Turning to Islamic Finance for Meeting Development Goals – III

I take pride in being from the academia. In the world of Islamic economics and finance, the sense of pride is more intense. I am a witness to how seminal articles, papers and books authored by scholars have given a shape to the Islamic financial services sector, unlike many other fields where theoretical work by researchers has essentially sought to explain/ followed practices by professionals. Examples are not hard to find. The book on “Interest-free Banking” by Dr Nejatullah Siddiqi in late 1960s led to the birth of modern Islamic banking and insurance. The paper on “Asset Ijara Bonds” by Dr Monzer Kahf of the Islamic Research and Training Institute (IRTI), a member of the Islamic Development Bank Group in the mid-1990s led the birth and rise of the global Sukuk sector by several years.

In the world of development finance too, the evolution of Islamic microfinance as a composite model involving combination of charity-based, not-for-profit and for-profit modes was rooted in some earlier scholarly contributions. A number of Islamic economists in a series of events/ publications of IRTI (during 2005-08) brought to the fore, the potential of integrating zakat, sadaqa and awqaf with microfinance in addressing multiple needs, e.g. to offer safety-nets for basic needs; to bring down the cost of for-profit microfinance and make it affordable to the poorest of the poor; to offer non-financial services including skill-enhancement, business development and what-have-you. While the CGAP (conventional) microfinance best practices were highlighting the need to restrict donor funds to capacity building alone primarily on the ground that these were not sustainable, Islamic economists pointed out, and rightly so, that zakat (unlike conventional donations) was in the nature of an annual levy and hence, sustainable by definition. A waqf, once created, is also a sustainable source of benefits/ cash flows. Hence, these could be easily applied to provide safety nets, to absorb elements of operational costs, and to provide for various non-financial benefits to the beneficiary poor.

The impact was quick. The sponsors of DEEP project started thinking in terms of establishing an international waqf that would provide for the safety net component in the overall intervention.[1] Composite interventions that would finance the entire value-chain for microbusinesses were the next to appear on the scene. In Sudan, the Bank of Khartoum’s Microfinance Department (IRADA) was established in 2009 with the support and assistance from the Islamic Development Bank.  The department was given the trust to implement the SDG 200 million Al-Aman fund for Microfinance. The fund was formed by a strategic partnership between the Diwan Zakah (apex body for zakat management in Sudan) and 32 Sudanese Commercial Banks. The IRADA initiative was widely appreciated for its innovative and composite Islamic microfinance structures that demonstrated how zakat can form the basis of a microfinance guarantee fund, how for-profit modes can be combined with not-for-profit and charity-driven modes successfully to offer microfinance in an affordable and sustainable manner. (See the following three blogs https://iiibf.com/islamic-participatory-microfinance-by-bank-of-khartoum/ ; https://iiibf.com/islamic-participatory-microfinance-by-bok-ii-abu-halima/ ; and https://iiibf.com/salam-based-microfinance-by-bok-iii/)

IRTI research events on the theme of Islamic microfinance also witnessed documentation of a few other unique indigenous experiments across the globe. These included the QHFs (qard-al-hasan funds) in Iran and the BMTs (baitul-maal-wat-tamweel) in Indonesia. These existed across the length and breadth of the respective countries and numbered over six thousand in each. (See my blog https://iiibf.com/a-visit-to-baitul-mal-wat-tamweel-bmt-dana-ukhuwwa/) However, such institutions were apparently not taken very seriously by the mainstream development professionals. For example, for some strange reason, the first ever global survey of Islamic microfinance institutions conducted by CGAP in 2008 (https://www.cgap.org/research/publication/islamic-microfinance-emerging-market-niche) did not include these two types of institutions. Apparently, such institutions were small in terms of size and membership count, and hence, were not significant enough. This was not a fact, though. Many BMTs were fairly large, even bigger than many rural banks. Notwithstanding its weaknesses, the survey will be remembered for its major finding, that unlocking the potential (of Islamic microfinance) could be the key to providing financial access to millions of Muslim poor who currently reject microfinance products that do not comply with Islamic law.

The Indonesian BMTs continued to gain traction of researchers and practitioners. For instance, they were under focus providing ground for several pilot studies by international development agencies to introduce micro-takaful. The Iranian QHFs were perhaps relatively less popular in terms of replication and experiment. Similar Qard-based microfinance was also attempted in other countries, such as, India and Pakistan. While the idea never took off in India (https://iiibf.com/baitul-maals-in-india-some-observations/ ), an experiment in Pakistan called Akhuwat attracted wide-spread interest.( https://iiibf.com/from-zakat-beneficiary-mustahiq-to-zakat-giver-muzakki-2-the-akhuwat-experiment/ ). The latter demonstrated how use of zakat and sadaqa along with moderation in costs through innovative practices can bring down the cost of microfinance to zero and can permanently transform the poor into productive agents in the economy (to be continued).

[1] Though project managers from DEEP discussed the international waqf creation in several international conference and workshops around this time, the idea did not see fruition for a variety of reasons.

Photo: A field visit to Abu-Halima project (IRADA Microfinance) at Khartoum