Innovation in financial industry should be adapted to the ethnic groups’ culture and customs. An OnFrontiers expert Muhammad Farooq Shaikh shares his thoughts on an old but famous financing model in Islamic culture:Waqf. This article explain how this model could help to alleviate poverty and how could it to be taken into action.
During recent times, ‘solutions’ for poverty alleviation and increasing access to finance to the poor have come under heavy scrutiny. Previously, since most governments could not gather sufficient funds to fully address this problem, the focus had shifted to the private sector. Banks’ SME financing arms and specialized microfinance institutions (MFIs) were believed to provide easy access of finance to the poor around the world.
However, it remains a fact that due to strong (or, in some cases, non-existent) regulatory requirements, the traditional banking sector’s ability to play an effective role in poverty alleviation remains severely constrained. Even microfinance institutions are under heavy criticism for their high mark-up rates and alleged abuse for loan recovery.
Economists and finance practitioners have been looking for alternative approaches which could reduce the pressure on government spending for public welfare, as well as on microfinance institutions for cheaper financing.
An Alternative Model: Cash Waqf
One such alternative is the concept of the Islamic waqf. Literally meaning “confinement”, a waqf involves giving up the custody of one’s belongings for the sake of charitable purposes. The donated property is confined or preserved while the profits are devoted for any purpose benefiting mankind.
How it works
There are three parties in a waqf:
(1) Waqif – the original owner,
(2) Mutawalli – the manager of the waqf and
(3) the beneficiaries.
This alternative model resembles that of a community development financial institution (CDFI). The concept of a waqf is also similar to the concept of trust and endowments with some minor differences. Both trusts and awqaf (plural of waqf) can be used for any specified purpose that
benefits mankind, including poverty alleviation programs and interest-free loans.
The difference lies in the time horizon. A waqf has to be strictly perpetual, while a trust can be either perpetual or defined.
Another difference is philosophical in nature, regarding the ownership of the assets. Under the waqf, ownership lies with the creator (i.e. Allah); in a trust, the ownership lies with the trust itself.
The nature of a waqf is similar to that behind the social economy in Quebec and particularly the Caisse d’economie solidaire, whereby members have voted to forego receiving annual interest and instead devote those gains to grants and community loans.
Aqwaf in Action
Although most established awqaf are based on real estate, there have been examples in history during the Ottoman Empire where awqaf were established for the specific purpose of giving out interest-free loans to the beneficiaries of the waqf.
These loans used to be self-sustaining and were based on the Islamic finance concept of Diminishing Musharaka, a form of a mortgage (different in certain respects). In this structure, borrowers are provided loans against their houses, although they continue to stay in them by paying a fixed rental. Borrowers pay back the principal through a series of transactions, leading to eventual ownership.
It is interesting to note how a cash-waqf fund could be tailored to provide easy access to finance to the poor and help poverty alleviation. One of the interesting models being implemented in Bangladesh is that of Cash Waqf Certificates by Social Islami Bank Limited (SIBL).
Individuals can open an account and donate money by buying Cash Waqf certificates. The Bank manages the funds on behalf of the waqif (the original owner) and the account is open till perpetuity. The funds generated from these certificates are invested in different profitable investments. The profits accrued from the investments are used for funding poverty alleviation programs.
The Waqif also has an option of defining the purpose for which the profits of the account could be used. The SIBL cash-waqf account offers 32 purposes under the following major fields, to which profits can be rerouted:
(1) Family Rehabilitation
(2) Education & Culture
(3) Health & Sanitation
(4) Social Utility and
Cash Waqf certificates are an interesting method to combat poverty, and the model has been used in several countries, including Indonesia and Ghana. They increase social investment, channel charity, improve access to finance, stimulate SME growth, and integrate banking, impact investing, social finance and philanthropy. With further improvement in structure, Cash Waqf certificates could become widely used instruments in an active social capital market.
Muhammad Farooq Shaikh, CFA is an expert in FMCG and banking sector in Pakistan