Awqaf Microfinance – Small is Beautiful

In Islam, lending is considered more of a charitable act than a commercial one. For a Muslim, it’s a matter of faith not to expect financial benefit from money lent. There are no collateral requirements, interest rate, or other stringent terms that are usually required by lending institutions. Islamic loans are advanced mainly as qard hassan (benevolent loan) where only the principal has to be repaid. Moreover, if the borrower’s circumstances are dire, Islam encourages the lender to extend the time of repayment, or to forgive the loan altogether if the borrower is in hardship.

With little income and no collateral, poor people are seldom able to obtain loans from banks or other formal financial institutions.

Islam allows a cash loan as a form of social service to help the poor and those needing financial assistance to provide for themselves and better their situation. Many poor households do not have a bank account or lack the ability to access financial services. With little income and no collateral, poor people are seldom able to obtain loans from banks or other formal financial institutions. For such individuals a small qard hassan can help them establish or grow a small-scale business. Microfinance for mini projects can help break the cycle of poverty, empower men and women, and make them self-sustainable.

Hence is the role of awqaf to bridge the gap in small business lending; it’s cooperative rather than competitive behavior.

Awqaf institutions are attracted to microfinance for its social impact and direct interaction with the poor. Banks are traditionally not designed to serve the poor or those who are considered uneconomical to serve. Hence is the role of awqaf to bridge the gap in small business lending. Awqaf need not spend inordinate amounts of money in order to assist small projects. There are many examples of loans ranging from $100 to $1,000 for micro projects such as a broom or a basket factory, picture framing, sewing and alteration, landscaping and lawn mowing, laundry and ironing service. These projects build capacities, create vibrant communities, and encourage local small businesses to trade with each other. In many respects it’s cooperative rather than competitive behavior.

Other than cash, awqaf can provide advice and guidance and help in areas of networking and planning.

Micro projects offer an attractive risk-return profile marked by low default rates and good financial returns. Micro businesses have a very good repayment record. Statistics indicate a repayment record of 98%. This is a higher repayment rate than that of conventional borrowers. The default risk is considered a non-issue in Islamic microfinance. However, if a default occurs, it may be due to loan size or poor loan monitoring. Merely supplying micro enterprises with capital is not sufficient, relevant business technical assistance is often needed to guide them along their journey. Many of the new micro entrepreneurs grapple with the pressure of multi-tasking since many tasks and outcomes are one person’s responsibility. Other than cash, awqaf can provide advice and guidance and help in areas of networking and planning. Without this help from awqaf many of the poor entrepreneurs will be left floundering.

An awqaf supported project has to be economically viable, socially desirable and value adding.

The project identification exercise is a participatory process with the micro entrepreneur having to prove the merits of his project. There are people with good ideas and high hopes, but they are not well funded and lack the experience to guide them along their journey. The economic activities of microenterprises that awqaf would consider are not about personal interests or hobbies but more about production, trading, and providing services. An awqaf supported project has to be economically viable, socially desirable and value adding.

Awqaf may use a variety of Islamic modes of financing in support of micro businesses.

Awqaf may use a variety of Islamic modes of financing in support of micro businesses. Awqaf financing products are designed to ease access to working capital. The mode of financing will depend on the type of activity for which funds are granted.  Some of the appropriate Islamic modes of financing include murabaha (cost-plus deferred sale) and Ijarah (leasing). Cash in the form of a small qard hassan is also a popular alternative.

Awqaf funds collection for micro entrepreneurs is mostly donor-based.

Awqaf funds collection for micro entrepreneurs is mostly donor-based. Awqaf organizations are becoming more professional in mobilizing funds. They use modern methods in their appeal campaigns such direct mail to regular donors, media advertising and online communication such as the internet, social media and mobile text messaging. New instruments include waqf certificates and the issuance of sukuk. Receipts of zakat, sadaqah and the popular rise of cash waqfs (waqf al-nuqud) have given awqaf institutions additional sources of funding for their projects and social programs. Crowd-funding also is a source of fundraising which is used effectively, whereby awqaf raise small amounts of capital from large numbers of people for non-equity contribution.

Awqaf microfinancing is an ethical practice that converts lending from a transactional model to a transformational vehicle.

Awqaf microfinancing is essentially a nonprofit undertaking. It is more of an ethical practice that converts lending from a transactional model to a transformational vehicle. It eliminates high interest rates and collateral requirements, two of the hurdles of conventional microfinancing. It is a participatory and risk sharing approach. Many of the micro borrowers graduate from job seekers to job creators, and grow from micro to macro entrepreneurs. As daunting as the task of micro business empowerment may seem, the good news is that awqaf microfinancing strategies add vitality to communities and provide essential services that enhance and protect wellbeing.

Authored by Hisham Dafterdar, CPA, PhD, Chairman, Awkaf Australia Ltd