By Mohammed Obaidullah
The 2015 issue of the Islamic Social Finance Report has just been launched at an International Workshop on Zakat Management organized by SANZAF at Pretoria, South Africa. This issue focuses on the zakah, awqaf and Islamic microfinance sectors in six countries in the sub-Saharan Africa – Sudan, Nigeria, Kenya, Mauritius, South Africa and Tanzania. This is in continuation of the 2014 issue of ISFR focusing on six countries in South and South East Asia.
The Report has been prepared by a two-member internal team of IRTI researchers comprising Dr Mohammed Obaidullah and Dr Nasim Shah Shirazi with additional contribution from scholars and practitioners from Sudan, Nigeria, Mauritius and South Africa.
The Report has benefited from the comments of and presentations by several scholars and representatives of Islamic organizations from the region under focus. Most of them actively participated in the preparatory events for the study that included a workshop on Awqaf in association with Awqaf S.A. at Pretoria, South Africa and a workshop on Zakat in association with the South African National Zakat Foundation (SANZAF) at Cape Town, South Africa. These were attended by participants from over ten countries in the region. Major findings of this Report were presented at the 10th IDB Global Forum on Islamic Finance on “Exploring Innovative Solutions for Affordable Microfinance in Africa” held in Maputo, Mozambique in June 2015.
The Islamic social finance sector broadly comprises the traditional Islamic institutions based on philanthropy e.g. zakat, sadaqah and awqaf; those based on cooperation e.g. qard and kafala, and the contemporary Islamic microfinance institutions that aim at making a dent on poverty. This issue of the Islamic Social Finance Report (ISFR) presents the trends, future challenges and prospects for the various segments of the Islamic social finance sector in Sub-Saharan Africa, e.g. Sudan, Nigeria, Kenya, Mauritius, South Africa and Tanzania. For a variety of reasons, mostly historical and political, each of these countries are at different stages of development as far as zakat, waqf and Islamic microfinance institutions are concerned.
The maiden issue of this Report focused on the Islamic social finance sector in South Asia and South East Asia. It documented several good practices from countries like Indonesia, Malaysia, Singapore, Brunei Darussalam, India, Pakistan and Bangladesh. Many of the conclusions have been further validated in this study. Some call for a revisit in the light of new findings.
The study involved careful collection and analysis of data and information pertaining to legal and regulatory frameworks as well as good and bad practices at macro, meso and micro levels. Attempts to collect, analyze, collate and interpret data involved personal visits to key stakeholder organizations, e.g. Ministries of Religious Affairs, central banks, apex regulatory bodies, networks and associations, major private organizations. Methods of data collection involved interviews, focus group discussions and workshops. Data collection for the sample countries in Sub-Saharan Africa was relatively more difficult than the South East Asian countries. Notwithstanding this major constraint, the data that could finally be collected were invaluable and provided the researchers with excellent insights into the inter-country differences in practices. The following first-cut observations have serious policy implications and therefore, may form the basis of further research and policy dialogue.
The following are the major findings in relation to the zakat sector.
From Individual to Institutional Management of Zakat: Comparing zakat potential of the sampled countries with their resource requirement to alleviate poverty, it is found that countries like Sudan, Nigeria and South Africa can easily generate resources for poverty alleviation. However, actual zakat collected falls far short of the potential. Data also clearly demonstrate that some countries have been non-starters as far as institutional zakat collection is concerned. There is a strong need therefore, to enhance professionalism and efficiency in zakat management and to ensure a movement away from individual to institutional management of zakat.
Strategic, not Localized Approach to Giving: It may be noted that a large country like Nigeria has been one of the top countries to receive humanitarian assistance. This perhaps highlights the need to look beyond a highly localized approach to zakat distribution, since locally raised zakat resources may be grossly inadequate to meet local needs, while seeking to move towards institutional zakat management.
Recognition of Diversity: Differences in geo-politic realities affect zakat management. There is thus, great diversity in the zakat management practices. Unlike South and South East Asian countries, in most Sub-Saharan African countries a major part of zakat is in the nature of in-kind zakat in the form of crops and livestock. Therefore, holding of zakat funds or investment of zakat funds is a non-issue, while the same is a formidable issue in South and South East Asian countries. Indeed, the case for having standardized and globally acceptable definitions of zakatable assets and methods of estimating zakat liability does not appear to be a strong one. Since Islamic societies are typically characterized by multitude of madhabs and schools of thought, the zakat system must retain enough flexibility to accommodate alternative views.
Liberal Cap on Operational Costs for In-kind Zakat: Collection of in-kind zakat from the actual locations, e.g. farms that are stretched far and wide entails huge collection costs. Therefore, a more liberal view is called for in relation to the cap on operational costs that is traditionally placed on one-eighth of zakat funds collected in South East Asia. Further, once zakat is collected, the transportation and storage of in-kind zakat involves substantial costs, which justifies the strategy of on-the-spot distribution. Various good practices developed in the context of South and South East Asian countries may thus, need to be revisited in the context of the Sub-Saharan African countries.
Compulsory/ Voluntary Zakat: Sudan provides supporting evidence for compulsory zakat. The Nigerian states that have both compulsory and voluntary zakat provide modest supporting evidence in favor of compulsory zakat. The voluntary zakat organizations have generally reported good performance. Irrespective of whether zakat is compulsory or voluntary, a policy of decentralization seems to have paid off. Thus, zakat is observed to be institution-elastic. It is the presence of a network of healthy institutions at multiple levels – in public or private domain – that seems to lead to greater public awareness and greater public participation in the process of poverty alleviation through zakat.
Level-playing Field for Public and Private Agencies: The coexistence of public and private agencies as zakat collectors raises certain issues. Competition among multitude of zakat institutions brings efficiency and gives more choice to the muzakki. However, competition also presupposes a level-playing field for the players. Where the public agency also assumes the role of the regulator of the zakat sector, it should restrict itself to regulation only, leaving zakat collection to private agencies. Alternatively, the entire process of zakat management should be undertaken by the public agency, through its own decentralized network. Such a scenario does not preclude the involvement of private players as agents of the public body as is the case with Malaysian states.
Sustainability, a Function of Controllable and Uncontrollable Factors: It was found earlier in the context of South East Asian countries that zakat is sustainable, dependable and could be a growing source of funds for institutions that acquire the necessary professionalism in fund-raising and seek continued betterment in their social credibility through integrity, transparency and good governance. The evidence seems to have lost some rigor in the context of the agrarian economies of Sub-Saharan Africa that display volatility in zakat collections due to changing fortunes in the farming sector. Further, the success or failure of a zakat institution is not so much dependent on whether it is in government or private hands, but on the credibility and trust it enjoys among the muzakki population. This, in turn is a function of the integrity, transparency and good governance reflected in its practices and as perceived by the stakeholders.
Incentivization of Payment: The issue of incentivizing zakat payment is quite crucial. Where zakat payment is made compulsory and non-compliance invites penalties and punishment, weak enforcement can cause zakat collection to be poor, as in case of some Nigerian states. With reasonably strong enforcement mechanisms, as in Sudan, incentives in the form of the benefits of compliance (e.g. tax incentives on zakat on salaries) as well as the costs of non-compliance (zakat payment as precondition to other commercial transactions) work well. At the same time, where zakat payment is voluntary, its mobilization has not been any less impressive.
Coordination with Inland Revenue Body: Where zakat collection and distribution is entrusted entirely to the state, zakat may be seen as a component of aggregate resources available to the state. In this sense, zakat payment may be seen as a perfect substitute of the direct taxes to the state and may be allowed as deductions to tax payable. However, there must be absolute clarity on the issue as well coordination between zakat and Inland Revenue bodies.
Cautious Approach to Credit Guarantee: There is a case in favor of using zakat for covering genuine credit defaults by the poor, since such borrowers qualify as eligible beneficiaries in the eyes of Shariah. There is, however, need for adequate caution while designing an institutional mechanism for this purpose. It is not easy to differentiate between genuine and willful defaulters for any microfinance institution operating with inadequate and imperfect information.
Supporting Infrastructure: Zakat management in Sub-Saharan Africa in general seems to have suffered a great deal due to absence of meso-level organizations, e.g. networks, training and education providers, consultancy and standard-setting bodies and advocacy organizations. As a result, public awareness about zakat obligations is extremely low in many part of the region. Data is extremely scarce. Capacity building is extremely important but neglected and large percent of zakat should go to this. A major change in mindset of all stakeholders is needed. There is a lot to be done in the matter of improving the administration and governance and disclosures. Transparency and accountability is a precondition to credibility and fund raising.
The following are the major findings in relation to the waqf sector.
A Comprehensive Definition of Waqf: Waqf law should provide a comprehensive definition of waqf that includes both permanent and temporary waqf. It must explicitly cover various types of waqf: family and social waqf, direct and investment waqf, cash waqf, corporate waqf.
Preservation of Waqf: Preservation of waqf is undoubtedly the most important concern in waqf management. The legal framework must clearly articulate that all awqaf (with the exception of temporary waqf or waqf for a finite time period) must be governed by the principle of “once a waqf, always a waqf”. In case old laws fail to ensure protection, they must be replaced with new provisions that enable recovery of lost waqf assets.
Development of Waqf: While preservation is important, law must clearly recognize the importance of sustaining and enhancing the benefits flowing out of the waqf, this being the ultimate purpose of the act of waqf. This is possible only when the importance of development of waqf is clearly recognized. An undue emphasis on preservation (e.g. constraints on leasing) would lead to neglect of developmental possibility with private participation. Similarly, an undue emphasis on development, to the extent that it results in loss of full or partial ownership of asset to private developers) would dilute and vitiate the very concept of waqf. The regulatory framework must seek to strike a balance between concerns about preservation and development.
Creation of New Waqf: The legal framework must not put undue restriction on creation of new waqf. Legal requirements that make the process more difficult, e.g. approval of the head of the state, are both unnecessary and undesirable. A simple process of registration with the regulatory body is both desirable and adequate. While obstacles to waqf creation must not be there, the legal framework should actually encourage creation of new waqf by minimizing financial and non-financial costs of waqf creation and management.
Liberal Definition of Waqif and Mawquf: The legal framework should not restrict making a waqf only to Muslim individuals and should permit both non-Muslims and institutional waqif as long as the purpose of waqf is religious or charitable. Also, the legal framework should not restrict the definition of the endowed asset to immovable tangible assets, such as, real estate, but should also explicitly recognize movable, financial and intangible assets, e.g. cash, stocks, bonds and financial securities, transportation vehicles, rights on land and building, rights of leasing, rights of intellectual property.
Revival of Family Waqf: Most observers and scholars of waqf believe that the institution of family waqf must be revived. The laws should consider explicit provisions, such as, the possibility of restricting the benefits to one or two generations, the method of distribution of waqf benefits etc. with adequate clarity.
State as Manager of Waqf: Waqf is an institution originally and always meant to be in the voluntary sector with management of waqf entrusted to private parties. However, state has often sought to play a role in the ownership and management of awqaf, at times governed by motives to expropriate and at other times, by need to curb corrupt practices of private trustee-managers. Whether ownership and management of awqaf should be in private hands or with the state has no clear answer. There is mixed evidence from both public management as well as private management.
Unambiguous and Explicit Criteria and Rules for Private Managers: Where waqf management is in private hands as in case of Mauritius, the state agency as regulator should clearly stipulate elaborate and clear eligibility criteria for a mutawalli or nazir or trustee-manager not only covering aspects of integrity and trust-worthiness but also professional competence. Given that the individual or institution so nominated meets the criteria, the regulator must respect the expressed intention the waqif or endower. Laws must clearly articulate the responsibility of waqf management that should not only emphasize preservation and protection of waqf assets, but also their development. The responsibility should also include transparent and honest reporting of financials. Laws must clearly stipulate the method of determination of remuneration of managers, sufficiently incentivizing sound and professional management of waqf assets.
State Interference may be Harmful: There is every reason for the state to take punitive action against mutawallis who fail the tests of efficiency, integrity, transparency. The measures must act as effective deterrent against further acts of apathy, neglect and misappropriation. At the same time, the state should not be allowed to wield absolute power to engage in irrational or whimsical action against the mutawalli. Instances of unfair and unlawful action by state are numerous, as are cases of corrupt mutawallis. There need to be effective checks and balances in the law against wrongful acts by both the state as well as the private mutawallis. Power has a tendency to corrupt and the possibility of such action can significantly increase the non-financial cost of creating new waqf. Endowers are likely to seek alternative forms of organizing their charitable activities if there is a possibility of undue state interference in the management of the endowed assets or outright usurpation of the endowed assets by the state.
Prudence in Investment of Assets: It is compulsory to invest waqf assets, be it real estate or moveable assets like cash. Three highly desirable dimensions of investing waqf assets are: sustainability, stability and permissibility of returns.
The following are the major findings in relation to the Islamic microfinance sector, especially in the context of Sudan where microfinance is offered to smallholder farmers.
Unique Products for Smallholder Farmers: The smallholder farmers are the “economically active” poor who witness grave food insecurity and abject poverty. Agriculture is highly dependent on the local conditions: availability of and access to good land, soil, water, climate and market. Further, crops vary widely in terms of duration, perishability, and seasonality. Therefore, provision of microfinance requires different products, diverse and tailor-made approaches. Recent best practices in conventional microfinance advocate “local” interventions based on a value chain approach.
Comprehensive Project Approach: While a majority of Islamic microfinance institutions (IsMFIs) focus on provision of microfinance alone to the farmers, a few IsMFIs prefer a more comprehensive and challenging approach. These IsMFIs believe that they must play the role of an anchor and a facilitator in a process of transformation, and in the economic and social empowerment of the farming communities. They prefer to adopt a “project” approach and provide support in a multitude of areas other than finance, such as, technology, production, marketing, business development, capacity building, and thus, ultimately steering the project to success.
The key lessons from the case studies included in the paper are highlighted below.
• A review of various Islamic modes that are used for provision of finance to farmers reveals that there is no one-size-fits-all mode, even though bai salam is widely seen to be the appropriate mode for agricultural finance.
• Islamic finance discourages debt-based products and encourages equity and partnership based products in general. Given that conventional MFIs derive their income from interest, they seem to be inclined to push their clients into larger and larger amounts of debt. In the Islamic approach, debt is not just discouraged; there are built-in mechanisms, such as zakat to address over-indebtedness of an individual.
• Islamic finance requires “simplicity” in contracts where the rights and obligations of the parties are well understood by them. Even where an Islamic finance model includes future obligations, or composite structures, the uncertainty and ambiguity factor is kept to the minimum. The diminishing musharaka based models used in Sudan are apparently complex but quite “definitive” in terms of transfer of ownership of the key assets into the hands of farmers over a finite period.
• While credit and finance are key inputs for transforming the lives of the farmers, they often require a wide range of non-financial services. Identifying these non-financial needs and finding creative and innovative solutions thereto is critical for success of any intervention.
• A related question is how these non-financial services are to be funded. Should they be priced? Should the farmers pay for these services? The cases highlight both commercial and philanthropic approaches to the issue.
• MFIs that focus on financing the need for physical assets by farmers through conventional or Islamic credit, or through leasing often ignore the importance of providing for basic consumption needs. It should not come as a surprise if farmers resort to diversion of funds from the so-called income-generating project or even distress sale of the assets (funded by MFIs) if the basic consumption needs remain unfulfilled.
• The projects discussed in this study not only seek to leverage existing skills, but also develop new skills, such as in the application of better farming technology on a sustained basis. The projects use an approach similar to conventional venture capital funding (with some differences, of course) and focus on the economic viability of project. They carefully seek to identify risks and mitigate them. They also provide a unique example of combining benevolence with commercial viability.
• In confronting the multitude of challenges facing the poor farming communities, the MFIs may have to limit their outreach significantly. While in case of credit-based finance, the size of financing per beneficiary is very small, the same is very high in case of project-based approaches that seek to finance the entire value-chain.
• Grant money or cash flows from dedicated awqaf may be used to absorb operational cost, thereby making it possible to offer financing at a modest rate. Given the widely expressed concern about affordability of high-cost microfinance, such a possibility offers great promise.
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This article was first published on Sadaqa.in website.