A Model of Economic Empowerment

While Islam strongly encourages charity from the giver’s point of view, it seeks to minimize dependence on charity from the beneficiary’s point of view and restricts the benefits to flow to the poorest of poor and the destitute, who are not in a position to generate any income and wealth. A famous Hadith[1] not only underscores the above, but also demonstrates how to design and implement a strategy of poverty alleviation through economic empowerment. The essence of the Hadith is broken down into numbered statements so as to highlight the key principles and components of the strategy that follows from the Hadith.

A man of the Ansar community came to the Prophet (peace be upon him) and begged from him. (#1)

He (the Prophet) asked: Have you nothing in your house? He (the man) replied: Yes, a piece of cloth, which we wear, or which we spread (on the ground), and a wooden bowl from which we drink water. (#2)

He (the Prophet) said: Bring them to me. He (the man) then brought these articles to him and he (the Prophet) took them in his hands and asked to the assembly of people: Who will buy these? A man said: I shall buy them for one dirham. He (the Prophet) asked twice or thrice: Who will offer more than one dirham? Another man said: I shall buy them for two dirhams. (#3)

He (the Prophet) gave these to him and took the two dirhams and, giving them to the man of the Ansar, he said: Buy food with one of them and take it to your family, and buy an axe and bring it to me. (#4)

He then brought it to him. The Prophet (peace be upon him) fixed a small branch of wood (as a handle) on it with his own hands (#5)

and said: Go, cut and gather firewood and sell it, and do not let me see you for a fortnight. (#6)

The man went away, cut and gathered firewood and sold it. When he had earned ten dirhams, he came to him and bought a garment with some of them and food with the others. (#7)

The Prophet (peace be upon him) then said: This is better for you than begging which should come as a spot on your face on the Day of Judgment. Begging is right only for three people: one who is in grinding poverty, one who is seriously in debt, or one who is responsible for compensation and finds it difficult to pay. (#8)

The components of this Hadith can be seen to emphasize the following fundamental conditions of a successful microfinance program:

#1. Access of the poorest of the poor to the program: The Prophet (peace be upon him) was the spiritual as well as the political leader of the Muslims and he was accessible to the poor and the needy at all times for economic and financial assistance;

#2. Careful assessment of the financial health of the poor; enquiry blended with empathy; insistence on contribution and beneficiary stake: Many failed microfinance programs owe their failure to inadequate evaluation of the client’s financial condition. Provision of micro finance does not stand to reason for a person in need of social safety nets resulting in the funds being consumed away instead of being invested. The poor come in disparate categories with varying needs of consumption and productive investment and risk of delinquency and default. Microfinance programs involving indiscriminate funding of the poor, such as, most government-managed ones are destined to fail. This is one of the cornerstones of microfinance “best practices” that assert the government should have no role in direct or indirect provision of financial services and its role should be restricted to providing a supporting and enabling environment. Insistence on beneficiary stake is of course, a device to reduce moral hazard and enhance efficiency.

#3. Transformation of unproductive assets of the beneficiary into income-generating ones through rigorous valuation (on the basis of price discovery through auction method); Involvement of the larger community in the process: Often the poor own high-market-value assets, such as, land in a prime city location without being able to derive income or benefit from the asset. While ownership of land does provide them with a bulwark against unforeseen adversities, this is an uneconomical and wasteful method of insurance. What is desirable here is a way to transform the unproductive asset into a productive one that could generate income. The original asset is not lost but transformed into an income-generating one. The price at which the original asset is disposed of must be fair and should not take the form of a distress sale resulting in loss of value to the seller. Contemporary finance theorists find the auction system to be the most efficient process of discovery of the intrinsic worth or the fair price. The involvement of larger community in the poverty alleviation program is also highly desirable for success of the program. For many contemporary successful MFIs, the right strategy is to involve grass-root NGOs in the process.

#4. Meeting of basic needs on a priority basis and investment of the surplus in a productive asset: Once again this highlights the need to take into account the consumption needs of the clients before expecting them to create wealth. The realization about the need for a social safety net and to link the same to micro finance at a later stage has come only recently in the microfinance industry.

#5. Direct involvement of the program in capacity building in the run-up to income generation and technical assistance to the beneficiary; Commitment of top management of the program: This part of the Hadith demonstrates a unique form of commitment and involvement on the part of the Prophet (peace be upon him) in the program of poverty alleviation. The involvement could not be more direct and the commitment more pure.

#6. Technical assistance in the form of imparting requisite training to the beneficiary for carrying out the business plan/ income-generating project; monitoring through a time-bound schedule and impact assessment through a feed-back mechanism: The need to establish an effective linkage between financial assistance and technical assistance is emphasized among microfinance professionals as never before. Also the importance of impact assessment can be hardly overemphasized.

#7. Transparent accounting of operational results and liberty to use part of income to meet higher needs: Transparency through meticulous accounting and proper documentation is a fundamental requirement of financial transactions in the Islamic framework. As the holy Qur’an asserts:

“O ye who believe! When you deal with each other, in transactions involving future obligations in a fixed period of time, put them in writing” and “Let a scribe write down faithfully as between the parties” (2:282)

The import and significance of this verse is often not fully understood. Indeed, lack of proper documentation and accounting by beneficiaries is a major challenge confronting microfinance. Proper accounting and accurate measurement of results of operations or profits is a pre-requisite for profit-sharing based mechanisms. They are no less important for lending operations.

#8. Strong discouragement to seeking charity: Economic empowerment is the key word that rules out dependence on charity, which is permitted only for the poorest of the poor and those overburdened with debt or other obligations with no means of payment in sight.

[1] Sunan Abu Dawood, Kitab al-Zakāh, Book 9, Number 1637