10th international conference on islamic economics and finance · finance is contrary to its...
TRANSCRIPT
INTEGRATION OF ISLAMIC FINANCIAL AND SOCIAL SECTORS:
CREATING SYNERGIES FOR SOCIAL IMPACT
Habib Ahmed Professor and Sharjah Chair in Islamic Law & Finnace
Durham University Business School, UK
1. INTRODUCTION
Socio-economic justice and equitable distribution of income are among the primary goals of
Islam and are expected to be unyielding features of an Islamic economic system (Chapra
1985). The Islamic financial system being a part of Islamic economic system should also
reflect and promote these objectives of Islam. Siddiqi (2004) and Khan (1997) point out the
philosophical basis of the Islamic financial system lies in adl (social justice) and ihsan
(benevolence). The implication of these concepts is "taking care of those who cannot be taken
care of by the market, who cannot play with economic forces or do not have access to
economic means to enable them to exploit the economic opportunities around them" (Khan
1997: 12-13). As such, it is imperative on Islamic financial sector to include social
dimensions in their operations along with the normal commercial financing practices.
However, most of the evidence on contemporary Islamic finance practice reveals that the
industry’s contribution to social objectives has been minimal.
Whereas the financial sector has a commercial profit motive, the nonprofit social sector aims
to achieve certain social goals. The social elements of the financial institutions are sometimes
reflected in their corporate social responsibility (CSR) activities. However, given their
diverse goals, the financial sector and the social sector are usually discussed separately. The
dichotomy is also reflected in practice of both Islamic finance and the Islamic social sector to
large extents. Whereas the Islamic financial sector has shown neglect of social factors, the
Islamic social sector which includes zakat, waqf and nonprofit organizations has been
operating independent of the financial sector. The disconnection of Islamic finance and social
finance is contrary to its foundational values and principles of promoting ethical and social
goals.
Given the above, there is a need to examine ways in which the gap between the Islamic
financial and social sectors can be bridged. This paper provides a framework to understand
how the two sectors can be integrated to create synergies that can promote social objectives.
The interaction of the Islamic financial sector and the social sector in promoting societal
PREPRINT: P
LEASE D
O NOT Q
UOTE OR D
ISTRIB
UTE.
10th International Conference on Islamic Economics and Finance
2
welfare can be exemplified in two ways. First, the financial sector can provide financial
services to the social sector to enhance latter’s capabilities and impact. Second, the social
sector can contribute to financial inclusion by either providing services to the poorer sections
of the population directly or supporting the financial sector to do so.
The paper is organized as follows. The next section provides an overview of the Islamic
financial sector and its social role followed by a section that discusses the status of the
Islamic social sector in general and zakat and waqf in particular. While Section 4 presents the
functions of the financial sector that can promote growth and social welfare, Section 5
provides a framework to assess the interactions between Islamic financial and social sectors.
Section 6 discusses ways in which the Islamic financial sector can contribute to the
development of the social sector and Section 7 presents how the latter can interact with the
former sector to enhance financial inclusion. The last section concludes the paper.
2. ISLAMIC FINANCE AND SOCIAL IMPACT
The financial sector can promote social welfare by providing financial services to all
segments of the population. In particular, the social goals can be achieved by providing
financial services to the social sector and also the poor. Given the multifaceted nature of
poverty and the risks facing the poor, ‘inclusive finance’ would entail providing a variety of
financial services to the poor including savings, credit and insurance facilities (United
Nations 2006 and Matin et. al. 2002). The poorer segments of the population are, however,
financially excluded from the formal financial sector voluntarily and involuntarily (World
Bank 2008).
Voluntary financial exclusion can occur on the demand-side due to cultural and religious
reasons. The poor in Muslim countries may choose not to access conventional financial
services due to religious reasons. Karim et al (2008) find that an estimated 72 percent of the
people living in the Muslim countries do not use formal financial services and a large
percentage of the population (ranging from 20 to more than 40 percent) would not avail
conventional microfinance to avoid interest. Thus, access of finance to the poor in many
Muslim countries would require provision of Shari’ah compliant services.
Involuntary exclusion arises on the supply side whereby financial institutions choose not to
finance the poor due to economic reasons. The private information of the poor households is
scant that leads to, among others, moral hazard and adverse selection problems. Furthermore,
as the size of the financial services for the poor is small, the costs of per-unit of financial
10th International Conference on Islamic Economics and Finance
3
services increase. Given the high risks and costs, sustainability becomes an important issue
for organizations providing financial services to the poor creating a tradeoff between outreach
and sustainability. The implication is that sustainability of inclusive finance would require
subsidies to cover the high costs of financing to the poor. Without subsidies financial
institutions would exclude the poor or sustain their activities by charging exorbitantly high
rates of return/interest rates. Given the tradeoff between outreach and sustainability, there are
two broad approaches to provide financial services to the poor. One is the poverty approach
that focuses on outreach, but need subsidies to sustain the activities. The other is the
commercial approach in which the organizations providing financial services are profitable,
partly because they exclude the poor clientele. Nonprofit organizations usually adopt the
former approach and for-profit firms the latter.
As the Islamic economic system pays particular attention to equitable income distribution,
there must be mechanisms for the poor and microenterprises to have access to finance. There
is a general feeling that the majority of the Islamic financial institutions have not been able to
serve the poorer segments of the society and fulfill the broader social goals adequately.
Several studies examining the Islamic financial sector’s role in contributing to the social
goals show that it is either small or non-existent. Kamla and Rammal (2013) study the social
reporting of 19 Islamic banks to examine, among others, funding socially motivated
investments and projects and community contribution. They did not find any evidence of
contribution of Islamic banks to social development or having any ‘serious schemes targeting
poverty elimination or enhancing equitable redistribution of wealth in society’ (Kamla and
Rammal 2013: 933). They conclude that ‘failure to make social justice the core value of their
operations has contributed to the failure of Islamic banks to fulfill their ideological claims’
(Kamla and Rammal 2013: 933). Whereas Haniffa and Hudaib (2007) find high scores for
commitment of Islamic banks towards stakeholders such as debtors and employees, the
commitment towards society scored the lowest.
3. ISLAMIC SOCIAL SECTOR: STATUS AND ISSUES
Zarqa (1988) identifies various institutions and structures Islam has instilled through which
income and wealth can be redistributed to fulfill the basic needs for all in the society. Among
others, zakat, awqaf, and qard hasan played important role in increasing the welfare and
mitigating poverty.1 Zakat (obligatory alms) is one of the fundamental pillars of Islam that
1 For detailed discussions see El Asker and Haq (1995) for zakat and Basar (1987) and Cizaka (1996, 1998) for
waqf.
10th International Conference on Islamic Economics and Finance
4
has direct economic bearing on the distribution of income and emancipation of the poor.
Considered among one of the essential forms of worship, it requires Muslims whose wealth
exceeds a certain threshold level (nisab) to distribute a percentage of their wealth and income
among specified heads annually. Though zakat can be an effective tool of income
distribution, it has diminished in scope in recent times in most Muslim countries.
Governments of a few countries such as Saudi Arabia, Pakistan and Sudan take the
responsibility for collecting and distributing zakat. While zakat is collected on a mandatory
basis in these countries, there are differences in the coverage of kinds of assets/properties on
which zakat is levied. Several other countries such as Jordan, Kuwait, Qatar, Bahrain,
Bangladesh, Indonesia and Oman have established governmental agencies to receive zakat
paid on a voluntarily basis (Kahf 1989 and 1997). The total zakat collection in most
countries, however, is very small. Kahf (1997: 55-57) reports that the ratio of zakat collected
as a percentage of GDP in Saudi Arabia, Yemen and Pakistan varies between 0.3-0.4 percent.
Waqf is a charitable endowment that has wide economic implications and can play an
important role in increasing social welfare. Whereas the corpus of waqf is usually immovable
assets such as land and real estate, moveable assets such as cash, books, grain to use as seeds,
etc. were also used for its creation. Other than providing support for religious matters, waqf
can be established for provision of economic relief to the poor and the needy and also to
provide social services such as education, health care, public utilities, research, serve animals
and environment. The status of waqf, however, has deteriorated in many Muslim countries
during modern times. Not only have the existing waqf become dormant and unproductive,
fewer new waqf are being established to serve social functions (Ahmed 2004).
One of the key problems faced by waqf is mismanagement and corruption of managers.
Traditionally, awqaf were mainly managed by private individuals (mutawallis) who were
nominated by the founder of the waqf. It takes only one dishonest mutawalli over the life of a
waqf to lose the endowed assets. While one of the reasons of the involvement of governments
with waqf in some countries was to resolve this problem of mismanagement, managing waqf
by them is not a solution. In fact, in most cases, government involvement with waqf has made
the problems worse. The managers of waqf under governments are public servants and
bureaucrats who lack the management skills. Thus, inefficient and passive management by
both private and public bodies are reasons of ineffective use of waqf and limiting their social
impact during contemporary times.
10th International Conference on Islamic Economics and Finance
5
4. FINANCIAL SECTOR: FUNCTIONS AND ECONOMIC IMPACT
To understand the scope of how the financial sector can promote growth and social goals
there is a need to understand their nature and functions. A financial system performs certain
core functions that are common to different financial structures and stable across time and
place (Merton 1992). Merton and Bodie (1995) identify six functions of financial system as
managing risks, transferring economic resources, dealing with incentive problems, pooling of
resources, clearing and settling payments (to facilitate trade) and providing price information.
Similarly, Levine (1997: 689) identifies the functions of a financial system as “the trading of
risk, allocating capital, monitoring managers, mobilizing savings, and easing the trading of
goods”. The functions that a financial system performs can enhance growth by increasing
saving and promoting capital accumulation and technological innovation (Levine (1997). BIS
(1986: 8) recognizes that financial innovations perform the functions of ‘transferring risks,
enhancing liquidity and generation debt and equity’ to meet the evolving financial
requirements. The key functions of financial institutions that are relevant to achieving social
goals can be summarized as mobilizing savings/asset management, allocating
capital/financing and managing risks. These are discussed below.
Mobilizing Savings/Asset Management
One of the key functions of the financial institutions and markets is to mobilize savings from
resource surplus individuals/institutions and allocate these to productive activities. This
function not only promotes growth but also provides important services that meet various
financial needs of individuals and institutions. The short-term and long-term financial needs
are identified under financial planning literature as money management, emergency planning,
investment for goals, and inheritance and estate planning (Chieffe and Rakes 1999). Note that
the former two items would be dealt with mainly under savings and the latter two by asset
management. Investment for goals would include wealth accumulation, pension and
retirement income, and wealth and lifestyle protection (Mindel and Sleight 2010). Achieving
these goals would require appropriate range of products and services. Specifically, products
for investments and wealth accumulation would include core banking products, lending
products and a menu of financial and non-financial assets. Similarly, retirement income is
ensured by using a variety of investment vehicles and pension schemes. Wealth and lifestyle
can be protected by different types of insurance products such as property, health and life
insurance/assurance. Finally, inheritance and estate planning are used to transfer wealth to
achieve desired distributive goals.
10th International Conference on Islamic Economics and Finance
6
Allocating Capital/Financing
Levine (1997) asserts one of the key functions of a financial system that enhances growth is
use savings to promote capital accumulation and technological innovation. Whereas
financing can be debt-based or equity-based, Islamic finance would prefer a balance in their
usage. Proponents of Islamic banking pointed out the advantages of profit-sharing modes of
financing over the conventional interest based financing. These include increase in
investment, allocative efficiency, stability, equity and reduction of poverty.2 They argued
that as the reward for a financier would be a share of profit, financial resources will be
allocated to projects with the highest productivities. Furthermore, equity based financing tend
to be for longer terms that would contribute positively to growth. Theoretical models (such as
Khan 1987) showed that a banking system using profit-loss sharing modes on the liability
side would be more stable as these would be able to absorb the negative shocks on the assets
side. Experiences, however, show that fixed-income short-term debt based instruments (like
murabahah, mark-up financing) are the dominant modes of financing used by Islamic banks.
Various reasons are given to explain the lack of use of profit-sharing modes by Islamic banks,
the most significant being the moral hazard problem.3
Managing Risks
Levine (1997) identifies one of the functions of the financial system as ‘facilitating the
trading, hedging, diversifying and pooling of risk’. The insurance industry can play an
important role in poverty alleviation if services can provided to the poor to reduce their risks
and vulnerability. Siddiqi (2009) discusses the approaches to risks management in financial
intermediation from Islamic perspective. He identifies two ways of managing risks in
financing, sharing and transferring. While the tendency in conventional finance is to transfer
risks, he asserts that the approach in Islamic finance should be risk sharing.
A key instrument of mitigating risks is the use of insurance services. The conventional
insurance contract has been deemed as non-Shari’ah compliant by most Shari’ah scholars
because of the existence of excessive uncertainty (gharar). The OIC Fiqh Academy in a
resolution 9 (9/2) 1985 declared conventional insurance to be prohibited due to uncertainty
(gharar) in the object of sale and outcome of the contract. The Islamic alternative, takaful,
using principles of ta’awun (mutual assistance) and tabarru’ (gift or donation) are operating
2 The advantages of Islamic banking are discussed in Chapra (1985) and Khan (1995a), and Siddiqi (1981 and
1983). 3 For a discussion on the lack of profit sharing modes of financing by Islamic banks see Khan (1995b).
10th International Conference on Islamic Economics and Finance
7
under the mudarabah (partnership) and wakala (agency) based models. There are two main
types of takaful, general and family. While the former provides short-term protection against
accidents and losses of property, the latter provides saving opportunities and long-term
protection arising from death or disability. The types of products under family takaful have
become diverse providing a variety of products that can be used for wealth and lifestyle
protection. The products under family takaful include investment-linked family takaful,
mortgage takaful, hospitalisation takaful and group medical takaful (Oracle 2008).
5. INTEGRATION OF FINANCIAL AND SOCIAL SECTORS: CONCEPTUAL
FRAMEWORK
Understanding how the financial sector and the social sector can be integrated to increase the
societal welfare requires examining how the functions of the financial sector affect various
market segments. In order to examine the social orientation of financing, the household and
business sectors are divided into two categories. Specifically, the household sector is
classified as poor/non-poor and the business sector as micro/small enterprises and
medium/large firms. Financial industry would fulfill the social goals if they serve all market
segments including the poor and micro/small enterprises.
Table 1 shows the interactions of the functions/products of financial sector and different
markets segments including the social sector. Provision of financial services to a specific
market segment is denoted by ‘√’ and non-provision is indicated by ‘?’ in the Table. As
discussed above, financial exclusion occurs from the supply side due to economic reasons
whereby the poorer households and the micro/small enterprises are not served by the
financial institutions due to higher risks and costs. As the formal financial sector generally
serves the non-poor households and the medium and large enterprises, gaps exist in providing
financial services to the poorer households, micro/small enterprises and the social sector.
Table 1: Financial Sector Functions and Outreach to Different Market Segments
Financial
Functions/Products
Household sector Business
Sector
Social
Sector
(zakat,
waqf &
charity)
(5)
Poor
(1)
Non-
poor
(2)
Micro &
small
enterprises
(3)
Medium &
large
enterprises
(4) Mobilizing savings/asset
management
MS1(?) MS2(√) MS3(?) MS4(√) MS5(?)
Allocating
capital/financing
AC1(?) AC2(√) AC3(?) AC4(√) AC5(?)
Managing risks MR1(?) MR2(√) MR3(?) MR4(√) MR5(?)
10th International Conference on Islamic Economics and Finance
8
Given the above framework, there are two approaches in which the synergies between the
financial and social sectors can be enhanced to promote social development. First, the
financial sector can provide its services to social sector to increase its potential and
capabilities of promoting social well-being. Specifically, the financial sector can invest in the
development of the social sector which then would be able to enhance its social outreach.
Second, given the tradeoff between outreach and sustainability, provision of financial
services to the core poor would require subsidies which can be provided by the social sector.
As the financial sector is reluctant to provide services to the poor and micro/small enterprises,
the social sector can fill the gaps by either providing the services directly or subsidizing the
financial sector engaged in inclusive finance.
6. FINANCIAL SECTOR PROMOTING SOCIAL SECTOR
Although the social sector in general and institutions of zakat and awqaf in particular can
potentially play an important role in enhancing social welfare, these institutions are dormant
and not used effectively in most countries. The financial sector can strengthen the social
institutions by providing services that can improve their management and enhance their
potentials and impact. The ways in which the financial sector can contribute to the
development of the social sector can be examined under the functions of the financial sector
identified above.
Mobilizing Savings/Asset Management (MS5)
The financial sector can facilitate mobilizing resources to enhance the capabilities and
potentials of the social sector in two ways. First, the contributions to the social sector can be
enlarged by changing the notion of savings from personal goals only to include broader social
objectives. This would require developing appropriate instruments that can be used to divert a
part of the savings to support the social sector. An example of this would be an option of
buying waqf certificates at financial institutions the proceeds of which can be used for
different social activites.
Second way in which the financial sector can contribute to the social sector is to provide
various services related to management of waqf assets. As discussed above, one key problem
of the waqf sector the mismanagement by both individual mutawallis and the government.
The financial sector can provide efficient and professional management services to the waqf
institutions to enhance their social impact. Conventional financial institutions offer trust
10th International Conference on Islamic Economics and Finance
9
services to individuals and organizations to meet various current and future financial needs
related to wealth management. Other than ensuring professional and expert management of
the assets, a professional corporate body acting as a trustee ensures continuity and
permanence. Furthermore, a corporate entity will fulfill the administration of the trust without
bias towards any particular beneficiary, which may happen in case of an individual manager.
The services that can be provided by the financial sector to the nonprofit sector in general and
the waqf in particular are the following:
Acting as a Trustee/Mutawalli
The key role of a corporate entity managing a waqf would be to act as a trustee or mutawalli.
Specifically, the services would include reviewing and implementing waqf terms; developing
and implementing investment strategies for waqf assets; collecting, distributing, reinvesting
income from waqf assets; maintaining all accounting records and provide regular information
to beneficiaries; fulfilling financial obligations related to assets (e.g., paying bills, taxes, etc);
and seeking legal counsel when needed. The corporate trustee/mutawalli can also provide
investment management services that includes making investment decisions; collecting and
reinvesting income (dividends, capital gains); pay asset related bills; preparing annual tax
information letter; and prepare monthly statements for all transactions.
Estate management and advisory services
The corporate entity can also provide estate management services by taking the role of an
executor of wills upon the death of a donor. The specific activities that can be performed in
this role include acquiring relevant document (wills, titles, etc.); notifying affected
companies/government entities of death; taking inventory of assets; collecting all income and
proceeds; paying off debt; accounting for all transactions; and distributing estate’s asset
according to will. Advisory services related to waqf would include will writing, advice on
waqf accounts/funds and waqf formation and general investment advice.
The asset management and trustee services can be provided by two types of institutions. First,
banks and financial institutions provide these services either themselves through a department
that deals with trust services or through a subsidiary that specializes in trust services. Second,
there are independent trustee companies that offer various types of services. Whereas
conventional trustee companies providing various services to the individuals exist, these
institutions are new and rare in Islamic finance. An example of an independent trustee
companies providing both conventional and Islamic trust services is Amanah Raya Malaysia.
10th International Conference on Islamic Economics and Finance
10
Another institution named Waqf Trust Services Ltd (UAE) which owned by Dubai Islamic
Bank & DIFC Investments LLC was established in 2007, but closed down after a couple of
years operations.
Allocating Capital/Financing(AC5)
Similar to any commercial enterprise, waqf assets can also be developed by raising funds for
investment either from Islamic financial institutions or capital markets. A large part of the
waqf properties are located in prime commercial areas in most countries and the rate of return
on investments to develop these assets is potentially high. For example, in a survey in India
revealed that the average rate of return on investments for a sample of waqf properties would
be close to 19% per annum. Therefore, a good economic case for the Islamic financial
institutions to provide financing to develop the social sector exists. Due to unique ownership
status of waqf, innovative financing mechanisms such as built-operate-transfer are used to
finance waqf assets. An initiative in this regards was taken by Islamic Development Bank
which established the Awqaf Properties Investment Fund (APIF) in 2001 to finance awqaf
properties in different parts of the world. Since its inception, APIF has approved $956 million
for 46 projects in different countries (IDB 2014). This experience can be replicated at
national levels.
The capital markets can also be used to develop waqf properties. Example includes Sukuk al
Intifa’a to fund Zamzam Towers in Makkah. The waqf land leased land to Binladin Group for
28 years on BOT to build complex (4 towers, mall & hotel). Binladen leased the project to
Munshaat Real Estate Projects for 28 years. Manshaat raised $390 million issuing sukuk al
intifaa (time-share bond) for 24 years by selling usufruct rights. Similarly, in Singapore,
musharakah sukuk used to raise $60 million to develop 2 projects. The partnership in which
the waqf provided the land and the investors (sukuk holders) provided the funds for
investment. In one case, a new mosque was built with attached commercial property earning
$200,000 annually. In another case, investment in the waqf properties increased the revenue
from SGD 19,000 per annum in 1995 to an income of SGD 5.3 million in 2006 (Karim
undated).
Managing Risks (MR5)
Like any other business, the non-profit sector also needs to mitigate the risks they face. The
waqf assets may need special risk management techniques as they corpus of the waqf needs to
10th International Conference on Islamic Economics and Finance
11
be kept intact. Among other, takaful schemes need to be created to deal with the special needs
of waqf institutions.
7. SOCIAL SECTOR PROMOTING INCLUSIVE FINANCE
As indicated, financial exclusion arises from the supply side due to economic reasons (high
costs and risks). The social sector can contribute to inclusive finance by integrating its
activities with the financial sector. The specific ways in which the social sector can contribute
to the different financial functions identified above are discussed below.
Mobilizing Savings/Asset Management (MS1 and MS3)
One area where the social needs of the poor can be served is to use zakat and waqf to provide
financial planning services to the poor. Usually, financial planning is used by the relatively
well-off households as they can afford to pay for these services. However, it is the poor who
need financial advice and planning services more partly due to their lower financial literacy.
In this regard, zakat and awqaf can be used in different ways to enhance savings and asset
management skills and capabilities of the poor. First, funds from zakat and waqf can be used
to provide the poor with specialized financial planning services that increases their
capabilities to manage their finances. Specifically, advice on different issues such as money
management, emergency planning and investment for goals can be provided. Second, zakat
and awqaf can be used to meet specific financial planning goals of the poor. For example, the
funds from these sources can be used to assist emergency planning and investment for goals
of the needy. Third, the funds from zakat, awqaf and other charities can also be used to
enhance financial literacy among the poor.
Allocating Capital/Financing (AC1 and AC3)
Given the charitable nature of zakah and awqaf, these instruments can be used to resolve the
problem the tradeoff between outreach and sustainability to some extents. The social sector can
contribute to inclusive finance in two ways. First, institutions based on zakat and waqf can be
used to directly provide financial services to the poor. Historically, waqf based institutions did
provide loans to the disadvantaged in Turkey and Iran. Cizakca (2004) suggests a model in
which the concept of cash waqf can be used to serve the social objectives in the society. One
use of cash waqf would be to provide microfinance to the poor. Kahf (2004) and Ahmed
(2004 and 2011) propose establishing a microfinance institutions based on zakah and waqf.
They suggest that the returns from waqf can be used to finance productive microenterprises at
subsidized rates.
10th International Conference on Islamic Economics and Finance
12
Second, zakah and waqf can be integrated with the operations of the existing financial sector to
provide financial services to the financially excluded. For non-profit organizations focusing on
poverty, charitable funds from these sources can provide support to sustain their activities. For
commercial for-profit organizations, zakat and awqaf can provide subsidized sources to funds
that can be used to expand their outreach to the poor. Waqf can also be used to support
financing to the poor minimizing there risks indirectly by providing guarantees. Guarantees
are important for small and medium enterprises (SMEs) to get financing. Shari’ah issue—
guarantees are gratuitous contracts. Some Shari’ah scholars have allowed fees for providing
guarantees under certain conditions. Waqf based institutions can provide guarantees, mainly
to SMEs (small and medium enterprises) and also MFIs.
Managing Risks
As there are some Shari’ah related issues arising in the mudarabah and wakala based models
in terms of gift contributions and distribution of surplus, a waqf based model can be used to
resolve these issues. Other than using waqf-based takaful model for takaful and re-takaful, it
can also be used for mirco-takaful. Microtakaful can be provided by commercial organisations
and nonprofits. While the commercial takaful operators may not serve the poor due to
economic reasons identified above, there is potential for non-profit that cab use zakat and
waqf to provide services to the poor. Another way in zakah and waqf can be used to mitigate
risks face by the poor is to use these funds to pay for takaful contributions. Doing this along
with support with current economic activities would also protect the poor from future risk
events and reduce their vulnerability.
The problems of sustainability and outreach also exists in providing microinsurance/micro-
takaful as information problems of adverse selection and moral hazard will be severe for the
poor (Mosley 2003). Several limitations make providing insurance to the poor difficult which
includes lack of actuarial data on the poor households and limited distribution options make
the provision of insurance riskier and costly. Thus, commercial insurance companies and their
agents and intermediaries shy away from providing insurance to the poor. As a result, there
may be a need for non-profit organizations to provide microinsurance (Roth et.al. 2007).
Nonprofits can provide microtakaful either providing these services agents and intermediaries
of takaful companies or establishing takaful companies. Example non-profits providing
various financial services including takaful to the poor as an intermediary include Peramu
Foundation (Yayasan Pengembangan Masyarakat Mustadh’afiin) based in Bogor, Indonesia
10th International Conference on Islamic Economics and Finance
13
which is a multi-purpose social development organization. It provides microtakaful using the
indirect approach for both its microfinance clients and non-clients. Whereas it is able to
provide takaful to the poorer sections of population, its breadth of outreach is still small.
Though initially it got some funds from external sources, the scheme is operating at a surplus.
Takaful T&T Friendly Society (TTTFS) is a multipurpose cooperative established under the
Friendly Societies’ Act (18 of 1950) of Trinidad and Tobago. The scheme has covered the
poorer sections of the society but their operations are small with a limited number of
members. TTTFS also has a waqf funds that is used to provide additional financial support in
case of death in of the family of tafaful participants.
8. CONCLUSION
Socio-economic justice and equitable distribution of income are among the paramount goals
of an Islamic economy and these goals must be reflected in an Islamic financial system.
Although most of the Islamic financial sector is modeled similar to their conventional
counterparts, the foundational principles and values requires coming up with alternative
organizations and products that can fulfill social goals. A framework of integrating the
financial and social sectors to create synergies for social impact has been presented in the
paper. Among, other things, this would require strengthening the social sector and
organizational and product diversification in the Islamic financial sector. Going forward, a
key determinant of realizing the synergies of the two sectors to achieve social goals will be a
supporting and facilitating legal and regulatory environment that can promote both
development of the zakat, waqf and the nonprofit profit sector and organizational/product
diversity in the financial sector.
REFERENCES
Ahmed, Habib (2004), Role of Zakah and Awqaf in Poverty Alleviation, Occasional Paper
No. 8, Islamic Research and Training Institute, Islamic Development Bank, Jeddah.
Basar, Hasmet. 1987. Management and Development of Awqaf Properties. Research
Seminar-Workshop Proceedings No. 1. Jeddah: Islamic Research and Training Institute,
Islamic Development Bank.
BIS (1986), Recent Innovations in International Banking, Bank of International Settlements,
Basel, http://www.bis.org/publ/ecsc01a.pdf
Chapra, M. Umer (1985), Towards a Just Monetary System, The Islamic Foundation,
Leicester.
Chieffe, Natalie, & Rakes, Ganas K. (1999), "An Integrated Model for Financial Planning",
Financial Services Review, 8, pp. 216-268.
10th International Conference on Islamic Economics and Finance
14
Cizakca, Murat (1996) “The Relevance of the Ottoman Cash Waqfs (Awqaf al Nuqud) for
Modern Islamic Economics.” In Financing Development is Islam, Seminar Proceedings
Series No. 30, edited by M.A. Mannan. Jeddah: Islamic Research and Training Institute,
Islamic Development Bank.
Cizakca, Murat (1998) “Awqaf in History and Implications for Modern Islamic Economics.”
Paper presented at International Seminar on Awqaf and Economic Development, Kuala
Lumpur.
Cizakca, Murat (2004) "Cash Waqf as Alternative to NBFIs Bank." Paper presented at the
International Seminar on Nonbank Financial Institutions: Islamic Alternatives, jointly
organized by Islamic Research and Training Institute, Islamic Development Bank, and
Islamic Banking and Finance Institute Malaysia, Kuala Lumpur, March 1–3, 2004.
El-Ashker, Ahmed Abdel-Fattah, and Muhammad Sirajul Haq, eds. 1995. Institutional
Framework of Zakah: Dimensions and Implications. Seminar Proceedings No. 23,
Jeddah: Islamic Research and Training Institute, Islamic Development Bank.
Haniffa, R. and Hudaib, M. (2007), “Exploring the ethical identity of Islamic banks
via communication in annual reports”, Journal of Business Ethics, 76, 97-116.
Honohan, Patrick (2001), “Islamic Financial Intermediation: Economic and Prudential
Considerations”, manuscript, The World Bank
IDB (2014), Islamic Development Bank Annual Report 1434H (2013), Islamic Development
Bank Group, Jeddah.
Kahf, Monzer (1989), "Zakat: Unresolved issues in the Contemporary Fiqh", Journal of
Islamic Economics, 2 (1), pp. 1-22.
Kahf, Monzer (1997), "Introduction, in Monzer Kahf (Editor), The Economics of Zakah,
Book of Reading No. 2, Islamic Research and Training Institute, Islamic Development
Bank, Jeddah.
Kahf, Monzer (1999), "Zakah: Performance in Theory and Practice", paper presented at the
"International Conference on Islamic Economics Towards the 21st Century", Kuala
Lumpur, August 1999.
Kamla, Rania and Hussain G. Rammal (2013), “Social reporting by Islamic banks:
does social justice matter?” Accounting, Auditing and Accountability Journal, 26
(6), 911-945.
Karim, Nimrah, Michael Tarazi and Xavier Reille (2008), “Islamic Microfinance: An
Emerging Market Niche”, CGAP Focus Note No. 49, CGAP.
Karim, Shamsiah Abdul (undated), “Contemporary Waqf Administration and Development
in Singapore: Challenges and Prospects”, Islamic Religious Council of Singapore.
http://www.muis.gov.sg/cms/uploadedFiles/MuisGovSG/Wakaf/Contemporary%20Waqf
%20In%20singapore.pdf
Khan, M. Fahim (1995a), Essays in Islamic Economics, The Islamic Foundation, Leicester.
Khan, M. Fahim (1997), "Social Dimensions of Islamic Banks in Theory and Practice,"
Islamic Research and Training Institute, Islamic Development Bank, mimeo.
Khan, Mohsin S. (1987), "Islamic Interest-free Banking: A Theoretical Analysis," in Mohsin
S. Khan and Abbas Mirakhor (Eds.), Theoretical Studies in Islamic Banking and
Finance, The Institute for Research and Islamic Studies, Houston.
10th International Conference on Islamic Economics and Finance
15
Khan, Tariqullah (1995b), "Demand for and Supply of Mark-up and PLS Funds in Islamic
Banking: Some Alternative Explanations," Islamic Economic Studies, 3, 39-78.
Levine, Ross (1997), “Financial Development and Economic Growth: Views and Agenda”,
Journal of Economic Literature, 35, 688-726.
Matin, Imran, David Hulme and Stuart Rutherford (2002), “Finance for the Poor: From
Microcredit to Microfinancial Services”, Journal of International Development, 14,
273-294.
Merton, Robert C. (1992), “Financial Innovation and Economic Performance”, Journal of
Applied Corporate Finance, 4 (4), 12-22.
Merton, Robert C. and Zvi Bodie (1995), “A Conceptual Framework for Analyzing the
Financial Environment.” in The Global Financial System: A Functional Perspective,
Harvard Business School Press, Boston, Massachusetts.
Mindel, Norbert M. and Sarah E. Sleight (2010), Wealth Management in the New Economy,
John Wiley & Sons, Inc.
Oracle (2008), Takaful – Meeting the Growing Need for Islamic Insurance, Oracle White
Paper, May 2008.
Siddiqi, M. N. (1981), Banking without Interest, Islamic Publications Ltd., Lahore.
Siddiqi, M. N. (1983), Issues in Islamic Banking, The Islamic Foundation, Leicester.
Siddidi, M. Nejatullah (2004), Riba, Bank Interest, and the Rationale of Its Prohibition,
Visiting Scholars Research Series No. 2, Islamic Research and Training Institute, Islamic
Development Bank, Jeddah.
United Nations (2006), Building Inclusive Financial Sectors for Development, United
Nations, New York.
World Bank (2008), Finance for All? Policies and Pitfalls in Expanding Access, A World
Bank policy Research Report, World Bank, Washington DC.
Zarqa, Muhammad Anas (1988), "Islamic Distributive Schemes", in Munawar Iqbal (Editor),
Distributive Justice and Need Fulfillment in an Islamic Economy, The Islamic
Foundation, Leicester, pp. 163-216.
10th International Conference on Islamic Economics and Finance