NON-MARKET ISLAMIC MODES FOR MICRO FINANCING AUSAF AHMAD IBF-NET Course on Islamic Finance Hotel Palm grove, Chennai October 5, 2008

In the name of Allah, The Most beneficent, The Most Merciful

WHY MICRO FINANCING? Financial intermediation between savers and investors. Mismatch between the preferences of savers and investors. Problems of Moral Hazards Problems of Adverse Selection Problems of collateral, high cost of processing.and enough acceptable returns Result: System Leaves out certain sectors and certain sections of population Solutions: Specialized agencies for small scale enterprises Micro Financing for poor people

WHAT IS MICRO FINANCING? Micro financing is a term used for providing financial services such as micro credit, micro saving and micro insurance to Poor people. Credit worthiness, Profitability and Bankable projects? [ Poor people do not have collaterals]. Poor people could be relied to repay the loans Market mechanism could be used productively to improve the economic conditions of the poor.

ISLAMIC MODES OF MICRO FINANCE Islamic modes of micro finance may be classified into two main categories: Market based Modes Non Market Modes (Zakah, Infaq, Awqaf, Qard) WHAT IS MEANT BY NON MARKET MODES? THE MOTIVE IS TO EARN THE PLEASURE OF ALLAH, AND NOT THE PROFIT FROM THE MARKET. Hence: on Market Modes = Non Profit Modes

Non-Market Islamic Modes of Micro Financing What is a non market mode? Non-market= not for profit Non-market Modes: Zakah Awqaf Qard Hasan Sadqat Nafilah (Voluntary Charity)

ZAKAH AS AN INSTRUMENT OF MICRO FINANCING Zakah is a pillar of Islam, next only to Salah in importance. It is universal in the sense it is imposed on all adult and sane Muslims who own wealth beyond a prescribed minimum (Nisab). It is taken from the rich, to be distributed amongst the poor. Its redistributive nature makes it eminently suitable for micro financing. There is no quid pro quo in Zakah either. However, it should not be confused with the taxation system of the country.

Exemption Limits (nisab) and Rates of Zakah ItemsNisabRates Gold8.5 grams2.5% silver595 grams2.5% Trade goods (Amwal Tijarah) Equal in value to Nisab in gold or silver 2.5% Agricultural Produce 653 Kilo grams. a. Rain fed land10% b. Irrigation fed5%

SOME FIQHI RULES FOR ZAKAH Zakah on animal wealth: Nisab and rates are prescribed for camels, cows and goats. The Nisab and rates were determined by the Prophet (pbuh) himself. Through out Islamic history these have been considered unalterable. There is evidence to suggest that Zakah base has been expanding. Modern scholars suggest a more comprehensive System of Zakah.

GOODS SUBJECT TO ZAKAH Precious metals: Gold Silver Animals Camels Cows Goats Grain Wheat Barley Fruits Dates Raisins Is Zakah to be Levied on these goods only? Ahnafs views: Zakah is to be levied on all agricultural goods as well as on horses. Modern Economists view: Zakah is to be levied extensively including business companies, company shares and other financial shares. Some economists favoured even alteration in Zakah rates but it did not cut any ice with the community.

Expenses of Zakah Alms (Charity) are for the poor, and the needy, and those employed to administer the (funds), For those whose hearts have been (recently) reconciled (to the truth), For those in bondage, and in debt, in the cause of Allah, and for the way farer. This is ordained by Allah. And Allah is full of knowledge and wisdom. [9: 60]

Octagonal Expenses for Zakah 1. For the Poor (MF) 2. The Needy (MF) 3. Those who administer 4. Those whose hearts are to be reconciled. 5. On freeing people from human bondage (PE) 6. To pay the debts (PE) 7. In the way of Allah (PE) 8. The Way farer (PE) MF= Micro Financing, PE= Poverty Eradication Amongst Eight heads, two can be clearly used for micro financing programs. The last four have clear implications for Poverty eradication programs. However, following Fiqhi rules must be observed.

Some Fiqhi Rules for Use of Zakah Zakah of a city must preferably be collected in a city and must be spent within the same city. This has clear implications for poverty eradication. Imam / ruler has the power to determine priorities. Nothing prescribes that all eight heads be exhausted in a given year. Zakah must be given to poor and needy in such a manner as to take him out of Zakah net next year.

Hanafi Fiqh and Principle of Tamlik The principle of Tamlik has been deduced from the Quranic injunction Give Zakah The Act of Giving / taking is complete only by transfer of ownership. Examples: Providing text book and digging a well. Modern scholars do not put much emphasis on Tamlik. The principle can be taken care of, even in social projects [Example: hospitals whose shares are owned by poor.]

Management of Zakah in Modern Societies Zakah was to be collected and distributed by the state. In modern societies, the responsibility has fallen to individuals shoulders. Collectivization of Zakah is a big issue of modern times. In various countries, various models have been used with varying degrees of success.

Management of Zakah in Modern Societies (Contd.) Management of Zakah by the State Saudi Arabia, Sudan, Pakistan, Iran, Management of Zakah by Commercial Banks Management of Zakah by NGOs. Zakah Houses ( Beit uz Zakah in Kuwait ) Zakah Funds Other Organizations having a Zakah Department. AICMEU, Muslim Funds, etc.

MICRO FINCING AND ZAKAH FUNDS Revolving Zakah Credit Funds based on Qard Hasan Micro industries program (Distribution of sewing machines) Supporting Crafts with required training (Example: manufacturing of leather purses and bags in Hyderabad) Rehabilitation and empowerment of economically weaker sections of the society.

Awqaf and Micro Financing Waqf (singular), Awqaf (plural) have been derived from the root word Wqf. In technical terms, it is an endowment in perpetuity, created for a specific purpose. The Prophet said, It (waqf) can neither be sold off, nor gifted away and nor can be inherited. There has been a rich tradition of making waqf in all Muslim societies in all times. This characteristic must be used in devising development and Micro financing programs.

AWQAF, HEW AND DEVELOPMENT

Developmental Role of Waqf Traditionally, HEW activities (Health, education and welfare) in the Muslim societies were looked after by perpetual Charity (waqf) institutions. Cazickcas results about Ottoman Empire: A very high proportion of public budget was spent on Defense, Very little on HEW How could the empire survive for such a long time ( ) without any expenditure on HEW? The catch is that HEW activities were taken care of by Philanthropic activities.

Developmental Role of Waqf (Contd.)