Mainstreaming Islamic Social Finance

Hua Lamphong is the informal name of the station, used by both foreign travellers and locals. The station is often named as Hua Lamphong in travel guide books and in the public press.

By Ebi Junaidi and Primandanu FA

Over the years, Zakah (mandatory alms-giving), waqf (Islamic endowment funds) and Islamic not-for-profit microfinance have been regarded as traditional and miniscule in importance. In this article, the authors present the direct effect of such condition as evident in several phenomena as well as how creative ideas on contextualising centuries old of Islamic social funds in the current lifestyle can result to a sweet fruit of giving helping hands to the needy.

 

It was such a typical gloomy winter morning in Durham back in early February. Yet, students were so passionate to come to the Durham Centre for Islamic Economics and Finance’s Professional Speaker Series. This time, the talk invited Dr. Mahmoud Mohieldin, Senior Vice President of the World Bank Group. The topic was Sustainable Development Goals (SDGs) and the Role of Islamic Finance – which is as much as interesting as the speaker, Dr. Mohieldin. Indeed, he is the right person to discuss on this matter, as he is the World Bank’s person-in-charge for delivering the SDGs as well as having a distinguished expertise on Islamic Finance.

One of the highlights in the talk was the use of Islamic Social Finance in achieving the SDGs’ 17 goals and 169 targets. The Islamic Social Finance is expected to cover part of the $3.1 trillion investment gap needed by 2030. Investment gap in this case is the difference between the total investment needed and the development fund available.

The Islamic Social Finance expected to cover the investment gap includes Zakah (mandatory alms-giving), waqf (Islamic endowment funds) and Islamic not-for-profit microfinance – sectors that over the years have been regarded as traditional and miniscule in importance. Prof. Mohamed Azmi Omar, former Director General or Islamic Research and Training Institute (IRTI) once even said, Islamic Social Finance “failed to catch the fancy of the (Islamic finance) professionals and practitioners.” As a result, he added, “mainstream Islamic finance is now understood to comprise banking, insurance and financial market participation (only).”

The direct effect of such condition can be found in several phenomena. Firstly, there was very less education given to the community over the importance of the provision and payment of Islamic social finance. The recent controversy over the Indonesia government’s plan over zakat collection on Muslim civil servant is just one of the consequence of it, despite the fact that Indonesia is the home of most populous Muslim country in the world. Looking back, the dimension of many teachings over Islamic social finance were mostly “hereafter-motivated” without many references on the significant role that the Islamic Social Finance can play in the world, let alone in development and poverty alleviation.

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Secondly, human resources allocation is very limited in this sector, as working or dedicating career and life in this field is considered inferior, compared to Islamic banks, insurance and/or other institutions and sectors. This is understandable as Islamic social finance might remunerate its management lower compare to other corporate level Islamic finance institutions due to its micro size as well as its effort to ensure only minimal percentage of funds managed is utilised in this manner.

Putting Islamic social finance with its philanthropy and not-for-profit nature in the frame of SDGs has given it the challenges it may well perform and at the same time allowed Islamic Social Finance to be pictured in the mainstream Islamic Finance.

Thirdly, infrastructure to support Islamic social finance’s necessary professionalism in both fund-raising and fund-using has been minimal. Many of the Islamic social finance institutions operate based on trust and utilise public figure to create their social credibility. In the future, it is very important to build a standard measure on integrity, transparency, and good governance in these institutions. Therefore, putting Islamic social finance with its philanthropy and not-for-profit nature in the frame of SDGs has given it the challenges it may well perform and at the same time allowed Islamic Social Finance to be pictured in the mainstream Islamic Finance.

Looking back, we should thank IRTI of Islamic Development Bank (IDB), who has initiated the very first global report of Islamic Social Finance back in 2014 – covering Indonesia and some other countries in South and South East Asia. The report has enhanced public understanding over the sector by providing comprehensive information over existing conditions of the sectors as well as the future development directions.

Since then, not only other series of reports have been produced but effort towards mainstreaming Islamic social finance has also been taken place. One worth mentioning is the special session in the World Humanitarian Summit of The United Nation in May 2016 on “Islamic Social Finance as a New Alternative for Humanitarian Financing”. The humanitarian purpose is indeed at the very heart of Islamic social finance, even more urgent compared to developmental purpose such as the SDGs.

Co-existence and cooperation of private and small Islamic social finance organisations as well as traditional Islamic institutions will strengthen their ability to reach their objectives as well as enable us to realise the full potential of Islamic social finance.

It is interesting that the opportunity targeted within this summit is not only zakah and waqf but also include the possible issuance of humanitarian sukuk, directing at impact investors. The success of International Finance Facility for Immunisation (IFFIm) for its $US 500 millions and $US 200 millions humanitarian sukuk back in 2014 and 2015, inspired many humanitarian organisations to follow suit.

It is important to note that mainstreaming Islamic social finance does not mean corporatisation of zakah, waqf and other funds. Corporatisation does bring efficiency to the fund management by creating a large network, big organisation and other resources that enable it to collect and channel more funds. Yet, existing private and small Islamic social finance organisations as well as traditional Islamic institution such as the Masjids, Baitul Mal Wat Tamwil (BMTs), Waqf institution, etc. have been there playing their role not only giving helping hands to those who were missed by larger institutions, but also as the source of social capital within community.

Co-existence and cooperation of private and small Islamic social finance organisations as well as traditional Islamic institutions will strengthen their ability to reach their objectives as well as enable us to realise the full potential of Islamic social finance. In the context of Indonesia, we are talking about IDR 270 trillion from zakah [based on Indonesia’s National Alms giving Institution’s (Badan Amil Zakat Nasional) (estimate), and IDR 180 trillion from waqf (based on Badan Waqf Indonesia (BWI)’s estimate) annually. These numbers plus the savers in non-profit Islamic microfinance and prospective ethical investors on humanitarian sukuk can indeed significantly play a role in humanitarian and developmental projects; projects that echo the very early intent of the birth of Islamic Economics and Finance.

 

“Blending” the social finance with existing Economic and Financial Institutions

There were two interesting events related to the intensification of Islamic social funds collection in Indonesia. The first is the introduction of “sazadah”, a program that enable investors of stock markets to pay their sadaqah (voluntary giving) and Zakat (annual Islamic alms giving) by their stocks. The launching was followed by the opening of 36 counters around Indonesia that enable philanthropists to consult as well as donate their stocks with no hassle. The initiative of paying these social funds in the form of stock is considered as the first ever in the world. The program targets not only Islamic finance investors but also conventional investors as long as the stocks donated are listed under the Jakarta Islamic Index.

It is important to note that the Sazadah program was initiated by private securities company, The Henan Putihrai Security. The company sought approval from Indonesia’s Ulama Council which agreed on the ground that stocks is considered as class of assets subject to Islamic annual obligatory alms giving. For channelling the funds, the company smartly cooperated with Indonesia’s official national Zakat Institution planning to finance its Zakat Community Development

This is not the first time that this security company held hands with zakat institution. Almost two years ago, the company introduced a program that allows investors to donate indirectly while performing transaction trough their Sharia Online Trading System (SOTS). Every brokerage fee paid due to trading activities will have 20% taken for donation. The so-called “berkah” (blessing) program has an annual subscription growth of almost 100%, which increases the donation amount transferred to projects under the zakat institutions.

The second event is the cooperation of BAZNAS with one of Indonesia’s electronic money provider, Go-Pay. The cooperation allows donations to be paid through Go-Pay platform directly to BAZNAS’ account. Last year, cooperation among the two has contributed to a targeted 10,000 poor recipient families. The cooperation was on better donation channelling system. Indeed, distribution of donation, especially during Muslim holy month of Ramadan, has been challenging. This have caused not only an unbalance distribution and exclusion of some of the most needed donation targets, but also, in the case where direct distribution was done, casualties and inhumane queuing practices have frequently occurred.

The above two events are indeed just examples of how creative ideas on contextualising centuries old of Islamic social funds to current lifestyle can result to a sweet fruit of giving helping hands to the needy. There are indeed many more ways to eventually enable us to locate Islamic social funds to a place it deserves –  a place that reminds people, in any regular activities they are involved in, that there is a space to contribute to their fellow human being socially. A noble cause that penetrates the everydayness, which is what mainstreaming aims for.

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About the Authors

Ebi Junaidi is School of Economics Lecturer at Universitas Indonesia. He is currently pursuing his PhD in Islamic Finance at Durham University Business School. His research areas are Waqf, Trust, Venture Capital, Risk Attitude and Financial Decision. He is now the Chairman for Indonesia Islamic Economics Society-United Kingdom Representative.

Primandanu FA is currently pursuing Master’s degree in Islamic Finance at Durham University. He is now the General Secretary of Islamic Economics Society (MES-UK). He commenced his career at Capital Market Supervisory Agency in 2010 and has been working at Indonesia Financial Services Authority since 2013.