiency, MFIs need to increase their sustainable performance through achieving to financial sustainability. In addition, organizations with a strong established investment should be aware that for making financial benefit, in addition to producing high quality products or services, organization‘s ability to save current 188 Book 2.indd 220 10/16/17 4:58 PM
  221. clients and attract more new ones and to be innovative in creating superior customer value , are also required. This proposition has been corroborated by the empirical findings of this study in which customer orientation and inter-function coordination have positive impacts on organization‘s sustainable financial performance. In addition, unlike the previous body of literature, in this study sustainability is investigated at the micro level, like sustainability of management. By definition and according to the results of the study, TEKUN got high level in customer orientation. Based on the results of current study, TEKUN has got high ability in providing new services based on the clients‘ preferences and their future demands by analyzing their current needs. In addition, TEKUN emphasized on keeping the clients satisfied through the creating more added value for them. Some of taken actions in this regard like failure customers are welcome to extend repayment period, each branch manager should be responsible to the clients‘ complaints, unsatisfied clients even can talk to top management level, R&D department is responsible to measure clients‘ satisfaction level, directly and frequently, clients can contact to top management through suggestion box installed in all branches and so on. Totally, fully adoptable to the customer orientation definition, TEKUN places the clients at the center of all the activities and provided services. The findings are fully consistent with previous studied that examined the influences of customer orientation on sustainable performance of organizations (Ghani & Mahmood, 2011; Kazemian et al., 2014; Megicks, Mishra, & Lean, 2005; Ruekert, 1992). On the other hand, financial sustainability of TEKUN was also influenced by inter-function coordination, significantly. However, this result also has previously been documented (Gresham et al., 2006; Kohli & Jaworski, 1990; Narver & Slater, 1990). In fact, it seems possible that this result is due to main focus of the management of TEKUN that is following principals as much as possible. Because of this fact all departments in TEKUN seem integrated but based on the management guidelines they should conflicts. In addition, TEKUN through its branches always seeks for providing more financial services in order to attract more clients. Gather together, all these possible explanations lead TEKUN to reach financial sustainability. However, regarding the insignificant relationship between competitor orientation and financial sustainability in TEKUN, this finding should be indicated that TEKUN is one of the largest microfinance providers as compare to other microfinance institutions in Malaysia. In addition, another possible explanation for this is nature of microfinance market in Malaysia which is not a competitive market. In other terms microfinance institutions in Malaysia are not really eager to monitor other competitors‘ actions, analyze and response to them. From a moral point of view TEKUN‘s management prefers to focus on their own activities rather than concern with the activities carried out by the other microfinance institutions. These findings are totally inconsistent with some previous studies (Armstrong & Collopy, 1996; Deshpandé & Farley, 1998; Narver & Slater, 1990). Based on the results of this study, it is claimed that market orientation partly affects financial sustainability of TEKUN which is directly accountable for the long-term financial performance the organization. The findings could be classified in three categories as ―long-term sustainable performance-based market orientation research‖. First, the positive impact of customer orientation on financial sustainability replicates previous researches that found a positive relationship between market orientation and performance at the macro level(Jaworski & Kohli, 1993; Matsuno & Mentzer, 2000). In other terms, based on the findings, creating superior 189 Book 2.indd 221 10/16/17 4:58 PM
  222. customer value , analyzing customers‘ current and future demands, identifying customer target market affect sustainable financial performance (financial sustainability) of TEKUN, significantly. Secondly, the results have shown that there is a conflicting theoretical perspective in this part. Nevertheless, as discussed above because of non-competitive market in the microfinance business in Malaysia, competitor orientation does not affect management sustainability of TEKUN significantly, however according to previous studies, it is revealed that informal markets (with more competitive atmosphere), sustainability of organizations could be affected by competitor orientation (Armstrong & Collopy, 1996; Jaworski & Kohli, 1993). Third, the results provide empirical validation that TEKUN‘s long-term financial sustainability is significantly affected by inter-function coordination. That is, through suitable level of interdepartmental interactions, management attitude and risk tolerance in terms of providing new services TEKUN could be more efficient. Consequently, this efficiency may cause to financial sustainability for TEKUN. Further, as it can be seen from Figure 2, between two control variables, as it was expected since customers are financial resources of MFIs, having customers got significant impacts on financial sustainability of TEKUN. But, in contrast having sustainable employees does not affect financial sustainability of TEKUN, significantly. 6. Conclusion and Recommendation for Future Research This empirical study advances past theories such as the stakeholder theory, or marketing-based theories like adaptive structuration theory and agency theory, about market orientation and organizational sustainability. From both theoretical and empirical standpoints, the current study attempted to address one gap in the ―sustainable performance-based market orientation research‖ in microfinance business; employing market orientation at the micro level such as financial sustainability. In addition, the results also indicated there is a conflicting theoretical perspective on the nature of market orientation (dimensions of market orientation). This study addressed this gap by empirically determining: a) The effects of each dimension of market orientation on financial sustainability; and b) The effects of two major control variables (sustainability of customers and employees) on financial sustainable performance (simultaneously with dimensions of market orientation). Remarkably, these fundamental issues have not been addressed in any empirical study to date. To sum up, the current study provided some empirical evidences that following customer orientation and inter-function coordination influence sustainability of TEKUN, significantly. On the other hand, competitor orientation has no significant impacts on management sustainability of TEKUN. And finally, as recommendation for future research these points seem necessary to be noticed. The current study sets out to examine the influences of market orientation on the financial sustainability of Islamic microfinance institutions in Malaysia. Further, studies comparing the level of being market oriented between two (or more) organizations or two (or more) different businesses in Malaysia would be very interesting. In addition, other than Malaysia, there are some other countries, which are classified as pioneers in the microfinance business like Indonesia, Bangladesh and Pakistan. A further research could compare the level of being market 190 Book 2.indd 222 10/16/17 4:58 PM
  223. oriented among microfinance institutions in selected countries or comparing the current status of Malaysia with another country in this particular area . 191 Book 2.indd 223 10/16/17 4:58 PM
  224. References Ahmad , I. (2003). Current Situation of Microfinance In Malaysia and Its Issues. Kuala Lumpur, Malaysia.: Agriculture Bank Of Malaysia. Akhter, W., Akhtar, N., & Jaffri, S. K. A. (2009). Islamic Micro-Finance And Poverty Alleviation: A Case of Pakistan. Proceding of the 2nd CBRC. Almazan, A., Hartzell, J. C., & Starks, L. T. (2005). Active Institutional Shareholders and Costs Of Monitoring: Evidence from Executive Compensation. Financial Management, 34(4), 5-34. Anderson, R., Babin, B., Black, W., & Hair, J. (2010). Multivariate Data Analysis–A Global Perspective: Pearson Prentice Hall, Upper Saddle River. Armstrong, S., & Collopy, F. (1996). Competitor Orientation: Effects of Objectives and Information on Managerial Decisions and Profitability Journal of Marketing Research, 33(2), 385-394. Barclay, D., Higgins, C., & Thompson, R. (1995). The Partial Least Squares (PLS) Approach To Causal Modeling: Personal Computer Adoption and Use as An Illustration. Technology Studies, 2(2), 285-309. Barr, M. S. (2005). Microfinance and Financial Development. Bhuian, S. N., & Habib, M. (2005). The Relationship between Entrepreneurship, Market Orientation And Performance: A Test in Saudi Arabia. Journal of Transnational Management, 10(1), 79-98. BNM, B. N. M. (2011). The Annual Report. Cheney, H., Nheu, N., & Vecellio, L. (2004). Sustainability as Social Change: Values and Power in Sustainability Discourse. Sustainability and Social Science: Roundtable Proceedings, 225-246. Chow, W. S., & Chan, L. S. (2008). Social network, social trust and shared goals in organizational knowledge sharing. Information & Management, 45(7), 458-465. Chowdhry, S. (2008). Creating an Islamic Microfinance Model - The Missing Dimension [Online]. http://www.dinarstandard.com/finance/MicroFinance111806.htm. Churchill, C., & Halpern, S. (2001). Building Customer Loyalty: A Practical Guide for Microfinance Institutions. Microfinance Network, Washington, 22- 39. Comim, F. (2007). Poverty Reduction Through Microfinance: A Capability Perspective. Microfinance and Public Policy: Outreach, Performance and Efficiency, 47-59. Compeau, D., Higgins, C. A., & Huff, S. (1999). Social Cognitive Theory and Individual Reactions to Computing Technology: A longitudinal Study. Mis Quarterly, 23(2). Crittenden, V. L., Crittenden, W. F., Ferrell, L. K., Ferrell, O., & Pinney, C. C. (2011). Market-Oriented Sustainability: A Conceptual Framework and Propositions. Journal of the Academy of Marketing Science, 39(1), 71-85. Cull, R., & Morduch, J. (2007). Financial Performance and Outreach: A Global Analysis of Leading Microbanks. The Economic Journal, 117(517), F107-F133. 192 Book 2.indd 224 10/16/17 4:58 PM
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  229. SECTION 4 HUMAN DEVELOPMENT AND SETORAL GROWTH THROUGH ISLAMIC FINANCE (Section 4) Human Development And Setoral Growth Through Islamic Finaiance 197 Book 2.indd 229 10/16/17 4:58 PM
  230. 198 Book 2 .indd 230 10/16/17 4:59 PM
  231. 11 What Active Role Have Islamic Endowments (Waqf and Zakāt) Played in Development of Human Capital through Education? Muhammad Tariq Khan84 Accumulation of human capital in the recent growing literature has gained a central role. Human capital with increasing globalization and the saturation of the job market is gaining wider attention particularly because of the recent set backs faced by economies of different countries of the world. Now all the countries emphasize more on development of human capital by devoting necessary efforts and time to accelerate the economic growth. Human capitals refer to processes relating to education, training, and other professional initiatives for increasing the levels of knowledge, skills, abilities, values, and social assets embodied in individuals, leading to satisfaction and performance of the employees (individuals). According to human capital theory capitals have different kinds including: schooling, training course, medical care, virtues of honesty and punctuality, because, they improve health, increase productivity and raise earnings and facilitate the creation of personal, social and economic well-being. Sustainable development realizing countries of the world have heavily invested in human beings, because without skilled human resources a country despite of having abundance of natural resources, cannot achieve its full potentials. If state has less resources to spend on development of human capital then what would be the solution. Islamic Endowments i.e Zakāt and Waqf (plural Awqāf) make a system, which may help the state to make up this deficiency. Awqāf and Zakāt in the past have played a very active role in building human capital through education by establishing educational institutions throughout the Islamic world. This study is dedicated to discuss human capital and highlight the role waqf played in development of human capital in Islamic society in the past and the role of Zakāt played recently in Pakistan. In this aspect, this study discussed role played by District Zakāt office in Abbottabad as a case study. 1. Human Capital – Origin of Concept Malloch (2003) and Germon et al. (2011) mentioned that Theodore Schultz first developed the concept of human capital and Garry Becker gave fame to this theory. Term ―human capital‖ appeared first in 1961 in an article of American Economic Review, titled ―Investment in Human Capital‖, by Nobel laureate economist, Theodore Schultz. Most economists are agreed that human capital comprises knowledge, skills, and experience while some add appearance personality, credentials, and reputation to the mix. Some others suggest human capital consists of educated and skilled people. Newer conceptions are of total human capital and view the value as an investment. Davenport (1999) looked at how a worker performance depends on ability and behavior. 84 Department of Management Sciences, University of Haripur, Pakistan, Email: tariq_phd_@yahoo.com. 199 Book 2.indd 231 10/16/17 4:59 PM
  232. Olaniyan & Okemakinde (2008) concluded referring many studies that the functioning of a nation and economic prosperity depend on stock of nation‘s physical and human capital. However, economic prosperity has been traditionally the focus of economic research, talent, and human skills enhancement-affecting factors are increasingly entering in the research of social and behavioral sciences. 1.1 Human Capital - Definitions Marimuthu et al. (2009) and Rizvi (2011) both quoted Schultz (1993), who defined the term human capital as “A key element in improving a firm assets and employees in order to increase productivity as well as to sustain competitive advantage”. Marimuthu et al. (2009) and Rizvi (2011) asserted that to sustain competitiveness human capital in the organization becomes an instrument used to enhance productivity. Human capital refers to processes relating to education, training, and other professional initiatives for increasing skills, knowledge, values, abilities‘ levels, and social assets of employees, leading to satisfaction and performance of the employees, and eventually enhancing performance of corporate firm. Human capital is an important input for organizations particularly for continuous improvement of employees mainly skills, knowledge, and abilities. They quoted the definition of human capital by OECD (Organization for Economic Co-Operation and Development, 2001), ―The knowledge, skills, competencies, and attributes embodied in individuals that facilitate the creation of personal, social and economic well-being‖. 1.2 Human Capital – Concept Ballot et al. (2001) commented that the most frequently cited items are marketing capital and research and development (R&D) capital, but human capital of workers is also important. According to Bassanini & Scarpetta (2002), accumulation of human capital in the recent growing literature has gained a central role. Marimuthu et al. (2009) expressed that human capital with increasing globalization and the saturation of the job market is gaining wider attention, particularly because of the recent downturn in the various world economies. All the countries emphasize more on development of human capital by devoting necessary efforts and time to accelerate the economic growth. Thus, to enter the international arena, one of the fundamental solutions is development of human capital. They also revealed that human capital refers to processes relating to education, training, and other professional initiatives for increasing the levels of knowledge, skills, abilities, values, and social assets of employees, leading to satisfaction and performance of the employees, and eventually increasing performance of the firms. They further asserted that human capital theory is rooted from the field of macroeconomic development theory. There are different types of human capital including schooling, computer training course, and medical care expenditures, and in fact, lectures on the virtues of honesty and punctuality. These segments of human capital improve health, raise earnings, and add to a person‘s appreciation of literature over a lifetime. 200 Book 2.indd 232 10/16/17 4:59 PM
  233. Most firms in response to changes have embraced the notion of human capital that has a good competitive advantage and will increase the performance . Human capital development has become a part of an overall effort for achieving cost-effective performance of the firm. Alani & Isola (2009) are of the view that in the development process, human capital has become important because for a nation human beings are the most-prized assets and for wealth creation other factors of production such as physical and financial capital unskilled labor and land need skilled human resources. Sustainable development realizing countries of the world have heavily invested in human beings. They do so because without skilled human resources, a country, despite of having abundance of natural resources, cannot achieve its full potentials. Technical innovations occurring in developed countries and some developing countries are an outcome of development of human capital. The ability of the participation of the people in the development process is enhanced with the development of their creative potentials. The focus of human capital development is on all activities directed toward producing population with appropriate knowledge, skills, motivation, attitudes, and job-related experience required for development of nation. Human development also happens with realization of national development goals, because human beings are expected objects of development. Therefore, in the development process, the significance of human resources has compelled its development. Germon et al. (2011) mentioned that human capital is the aggregation of individuals incorporated intangibles assets such as skills, knowledge, experience, etc. Human capital can be identified materialized and valorized exchangeable and exploitable, quite as the other corporate assets. Human capital is highly volatile and a set protean and with the departure of those who hold this capital is likely to disappear. Rizvi (2011) stated that human capital is a stock of knowledge and skills resulting in the ability to perform labor to produce economic value. It is the knowledge and skills with different areas in the field that workers gain through, education and experience. Stiles & Kulvisaechana (n.d) expressed that the human capital concept and perspective stem from the fact that there is no substitute for learning and knowledge, capabilities and competencies, and innovation and creativity. Alani & Isola (2009) in their study on Nigeria stated that human capital refers to human beings possessing knowledge, skills, and attitudes utilized in the process of production. Human capital is generally believed to be the most important factor of production, because it coordinates other factors of production in the production of goods and services. It is also the most active catalyst of development and economic growth. Stiles & Kulvisaechana (n.d) are of the view that it is generally understood that ‗human capital comprises the knowledge, skills experience, and capabilities, of the managers and individual employees of the company relevant to the task at hand, and also the capacity to add to this reservoir of skills, knowledge, and experience through individual learning‘. It becomes clear that human capital in scope is broader than human resources. The human capital literature has moved to embrace the idea of sharing knowledge between groups and institutionalized within organizational routines and processes. Jeong (2002) also included health along with skills in human capital. So in the opinion of Jeong (2002) human capital input is conceptually, the labor 201 Book 2.indd 233 10/16/17 4:59 PM
  234. input in the production adjusted for quality in terms of skills and health . Marimuthu et al. (2009) asserted human capital considers labor as a tradable commodity, in terms of sale and purchase. They pointed out that this classical theory is focused on the labor exploitation by capital. However, contrary to labor, human capital refers to the knowledge, skill and expertise one accumulates through training and education. The fact emerged from the above lines is that human capital refers to processes relating to education, training, medical care, and other professional initiatives for increasing the levels of knowledge, skills, abilities, values, and social assets of employees, and improving health, leading to satisfaction and performance of the employees. Human capital development includes schooling, training course, and medical care expenditures, lectures on the virtues of honesty and punctuality, to enhance productivity improve health, raise earnings, and add to a person‘s happiness. The answer to the question of how human capital formation could be increased is that human capital can be formed through education, training, and skill building and health care. The Islamic endowments (Waqf and Zakāt) are the institutions, which have played a vital role in the formation of human capital through education and health care by providing resources funds and properties. Coming paragraphs are dedicated to reveal role of education in development of human capital and then role of Islamic endowments in development of human capital through education 2. 2.1 Islamic Endowments (Waqf and Zakāt) What is Waqf? According to Heidemann (2009) al-Kasani (d. 587/ 1189) the Aleppan legal scholar in the twelfth century defined the endowment (Waqf) in brief: The waqf is a continuous charitable act for the sake of God-He is exalted (al-waqfu Ṣadaqahtun jari)' atun fi sabili llahi ta'ala). As a part of Islamic law, waqf regulations were developed in the 3'd century H. According to these regulations, waqf is established by a legal deed that names the owner of the endowed property, the substance of the endowment ('ayn or asb, and the beneficiary (mawquf'alayhi) of its income (manftta). According to the ‗Hanafi School of law‘, by the act of endowment, the founder relinquishes all his property rights, transforming it into a haqq Allah, an inalienable "claim of God". Ali (2009) expressed that in Islam, the institution of waqf is augmented by the prevailing spirit of altruism, which forms an integral part of the Islamic way of life. Islam views charity as a means of transfer of wealth from the rich to the poor as well as a mechanism for self-development and a way for achieving pleasure of Allah Almighty and also his reward in the hereafter world. Abattouy & Al-Hassani (n.d) asserted that there are three basic principles of Islamic law of waqf defining the charitable trust: it must be 1- irrevocable, 2- perpetual, and 3- inalienable and in addition, to qualify as charitable, the ultimate purpose of the waqf must be of pious. Çizakça (1998) and Abattouy & Al-Hassani (n.d) asserted that the Awqāf system has remarkable resilience so indeed many Awqāf had survived even for more than a millennium and some considerably longer than half a millennium. According to historical sources, good examples are 202 Book 2.indd 234 10/16/17 4:59 PM
  235. the Awq āf of the Ayyubids and the Mamluks in Egypt, Syria, and Palestine so at the beginning of the 12th century Jerusalem had sixty-four Waqf properties supported schools from Palestine, Syria and Turkey and forty of these schools were made from Awqāf by Ayyubid and Mamluk rulers and their governors. 2.2 What is Zakāt? Johari et al. (2013) asserted that can be defined in various ways such as grow, blessing, pure, good and renowned. Further, from the Fiqh point of view, Zakāt can produce a certain amount from a specific wealth for the benefit of those who are entitled to receive it as stipulated by Allah. Khan (n.d) stated that Zakāt is the part of wealth, which the rich, possessing the Niṣāb, has been ordained to spend for the deserving recipients at prescribed rates as per rules laid down in the Islamic Sharīʿah. Abdullah & Suhaib (2011) wrote about significance of Zakāt as: The Holy Quran has mentioned Zakāt more than eighty times. It is a duty from Allah similar to ‗Ṣalāt‘. Allah commands in the Holy Quran: ―So establish Ṣalāt and give Zakāt, and hold fast to Allah‖ Zakāt is one of the five pillars of Islam. The Prophet Muhammad (SAW) said: ―Islam was built upon five pillars: to witness that there is no God but Allah and that Muhammad (SAW) is His servant and messenger, performing prayer, giving Zakāt, performing pilgrimage and fasting the month of Ramadhan. The first caliph Hazrat Abu Bakar Siddique (RA) declared war against the tribes who refused to pay Zakāt, though they were still observing Ṣalāt and professing Islam in other matters. He reasoned that Divine Law (Sharīʿah) cannot be divided and that one cannot follow part of the Holy Book and cast aside other parts. Johari et al. (2013) and Mohsin (2013) asserted that Zakāt is a Rukn (third pillar) of faith in Islam and upon all Muslims, is an obligatory ʿIbādah ordained in the Quran along with prayer, to give part of their wealth basis or once harvested. This was an obligatory ʿIbādah during all other prophets in the past, which signifies its importance as an ʿIbādah and also emphasizes its role in the socioeconomic development in life of Muslims. So any discussion on Zakāt in the context of worship cannot be disconnected from the socioeconomic factors, especially in aiding the underprivileged based on the Maslahat concept because the Zakāt fund could free the recipients from poverty and improve their living standard. Similarly, Johari et al. (2013) expressed that Zakāt has also become an important financial source, especially in dense Muslim population countries. Zakāt on wealth includes more than fourteen types of wealth that man possesses such as livestock, gold, silver currency, and jewelry, commercial assets, agriculture, honey and animal products, mining and fishing, rented buildings, plants, and fixed capital. Mutiara et al. (2013) expressed that Zakāt is payment required by Islam to its followers who have property in various forms, if sufficient conditions, (haul) or period and Niṣāb or a minimum amount sufficient to meet basic needs for a period of imposed. Those who rightly perform Zakāt obligation would be given an increase in their wealth. Said differently, any asset or amount paid as Zakāt is promised to grow significantly, in many different aspects including spiritual, psychological, and financial – benefiting payers as well as the entire economy. 203 Book 2.indd 235 10/16/17 4:59 PM
  236. Adebayo (2011) wrote that Niṣāb differs with different kinds of property. The minimum assessable quantity (Niṣāb) of gold or gold jewellery is 85 grams, while that of silver is 595 grams. During the lifetime of the Prophet, the Niṣāb was fixed at 20 dinars for gold and 200 dirhams for currency. An equivalent of this is calculated in cash today as the Niṣāb upon which Zakāt can be deducted. In the case of animals, the Niṣāb is five for camel, thirty for bulls, or cows, and forty for goats or sheep. Zakāt is levied at almost a uniform rate of 2 ½ percent (2.5%) or 1/40 of such a wealth. On agricultural products as grains, oil seeds, beans, peas, the minimum assessable quantity is 650 kg and there is leviable tax of one-tenth of the crop, even when grown on rent paying land. Where irrigation is partly done by machine and partly by rain, the rate is 5%, and, if not, then the rate is 10%. On fish and other marine wealth, the value of 85 grams gold is its Niṣāb and a due of 10% is paid annually out of the net profit. 2.3 Potential of Zakāt Suhaib (2009) expressed that the potential of mobilizing substantial resources for alleviation of poverty because the Niṣāb is low and the base of the levy is fairly wide. In fact, the base is so wide that almost everyone except the very poor has to pay something in way of Zakāt. In certain country specific studies, Zakāt has been found to have the potential of transferring 3-4 per cent of Gross Domestic Product every year to poorer sections of the population. The position would, of course, vary from country to country depending on the pattern of its income distribution and its structural characteristics. Whatever these variations are, the Niṣāb system of Zakāt plays a significant role in social development in all the societies. Suhaib (2009) also revealed the broad outlines for financing the Islamic socioeconomic infrastructure from Zakāt funds. A part of it is indicated below: (i) Channel of payments for the poor and the needy Zakāt funds, under this category, could be spent on Islamic education of the children of the poor, by establishment of at least one Islamic educational school each year in every town with one meal freely provided to its pupils, where teaching of Arabic is a basic school subject and also the establishment and support to primary school for teaching the Holy Qur‘ān. (ii) Professional training and rehabilitation for Zakāt recipients By training of craftsmen and tradesmen and supplying necessary tools to craftsmen their productive efficiency and skills can be enhanced. Also provision of vocational training to some of the handicapped in order to turn them into productive individual coupled with the provision for the handicapped. Supplying tools for productive families, which can carry out economic activities indoors and establishment of ready-made clothes centers and widows knitting and producing woollen clothes would enhance economic activities. 204 Book 2.indd 236 10/16/17 4:59 PM
  237. 2 .4 Human Capital Development Rizvi (2011) mentioned that Adam Smith defined four types of fixed capital characterized as (1) useful trade instruments, machines; (2) buildings as the means of revenue procurement; (3) land improvements (4) human capital. ‗Human capital represents the skills, knowledge, and abilities that make it possible for people to do their jobs. So “Human Capital Development is about recruiting, supporting and investing in people through education, training, coaching, mentoring, internships, organizational development and human resource management”. 2.5 Investment in Human Capital Acquah & Hushak (1978) argued that personal income distribution is related to human capital investment. Wolff (2000) elaborated that human capital theory considers schooling as investment in skills and a way of enhancing productivity of worker. This line of reasoning has led to growth accounting models for deriving output growth or productivity as a function of the change in attainment of education. On this subject, early studies showed substantial effects on economic growth of educational change. Coetzer (2006) argued that the idea of investing in human beings as a form of capital since the emergence of human capital theory has accelerated the growing interest in theory and practice of workplace learning. The existing literature on workplace learning, organizational learning, and the learning organization is evidence of this growing interest in making workplaces into effective learning environments. Why learning has become so important? Learning is important due to need of organizations for responding to continuous and rapid change in the external environment of organization. Organizations for their survival must monitor their external environments, and adapt and anticipate continual changes. In the organizations, implementation of change initiatives e.g. the introduction of new technology, processes or products, need the acquisition of new skills and knowledge. Faster learning organizations can adapt quicker and thus, avoid the economic evolutionary process of ‗weeding out‘. Learning is important, for survival of organization, and also because the ability to learn faster than competitors is a sustainable competitive advantage. There is increasing emphasis in this knowledge-based era, on human capital, instead of physical and financial assets because in the economy where there is uncertainty, knowledge is the one sure source of lasting competitive advantage. Thus, knowledge is regarded as employees‘ key asset, and their ability to acquire and use it is a source of competitive advantage. Importance of learning is not limited only to economic considerations but learning at work as part of general education is also important for citizenship and fuller participation in society as a whole. Employees when develop communication and expression skills, these skills spill over into their entire personal lives. Employees learn new ways of planning and collaborating to which they apply in the community organizations and families to which they belong. Rizvi (2011) concluded that human resource 205 Book 2.indd 237 10/16/17 4:59 PM
  238. input undoubtedly , plays a significant role in enhancing competitiveness of firms. At a glance, enhancement of human capital will result in greater performance and competitiveness. 206 Book 2.indd 238 10/16/17 4:59 PM
  239. 3 . Human Capital Development through Education and Training Asteriou & Agiomirgianakis (2001) asserted that educational variables generally act as proxy for investment in human capital. It is widely acknowledged that the formal educational system is the principal institutional mechanism for developing human knowledge and skills. Most developing countries now believe that the rapid expansion of educational opportunities is the key to their national and economic development. Olaniyan & Okemakinde (2008) commented that the assumption that education is a growth engine in any country is based on the quality and quantity of education. Empirical evidences of human capital model revealed that investment in education is positively correlated with development and economic growth. They also expressed that being not easily obtainable education is an economic good and needs to be apportioned. Economists regard education as both capital good and consumer good due to having utility for consumers and also serving as an input in production of other goods and services. Education can be used as a capital good for development of human resources required for social and economic transformation. As a capital good, the focus on education is relating to the concept of human capital, which emphasizes that the skills development is an important factor in production activities. Education helps in upgrading the general living standard in a society. Therefore, production of qualitative citizenry is associated with the cause of positive social change. This is an increasing faith that in many developing countries education is an agent of change. In many developing countries, the pressure for higher education has been helped by public perception of financial reward from pursuing such education. Generally, it is believed that expenditure on education promotes economic growth. Olaniyan & Okemakinde (2008) expressed that it is the assumption of human capital theory that formal education is highly instrumental and necessary for improvement the production capacity of a population. Human capital theory emphasizes on how education increases the workers‘ efficiency and productivity by increasing the cognitive stock level of economically productive human capability. Cognitive stock level is a product of investment in human (in the form of education) beings and innate abilities. In other words, according to this theory, a population, which educated is a productive population. Proponents of the theory see formal education provision as a productive investment in human capital and consider it more worthwhile than physical capital. Following three arguments are the base of rationality behind investment in human capital: (i) The new generations must be imparted the knowledge already accumulated by their previous generations. (ii) The people are to be encouraged to generate through creative approaches entirely new ideas, new processes, new products, and new methods. 207 Book 2.indd 239 10/16/17 4:59 PM
  240. (iii) It is necessary to teach the new generation that how existing knowledge is to be used for development of new products, for introduction of new processes and production methods and social services. They further commented that human capital theory provides both in developed and developing nations, justification for large public expenditure on education, which is based on the presumed economic return of investment both at the macro and micro levels in education. For rapid economic growth for society is the result of efforts to promote investment in human capital and, for individuals, such investment provide returns in the form of individual achievement and economic success. Alani & Isola (2009) expressed that human capital means human beings who have achieved needed knowledge, skills, and attitudes, necessary for national development. These human resources are either self-employed or employed in work organizations. The knowledge, skills, and attitudes acquired through human capital formation are result of investments in human beings. They are of the view that in the development process human capital has become important because for a nation human beings are the most-prized assets. Because for wealth creation other factors of production such as physical and financial capital unskilled labor and land need skilled human resources. Sustainable development realizing countries of the world have heavily invested in human beings, because without skilled human resources a country despite of having abundance of natural resources, cannot achieve its full potentials. Technical innovations occurring in the developed countries and some developing countries are an outcome of development of human capital. The ability of the participation of the people in the development process is enhanced with the development of their creative potentials. The focus of human capital development is on all activities directed toward producing population with appropriate knowledge, skills, motivation, attitudes and job-related experience, required for development of nation. Human development also happens with realization of national development goals, because human beings are expected objects of development. Therefore, in the development process the significance of human resources has compelled its development. Rizvi (2011) expressed that greater attention is paid to training related aspects because of rapid development of the human development theory. Investment in human capital is any activity, leading to the improvement in the worker‘ quality (productivity) therefore training is an important part of investment in human capital. It refers to the knowledge and training persons require and undergo for increasing their capabilities for performing activities, have economic values. Studies have shown the importance of training for workforce hence investments in training are very desirable, from both a personal as well as a social perspective, while the lack of training of workforce is related to low competitiveness. Human capital is creating expenditure in research and development (R&D), a motivating source to workers, and boosting up their commitment and eventually paving way in general to generate new knowledge for the economy and society so, greater productivity and higher salaries are related with greater stock of human 208 Book 2.indd 240 10/16/17 4:59 PM
  241. capital . Human capital is also a precious asset for small businesses, and related positively with performance of business. 209 Book 2.indd 241 10/16/17 4:59 PM
  242. 4 . Role of Waqf in Education (Knowledge, Training and Skill) Abattouy & Al-Hassani (n.d) revealed that in Islamic history Awqāf played a most important role in intellectual development of people by dissemination of knowledge. Mannan (2005) revealed that Awqāf also helped for the cause of Islamic education and research by establishing Madrasahs, schools, and public libraries. Waqf resources were used to construct libraries, reading rooms, for other research activities such as copying services by professional copies, centre for decorative arts and also for residential quarters of the scholars etc. To encourage research, revenue of the Waqf properties was used to support translation programs so with the support of the Waqf funds Muslim scholars and scientists either wrote or translated a large number of book. Researches using scientific and empirical methods were encouraged and supported. Hasan (2006) mentioning experiences from different communities expressed that in many countries, waqf funds, have been used for three main social and human development related purposes, i.e., education, urban services, and health and hygiene. He also asserted that Islam emphasizes education and Al Azhar University of Egypt is one of the oldest and a major Awqāf supported seat of Islamic teaching and research and higher education. Some madrashas or orphanages have been successful in receiving waqf funds in Muslim communities, for generations. A wqaf provides support for education in different parts of South Asia therefore in South Asia almost all the functioning madrashas, are established, financed, and managed through many Awqāf funding. In Malaysia, Awqāf funds establish and operate Islamic educational institutions, especially the pondoks (boarding schools). Zuki (2012) mentioning some studies (Cajee, 2007) asserted that Islamic waqf was a ―powerful community supporting institution, through educational programs, provision of infrastructure and health.‖ Abattouy & Al-Hassani (n.d) mentioned that there are three basic principles of Islamic law of waqf defining the charitable trust: it must be 1- irrevocable, 2- perpetual, and 3inalienable and in addition, to qualify as charitable the ultimate purpose of the waqf must be of pious. The fact that property was classified as Waqf for the advancement of education was proof enough that its purpose was charitable. Hence, education (after mosques) is the second social institution attracting support and investments of Awqāf. Though waqf, usually religious education is provided in the mosques. Education has been financed by voluntary contributions since the beginning of Islam. Even governments have been financing education by constructing schools and assigning certain property as Waqf of the schools. According to historical sources, good examples are the Awqāf of the Ayyubids and the Mamluks in Egypt, Syria, and Palestine so at the beginning of the 12th century Jerusalem had sixty-four Waqf properties supported schools from Palestine, Syria, and Turkey, and forty of these schools were made from Awqāf by Ayyubid and Mamluk rulers and their governors. Al-Azhar University the best-known madrasa in the Muslim world, throughout the ages founded in 972 in Caro (Egypt) is another example which was founded, like every madrasa with the endowment of a charitable trust and financed by its Waqf revenues until 1812 when government of Muhammad Ali in Egypt took control over the Awqāf. Education financing of Waqf has freedom of education approach which means it was not 210 Book 2.indd 242 10/16/17 4:59 PM
  243. restricted to religious studies and usually covered books , libraries, stipends to students and salaries of teachers and other staff so this financing helped to create a learned class separate from the ruling and rich classes. Therefore, majority of Muslim scholars were from poor segments of society causing in the Islamic societies an extremely important and unprecedented process of dynamic social change. In the field of education, some other most significant endowments were: 1. Regular ‗Nizāmiyya School‘ was established in Baghdad in 459 H, in which a library was established and a keeper and supervisors were appointed from the resources of endowments. Nizām al-Mulk, founder of school endowed much money, for the teaching of students, and for the purchase of valuable books. 2. Abbasid Caliph Al-Muntazir Billah allocating great endowments established in 623 H in Baghdad and by this waqf the Mustansiriya School was established in 631 H and no school in the world was built like it. 3. Wife of the Abbasid Caliph Al-Al-Musta‘sim Billah, endowing books and money Al-Bashiriya school and library established in 1255 A.D. Baghdad. As had been done in other school libraries to maintain and ensure the return of books, the books were loaned outside the campus with a deposit. 4. Al-zahir Baybars established in Damascus in 1279, Al-zahiriyya School equipped with endowments and allocated funds with a huge Zahiriyya library containing books of all sciences and this library is now part of the Syrian National Library. 5. In Makka Sultan Qaitbay School was opened in 884 H endowed with many endowments Muslim women also offered contributions to education in the field of Waqfs reflecting in development of Islamic civilization their effective charitable role. 6. Shams al-Dhuha, the granddaughter of Salah al-Din al-Ayubi, founded famous alMu‘tasimiyya school in Baghdad besides establishing many other schools. 7. Ismat al-Dīn Sitt al-Shām bint Ayyūb ibn Shadi (died in1220) who rose to fame chiefly as a result of her building activities, founded a Waqf for establishing two schools in Damascus. She built, Al-Shāmīya al-Barrānīya madrasa, a complex of madrasa and turba (tomb) and had her residence rebuilt to become madrasa Al-Shāmīya alJuwwānīya. 8. Two schools one Al-Shamsiyya school in Taez, Yemen and another school bearing the same name in Zubayd were established by Al-Dār al-Shamsī, the daughter of Sultan Mansur ibn Rasul to which she allocated a good waqf. 211 Book 2.indd 243 10/16/17 4:59 PM
  244. 9 . In Yemen Mariam (1313 A.D.), wife of Sultan al-Muzaffar, allocating a good waqf built the prestigious Al-Sabiqiyya school and allocated a sufficient waqf to this. 10. In modern times in the Arabian Peninsula and particularly in Najed, among the books dedicating women was Fatima Bint Hamad al-Fadhili, better known as Al-Sheikha al-Fadhiliya (died in 1847-48A.D. in Makka). Having an interest she collected books on different subjects and dedicated all collected books to the Hanbali students. Ahmed (2007) is of the opinion that various kinds of Awqāf including those for, education and research, health care and public utilities, were established. Awqāf for education also covered scientific research and there were Awqāf specifically for research in astronomy, science, mathematics, pharmacology, physiology, etc. Frenkel (2009) expressed that religious endowments financed a large number of educational institutions such as Madrasah; Maktab; Dār al-qurān; Dār al-adīth proliferated throughout Bilād al-Shām. Awqāf deeds also stipulated the curricula for these institutions. Babacan (2011) expressed that foundation of schools was an important social service that Awqāf provided. In the Ottoman period, the number of the schools for higher education built by the Awqāf totaled more than 500 after conquering Constantinople (Istanbul) until the 19th century. Abattouy & Al-Hassani (n.d) and Mannan (2005) revealed that the Waqf funded the medical schools, and also covered various expenses such as the payment of teachers and students and their maintenance out of their revenues. The Waqf supported funds to encourage the medical science development provided facilities for education and better public health through establishment of medical schools, hospitals, and by encouraging development of local medicine and chemistry. Medical education was included in endowed schools, such as in the medicine teaching specialized school 1. Al-Mansuriyya (medical school) established by Al-Mansur ibn Qalawun in 683 H in Egypt (endowed along with the Mansuriyya Dome, an astronomical observatory, both benefiting from a wide range of shops and arable land). 2. Al-Dnaysariya (medical school) established for medical education and graduation of doctors in 686 H by endowment of ‗Imad al-Din Muhammad Al-Dnaysari. By attending these hospitals, students learned medicines and their applications. Medical education was also offered in mosques and universities such as Al-azhar in Cairo, Egypt besides to medical schools and hospitals only but. 212 Book 2.indd 244 10/16/17 4:59 PM
  245. 4 .1 Zakāt in Pakistan Bonbright & Azfar (2000) reported that conceived in 1978, the Government of Pakistan‗s Zakāt and ʿUshr Ordinance (1980) mandates that 2.5 percent of the value of all declared, fixed assets for those possessing Niṣāb are to be automatically extracted at source by the state at the beginning of the Islamic holy month of Ramadan (when Zakāt is traditionally given). An elaborate administrative structure headed by the Central Zakāt Council oversees the collection and disbursement of Zakāt and ʿUshr through councils at the federal, provincial, district and local levels. The individual donor, in lieu of government extraction, may give Zakāt directly to government-recognized institutions. The recipients of Zakāt include both organizations and individuals, with 50 percent divided between a number of eligible social, health, education and religious institutions and the remainder directed to mustahqeen, or needy individuals, identified by the local Zakāt committees. At present, there are an estimated 1.5 million mustahqeen. Although the Quranic injunction to give Zakāt applies to all members of society meeting the threshold level of wealth, non-Muslims, non-Pakistanis, and Muslims of certain sects are not subject to the Government of Pakistan‗s compulsory Zakāt deductions at source. Moreover, some philanthropy-receiving organizations have reported that public giving has decreased as a result of state Zakāt deduction. The government provides only the aggregate figures for the amounts deducted, and no details about the ultimate beneficiaries. Only the most general information is provided about the distribution structure, which operates through some 40,000 local Zakāt committees established by government. Hossain (2012) wrote in detail about Pakistan with reference to some researchers that like Bangladesh, poverty is also widespread in Pakistan, particularly in rural areas. The change in agrarian structure in the 1960s contributed towards the higher rural poverty. The increase in foreign remittances and hence an improved economic growth has been responsible for a slight decline in poverty since the 1970s. The introduction of Zakāt and ʿUshr system in Pakistan in 1980 has also played an important role in this regard. Table-1 given below shows the total amount of Zakāt and ʿUshr collection from 1982 to 1991. Table 1: The Total Amount of Zakāt and Ushr Collection between 1982 and 1991 Year 1982-83 1983-84 1984-85 1985-86 1986-87 1987-88 1988-89 1989-90 1990-91 Zakat 855.19 1011.33 1230.86 1439.04 1513.62 1944.18 2190.01 2444.03 2685.53 Ushr 179.34 259.40 262.74 247.35 228.92 240.69 183.24 140.79 113.83 (Rs. in Millions) Total 1034.53 1270.73 1493.60 1686.39 1742.54 2184.87 2373.25 2584.82 2799.36 Source:Central Zakāt Administration, Ministry of Finance, Government of Pakistan, Islamabad (1994) (Quoted by Hossain 2012) 213 Book 2.indd 245 10/16/17 4:59 PM
  246. Hossain 2012 ) further asserted that poverty still remains one of the most serious problems in the country. It clarifies that if there is no Zakāt, poverty levels are higher than those reported. Zakāt has resulted in reducing poverty level in Pakistan by 2.41% overall from levels computed with Zakāt, 3.93% in urban areas and 1.83% in the rural areas. Although the reduction of poverty due to Zakāt in percentage terms seems to be small, yet the absolute number of household who benefited from Zakāt is quite large. For example, more than 60 thousand households moved above the poverty line in Pakistan through Zakāt in 1987-88, which is quite a large number though it is not significant in relation to the total number of poor households. 5. A Case Study: Zakāt for Education and Health Care in Abbottabad District of Pakistan As Yusoff (2008) and other researchers expressed that weak economic conditions may result in the social problems like begging. Zakāt plays an important role in the economy, and also in the moral and social well-being of a society. Morally, Zakāt promotes sharing of wealth and eliminates greediness, whilst socially; it helps to reduce poverty within the community. Zakāt covers the areas called social insurance and social security enabling the poor segment of the society to participate in the economic activities with full responsibilities and making them a useful part of the society and making them feel their importance as a part of the society. Zakāt address many social, economic, and moral problems. Some of them are: 1. Illiteracy because poor families cannot afford to educate their children properly, so, resort to child labor or fall in the hands of mischief mongers causing problems for society. 2. Moral Bankruptcy, which is due to poverty, as the poor and the uneducated community cannot maintain the strong footing of morality. Moral values, inculcate mutual respect, cooperation and sympathy among the members of society but such noble traditions and great human standards cannot be expected from the illiterate people. These problems could be solved and such curses could be removed if poor segment of society is imparted education particularly technical education enabling them to earn for their need. The ‗District Zakāt committee Abbottabad‘ on the proposals of some members launched a program of paying fee for very poor and talented students in several vocational, technical and engineering institutions/colleges. During interview, a member of ‗District Zakāt committee Abbottabad‘ told that Zakāt committee has awarded scholarships out of Zakāt to talented students. The year-wise detail of payment is as below. 214 Book 2.indd 246 10/16/17 4:59 PM
  247. Table 2 : Total Amount of Zakāt Paid as Scholarship to the Students of COMSATS S. No. 1 2 3 4 Year 2009-10 2010-11 2011-12 2011-12 Total (Amount in Rupees) Number of Scholarships 77 200 249 110 486 Amount of Scholarship 850,000 2,200,000 1,939,000 1,210,000 6,199,000 Source: Interview of Abdul Qayyum Tanoli, Member, Dist. Zakat Council, Abbottabad Table 3: Total Amount of Zakāt Paid as Scholarships to Students of 10 Institutions during the Years 2010-2013 S. No. Name of Vocational/Technical Institution 1 2 PICT Abbottabad COMSATS (CIIT) Abbottabad FIMS Abbottabad Ideal TVC Nammal Abbottabad GTVC Nowsera Abbottabad CB Technology Abbottabad Lighthouse Society for Blind Aiza TVC Abbottabad Jinnah I. I. Technology, Havelian Pakiza TVC Havelian Abbottabad GTVC Women Abbottabad Idara Tadrees ul Quran GTVC Havelian Abbottabad NIMS Abbottabad Global Institute Abbottabad Sarhad Institute Abbottabad Sundas Welfare Society Kotnali Skyline V. Trg. Centre Mirpur Abdullah College of Technology 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 2010-11 Amount 2011-12 Amount 748000 2200000 No. of Beneficiaries 44 200 196000 770000 2012-13 Amount 1724000 1939000 No. of Beneficiaries 124 249 782000 121000 No. of Beneficiaries 46 110 25 70 798000 880000 94 80 660000 - 55 - 385000 35 868000 78 550000 50 440000 40 - - - - 330000 30 - - - - 308000 660000 28 60 510000 275000 30 25 765000 561000 45 33 275000 25 - - 330000 30 159488 19 396000 30 - - - - 760000 550000 70 50 51000 30 - - - 216000 473000 30 43 - - - 440000 40 - - - 275000 25 - - - 330000 30 - - - 550000 50 - Source: Record of District Zakāt Committee Abbottabad (collected personally) 215 Book 2.indd 247 10/16/17 4:59 PM
  248. This practice of awarding scholarships has been conducted on merit and need base only in Abbottabad district as organized and planned activity out of 136 districts of Pakistan . Besides sustaining education (technical Diploma or Certificate) cost on successful completion of the education each candidate was given Rupees 5000/-. To determine the benefits passed to the recipients or scholarship awardees and their families were estimated by conducting interviews of awardees and their families. For this 70 interviews were conducted. Table 4: Job Status of Zakāt Scholarship Awardees Interviewees Candidate Candidate Number 35 05 Family of candidtae 30 Present Status On-job in Pakistan Job not according to level of education/Unemployed Working out of Pakistan Source: Personal interviews conducted by the researcher Table-5: Job and Income status of Zakāt Scholarship Awardees Number of Awardees 30 20 15 05 70 Nature of Job Abroad Government job Job in banks Private job not well paid - Income Had some earning Satisfactory Good Not satisfactory - Source: Personal interviews conducted by the researcher During interview 48 scholarship awardees or their families told that without this scholarship, it was not possible for them or their child to acquire such education due to poverty. Almost all 60 asserted that with out this training it was not possible for them to get such job. They told that they are 50 percent more well off as compared to the position with out this education. Therefore, it is suggested that all the Zakāt committees of all the districts of Pakistan should follow this example and all Islamic countries should also make such arrangements 6. Conclusion This study concluded that human capital is the most important asset in the development process of a nation and its importance is increasing with globalization. Human capital development refers to processes relating to education, training, and other professional initiatives for increasing the levels of knowledge, skills, abilities, and social assets through education (schooling), and training, causing enhancement of virtues of honesty punctuality, and hardworking to increase 216 Book 2.indd 248 10/16/17 4:59 PM
  249. productivity , raising earnings and ultimately facilitating to boost personal, social and economic well-being. Islamic endowments (waqf and Zakāt) have proved to be very reliable institutions, which have fulfilled the need of education and medical care in the past and it can be relied on, for spreading education (to enhance the level of knowledge, skill and abilities) and provision of medical facilities for health improvement. Both education and health collectively develop human capital, which may increase productivity (of individual as well as of nation) and raise earnings and facilitate the creation of personal and national wealth and consequently resulting in, social and economic well being. During interview while obtaining data and taking opinions of beneficiaries of Zakāt, 48 scholarship awardees or their families told that without this scholarship and financial support received from Zakāt, it was not possible for them or their children to acquire such education due to poverty. Almost all 60 asserted that with out this training it was not possible for them to get such job. They told that they are 50 percent more well off as compare to the position with out this education. Therefore, it is suggested that all the Zakāt committees of all the districts of Pakistan should follow this example and all Islamic countries should also make such arrangements. Similarly, as Awqāf benefited education in the past in several Muslim countries, same practice of well off Muslims bequeathing property to Awqāf should continue specially in Pakistan so that the poor strata of the society may also gain education and may serve their families and society at large. 217 Book 2.indd 249 10/16/17 4:59 PM
  250. References Abattouy , Prof. Mohammed and Al-Hassani, Prof. Salim T S (n.d) ―The Role of Awqāf in Developing Islamic Civilization: Definition, History, Functions and Articulations with Society‖, Article Contributed by the Foundation for Science, Technology and Civilization, UK, In the Book on: King Abdul Aziz Endowment for the Two Holy Mosques, (Desert Publishers, Riyadh, KSA), Abdullah & Suhaib (2011). Acquah Emmanuel T. and Hushak Leroy J. (1978) ―Human Capital and Labor Turnover in Manufacturing Industries: The Case of Relatively Undeveloped Region in Southeast Ohio‖, Southern Journal of Agricultural Economics, December, 1978 Adebayo Dr. R. Ibrahim (2011) ―Zakāt and Poverty Alleviation: A Lesson for the Fiscal Policy Makers in Nigeria‖, Journal of Islamic Economics, Banking and Finance, Vol. 7 No. 4, Oct - Dec 2011, pp. 25-42. Ahmed, Habib (2007) ―Waqf-Based Micro-finance: Realizing the Social Role of Islamic Finance‖, Paper written for the International Seminar on ―Integrating Awqāf in the Islamic Financial Sector‖, Singapore, March 6-7, 2007 Alani, R. A. and Isola W. A (2009) ―Human Capital Development in Nigeria‖, Institute of Organization and Management in Industry‖ORGMASZ‖ Vol. 5, No.3, pp. 58 – 71 Year 2009. Ali, Imtiaz B. (2009) ―WAQF- A Sustainable Development Institution for Muslim Communities‖, publisher, Takaaful T&T Friendly Society 2009, P.O. Bag 1066, Valsayn, Trinidad and Tobago, www.takaafultt.org. Asteriou, D. and Agiomirgianakis G.M. (2001) ―Human Capital and Economic Growth Time Series Evidence from Greece‖, Journal of Policy Modeling, Vol. 23, (2001) pp. 481–489. Babacan, Mehmet (2011) ―Economics of Philanthropic Institutions, Regulation and Governance in Turkey‖, Journal of Economic and Social Research Vol 13(2) 2011, 61-89. Ballot, Gerard; Fakhfakh, Fathi and Taymaz, Erol (2001) ―Firms‘ Human Capital, R&D and Performance: A Study on French and Swedish firms‖, Labor Economics Vol. 8 (2001), pp. 443– 462. Bassanini, Andrea and Scarpetta, Stefano (2002) ―Does Human Capital Matter for Growth In Oecd Countries? A Pooled Mean-Group Approach‖, Economics Letters, Vol. 74 (2002) pp. 399– 405, www.elsevier.com/locate/econbase. Bonbright, David and Azfar, Asad (2000) ― Philanthropy in Pakistan‖ A Report of The Initiative on Indigenous Philanthropy, Prepared by David Bonbright and Asad Azfar of the Aga Khan Foundation, August 2000. Çizakça, Murat (1998) Awqāf in History and its Implications for Modern Islamic Economies‖, Islamic Economic Studies, Vol. 6, No. 1, November 1998. Coetzer, A. J. (2006) ―Developing Human Capital in Small Firms: A Conceptual Framework for Analyzing the Effects of Managers on Employee Learning‖, Research and Practice in Human Resource Management, Vol.14, No. 1, pp. 143-179. 218 Book 2.indd 250 10/16/17 4:59 PM
  251. Frenkel , Yehoshua (2009) ―Awqāf in Mamluk Bilād al-Shām‖, Mamlūk Studies Review, Vol. 13, No. 1, 2009, pp. 149-166, © 2009 Middle East Documentation Center, The University of Chicago, http://mamluk.uchicago.edu/MamlukStudiesReview_XIII-1_2009.pdf. Germon, Rony; Laclemence, Patrick and Birregah, Babiga (2011) ―A Matrix Approach for Threat Assessment on Human Capital in SMEs‖, International Journal of Business and Management Studies, Vol. 3, No 2, (2011) pp. 273-282, ISSN: 1309-8047 (Online). Hasan, Sami (2006) ― Muslim Philanthropy and Social Security: Prospects, Practices, and th Pitfalls‖, Paper presented at the 6 ISTR Biennial Conference held in Bangkok, 9-12 July 2006. Heidemann, Stefan (2009) ―Charity and Piety for the Transformation of the Cities -The New Direction in Taxation and Waqf Policy in Mid-Twelfth-Century Syria and Northern Mesopotamia‖ in ―Charity and Giving in Monotheistic Religions‖, Edited by, Miriam Frenkel and Yaacov Lev, Walter de Gruyter, Berlin· New York. Hossain, M. Z (2012) ―Zakāt in Islam: A Powerful Poverty Alleviating Instrument For Islamic Countries‖, International Journal of Economic Development Research and Investment Vol. 3, No 1, April 2012. Jeong Byeongju (2002) ―Measurement of Human Capital Input Across Countries: A Method Based on the Laborer‘s Income‖ Journal of Development Economics, Vol. 67, (2002) pp. 333– 349. Johari, Fuadah; Muhammad Ridhwan Ab Aziz; Mohd Faisol Ibrahim and Ahmad Fahme Mohd Ali (2013) ―The Roles of Islamic Social Welfare Assistant (Zakāt) for the Economic Development of New Convert‖ Middle-East Journal of Scientific Research Vol. 18, No. 3, pp. 330-339, 2013. Khan, Foyasal (n.d) ―Role of Zakāh as an Effective Social Safety Net‖, Thoughts on Economics, Vol. 21, No. 02. Malloch, Dr. Theodore Roosevelt (2003) ―Social, Human and Spiritual Capital in Economic Development, Dr. Theodore Roosevelt Malloch, CEO, The Roosevelt Group Templeton Foundation, Working Group of the Spiritual Capital Project Harvard University, October, 2003. Mannan, Prof. Dr. M. A. (2005) ―The Role of Waqf in Improving the Ummah Welfare‖ Presentation at the International Seminar on Islamic Economics as Solution, organized by Indonesian Association of Islamic Economists and Muamalat Marimuthu et al (2009). McDonald, Scott and Roberts, Jennifer (2002) ―Growth and Multiple Forms of Human Capital in an Augmented Solow Model: A Panel data Investigation‖, Economics Letters Vol. 74 (2002) pp. 271–276, www.elsevier.com/locate/econbase. Mohsin, Magda Ismail A. (2013) ―Potential of Zakāt in Eliminating Ribā and Eradicating Poverty in Muslim Countries‖, EJBM-Special Issue: Islamic Management and Business, Vol.5 No.11 2013. Mutiara Dwi Sari, Zakaria Bahari, Zahri Hamat (2013) ―Review on Indonesian Zakāh Management and Obstacles‖, Social Sciences. Vol. 2, No. 2, 2013, pp. 76-89. Olaniyan. D.A and Okemakinde, T. (2008) ―Human Capital Theory: Implications for Educational Development‖, European Journal of Scientific Research, Vol.24 No.2 (2008), pp.157-162. 219 Book 2.indd 251 10/16/17 4:59 PM
  252. Rizvi , Yasmeen (2011) ―Human capital development role of Human Resource (HR) during mergers and acquisitions‖, African Journal of Business Management Vol. 5, No. 2, pp. 261-268, 18 January, 2011. Stiles Dr Philip and Kulvisaechana, Somboon (n.d) ― Human capital and performance: A Literature Review‖, Judge Institute of Management, Cambridge Business School, University of Cambridge, Trumpington Street, Cambridge CB2 1AG. Suhaib Abdul Quddus (2009) ―Contribution of Zakāt in the Social Development of Pakistan‖, Pakistan Journal of Social Sciences (PJSS) Vol. 29, No. 2 (December 2009), pp. 313-334. Wolff, Edward N. (2000) ―Human Capital Investment and Economic Growth: Exploring the Cross-country Evidence‖, Structural Change and Economic Dynamics, Vol. 11, (2000), pp. 433– 472. Yusoff, Wan Sulaiman bin Wan (2008) ―Modern Approach of Zakāt as an Economic and Social Instrument kor Poverty Alleviation and Stability of Ummah‖, Jurnal Ekonomi dan Studi Pembangunan, Vol. 9, No. 1, April 2008: pp. 105-118. Zuki, Mazrul Shahir Md (2012) ―Waqf and Its Role in Socio-Economic Development‖, ISRA International Journal of Islamic Finance, Vol. 4, Issue 2, 2012. 220 Book 2.indd 252 10/16/17 4:59 PM
  253. 12 Growth Volatility and Export Diversity in OIC Countries Salman Syed Ali 85 Exports expand the market size and are hence important for economic growth . However, a narrow export-base can have adverse effect that it can make economic growth unstable by increasing its volatility. The present paper measures the impact of export diversity on the volatility of growth of OIC countries as a group. It uses a new data set on tradeflows at 4digit STIC level issued by IMF. It finds that export diversification helps in reducing macroeconomic growth volatility of OIC member countries. In this context, diversification through extensive margin is relatively more important than through intensive margin in OIC countries. That is, for the OIC countries, adding new commodities to the export basket or adding new markets or new partners tends to have more stabilizing impact on GDP growth than balancing the volume of exports across the existing export commodities and across the existing trading partners. Key words: Export Diversification, GDP Volatility, Growth, OIC Countries A fundamental paradigm of economic theory is that stability of growth requires diversification of economic base that reflects in scale, scope and diversity of economic activities. The 57 member countries of the Organization of Islamic Cooperation (OIC) together constitute a vast portion of the world stretching from 141°05'E longitude (e.g. Merauke, Indonesia) in the far east to 17°27'W longitude (Dakar, Senegal) in the west, with two countries even further west and across Atlantic (Suriname and Guyana). And from 55°06'N latitude in the north (Kazakhstan) to 26°54'S latitude in the south (Kosl, Mozambique). These countries serve as home for 1.624 billion people constituting 22.2 percent of world population. 86 The OIC group with its vast area, diversity of land and climate, of natural resources and demographic advantage reflect a great potential for stable economic growth. Yet, the contribution of this group of countries in the world economic activity is small relative to its size and potential, and the individual economies are in general open to internal and external shocks.87 The low level of economic diversification within a country, small export base, narrow 85 Islamic Research and Training Institute, Islamic Development Bank, 8111, King Khalid Street, Al Nuzlah Yamania District, Unit No. 1, Jeddah 22332-2444, Kingdom of Saudi Arabia. The present paper is a shorter version of a more detailed analysis paper forthcoming elsewhere. 86 Estimates for the year 2008 from https://en.wikipedia.org/wiki/Demographics_of_the_member_states_of_the_Organisation_of_Islamic_Cooperation The 2014 estimate is 1.68 billion people constituting 23.43 percent of the total world‘s population. http://muslimmirror.com/eng/population-of-oic-countries-rose-to-1-68-billion-in-2014/ 87 The GDP of OIC countries taken together makes only 15.67% percent of the world GDP and their exports contribute to only 11.98% of the world exports. It is also important to note that contribution of these 57 countries to the exports is not evenly distributed. A bulk of export share (more than 76%) is contribution by only 10 OIC countries with other countries contributing a very small share. Most countries are exporting traditional low value- 221 Book 2.indd 253 10/16/17 4:59 PM
  254. product range and markets (i.e., low diversification of exports) make many OIC-countries vulnerable to both internal and external shocks. For example, a fall in export commodity prices or a loss of export market or a crop failure or any other factor that adversely affects export can significantly affect economic growth of the country. The OIC has therefore been urging its member countries to improve the quantity and quality of their exports, focus on value-addition and promote export diversification. It is also targeting to increase the intra-OIC trade so that countries can contribute to each other‘s development. Functioning as a group would be more advantageous than the sum of individual country performance. With this background, the present paper focuses on export diversity and its impact on stability of growth.88 A logical expectation is that export diversity would be associated with lower volatility of growth. Countries with more diversified export base are in better capacity to absorb demand shock in exports of some commodities (or from some trading partners) by compensating increase in other export goods or by exporting to other partners. We want to find if export diversity and growth volatility are related in any ways. If they are related, we would like to measure the magnitude of this relationship for the OIC countries as a group. Specifically, we address two questions: 1. Is there any relationship between export diversity and growth volatility? 2. If they are related, what is the magnitude of this relationship for the OIC countries as a group? The main contribution is to measure the potential impact of export diversity on the volatility of economic growth in the OIC countries. Next two sections provide a brief survey of literature and an overview of the export sector diversity in OIC-member countries. Literature Survey There is vast literature on importance of trade for economic growth; some of this literature also explore the relationship between diversity of trade and economic growth. Cadot et al (2011). Haddad et al. (2013) in a pioneering work found that export diversification has a good conditioning effect in determining the relationship between trade openness and economic volatility. Specifically, trade openness is helpful for growth but it also increases vulnerability of the economy to external shocks making domestic economic growth very volatile. However if the countries are well diversified, then it helps reduce growth volatility as an adverse shock to some exports (or demand from a trading partner) can be compensated by increase in exports of other commodities (or to other partners). Thus, we expect an inverse relationship between volatility of added goods. However, the trend is changing towards more diversification and relatively higher technologically intensive products. Another noteworthy aspect is that the intra-OIC trade has been only around 17.3% of the total OIC trade, with intra-OIC exports constituting 15% of total OIC exports and intra-OIC imports constituting around 20% of total OIC imports. [see SESRIC (2012) Annual Economic Report on the OIC Countries, pages 3, 5 and 44. http://www.sesrtcic.org/files/article/454.pdf] 88 In an open economy, export diversity is only a reflection of the diversity of overall economic activity. Export diversity is much easier to measure than the diversity of the overall economy. The ease of measurement is due to the availability of standardized and detailed data (at least) on flow of international trade in goods and the trading countries collected and disseminated by international organizations. 222 Book 2.indd 254 10/16/17 4:59 PM
  255. economic growth and export diversification . Recently research about export diversity, output diversity, and product quality has surged because of a new and more-detailed data set made available by IMF.89 The new data on diversity, extensive margin, and intensive margin of exports uses 4-digit SITC classification of trade in goods at the country level covering 187 countries and spanning the period from 1962 to 2010. Previously the data was available only at single-digit or two-digit classification and did not cover a long time series. IMF Policy Paper, March 2014 and the separately issued Background Notes to the same policy paper use this new data set to analyze long-run growth and macroeconomic stability in low-income countries. Among its key findings, the one that is relevant to the stability focus of the present paper, is that the increased diversification in exports has been conducive to lower output volatility and greater macroeconomic stability in low-income countries. It finds that an increase in export diversity by one standard deviation reduces the GDP-growth volatility by about 8 percent in the low-income countries. Another recent study (Papageorgiou et al., 2015) focuses on diversification, growth and volatility in Asia. It finds that one standard deviation improvement in export diversification increases the GDP by about 6 percent. Moreover, the extensive margin (diversifying across export products and partners by adding new products or partners) has played more important role than the intensive margin (diversifying across product markets and partners by more evenly distributing trade among the existing products and partners) in the growth of Asian economies.90 What is the evidence from OIC countries? However, no study has specifically focused on OIC countries. These countries share many commonalities among them due to common religion but at the same time exhibit great diversity because of differences in many aspects such as in the size of their populations, human capital, geography, resource bases, technological advancement, governance, internal stability, and external threats that each country face. In the present study we controlled for some institutional and economic factors and also accounted for openness and its effects when measuring the impact of export diversity on volatility of economic growth. Exports and Export Diversification in the OIC Countries We start with some background information about export sectors in the OIC countries. The amount of exports differ significantly across the OIC countries reflecting the different sizes of their economies and country specific and regional characteristics. For example, in 2010 among the OIC countries, the smallest size of export sector was USD108 million and largest was USD 180 billion with a standard deviation of USD 49 billion. Figure 1 shows the exports as percent of GDP for each of the OIC countries. It highlights the varying importance of exports in the structures of their respective GDPs. The data is shown for the years 2000 and 2014 along with the world average for comparison over time and with rest of the world. Twenty-six out of the 57 OIC countries have higher exports to GDP ratio than the world average in 2014, showing exports matter very much for their economies. Even for the countries with lower export to GDP ratio, if 89 The Diversification Toolkit: Export Diversification and Quality Databases 2014, available at https://www.imf.org/external/np/res/dfidimf/diversification.htm 90 The concepts of measurement of export diversification and its bifurcation into extensive and intensive margins are explained in appendix A. 223 Book 2.indd 255 10/16/17 4:59 PM
  256. the GDP value is high then the amount of exports are high and hence its diversification can be potentially important for further growth and stability of the economy . Figure 1: OIC Country Exports as Percent of GDP Exports as % of GDP 120 120 100 100 80 80 60 60 40 40 20 20 0 0 2000 2014 World Average Export Diversification Is there a relationship between export diversification and growth volatility? Let us explore, if such relationship exists, by plotting GDP growth and export diversification for the panel of all OIC countries. The scatter plot is given in Figure 2 with a trend line. It shows a slight positive slope, i.e. a negative correlation between economic growth and export diversity.91 This appears to be strange because we expect improved export diversity with economic growth. However, it could be the case that at higher levels of income countries specialize more and room for further diversification shrinks, which might be driving this apparent overall negative correlation. This is yet to be confirmed. Let us now try to see the relationship between growth volatility and export diversity for all OIC countries. This is shown in Figure 3. An exponential trend line (and a polynomial line) indicates the possibility of nonlinear relationship between the growth volatility and export diversification. There is an optimal trade diversification around which growth volatility is small. An increase of export diversification (movement to the left) or a decrease of export diversification (movement to the right) can lead to higher degree of volatility. 91 A higher number on the diversity index shows lesser diversity. 224 Book 2.indd 256 10/16/17 4:59 PM
  257. Figure 2 : GDP Figure Growth 2: GDP andGrowth Export and Diversity Export Diversity 100 100 80 80 60 60 40 40 20 0 0 -20 GDP growth GDP growth GDP GrowthGDP andGrowth Export Diversity and Export AllDiversity OIC Countries All OIC Countries (1962-2010)(1962-2010) 20 0 1 0 -20 -40 -40 -60 -60 -80 -80 2 1 3 2 4 3 5 4 6 5 7 6 7 Export DiversityExport Diversity Figure 3: Volatility Figure 3:ofVolatility Growth and of Growth Export and Diversity Export Diversity 50 45 40 35 30 25 20 15 10 5 0 Volitility of Growth Volitility of Growth GDP GrowthGDP Volatility Growth and Volatility Export Diversity and Export OIC Diversity Countries, OIC Countries, yearly 1966-2010 yearly 1966-2010 0 50 45 40 35 30 25 20 15 10 5 0 1 0 2 1 3 2 4 3 5 4 6 5 7 6 7 Export Diversification Export Diversification dataexdi dataexdi dataexdi)( .‫ أسي‬dataexdi)(dataexdi) .‫أسي‬ ( ‫الحدود‬dataexdi) ‫متعدد الحدود ( متعدد‬ In order to In make order thetoanalysis make the more analysis concise more while concise covering whileallcovering such possibilities all such possibilities and also obtain and also obtain quantitativequantitative measures of measures these relationships of these relationships we now turn we to nowformal turn to modeling formal and modeling use ofand use of econometrics. econometrics. 225 Book 2.indd 257 10/16/17 4:59 PM 225
  258. What is the magnitude of this relationship for the OIC countries as a group : Regressing Export Diversity on Volatility of Growth? In order to quantify the relationship identified in the previous section we used following single equation model. Where is volatility of GDP calculated as standard deviation of GDP with moving window of five years. represents a measure of diversity of exports calculated in three different ways: as Theil Index, and as two of its decompositions i.e., the extensive margin, and the intensive margin (see appendix for further details). Theil index is a measure of inequality with higher values representing less diversity and lower values signifying more diversity. Its sub-index ‗extensive margin‘ measures addition of new goods to the export basket or addition of new trade partners. Whereas the sub-index ‗intensive margin‘ measures diversification through intensification of exports of goods that are already in the export basket in such a way that share of each good in export basket becomes more even or by of exporting to the existing partners in such a way that distribution of export volume across the trade partners become more equal. We will suffix DX with a letter by writing DX-T, DX-E, DX-I respectively, for total Theil, Extensive margin, and Intensive margin. Same as the total Theil, higher values of the sub-indices represent lower diversification. is a set of exogenous control variables that are defined later. The is time dependent random effect, is subscripts denote country and time, respectively. unobservable country fixed effects, and represents residual error. While a number of long-term factors that include investment, price level, inflation, exchange rate, determine the economic growth, the stability of growth is determined by the volatility of these variables. Therefore, we take standard deviations of inflation, exchange rate, and investment as the control variables that constitute X. The standard deviations were calculated using five-year moving window for each control variable. Taking the control variables in standard deviation form has another advantage that it makes them of the same order in magnitude and variability as the dependent variable, which is also in standard deviation form. Sufficiently comparable variability in the variables is important for econometric analysis and statistical testing. Another advantage of this choice is it allows for simple and easy interpretation of the results. The purpose of the control variables here is to isolate the effect of export diversity from other possible ways in which exports can influence growth volatility. Another control variable that is included is the openness of the the economy, as more open the economy more repurcussions it can face from external demand shocks which can impact the growth as well as volatility of GDP. Data The data on export diversity is from IMF Diversification Toolkit. This include indices of diversification across products and trading partners. It reports total Theil (a measure of inequality) as overall diversity, between-Theil as measure of extensive margin in export diversity, and within Theil as measure of intensive margin in export diversity. The base data for 226 Book 2.indd 258 10/16/17 4:59 PM
  259. these indices are UN-NBER dataset refined from COMTRADE bilateral trade flow data at the 4digit SITC (Rev. 1) level. The data itself and further details about it can be accessed at: https://www.imf.org/external/np/res/dfidimf/diversification.htm and at https://www.imf.org/external/np/res/dfidimf/ExportDiversificationDatabase.csv This data is available for the period 1962 to 2010. However, in the regression analysis we have used data from 1966 to 2010 period. All the other data such as GDP, exchange rate, terms of trade, inflation, and openness is from World Bank, World Databank. It can be accessed at: http://databank.worldbank.org/data/home.aspx Summary statistic of the variables used in this study are given in the appendix. Estimation of the Model We used a version of 2SLS method92 as preliminary estimates to understand the relationships and then estimated the main results by using the GMM method. In both steps we estimate the base model and the subsequently enhanced models. The two separate estimation methods not only allow us to check the robustness of the results, they also help us to deconstruct the possible endogenity effects among the variables. Preliminary Estimations The estimates using 2SLS method are given in Table 1. It shows the four sets of models that are constructed by gradually adding control variables and interaction term. Each model was estimated using one measure of diversification at a time (we are using three different measures of export diversity DX-T, DX-E and DX-I). In this way we have three versions of each model, thus in total 12 equations, one at a time, were estimated given by columns 1 to 12 in Table 1. In short, the models are: (A) the base model (columns 1 to 3), (B) model with control variables (columns 4 to 6), (C) model with trade openness added to the previous model (columns 7 to 9), and (D) a model with openness interacted with diversification (columns 10 to 12). We start with the base model when estimated by 2SLS method (columns 1 to 3 of Table 1). The coefficient b2 of Diversity of exports are statistically significant at 95 percent confidence level in equations 1 and 2 but not in equation 3. The sign and magnitude of b2 in these equations show that (i) an increase of one standard deviation in total export Theil index (i.e., reduction in export diversity by 1 standard deviation) will increase volatility of growth by 15.9 percent. Similarly, if the extensive margin increases by one standard deviation (i.e., the concentration of exported goods or the concentration of trade partners increases) it increases the volatility of growth to even higher degree of 51.4 standard deviations. Next, we introduced exchange rate volatility as additional exogenous control variable and reestimate the impact of the three measures of export diversification i.e., total Theil, extensive margin, and intensive margin, taking one at a time (columns 4 to 6 of Table 1). The statistical 92 We used GMM command with exact identification in this single equation model (i.e., using rhs variables as they are, not their lagged values as instruments), it is equivalent to estimating by 2SLS method and it gives more robust standard errors. 227 Book 2.indd 259 10/16/17 4:59 PM
  260. significance remains the same but the magnitude of the three coefficients change . The adverse impact of total Theil slightly increases to 16.8 percent but the impact of extensive margin decreases to 31.5 percent. Changes in export diversity is likely to impact more on the growth volatility of countries that are more open to international trade than those who are less active in international trade. Put differently, the impact will be moderated by the openness relative to the GDP of the country. For this reason we introduced openness adjusted for GDP (adjusted-openness = (exports + imports)/GDP) as an explanatory variable. Moreover, to capture the possibility of non-linearity of the impact of export diversity when openness is low and when it is high we interact adjustedopenness with the export diversity. The estimated models with these two additional variables are given in Table 1 (columns 7 to 9, and columns 10 to 12, respectively). These models were estimated for the three versions of export diversity, i.e, the total Theil, extensive-, and intensivemargin. The coefficient to export diversity remained significant, as before, for the total Theil and extensive margin and non-significant of intensive margin. However, their magnitudes changed (all slightly reduced) obviously due to addition of adjusted-openness variable (see Table 1 columns 7 to 9). The interesting part is that the coefficient of adjusted-openness is significant in all three versions of the equation and much larger in magnitude (in the range of 29.6 percent to 30.3 percent; see Table 1 columns 7 to 9). When the interaction term (adjusted-openness x export diversity) was added, and the equation reestimated for the three versions of export diversity (see Table 1 columns 10 to 12) the coefficient of total Theil remained significant as before, however, the coefficient of extensive margin became insignificant from significant and the coefficient of intensive margin became significant from insignificant. More importantly, the sign of these three coefficients of export diversity reversed to negative, suggesting that export diversity started to contribute to exacerbate growth volatility. This could be due to the nonlinear effects of diversity and or openness which have now been explicitly accounted for in this set of models. Therefore we have to turn to examine the coefficients of the adjusted-openness and the interaction term. The coefficient of adjustedopenness and the coefficient of the interaction term were significant in case of Theil and intensive margin versions of the equation but not in case of extensive margin version of the equation. Another interesting aspect is that the interaction term coefficients, when significant, were large (in the range of 57.4 to 83.3 percent) and positive: indicating a volatility-reducing role of export diversity in more open economies. Main Estimations: Correction for possible endogenity Since we are using a lagged dependent variable on the right-hand side there is a possibility of errors becoming correlated with regressors. Moreover, as the model is parsimonious there is also a possibility of correlation between regressors and the error term due to excluded endogenous variables which may be affecting both the dependent and independent variables. The 2SLS method solve one aspect of the problem of endogenity of regressors and error term by using instrumental variables (e.g. by using estimated values of the rhs variables as instruments for the original variables). However, in large panel data exact identification of the instruments is 228 Book 2.indd 260 10/16/17 4:59 PM
  261. difficult that calls for over-identification (more instruments than the original variables). The 2SLS does not utilize the full information of the extra instruments but requires imposition of exogenous restrictions specifying the relationships among the instruments to restrict them effectively to a just identified case. Hence the coefficients that are obtained by 2SLS method may not be statistically significant. It may also be the reason for switching of the signs and change in significance. In order to control and adjust for this possibility we used 2-stage GMM estimation method with three periods of lagged values of each independent variable as instruments. The GMM estimation results are reported in Table 2. Note that the magnitude of the effect of diversification on volatility of gdp-growth has decreased across all three measures of export diversification (i.e., the coefficients b2, b2‘, b2‘‘). The sign has remained correct, however, the level of statistical significance has reduced. The more comprehensive model with openness (Table 2, columns 7 to 9) shows that one standard deviation increase in export diversification (Total Theil) contributes to reduction in volatility of growth by 9.3 percent. Whereas the impact of similar change in extensive margin (between Theil) is more than thrice of the former, i.e., 31.6 percent, and statistically more likely (higher level of significance). In the case of model with openness-diversification interaction (Table 2, columns 10 to 12) the statistical significance of the export diversification coefficients became lower and signs of some switched, indicating poor fit. However, the last equation (column 12) shows statistically significant coefficients for intensive margin and its interaction with openness. Also note that the negative sign for b2 and b2‘‘ indicating increase in growth volatility with increased diversification (or equivalently, reduction in growth volatility with increase in concentration of exports). However, in case of openness-diversity interaction terms the coefficients b6 and b6‘‘ are positive. This indicates possibility of nonlinear effect of diversification with change in openness. The Arellano-Bond post estimation test shows significant and less than unity AR(1) coefficients and non-significant AR(2) coefficients for the equations in columns (7 to 12). These two results together imply dynamically stable and correctly specified models with openness and its interaction with export diversity for the group comprising all OIC-countries. 229 Book 2.indd 261 10/16/17 4:59 PM
  262. Table 1 : Growth Volatility on Export Diversification (All OIC Countries) Two Step GMM Regression (with exact identification , i.e. equivalent to 2SLS) Dependent Variable is Volatility of GDP Growth Export Diversification with Export Diversification Base Export Diversification with Control Variables and Trade Model Control Variables Openness VARIABLES Lag growth volatility b1 Diversity of exports (Theil) b2 Diversity Extensive Margin (between Theil) b2' Diversity Intensive Margin (within Theil) b2'' Exchange rate volatility b3 Openness adjusted for gdp b4 Diversity (Theil) x Openness b5 Diversity (Extensive Margin) x Openness b5' Diversity (Intensive Margin) x Openness b5'' Constant (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) 0.858*** 0.833*** 0.870*** 0.859*** 0.856*** 0.871*** 0.840*** 0.839*** 0.848*** 0.833*** 0.837*** 0.845*** (0.0354) (0.0358) (0.0358) (0.0363) (0.0355) (0.0351) (0.0304) (0.0297) (0.0299) (0.0300) (0.02960) (0.02990) 0.159*** 0.168*** 0.119** -0.332* (0.0610) (0.0615) (0.0564) (0.1840) 0.514*** 0.315*** 0.255*** 0.0883 (0.1330) (0.0870) (0.0968) (0.16000) -0.0104 0.0217 (0.0738) 0.027 (0.0589) -0.578** (0.0624) (0.23100) 0.000345 0.000322 0.000311 0.000299 0.000277 0.000279 0.000278 0.000276 0.00026 (0.0003) (0.0003) (0.0003) (0.0003) (0.0003) (0.0002) (0.0003) (0.00025) (0.00025) 0.298** 0.303** 0.296** -1.956** 0.179 -2.454** (0.1270) (0.1270) (0.1280) (0.8960) (0.18000) (0.98200) 0.574** (0.2270) 0.197 (0.20700) b0 0.833*** -0.0863 (0.2260) Observations Export Diversification with Control Variables and Interactions 1,609 1.479*** (0.29400) 0.579** -0.16 0.323** 0.428** -0.137 0.172 0.224 1.668** 0.285* 2.232*** (0.5200) (0.2800) (0.2260) (0.1420) (0.2040) (0.2310) (0.1310) (0.2180) (0.7210) (0.14700) (0.76400) 1,603 1,609 1,558 1,556 1,558 1094 1092 1094 1,094 1,092 1,094 Notes: Robust standard errors in parentheses *** p<0.01, ** p<0.05, * p<0.1 230 Book 2.indd 262 10/16/17 4:59 PM
  263. GMM VARIABL ES Table 2 : Growth Volatility and Export Diversification (All OIC Countries) Two Step GMM Regressions Dependent Variable is Volatility of GDP Growth Export Diversification With Controls With controls and Trade With Export Diversity Base Model openness interacting with Openness (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) Eq Eq1 Eq2 Eq3 Eq4 Eq5 Eq6 Eq7 Eq8 Eq9 Eq10 Eq11 Eq12 Lag growth volatility b1 Diversity of exports (Theil) b2 Diversity Extensive Margin (between Theil) b2‘ Diversity Intensive Margin (within Theil) b2‘ ‘ Exchange rate volatility b3 Inflation volatility (0.053 1) b5 Diversity (Theil) x Openness b6 Diversity (Extensive Margin) x Openness b6‘ Diversity (Intensive Margin) x Openness b6‘ ‘ AR(1) WC robust s.e. AR(2) WC robust s.e. 0.858* ** (0.028 0) b0 0.861* ** (0.038 3) 0.0756 (0.052 6) 0.214* * (0.087 0) 0.891** * (0.0440) 0.876* ** (0.036 1) 0.825** * (0.0456) 0.861** * (0.101) 0.834** * (0.0417) 0.0933* 0.823** * (0.0447) 0.857** * (0.107) -0.0836 0.316** * (0.126) (0.122) 0.0380 -5.72e05 0.00011 2 (9.94e05) 0.0001 92 (0.0001 89) -0.0803 (0.026 0) (0.0497) 0.251 (0.255) -0.0105 0.270** (0.057 8) -6.09e05 (0.0551) -7.03e05 3.85e-05 (0.0607) -9.69e05 -6.40e05 2.02e-05 (0.134) (9.04e05) 0.0093 3 (0.023 2) (0.0001 15) 0.0263 (0.0003 02) -0.0376 (0.0001 05) 0.0267 (0.0001 06) 0.0201 (0.0003 06) -0.0316 0.00010 1 (0.0001 01) 0.0272 (0.0432) (0.150) (0.0407) (0.0395) (0.157) (0.0395) 0.340* 0.158 0.324* -0.703 0.122 -0.929 (0.181) (0.429) (0.180) (0.594) 0.256* (0.574) (0.668) (0.146) 0.0783 (0.289) 0.192 0.829** * (0.0415) (0.117) 0.310** 0.0115 (0.055 7) 0.393* 0.575* * (0.239) -0.188 0.352 0.200 0.590 0.364 (0.202) 1.041** (0.242) 0.613** * (0.224) (0.318) (0.824) (0.330) (0.540) (0.954) (0.518) 1,052 838 836 838 838 836 838 835 836 838 0.935* ** (0.091 2) 0.227* * (0.097 5) 0.913* ** (0.046 9) 0.206* ** (0.062 0) 0.916** * (0.0413) 0.905* ** (0.059 0) 0.203* ** (0.071 5) 0.863** * (0.144) 0.814** * (0.113) 0.889** * (0.100) 0.854** * (0.130) 0.784** * (0.162) 0.727** * (0.139) -0.179 -0.116 -0.169 -0.159 -0.108 -0.0568 (0.196) (0.0966) (0.123) (0.153) (0.167) (0.114) 0.400* ** (0.099 7) 0.519* ** (0.195) 0.148 1,052 1,050 0.942* ** (0.094 2) 0.238* * (0.098 8) 0.919* ** (0.098 9) 0.241* * (0.098 3) (0.201) Observation s 0.842* ** (0.029 0) b4 Openness adjusted for gdp Constant 0.849* ** (0.028 5) 0.0828 0.208** * (0.0496) 231 Book 2.indd 263 10/16/17 4:59 PM
  264. Notes : Robust standard errors in parentheses *** p<0.01, ** p<0.05, * p<0.1 232 Book 2.indd 264 10/16/17 4:59 PM
  265. Book 2 .indd 265 10/16/17 4:59 PM
  266. What do we conclude from this complex analysis ? If we consider only the ‗direct effect‘ of export diversification on the volatility of growth in the OIC countries as a group then, the intensive margin of export diversification seems to be more important than the extensive margin in magnitude and it is working in opposite direction than the extensive margin. Focusing on intensive margin, i.e., keeping constant the number of exportproducts, the countries whose exports are more balanced in volume of trade across the products and across the partners seems to face larger volatility in their GDP growth (their GDP growth volatility increases by 27 percent). However, taking account of the indirect effect of diversity on trade openness the full impact of improvement in intensive margin is reduction in volatility of GDP growth by 12.3 percent.93 This result is statistically significant at 10 percent level of significance.94 Considering the extensive margin, the countries with increasing number of export-products seems to face lesser volatility in their GDP growth (their GDP growth volatility decreases by 25 percent). However, taking into account the indirect effect of diversity on volatility of GDP through its impact on trade openness (similar to that is done above), one standard deviation improvement in extensive margin reduces the volatility of GDP growth by 32 percent. However, this result is not statistically significant. The result for overall export diversification (total Theil) is that a one standard deviation increase in export diversity reduces the volatility of GDP growth by about 17.2 percent. The non-linearity in the relationship between growth volatility, export diversity and openness calls for further analysis to account for the regional and economic differences among the countries. It also allows us to analyze the critical value of diversification (or of the openness) where the impact reversal takes place. These issues are address in the following section. Conclusions Export diversification helps in reducing macroeconomic growth volatility of OIC member countries. In this context, diversification through extensive margin is relatively more important than through intensive margin in OIC countries. That is, for the OIC countries, adding new commodities to the export basket or adding new markets or new partners tends to have more stabilizing impact on GDP growth than balancing the volume of exports across the existing export commodities and across the existing trading partners. Specifically, a model with openness (Table 2, columns 7 to 9) shows that one standard deviation increase in export diversification (Total Theil) contributes to reduction in volatility of growth by 9.3 percent. Whereas the impact of similar change in extensive margin (between Theil) is more than thrice of than this, i.e., 31.6 percent, and statistically more significant. 93 To get the total effect of export diversity we have to add b2‘‘ + b6‘‘. The coefficient b2‘‘ is partial derivative of volatility with respect to export diversity. The coefficient b6‘‘ is the indirect effect of export diversity through change in openness on the volatility of GDP. 94 The coefficient b2‘‘ is significant at 5 percent level while the coefficient b6‘‘ is significant at 10 percent level. Therefore, the significance of the sum of the two coefficients is expected to be 10 percent – the weakest link in the chain. 226 Book 2.indd 266 10/16/17 4:59 PM
  267. Moreover , the relationship between export diversity and growth volatility is conditioned by trade openness thus introducing nonlinearities in this relationship. As compared to the earlier studies, that have explored the relationship between growth volatility and export diversity for a different group of countries and have found that relationship very robust (e.g., Haddad et al. 2013), our results indicate that the relationship is not that robust in the case of OIC countries. The non-robustness is signified by occurrence of change in the signs of the coefficients and change in their statistical significance when some control and conditioning variables are added. This difference may be due to the nature of data; as we are using a different, more granular, and longer horizon data than used by Haddad et al (2013). The richness of present data is providing greater variability and contrast that was not available in the earlier studies that found very stable and intuition confirming results. A recent study (Wang 2014) that uses same data that we used also does not exhibit very robust results when it evaluated a similar relationship in the group of all world countries and in the group of less developed countries. This indicates that there is a room for further research and refinement of the model incorporating sector specific constraints. For formulation of a clear policy on export diversification and growth, we need to go a step further than simply establishing the relationship between the two variables. We need to understand what drives the relationship and what needs to be done to improve the situation. We recommendfuture work in this direction. Appendix: Summary Statistic of Data Variable _sd5_v06 _sd5_v17 _sd5_v11 opennes1 dataexdi dataexm datainm Description Growth volatility = Standard deviation of gdp growth (moving 5 year window) Standard deviation of exchange rate (moving 5 year window) Standard deviation of CPI inflation (moving 5 year window) Openness/GDP Theil index of export diversification (total Theil) Extensive margin of export diversification (between Theil) Intensive margin of export diversification (within Theil) Obs 1735 Mean 4.973583 Std.Dev. 4.722591 Min .2 Max 47.06698 1989 1360 1342 2219 2213 2219 50.51576 7.47712 .752166 4.308975 .9003356 3.411074 237.1754 16.97938 .3953539 1.100988 .8038052 .9803254 0 .2957979 .0792124 1.53035 -.049862 .943779 3614.737 226.4408 2.891168 6.43775 3.99245 6.207 227 Book 2.indd 267 10/16/17 4:59 PM
  268. References : Arellano, M. and S. Bond (1991), ―Some tests of specification for panel data: Monte Carlo evidence and an application to employment equations‖, Review of Economic Studies, 58, 277– 297. Arellano, M., and O. Bover. 1995. ―Another look at the instrumental variable estimation of errorcomponents models‖, Journal of Econometrics 68: 29–51. Blundell, R and S. Bond. 1998. ―Initial conditions and moment restrictions in dynamic panel data models‖, Journal of Econometrics 87: 115-143. Cadot, Oliver, Céline Carrére, and Vanessa Strauss-Kahn (2011), ―Export Diversification: What‘s Behind the Hump?‖ Review of Economics and Statistics, 93 (2), pp. 590-605. Haddad, Mona, Jamus Jerome Lim, Cosimo Pancaro and Christian Saborowski (2013) ―Trade openness reduces growth volatility when countries are well diversified‖, Canadian Journal of Economics, Volume 46, Issue 2, pp. 765–790, May. IMF https://www.imf.org/external/np/res/dfidimf/diversification.htm Muslim Mirror, http://muslimmirror.com/eng/population-of-oic-countries-rose-to-1-68-billionin-2014/ Papageorgiou, Chris, Nikola Spatafora, and Ke Wang (2015), ―Diversification, Growth and Volatility in Asia‖, World Bank Policy Research Working Paper 7380, July. SESRIC (2012) Annual Economic Report http://www.sesrtcic.org/files/article/454.pdf] on the OIC Countries, available at Wang, Ke (2014), ―Diversification and Volatility‖ in Papageorgiou, Chris, Lisa Kolovich, et al., IMF Policy Paper, Sustaining Long-Run Growth and Macroeconomic Stability in Low-Income Countries – The Role of Structural Transformation and Diversification – Background Notes. March. pp. 27-37. Wikipedia, https://en.wikipedia.org/wiki/Demographics_of_the_member_states_of_the_Organisation_of_Isl amic_Cooperation World Bank, http://databank.worldbank.org/data/home.aspx 228 Book 2.indd 268 10/16/17 4:59 PM
  269. 13 Role of Islamic Banks ’ Short-Term Financing in Agri-Business Development: The Case of Pakistan Muhammad Mahmood Shah Khan95, Farrukh Ijaz96, Syeda Hameeda Batool97 and Asim Shahzad98 Agriculture is an important sector of any economy. In a country like Pakistan, agriculture sector has a leading position towards the growth of the economy. Agricultural mechanism not only boosts the country‘s GDP growth rate by 22% by employing 46% of the labor force but also revolutionizes the frame of the economy. This revolutionary aspect calls for the crucial role of the financial institutions to meet the short term and long term needs of this sector. Pakistani agriculturists are bounded to the traditional traits and are reluctant to make use of the financial (interest based) services being provided by the Pakistan conventional banking system. Also, Islamic banking system in Pakistan has least contribution in the development of argi-business despite tremendous growth in last 5 years. The study has found that, in view of the seasonality of the agricultural business, there is a need for short term financing to meet and manage the day to day agricultural related expenses (purchases of various inputs and payment of wages). The study also found that majority of the people rearing livestock are not aware about the short term financing provided by the Islamic banks. They are also of the opinion that Islamic banks do not provide short term financing facility which indicates the low awareness level among the farmers regarding Islamic banking products. Keywords: Agri-business, Islamic banks, Short term financing, Awareness 1. Introduction Pakistan possesses prosperous and enormous natural reserves, covering various ecological and climatic zones. The country has great potential for producing all types of food commodities. Therefore, agriculture sector of Pakistan has an important direct and indirect role in generating economic growth. The agriculture sector continues to be an essential component of Pakistan‘s economy. The importance of agriculture to the economy is seen in three ways: first, it provides food to consumers and fiber for domestic industry; second, it is a source of scarce foreign exchange earnings; and third, it provides a market for industrial goods. Agriculture sector currently contributing almost 22% to the Gross Domestic Product (GDP) of Pakistan, generating employment opportunities for 46% of the labor force and providing livelihood to above 60% of the Pakistan‘s rural population (Pakistan Economic Survey, 2014). Agriculture sector plays a vital role in ensuring food security, generating overall economic growth, reducing poverty and transforming towards industrialization. The total geographical area of Pakistan is 79.6 million hectares. About 27 percent of the area is currently under cultivation. Of this area, 80 percent is irrigated while the rest is rainfed. In this regard, Pakistan has one of the highest proportions of irrigated cropped area in the world. 95 Director, Institute of Islamic Banking, University of Management and Technology, Lahore. Officer Academics, Institute of Islamic Banking, University of Management and Technology, Lahore. 97 Research Associate, Institute of Islamic Banking, University of Management and Technology, Lahore. 98 MS Scholar, Institute of Islamic Banking, University of Management and Technology, Lahore. 96 229 Book 2.indd 269 10/16/17 4:59 PM
  270. Banks ‘ Role in Agricultural Credit Financing In Pakistan, all banks are allowed to provide agricultural financing to the farmers pursuing agribusiness; whether these are the conventional banks, Islamic banks or specialized banks. The central bank of Pakistan (State Bank of Pakistan – SBP) does not place any restriction in providing agricultural financing by these banks. However, proper documentation, rules and regulations enforced by SBP should be followed by both the parties. Any individual (farmer or fisherman), corporate firm, cooperative society undertaking livestock related activities must have the relevant experience and sufficient knowledge to be entitled to draw agricultural credit from the banks. The financing provided by the banks could be for complete value chain of activities such as crop loans (seed, fertilizer, pesticides, etc.), development loans (tube wells, tractors, machinery, etc.), corporate farming, marketing, storage, processing of crops, grading, polishing, transportation and exports of agricultural goods. Financing facility can also be availed for nonfarm sector such as livestock, floriculture, poultry, horticulture, forestry, dairy farming, and fisheries. However, the financing for the procurement of fruits/crops has not been provided by SBP under the list of eligible items. Currently, the banking sector is providing three types of loans - short-term loans for the period up to 1.5 years, medium-term loans from 1.5 to 5 years and long-term loans for maximum of 7 years. The short term loans are used for fulfilling the day to day working captal requirements; whereas medium and long-term loans help in meeting the developmental needs of the farmers and corporate firms such as development of land and irrigation resources and purchase of agricultural machinery. The guidelines and regulations issued by SBP on different financing schemes are communicated to the banks by SBP through published brochures and promotional channels which are translated into Urdu and other regional languages to be distributed among the all concerned. Moreover, special outreach and training programs organized in collaboration with banks create awareness among the farming/rural communities about the financing facilities they can access. The agricultural statistics issued by the government of Pakistan for the period 2009-2014 as shown in Table 1 helps to understand the significance of agriculture in the economy. Table 1: Agriculture Sector Statistics Indicators Growth Rate of Agriculture (%) Contribution to GDP (%) Important crops Growth rate (%) Other crops Growth rate (%) Total Cropped Area (Mln. Hectares) Wheat Production (Mln. Tonnes) Rice Production (Mln. Tonnes) Sugarcane Production (Mln. Tonnes) Cotton Production (Mln. Bales) Gram production (000.Tonnes) Maize production (000.Tonnes) Fertilizer Off-take (Mln. N/Tonnes) Credit disbursed to Agriculture Sector (Bln.Rs.) Credit disbursed to Agri. Sector by ZTBL (Rs. Bln) Labour force employed (%) Growth Rate of Livestock (%) Growth Rate of Forests (%) 2009-10 2.00 21.55 -3.70 -7.20 23.80 23.30 6.90 49.40 12.90 4.40 2010-11 2.38 20.91 1.50 2.30 22.80 25.20 4.80 55.30 11.50 496 3707 3.90 2011-12 3.60 21.02 7.90 -7.50 22.50 23.50 6.20 58.00 13.60 291 4271 3.90 2012-13 2.90 21.40 1.20 6.10 22.80 24.20 5.50 63.80 13.00 751 4220 3.60 2013-14 2.10 21.04 3.70 -3.50 22.80 25.30 6.80 66.50 12.80 475 4527 3.30 248.10 263.00 293.90 336.20 255.70 - 37.40 37.90 38.00 45.90 45.70 4.10 2.20 45.00 3.97 -0.40 45.00 4.04 1.80 45.00 3.50 1.00 43.70 2.90 1.50 230 Book 2.indd 270 10/16/17 4:59 PM
  271. Forest Area (as % of total area) Land for Wild Life (as % of total area) Source: Pakistan Economic Survey (2014) 4.21 - 5.11 11.30 5.17 11.30 5.20 11.50 5.20 11.60 1.1. Research Question Although, the Islamic banking has become successful so far but it still could not get the required pace to justify its presence as an alternative to conventional banking which is attributed to numerous reasons. One of the major reasons rests with not fulfilling the financing needs of the most vital sector of the economy, that is, the agricultural sector. The present study has been conducted to answer mainly the question related to the probability of Islamic banks for short term financing in agri-business sector of Pakistan. 1.2. Research Objectives The following research objectives have been framed: 1. 2. To identify the areas where short-term financing is needed in agriculture sector. To check the level of familiarity of agriculturists/farmers with Islamic banking financing in agriculture sector. 3. To find out the availability of agricultural financing by Islamic banks in Pakistan. 4. To find out the modes of financing agriculture suiting to the needs of agriculture sector. 2. Literature Review Financial markets are concerned with the valuation and pricing of financial contracts. These financial contracts can be viewed as the exchange of cash in the present for a promise of future reciprocity. According to Belongia (1986), the financial profitability and performance of conventional as well Islamic banks tends to mirror the farm sector because loan demand rises typically with farm income as in case of bank‘s profits. But when the agriculture sector experiences downturns, a bank tends to experience sharp increases in nonperforming loans. Financial markets create value through loans which entail an exchange of current cash for a promise to pay in the nearby future. The promise is often supplemented with additional restrictions and covenants that determine the rights and behavior of the parties. The borrower, however, sometimes breaks the promise. Recognition of this state of imperfect information causes lenders to screen different loan applications to determine who is more likely to repay (Von Pischke, 1991; Dowd, 1992). Access to external financial resources has been severely constrained in Pakistan agriculture sector during transition. This is due to the standard problems of imperfect and costly information encountered in financial markets. These transition-specific problems refer to the role of credit in the economic system, institutional reforms occurring within the financial sector, low enterprise profitability in agriculture, accumulated debts, high inflation rates, risk and uncertainty, and collateral (Swinnen, 1999). However, the problem related to asymmetric information leads to the importance of the borrower‘s initial net worth in determining the size of investment and contractual instruments that will prevail in the market (Stiglitz, 1993). Changes in the levels of internal financial resources can have important allocative effects on investment, especially in presence of high information cost (Meyer and Kuh, 1957; Tybout, 1984; Myers, 1984). This is because firms place their wealth at risk when asymmetric information conditions are present. 231 Book 2.indd 271 10/16/17 4:59 PM
  272. This increases the lender ‘s confidence thereby lowering the cost of external finance and reducing the amount of external financing required (Hubbard, 1998). Agriculture financing plays a major role in economic development (Zuberi, Aleem, & Malik, 1991). In agricultural sector, financing appears to be an essential input along with modern technology to achieve higher productivity. Credit requirements of the farming sector have increased rapidly over the past few decades. In order to obtain the credit facility from the banks, collateral plays an important role in a farmer‘s ability to secure external financial resources. Financial institutions require the pledging of assets (collateral) as a strategy to screen a client‘s creditworthiness and reduce default risk. Accordingly, the farmers who do not intend to repay the loan will be unwilling to provide personal capital or collateral to support the loan (Rizov, 1996; Szabo, 1997). Agriculture as a sector depends more on financing than any other sector of the economy because of the seasonal variations in the farmers returns and a changing trend from subsistence to commercial farming (Vogt, 1978). Under Agriculturists Loan Act (ALA) of 1958, credit is provided for relief of distress and for purchasing seed, fertilizer, cattle and implements (Yusuf, 1984). The importance of credit availability can be seen by the fact that mean input expenditures per hectare are significantly higher for farmers with credit, regardless of their level of assets. Higher input expenditures are presumably associated with higher growth in productivity (Saeed et al., 1996). The commercial banks are the important formal source of agricultural financing in Pakistan. Prior to the Banking Reform of 1972, the financing was limited to agricultural marketing with produce as collateral for the loans (Qureshi and Shah, 1992). Under these reforms, commercial banks were required to broaden the scope of lending to finance modern farm inputs and investments. According to Schmith (2007), the growth of Islamic financial industry is quite high within the Muslim world because they need an alternative to Ribā based banking. Islamic banks are planning to capture 15% of the total financial market in the next three years. The target may not be met without agriculture financing. Agriculture credit through formal channels caters to a small number of farmers against the potential rural clients estimated at 5.44 million. There are vast untapped opportunities for Islamic banks which are presently focusing more on consumer and corporate financing. The growth of an economy has very close relation with the growth of banking industry (Zaidi, 2005). However, Muslims require a financial system which fulfills their financial needs according to Sharīʿah. Islamic banking is a way to fulfill their financial requirements according to Islamic law. Meezan Bank was the first Islamic bank in Pakistan that provided Sharīʿah-compliant agricultural financing in the agriculturally rich central region of Pakistan. Qureshi and Shah (1992) observed that institutional credit affects agricultural output and found that the responsiveness of agricultural output is larger to institutional credit than that of output to fertilizer. Islamic finance has the ability to cover all the farm size groups with unique and comprehensive Islamic products (Iqbal, 2007). The importance of Islamic finance has compelled all the leading conventional banks to start Islamic banking windows. Islamic banking provides number of products/instrument (Wilson, 1991), which can deal with every nature of business (Adam and Ahmed, 2005). Islamic finance provides various products especially for agriculture sector. These products can be classified into following three categories as per the guidelines issued bt SBP: a) Trade based financing (Murābaḥah, Istiṣnāʿ, Salam, etc.), b) Rental based financing (Ijārah, Diminishing Mushārakah), and c) Participatory mode of financing (Muḍārabah, Mushārakah, 232 Book 2.indd 272 10/16/17 4:59 PM
  273. Muzara ‘, etc.). All such modes cater almost all financial requirements of the customers and can be effectively utilized for agriculture sector. 3. Research Hypothesis The following hypotheses have been developed for the study 1. Short-term financing is needed in agriculture sector of Pakistan. 2. Short-term investment opportunities in agriculture sector are available to Islamic banks. 3. The farmers are aware about availability of short-term financing for agriculture sector. 4. Research Methodology The population of the study consists of people working in agriculture sector of Pakistan which includes all sub-sectors, that is, crop/vegetable farming, orchard farming, horticulture, floriculture, aqua culture, forestry and agri-processing. In order to figure out the availability and need for short term financing in the agriculture sector, the survey instrument was designed consisting of 2 main factors, i.e. Short-term need analysis and short-term availability of financing. The information was was collected from different types of agricultural sub-sectors. Convenient sampling technique has been used to to approach the sample respondents. Sample A sample is a sub-set of the population which is selected with the expectation that it will represent the characteristics of the population. The classification of the sub-sectors has been adopted from Small and Medium Enterprises Development Authority (SMEDA). The detail of the sample is given in Table 2. Table 2: Sample of Study Agricultural Sub sectors Horticulture Floriculture Aqua-culture Population (in %age) As per SMEDA 40 30 Sample (in No.) 40 30 Sample (in %age) 40.4 30.3 10 10 10.1 Agri- processing Foresting 10 10 100 10 9 99 10.1 9.1 100 Research Tool and Data Collection In order to collect the data, a questionnaire was developed, covering the maximum possible factors with the help of literature review. The questionnaire was filled by 99 respondents from the abovementioned sample during personal visits of the enumerators. The face and content validity have been tested with the help of expert researchers indicating a Cronbach‘s alpha value of 0.85. In this case alpha is slightly above .8, and is certainly in the region indicated by Kline (1999), therefore indicates good reliability. Anonymity of respondent was ensured and biasness has been avoided. Adequate time was allocated for each respondent to realize better results. Authority letter was issued by the institute for making data collection easier. The ‗Statistical Package for Social Science‘ (SPSS) software was used for the data analysis. 233 Book 2.indd 273 10/16/17 4:59 PM
  274. 5 . Analysis and Discussion This section discusses the data analysis and the results obtained through the survey. Descriptive statistics, like frequency tables and histograms are used for better understanding to help interpreting the results effective ely. One sample t-test was applied to check the awareness level of farmers about the Islamic banking practices. 5.1. Descriptive Statistics for Short-term Need Analysis (1) Short Term Need Analysis for Transportation and Delivering Agricultural goods Table 3 shows short term need analysis of the farmers for transportation and delivery of agricultural products to the clients. The results indicate that 34% respondents did not require short-term financing facility for transportation and delivery of goods. However, 16%, 20%, 11%, and 18%, respectively fell in the categories of ‗may be needed‘, ‗little need‘, ‗needed‘, and ‗vital need‘. Table 3: Short Term Need Analysis for transportation and delivering agricultural goods Items No Need At-all Frequency Percent 16 16.2 34 May be Needed Little Need 20 Needed 11 Vital Need 18 Total 99 34.3 20.2 11.1 18.2 100 (2) Short Term Need Analysis for Hiring the Trained Staff and Technology Table 4 shows short term need analysis of the farmers to hire specialized staff. The response for this from the farmers indicates that in the ‗No Need at all‘ category the response rate is 15%. In ‗may be needed‘, ‗little need‘, ‗needed‘, and ‗vital need‘ categories the proportion of respondents has respectively been counted as 10%, 26%, 32%, and 16%. Table 4: Short Term Need Analysis hiring the Trained staff & technology Items Frequency Percent No Need At-all 15 15.2 Little Need 26 26.3 May be Needed Needed Vital Need 10 32 16 10.1 32.3 16.2 234 Book 2.indd 274 10/16/17 4:59 PM
  275. Total 99 100 (3) Short Term Need Analysis to Balance the Salaries and Wages Expense Table 5 shows short term need of the farmers for payment of salaries and wages. The response for this from the farmers indicates that in the No Need at all category the response rate is 26%. In May be needed category it is 22%. And 20%, 13%, and 18% are in the categories of Little need, Needed, and Vital need respectively. Table 5: Short Term Need Analysis to balance the Salary and wages expense Items No Need At-all May be Needed Little Need Needed Vital Need Total Frequency Percent 22 22.2 26 20 13 18 99 26.3 20.2 13.1 18.2 100 (4) Short Term Need Analysis to Purchase Raw Material Table 6 shows short term need of the farmers for purchase of raw material. The response for this from the farmers indicates that in the No Need at all category the response rate is 17%. In May be needed category it is just 10%. And 24%, 30%, and 18% are in the categories of Little need, Needed, and Vital need respectively. Table 6: Short Term Need Analysis to purchase Raw Material Items No Need At-all May be Needed Little Need Needed Vital Need Total Frequency 17 10 24 30 18 99 Percent 17.2 10.1 24.2 30.3 18.2 100 (5) Short Term Need Analysis to Purchase Raw Material Table # 7 shows short term need of the farmers for purchase of medications. The response for this from the farmers indicates that in the No Need at all category the response rate is 14%. In May be needed category it is 13%. And 16%, 33%, and 23% are in the categories of Little need, Needed, and Vital need respectively. 235 Book 2.indd 275 10/16/17 4:59 PM
  276. Table 7 : Short Term Need Analysis to arrange the medications Items No Need At-all Frequency Percent 13 13.1 14 May be Needed Little Need 16 Needed 33 Vital Need 23 Total 99 14.1 16.2 33.3 23.2 100 5.2. Descriptive Statistics for Short-term Availability Analysis (1) Short Term Availability Analysis for Hiring the Trained Staff and Technology Table 8 shows awareness among the farmers regarding availability of short term financial facility in market for acquiring latest technology and trained staff for betterment of their existing business to compete in market. It shows 57% farmers are aware of it and only 43% farmers have no awareness of such type of facility available in the market or not. Table shows 76% farmers either don‘t know or unavailability of such type of financial facility which clearly describes there is high potential in that area for Islamic banks to excel. Table 8: Short Term Availability Analysis hiring the trained staff & technology Items Available Not Available Don't Know Total Frequency Percent 34 34.3 23 42 99 23.2 42.4 100 (2) Short Term Availability Analysis to Balance the Salaries and Wages Expense Table 9 shows awareness among farmers regarding availability of short term financial facility in market to meet salary and wage expenses of workers of their agri-business for smooth run of business. It shows 60% farmers are aware of it and only 40% farmers have no awareness of such type of facility available in the market or not. Table shows 85% farmers either don‘t know or unavailability of such type of financial facility which clearly describes there is high potential in that area for Islamic banks to excel. Table 9: Short Term Availability Analysis to balance the Salaries & Wages Expenses Items Available Not Available Don't Know Frequency Percent 45 45.5 14 40 14.1 40.4 236 Book 2.indd 276 10/16/17 4:59 PM
  277. Total 99 100 (3) Short Term Availability Analysis to Purchase Raw Material Table 10 shows awareness among the farmers regarding availability of short term financial facility in market for purchase of raw material for their business. It shows 61% farmers are aware of it and only 39% farmers have no awareness of such type of facility available in the market or not. Table shows 71% farmers either don‘t know or unavailability of such type of financial facility which clearly describes there is high potential in that area for Islamic banks to excel, because working capital is in need of a business like blood for a body. Table 10: Short Term Availability Analysis to purchase Raw Material Items Available Not Available Don't Know Total Frequency Percent 32 32.3 29 38 99 29.3 38.4 100 (4) Short Term Availability Analysis to Arrange the Medications Table 11 shows Awareness among the farmers regarding availability of short term financial facility in market for purchase of medication for their fields or livestock. It shows 59% farmers are aware of it and only 41% farmers have no awareness of such type of facility available in the market or not. Table shows 71% farmers either don‘t know or unavailability of such type of financial facility which clearly describes there is high potential in that area for Islamic banks to excel. Table 11: Short Term Availability Analysis to arrange the medications Items Available Not Available Don't Know Total Frequency Percent 29 29.3 29 41 99 29.3 41.4 100 5.3. Access to Financial Services (1) Do you have Short Term Loan Table 12 shows 41% farmers having bank loans and familiar with basic procedure of it, whereas 58.6% farmers don‘t use credit facility from the banks. 237 Book 2.indd 277 10/16/17 4:59 PM
  278. Table 12 : Do you have short term loan Items Yes Frequency Percent 58 58.6 41 No Total 99 41.4 100 (2) How many Short Term Loans you have Table 13 shows the market potential for Islamic Banks to excel in it. It clearly shows that there are almost 57% farmers who didn‘t get short term financial facility yet. According to the ―Need analysis‖ section it is very much cleared that they are in need of it. So the conclusion may be made that there is 57% market share is available for Islamic Banks for maximizing their profitability. Table 13: How many Short term loans you have Items No Loan Frequency Percent 26 26.3 58 One Loan Tow Loan 5 Three Loan 58.6 5.1 8 More Than Three 2 Total 99 8.1 2 100 (3) How many Bank Accounts you have Table 14 shows the familiarization of farmers with the banking system. It shows almost 81% farmers are having bank accounts. That is very good figure because it‘s a clear sign that most of the farmers having basic knowledge of banking system. So Islamic Banker can easily explain them regarding any product and procedures and there is also a positive sign for Islamic Bankers that they can easily explore and target the market to earn enormous profits. Table 14: How many bank accounts you have Items No Account One to Two Three to Four More Than Four Total Frequency Percent 65 65.7 17 15 2 99 17.2 15.2 2 100 (4) How many Bank Accounts you have Table 15 shows only 26% respondents are willing to take financial facility from banks as they are working now. But 74% respondents are not happy with the current scenario they have 238 Book 2.indd 278 10/16/17 4:59 PM
  279. following problems with the current system , like Religious, Lengthy procedure, Difficult Procedure, Strict Conditions and Non-cooperating staff members of bank. Table 15:Do you like taking loan from banks Items Yes No Total Frequency Percent 73 73.7 26 26.3 99 100 (5) Reasons behind Not Taking Loans Table 16 shows the reasons behind not taking loan from the banks. There are 24 percent farmers having no problem at all and remaining 76% farmers facing different types of problems while taking loan from the Banks. The first and most important problem is Religious problem, 28% farmers are away from banks just due to conventional banking system which deals in Ribā. It clearly shows 28% market share can be addressed by Islamic bankers without any extra efforts because Islamic banks having Ribā free dealings. The second major problem faced by farmers is Strict Conditions which is 20% out of 47%. 13%, 12% and 2% having problems related Difficult Procedure, Lengthy Procedure and not cooperating Staff respectively. Banks are bound to follow strict conditions so there is no need of debate. But rest of the problems like difficult, lengthy procedure and not cooperating staff can be minimized to get more 27% share of market. Table 16: Reason behind not taking loans Items Haven‘t any Problem Religious Lengthy Procedure Difficult Procedure Strict Conditions Not Cooperate Staff Total Frequency Percent 28 28.3 24 12 13 20 02 99 24.2 12.1 13.1 20.2 2.0 100 5.4. Kind of Contract In the survey, the respondents were also asked which kind of contract they prefer to hold with Islamic banks for their various needs of financing. 51% of the respondents show willingness to adopt Rental base of Islamic mode of financing. 16% and 33% respondents not decided yet and unwillingness to adopt it respectively. 33% respondents may be due to limited knowledge regarding Islamic modes of financing. 66% of the respondents show willingness to adopt Partnership base of Islamic mode of financing. 17% and 14% respondents not decided yet and unwillingness to adopt it respectively. 14% respondents may be due to limited knowledge regarding Islamic modes of financing. 57% of the respondents show willingness to adopt Trade 239 Book 2.indd 279 10/16/17 4:59 PM
  280. base of Islamic mode of financing . 19% and 24% respondents not decided yet and unwillingness to adopt it respectively. 24% respondents may be due to limited knowledge regarding Islamic modes of financing. Table 17: What Type of contract you want from Islamic Bank Items Strongly Disagree Rental Base Partnership Base Trade Base Frequency Percent Frequency Percent Frequency 13 13.1 3 3 5 Disagree Not Decided Agree Strongly Agree Total 20 16 5 20.2 99 14.1 19 19.2 5.1 16.2 17 17.2 19 19.2 45.5 41 41.4 40 40.4 5.1 45 14 Percent 100 24 99 24.2 100 16 99 16.2 100 5.5. One Sample T test Analysis One sample t-test for short term financing need analysis indicates that 4 items out of 5 are significant at 5% and 10% level. Under short term financing, the need for transportation, hiring trained staff, for operational cost, purchasing raw material and arranging the medications secured level of significance 0.015, 0.062, 0.085, 0.101 and 0.006 respectively. Need for transportation shows 0.015 significance level with t value of -2.475 which shows that farmers are in high need of short term loan for transportation and delivery of goods. Hiring trained staff received 0.062 significance value which is significant at 10% level. In the last arranging the medications as a domestic requirement received 0.006 and 0.085 significant value which indicates the malnutrition in village side areas and they are in the frequently need of finances for their medications and to meet daily expenses. However, the findings for purchasing raw material are insignificant at both 5% and 10% significance level, which show that farmer didn‘t concern for short term credit facility for purchasing the raw material. Table 18: One-Sample Test for Short Term Need Analysis Short Term Need Analysis for transportation & delivering agri-goods. Short Term Need Analysis hiring the Trained staff & technology. Short Term Need Analysis to balance the Salaries & Wages Exp Short Term Need Analysis to purchase Raw Material Short Term Need Analysis to arrange the medications Test Value = 3 95% Confidence Interval of the Difference t df Sig. (2-tailed) Mean Difference Lower Upper -2.475 98 0.015 -0.37374 -0.6734 -0.0741 2.887 98 0.032 0.24242 -0.0126 0.4974 -3.739 98 0.045 -0.25253 -0.5408 0.0357 1.654 98 0.101 0.22222 -0.0444 0.4888 2.823 98 0.006 0.38384 0.114 0.6537 240 Book 2.indd 280 10/16/17 4:59 PM
  281. 5 .6. Cross Tabulation Analysis (1) Short Term Need Analysis for Transportation/Delivering Agri-goods vs. Availability Short term need analysis to transport in comparison of availability of short term financing is shown in the above table short term financing need has been taken on a left side of the table row wise and its availability is being measured column wise. The comparison shows out of 99 respondents, 4 are in the need of the long term loan and they also know about the availability of the financing. Out of 99 respondents 34 respondents are having the perception that the long term financing from financial institutions are not available though among them 22 respondents are in the need of long term financing. Out of 99 respondents 39 respondents are just unaware about the availability of long term financing. Among them 18 respondents are in the need of long term financing. Table 19: Short Term Need Analysis for transportation & delivering agricultural goods. Vs. Short Term Availability Analysis for transportation & delivering agricultural goods Short Term Availability Analysis for transportation & delivering agri-goods. No Need At-all Short Term Need Analysis for transportation & delivering agri-goods. Total May be Needed Little Need Needed Vital Need Available Not Available Don't Know Total 13 5 16 34 4 7 5 16 5 8 7 20 2 5 4 11 2 9 7 18 26 34 39 99 (2) Short Term Need Analysis for Hiring Staff and Technology vs. Availability Short term need analysis to hire the trained staff in comparison of availability of short term financing is shown in the above table short term financing need has been taken on a left side of the table row wise and its availability is being measured column wise. The comparison shows out of 99 respondents, 18 are in the need of the long term loan and they also know about the availability of the financing. Out of 99 respondents 34 respondents are having the perception that the short term financing from financial institutions are not available though among them 28 respondents are in the need of short term financing. Out of 99 respondents 42 respondents are just unaware about the availability of long term financing. Among them 28 respondents are in the need of long term financing. 241 Book 2.indd 281 10/16/17 4:59 PM
  282. Table 20 : Short Term Need Analysis hiring the Trained staff & technology. Vs. Short Term Availability Analysis hiring the Trained staff & technology. Short Term Availability Analysis hiring the Trained staff & technology. Not Available Don't Know Total 11 15 1 6 3 10 9 12 5 26 6 11 15 32 3 5 8 16 Available Short Term Need Analysis hiring the Trained staff & technology. Total No Need At-all May be Needed Little Need Needed Vital Need 4 23 0 34 42 99 (3) Short Term Need Analysis to Balance Salaries and Wages Expense vs. Availability Short term need analysis to pay salaries and wages in comparison of availability of short term financing is shown in the above table short term financing need has been taken on a left side of the table row wise and its availability is being measured column wise. The comparison shows out of 99 respondents, 4 are in the need of the long term loan and they also know about the availability of the financing. Out of 99 respondents 45 respondents are having the perception that the short term financing from financial institutions are not available though among them 28 respondents are in the need of short term financing. Out of 99 respondents 40 respondents are just unaware about the availability of long term financing. Among them 19 respondents are in the need of long term financing. 242 Book 2.indd 282 10/16/17 5:00 PM
  283. Table 21 : Short Term Need Analysis to balance the Salaries & Wages Exp * Short Term Availability Analysis to balance the Salaries & Wages Exp Short Term Availability Analysis to balance the Salaries & Wages Exp Not Available Don't Know Total 13 26 5 9 8 22 0 12 8 20 2 5 6 13 2 11 5 18 14 45 40 99 Available Short Term Need Analysis to balance the Salaries & Wages Exp Total No Need At-all May be Needed Little Need Needed Vital Need 5 8 (4) Short Term Need Analysis to Purchase Raw Material vs. Availability Short term need analysis to purchase Raw material in comparison of availability of short term financing is shown in the above table short term financing need has been taken on a left side of the table row wise and its availability is being measured column wise. The comparison shows out of 99 respondents, 20 are in the need of the long term loan and they also know about the availability of the financing. Out of 99 respondents 32 respondents are having the perception that the short term financing from financial institutions are not available though among them 25 respondents are in the need of short term financing. Out of 99 respondents 38 respondents are just unaware about the availability of long term financing. Among them 27 respondents are in the need of long term financing. Table 22: Short Term Need Analysis to purchase Raw Material vs. Short Term Availability Analysis to purchase Raw Material Short Term Availability Analysis to purchase Raw Material Not Available Don't Know Total 8 17 4 3 3 10 Available Short Term Need Analysis to purchase Raw Material Total No Need At-all May be Needed Little Need Needed Vital Need 5 4 6 12 6 24 11 8 11 30 3 5 10 18 29 32 38 99 243 Book 2.indd 283 10/16/17 5:00 PM
  284. (5) Short Term Need Analysis to Arrange Medications vs. Availability Short term need analysis to purchase Medication in comparison of availability of short term financing is shown in the above table short term financing need has been taken on a left side of the table row wise and its availability is being measured column wise. The comparison shows out of 99 respondents, 18 are in the need of the long term loan and they also know about the availability of the financing. Out of 99 respondents 29 respondents are having the perception that the short term financing from financial institutions are not available though among them 22 respondents are in the need of short term financing. Out of 99 respondents 41 respondents are just unaware about the availability of long term financing. Among them 32 respondents are in the need of long term financing. Table 23: Short Term Need Analysis to arrange the medications vs. Short Term Availability Analysis to arrange the medications Short Term Availability Analysis to arrange the medications Available Short Term Need Analysis to arrange the medications Total Not Available 2 Don't Know 6 Total No Need At-all 6 5 5 3 13 Little Need 2 10 4 16 13 9 11 33 29 29 41 99 May be Needed Needed Vital Need 3 3 17 14 23 5.7. Conclusion and Recommendations The findings of the study conclude that there is clear need of short term financing for the purchase/installation of latest plants and machinery, rather respondents intend to invest in the purchase of factory equipment/tools. This also shows that agriculture sector has not been fully mechanized and most part of the sector is using conventional instruments for cultivation and harvesting. As small financing companies or specialized banks providing short term loans, hence more than 50% of the respondents were of the opinion that short term financing should be provided for their business expansion. The research study also concludes that the farmers are satisfied with the current transport and delivery mechanism of agricultural goods to different cities, districts and provinces and very few of them are in the need of short term financing for the logistics. There is also a need for short term financing for the training and development of staff as well as to equip them with the latest technology for efficiency and improvement in the agricultural processing. There is also a need of short term financing to match the day to day or weekly expenses and medication arrangement and salaries of the staff members since the agricultural business is mostly seasonal and it becomes quite difficult for the small farmers to manage cash flows. The study found that majority of the farmers and livestock people are not aware about the short term financing by the Islamic banks. They are also of the opinion that no Islamic bank is providing short term loan facility for day to day working capital requirements and for medication 244 Book 2.indd 284 10/16/17 5:00 PM
  285. purposes . This indicates the low awareness level among the people regarding Islamic banking products. More than 70% of the respondents did not ever opened an account with a bank to raise loan or to deposit their savings. The reason behind this is that they think Islamic banking system is not as per the Sharīʿah guidelines. Some farmers believe that the terms and conditions being posed by the banks for enjoying their facilities are highly difficult to meet. Few are of the opinion of lengthy and difficult procedures of the banks. The findings of one sample t-test found that the need for transportation, hiring trained staff, for operational cost, purchasing raw material and arranging the medications secured level of significance of 0.02, 0.06, 0.085, 0.10 and 0.01 respectively. The research study recommends that Islamic banks market their short term financing products among the farmers and agri businessman so that they become aware of the available products in the market. The Islamic banks also change customer‘s viewpoint in understanding the difference between the typical conventional and Sharīʿah complaint financing and bank management should provide such facility to these farmers on the rental based mode as well with partnership and trade based modes. Besides, Islamic banks start marketing campaign among the urban areas about their credit facilities related to agri business expansion and to educate them to compete internationally. There is also a need for short term financing for the training and development of staff as well as to equip them with the latest technology for efficiency and improvement in the agricultural processing and Islamic banks and government should organize educational awareness seminars and events for such purpose. The research findings are expected to be useful to the financial institutions, managers as well as practitioners in the area of investment and financing decision-making. This study measures only small and medium agri financing needs of the sector. As there are various methods and criteria available, the research studies suggest that there is a lot of potential in the sector which can also be achievable by educating and creating awareness among the farmers. 245 Book 2.indd 285 10/16/17 5:00 PM
  286. References Ahmad Kaleem , Rana Abdul Wajid, (2009) "Application of Islamic banking instrument (Bai Salam) for agriculture financing in Pakistan", British Food Journal, Vol. 111 Iss: 3, pp.275 - 292 Bashir, A., & Hassan, M. (2004). Determinants of Islamic banking profitability. In ERF paper, 10th Conference. Bashir, A. M. (2003). Determinants of Profitability in Islamic Banks: Some Evidence from the Middle East. Islamic Economic Studies, 11(1), 31-57. Haron, S. (2004). Determinants of Islamic bank profitability. The Global Journal of Finance and Economics, 1(1), 11-33. Capie, F., & Billings, M. (2001). Profitability in English banking in the twentieth century. European Review of Economic History, 5(3), 367-401. Baas, T., & Schrooten, M. (2006). Relationship banking and Agriculture: a theoretical analysis. Small Business Economics, 27(2), 127-137. Mitchener, K. J. (2004). Bank supervision, regulation, and instability during the Great Depression (No. w10475). National Bureau of Economic Research. Liao, Z., & Wong, W. K. (2007). The determinants of customer interactions with internetenabled e-banking services. Journal of the Operational Research Society, 59(9), 1201-1210. Tan, Y., & Floros, C. (2012). Stock market volatility and bank performance in China. Studies in Economics and Finance, 29(3), 211-228. Sufian, F., & Parman, S. (2009). Specialization and other determinants of non-commercial bank financial institutions' profitability: Empirical evidence from Malaysia. Studies in Economics and Finance, 26(2), 113-128. Tan, Y., & Floros, C. (2012). Bank profitability and inflation: the case of China.Journal of Economic Studies, 39(6), 4-4. Smirlock, M. (1985), ―Evidence on the (Non) Relationship between Concentration and Profitability in Banking‖, Journal of Money, Credit and Banking, Vol. 17, p. 69-83. Hester, Donald D. and Zoellner, John F. (1966), ―The Relation between Bank Portfolios and Earnings: An Econometric Analysis.‖, Review of Economics and Statistics, Vol. 48 (November), 372-386. Haslem, John A., (1968), ―A Statistical Analysis of the Relative Profitability of Commercial Banks‖, Journal of Finance, Vol. 23, p. 167-176. Fraser, D. R., Philips, W. and Rose, P. S. (1974), ―A Canonical Analysis of Bank Performance‖, Journal of Financial and Quantitative Analysis, Vol. 9, p. 287-295. Heggested, Arnold A. and Mingo, John J. (1976), ―Price, Non-prices, and Concentration in Commercial Banking‖, Journal of Money, Credit, and Banking, Vol. 8 (February), p. 107-17. Heggested, Arnold A., (1977), ―Market Structure, Risk, and Profitability in Commercial Banking‖, Journal of Finance, Vol. 32, p. 1207-1216. 246 Book 2.indd 286 10/16/17 5:00 PM
  287. Mullineaux , D. J. (1978), ―Economies of Scale and Organizational Efficiency in Banking: A Profit-Function Approach‖, Journal of Finance, Vol. 33, p. 259-280. Kwast, Mayron L., and John T. Rose (1982), ―Pricing, Operating Efficiency, and Profitability among Large Commercial Banks‖, Journal of Banking and Finance, Vol. 6, No 2 (June), p. 233254. Bourke, Philip (1989), ―Concentration and Other Determinants of Bank Profitability in Europe, North America and Australia‖, Journal of Banking and Finance, Vol. 13, p. 65-67. Molyneux, P. and Thornton, J. (1992), ―Determinants of European Bank Profitability: A Note‖, Journal of Banking and Finance, Vol. 16, No. 6, p. 1173-1178. Steinherr, A. and Huveneers, C. (1994), ―On the Performance of Differently Regulated Financial Institutions: Some Empirical Evidence‖, Journal of Banking and Finance, Vol. 18, p. 271-306. 247 Book 2.indd 287 10/16/17 5:00 PM
  288. Annexure - 1 Figure : 1 - Rental Base Contract Rental Base 45 40 35 30 25 20 15 10 5 0 Frequency Strongly Disagree 20 Disagree 13 Not Decided 16 Agree 5 Strongly Agree 45 Partnership Base Figure: 2 - Partnership Base Contract 50 40 30 20 10 0 Frequency Strongly Disagree 14 Disagree 3 Not Decided 17 Agree 24 Strongly Agree 41 Figure: 3 - Trade Base Contract Trade Base 40 30 20 10 0 Frequency Strongly Disagree 19 Disagree Not Decided Agree 5 19 16 Strongly Agree 40 248 Book 2.indd 288 10/16/17 5:00 PM
  289. Book 2 .indd 289 10/16/17 5:00 PM
  290. EDITORS DR . MUHAMMAD KHALEEQUZZAMAN Dr. Muhammad Khaleequzzaman holds a Master‘s Degree in Policy Economics from University of Illinois, Urbana‐Champaign, USA and Ph.D. in Islamic Banking & Finance from International Islamic University Islamabad (IIUI). He is a certified Islamic banker from the State Bank of Pakistan. Having served in the banking sector in middle to senior management positions for 25 years, he joined International Islamic University Islamabad in 2003 and served prominently in establishing the School of Islamic Banking & Finance (SOIBAF) as chairman of the school until April 2014. Currently, he is heading Training and Seminars portfolio in SOIBAF. He is the convener of the Sharīʿah Advisory Centre of IIUI and Director Product Development for the Islamic Microfinance Resource Centre. Dr. Zaman has been engaged in consultancy and advisory work in the financial sector for institutions including Islamic Development Bank, State Bank of Pakistan, Asian Development Bank, World Bank, Government of Pakistan, Government of Egypt, Govt. of Tunisia, USAID, Swiss Agency for Development & Cooperation (SDC), and Int‘l Fund for Agricultural Development (IFAD). His work experience relates to Pakistan, Kazakhstan, Mauritius, and Egypt. PROF. NASIM SHAH SHIRAZI Prof. Dr. Nasim Shah Shirazi is Lead Economist and Acting Manager, Islamic Economics & Finance Research Division, IRTI, Islamic Development Bank. Dr. Shirazi has experience of more than 36 years in the areas of teaching, research, consultancy, and administration. He has worked as Deputy Dean (Suleyman Demirel University, Almaty), Dean, Director Research and Director General, IIIE, International Islamic University, Islamabad, Pakistan. He also has designed, developed and taught courses at the graduate and post-graduate level in the field of Economics, Finance, Islamic Economics and Decisions Sciences both at the National and International Universities. With more than 76 publications, Dr. Shirazi is well respected for his research in the areas of development economics and Islamic Finance for social development. He has supervised several Ph.D., M.Phil., and Master theses. Besides the academic excellence, Dr. Shirzai has completed several consulting assignments with the World Bank, Asian Development Bank, PPAF and private organizations. Dr. Shirazi is also active in community services and currently act as a member of the editorial boards of IRTI Journal: Islamic Economic Studies and Journal of King Abdul Aziz University: Islamic Economics, Pakistan Journal of Contemporary Sciences and Pakistan Journal of Management & Social Sciences. DR. ABDUL RASHID Dr. Abdul Rashid is currently working as Associate Professor/Chairman Research at International Institute of Islamic Economics (IIIE), International Islamic University Islamabad, Pakistan. He possesses vast experience of research, teaching, and project leadership in economics, finance and Islamic banking & finance. He carries a wealth of published research earning an impact factor of 8.434 reflecting a proven capacity to lead the research related assignments. Having received formal training in economics, econometrics, and finance from Pakistan and Ph.D. Economics degree from the University of Sheffield UK in 2012, Dr. Rashid is actively involved in research in Islamic finance and related disciplines. In postgraduate research, he has achieved a leading position in supervising the Ph.D. and MS students of Islamic banking & finance in advanced areas such as Sharīʿah evaluation of Islamic banking operations, their capital structures, risk management, financial stability, liquidity management, and Islamic microfinance. Dr. Rashid is also widely read at national and international forums and is part of the core committee of the conferences, round table, and symposia in applied economics and Islamic finance. DR. MOHAMMED OBAIDULLAH Book 2.indd 290 Dr. Mohammed Obaidullah has been serving the Islamic Research and Training Institute of the Islamic Development Bank (IsDB) Group at Jeddah, Saudi Arabia since 2006. His areas of interest include Islamic finance, development finance, social finance and digital finance. He recently held the position of 2nd Yayasan Tun Ismail (YTI) Chair Professor in Islamic Finance at the Islamic Sciences University Malaysia (USIM) at Kuala Lumpur, Malaysia. Dr Obaidullah is a Certified Trainer of Trainers in Microfinance by the ADB Institute and Certified in Digital Money by the Fletcher School of Tufts University, USA. He holds a Ph.D. and a Master of Business Administration (MBA) degree from India. Dr Obaidullah has held the position of the Secretary General, International Association of Islamic Economics and was the Founder of IBF Net: Islamic Business and Finance Network and its online academy at IIIBF.Com. 10/16/17 5:00 PM
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  294. 8111 King Khalid Street Al Nuzlah Al Yamania Dist . Jeddah 22332-2444 Kingdom of Saudi Arabia Tel: (00966-12) 636 1400 Fax: (00966-12) 637 8927 Email: irti@isdb.org www.irti.org Book 2.indd 294 10/16/17 5:00 PM