ISLAMIC SOCIAL FINANCE REPORT 2014 - India …indiamicrofinance.com/.../03/Islamic-social-finance-report-2014.pdf · ISLAMIC SOCIAL FINANCE REPORT 2014. ... Islamic social Finance

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ISLAMIC SOCIALFINANCE REPORT2014

TAbLE OF CONTENTS

0.1 Message (from Director general, IRTI) 08

0.2 acknowledgement 09

1.0 execuTIve suMMaRy 13

2.0 RegIon unDeR Focus 25

2.1 economic Indicators 27

2.2 Potential of Islamic social Finance 34

3.0 ZaKaH 39

3.1 overview of Zakah sector 42

3.2 Institutional structure 55

3.3 Regulatory and Policy Framework 58

3.4 supporting Infrastructure 62

3.5 success stories & good Practices 64

3.6 Lessons and Policy Implications 70

4.0 aWQaF 73

4.1 overview of awqaf sector 74






5.0 IsLaMIc FInancIaL cooPeRaTIves & non-PRoFIT-oRganIZaTIons 98

5.1 overview of Islamic Financial cooperative and nPo sector 99






6.0 gLossaRy 124

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Islamic Social Finance Report

FIguRES

2.0 RegIon unDeR Focus

Figure 2.1: gDP Per capita , 2011 (current usD) 27

Figure 2.2: gDP in billion usD 28

Figure 2.3: average annual gDP growt h 2000-2012 28

Figure 2.4: gDP growth Rate 2000-2012 Br unei , Indonesia , Malaysia and singapore 28

Figure 2.5: gDP growth Rate 2000-2012 Bangladesh, India and Pakistan 29

Figure 2.6: agriculture, Industry, and services in the 7 countries for 2011 29

Figure 2.7: Inflation, average consumer Prices, 2000-2011, Bangladesh, India and Pakistan 30

Figure 2.8: Inflation, average consumer Prices, 2000-2011, Brunei , Indonesia, Malaysia and singapore 31

3.0 ZaKaH

Figure 3.1: Time series (2002-2012) of Total Zakah collected in Indonesia 43

Figure 3.2: Pattern of Zakah Distribution by BaZnas in Indonesia (2012) 45

Figure 3.3: Time series of Zakah collected in Malaysia 1991-2011 46

Figure 3.4: Distribution of Zakah among asnaf in Malaysia (2010) 48

Figure 3.5: Time series of Zakah collected in singapore 2009-2012 48

Figure 3.6: Distribution of Zakah among asnaf in singapore (2012) 49

Figure 3.7: Time series of Zakah collected in Brunei Dar 50

Figure 3.8: Distribution of Zakah among asnaf in Br unei Darussalam (2010) 50

Figure 3.9: Distribution of Zakah in Pakistan (2010) 51

Figure 3.10: Distribution of Zakah in India 54

ChARTS

3.0 ZaKaH

chart 3.1: Institutional structure for Zakah in Indonesia 55

chart 3.2: Institutional structure for Zakah in India 56

chart 3.3: Institutional structure for Zakah in Pakistan & Bangladesh 56

chart 3.4: Institutional structure for Zakah in Malaysia, singapore and Brunei Darussalam 57

4.0 aWQaF

chart 4.1: Institutional structure for Waqf in Indonesia 76

chart 4.2: Institutional structure for Waqf in India 77

chart 4.3: Institutional structure for Waqf in Pakistan 77

chart 4.4: Institutional structure for Waqf in Bangladesh 78

chart 4.5: Institutional structure for Waqf in Malaysia and Brunei Darussalam 78

chart 4.6: Institutional structure for Waqf in singapore 79

chart 4.7: Wakaf syed omar ali aljunied (Bencoolen) 91

5.0 IsLaMIc FInancIaL cooPeRaTIves & non-PRoFIT-oRganIZaTIons

chart 5.1: Institutional structure for BMTs in Indonesia 104

TAbLES

2.0 RegIon unDeR Focus

Table 2.1: Total Population, Density of Population and Percentage of Muslim Population 26

Table 2.2: Income Distribution - gInI index 32

Table 2.3: Head count Ratio 2000-2012 33

Table 2.4: Resources gap for poverty alleviation 34

Table 2.5: estimate of Zakah Potential 35

3.0 ZaKaH

Table 3.1. share of Private and Public agencies in Zakah collection in Indonesia 42

Table 3.2: Time series (2002-2012) of Zakah collected in Indonesia 43

Table 3.3: Pattern of Zakah Distribution by LaZ in Indonesia 2004-2008 44

Table 3.4: Pattern of Zakah Distribution by BaZnas in Indonesia 2011-2012 44

Table 3.5: Time series of Zakah collected & Distributed in Malaysia 1991-2011 (Million RM) 45

Table 3.6: Zakah collection and distri bution across states in Malaysia * 47

Table 3.7: Distribution of zakah among asnaf in Malaysia * 47

Table 3.8: Time series of Zakah collected in singapore 2009-2012 (Million s$) 48

Table 3.9: Time series of Zakah Distributed in singapore 2009-2012 (000 s$) 49

Table 3.10: Time series of Zakah collected in Brunei Darussalam 2001-2008 (Million BnD$) 49

Table 3.10: Time series of Zakah Distributed in Brunei Darussalam 2000-2010 (000 BnD$) 51

Table 3.11: Time series of Zakah Distributed in Pakistan 52

Table 3.12: composition of Zakah Distribution in India 53

Table 3.13. Multiple channels for zakah mobilization in Malaysia 61

Table 3.14. services provided by sKMcH&Rc as in 2012 64

Table 3.15. Revenue growth of sKMcH&Rc (1994- 2011) 65

Table 3.16. collection & utilization of Zakah and charity Funds (2010-2011) 67

Table 3.17. 5-year Details on economic empowerment Programs by DDR 68

5.0 IsLaMIc FInancIaL cooPeRaTIves & non-PRoFIT-oRganIZaTIons

Table 5.1. Initial capital of BMTs 99

Table 5.2. age of BMTs 100

Table 5.3. area of operation of BMTs 101

Table 5.4. asset structure of BMTs 101

Table 5.5. Distribution of BMTs Based on asset size 102

Table 5.6. asset growth of BMTs 102

Table 5.7. age and asset growth of BMTs 102

Table 5.8. sources of Funds for BMTs 103

Table 5.9. Modes/Products and Beneficiaries at Wasil 110

Table 5.10. Time-series of Major Performance Indicators 113

Table 5.11 operational expenses 2008-12 115

Table 5.12. Flow of charity Funds (2008-13) 116

Table 5.13. Donations from Borrowers (2008-13) 116

Table 5.14. growth of RDs 118

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Islamic social Finance Report

The Islamic Research and Training Institute (IRTI), a member of the Islamic Development Bank Group (IDBG), was established in 1401H (1981). The principal aim of IRTI is to undertake research, training and advisory activities in Islamic Economics and Islamic Finance to facilitate the economic, financial and banking activities in IDB member countries to conform to Shariah. A knowledge-based organization, IRTI, is considered to be one of the pioneers and key centers of excellence around the world in promoting and supporting the development and sustenance of a dynamic and comprehensive Islamic Financial Services Industry (IFSI), which supports the socio-economic development of IDB member countries and Muslim com-munities across the globe.

Vision TobetheglobalknowledgecenterforIslamicEconomicsandFinanceby1440H(2020)

Mission Toinspireanddelivercuttingedgeresearch,capacitybuilding,advisoryandinformationservicesintheareaofIslamicEconomics andFinance

Islamic Research and Training Institute | P.O. Box 9201, Jeddah 21413, Kingdom of Saudi Arabia | Tel: +966-12-636-1400

Fax: +966-12-637-8927 or +966-12-636-6871 | http://www.irti.org | Email: [email protected]

IRTI SeRvIceSAdvIsoryAndConsulTAnCyIrTIprovidescomprehensiveadvisoryandconsultancyservicesinthefieldsofIslamicFinanceandEconomicswithglobaloutreachtothepublicandprivatesectors.Backedbyoverthreedecadesofindustryexperience,IrTIsadvisoryandconsultancyservicesaddrealvaluetotheclientsbusinesses.InadditiontoIrTIsrenownedexperts,IrTIutilizesindustryexperts,affiliatepartnersandIdBGroupmembersentitiesexpertstoprovideadvisoryandconsultancyservicestoclients.

TrAInInGAndCAPACITyBuIldInGIrTIseekstobuildcapacitiesintheIslamicfinancialservicesindustrythroughcomprehensivetrainingprogramsinvarious

fields,suchas,Islamicbanking,insurance,capitalmarkets.ItalsoseekstostrengthentheIslamicsocialfinancesectorbyprovidingtrainingcoursestargetedatzakah,awqafandIslamicmicrofinanceinstitutions.

rEsEArCHIrTIisacatalystintheadvancementoftheIslamicEconomicsandIslamicFinancefields.CurrentlyIrTIsresearchagendaisfocusedonfiveclusters,namely:IslamicFinancialInstitutionsandFinancialsectordevelopment,IslamicFinancialProductsdevelopment,FinancialstabilityandriskManagement,EconomicdevelopmentinoICmembercountries,andHumandevelopmentinlightofMaqasidAlshariah.

InForMATIonAndKnowlEdGEsErvICEsIrTIeffectivelyandefficientlycreates,capturesanddisseminatesknowledgeusingtraditionalandmoderninformationsystemsandprograms.Theseprogramsinclude,butnotlimitedto;theinternet,socialmedia,e-learning,distancelearning,voiceandvideoconferences.

IslAMICFInAnCIAlIndusTryInForMATIonCEnTEr(IFIIC)IFIICisaportfolioofonlineapplicationsanddatabaseswithrelevantdataabouttheIslamicFinancialIndustry.ComponentsoftheIFIICarethefollowing:IslamicBankingInformationsystem(IBIs,www.ibisonline.net),shariahandwhoswhodatabases.

A MeMber of

About the IslAmIc ReseARch And tRAInIng InstItute

President of Islamic Development Bank (IDB) Group Ahmed Muhamed Ali speaks during the Third IDB 1440H Vision Commission Meeting in Kuala Lumpur March 23, 2006. REUTERS/Zainal Abd Halim

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MESSAgE

The Islamic social finance sector comprising zakah, awqaf and non-profit microfinance institutions faces many challenges. at a micro level, institutions in this sector need to address the issue of sustainability in the supply of funds. a sustained flow of social funds demands high degrees of social acceptance and credibility, which in turn, are influenced by levels of integrity, transparency and professionalism in the management of these funds. Related to this is the institutional need for adequately trained professionals and managers well-versed in the shariah aspects well as in scientific techniques of management of such charity-based and not-for-profit institutions. at a meso level, there appears to be a need for better supporting infrastructure including networks, associations, providers of education, training and consultancy services. Macro level challenges perhaps include absence of enabling regulatory and policy frameworks. Identifying these challenges constitutes the first step towards meeting them.

a comprehensive understanding of the sector requires information. unfortunately the available information pertaining to the sector is neither timely, nor adequate. new information need to be produced through research and documentation. The present initiative is a step in this direction. This is the first in a series of research-based reports towards a comprehensive documentation of trends in the Islamic social finance sector comprising zakah, awqaf and non-profit microfinance institutions. The report also undertakes a rigorous analysis of the legal and regulatory environment, supporting infrastructure and good practices by key players in the sector.

Zakah, sadaqah and awqaf as instruments of philanthropy as well as various not-for-profit modes of Islamic finance occupy a central position in the Islamic scheme of poverty alleviation. Therefore, this initiative is of special significance to IRTI, since poverty alleviation and promotion of Islamic economics and finance are two strategic objectives in line with the vision and mission of the IsDB group and IRTI.

The report has been prepared by a team of researchers from IRTI who have painstakingly collected and analyzed data pertaining to the sector throughout the year using a variety of means including personal visits and focus group discussions involving key stakeholders in the sector. Let me take this opportunity to congratulate the team for producing an excellent piece of work. at the same time, let me also invite you to share your views and opinions for further enhancement of its value.

I hope this report would play a very positive role in initiating and shaping a productive dialogue among policy makers and all major stakeholders for strengthening the global Islamic social finance sector.

after growing at a frenetic pace for over four decades, mainstream Islamic finance is now understood to comprise banking, insurance and financial market participation. These are for-profit segments of the Islamic economy. The impressive growth has also been matched by a large scale increase in research and documentation pertaining to these segments. at the same time there appears to be a gross imbalance in resources committed to research and documentation of the Islamic social, philanthropy-based and not-for-profit sector. The IRTI internal team entrusted with the formulation of its strategy noted this imbalance with concern and rightly identified the present study as a flagship multi-year project of IRTI. The team merits appreciation of all stakeholders in the sector including that of the authors of the present study.

This study on the Islamic social finance sector comprising institutions rooted in Islamic philanthropy, e.g. zakah, sadaqa and awqaf and in cooperation and solidarity has been undertaken by an internal cross-functional team of four researchers from IRTI. Major findings of a study undertaken for this purpose were presented at an intensive workshop on the theme strengthening Islamic social Financial sector held in Bogor, Indonesia during april 29-30, 2013 in collaboration with the national Zakat Board (BaZnas), Bogor agricultural university and the Indonesian association of Islamic economics. The event was attended by a large number of participants from the academia, Ministries of Religious affairs, apex regulatory bodies, central banks, networks and associations and organizations that are engaged either in direct mobilization and management of zakh and waqf resources as a tool to alleviate poverty, or in development of good practices in the field of management of these sectors through research, training and consultancy. The revised document was later presented at the global Islamic Finance Forum organized by IRTI and general council of Islamic Banks and Financial Institutions (cIBaFI) in the sidelines of the Islamic Development Bank group Bog Meetings at Dushanbe, Tajikistan on May 19, 2013.

The study and the preparation of the Report have involved interaction with these experts at various stages of its

development. some of the experts who deserve special mention are: DrDidinHafidhuddin,BAZNASandWorldZakatForum,

Indonesia DrIrfanSyaukiBeik,BAZNAS,Indonesia SrNanaMintarti,IndonesiaMagnificenceZakat(IMZ),

Dompet Dhuafa Republica, Indonesia BrAliSakti,BankIndonesia,Indonesia DrAminAziz,CenterforMicroenterpriseIncubation

(PInBuK), Indonesia DrRahmatullah,AllIndiaCouncilforMuslimEconomic

upliftment, India BrArshadAjmal,AlKhairCreditCooperative,India DrAmjadSaqib,Akhuwat,Pakistan SrFaridaTariq,WasilFoundation,Pakistan DrRajaMuhammadHanif,MinistryofReligiousAffairs,

government of Pakistan BrMirzaRizwanBaig,ShaukatKhanumCancerHospital,

Pakistan DrMahmoudAhmad,IBTRA,IslamiBankBangladesh Dr.ShamsiahBteAbdulKarim,MajlisUgamaIslam

singapura (MuIs), singapore BrAmranHazali,PPZ-MAIWP,Malaysia DatoDrSyedGhazaliWafa,AngkasaSyariahFinancing

cooperative Limited (KoPsya angKasa), Malaysia DrNorazlinaAbdWahab,IslamicBusinesSchool,

universiti utara Malaysia HjhRosebintiAbdullah,UniversitiIslamSultanSharifAli,

Brunei Darussalam Br.AkMdHasnolAlweePgMdSalleh,UniversitiBrunei

Darussalam, Brunei Darussalam

a project of this nature would not have been possible without the cooperation and support of major stakeholders in the sector. We are much beholden to those who have contributed to the present study and look forward to their continued support as we move forward.

Dr. Mohammed ObaidullahProject LeaderIslamic Social Finance Report

ACkNOwLEDgEMENT

Prof. Dato Dr. Mohd. Azmi OmarDirector generalIslamic Research and Training Institute

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Islamic Social Finance Report

The British Telecom tower is seen silhouetted at dusk in central London on April 28, 2008.

REUTERS/ToBy MELviLLE (BRiTAiN)

EXECUTIVESUMMARY

The sun sets behind the Petronas Twin Towers in Kuala Lumpur June 26, 2006.

REUTERS/ZAiNAL ABd HALiM (MALAySiA)

a. Zakah

1. how do we ensure standardization in defining zakatable assets and estimating zakah liability in the presence of diversity in legal opinions?

The case for having standardized and globally acceptable definitions of zakatable assets and methods of estimating zakah liability does not appear to be a strong one. since Islamic societies are typically characterized by multitude of madhabs and schools of thought, the zakah laws must retain enough flexibility to accommodate alternative views. The diversity in legal opinions should be respected. It is more practicable to ensure that zakah estimation is an outcome of consultative processes between the muzakki and the zakah collecting institutions.

2. is zakah a dependable source of funds for institutions?

contrary to commonly held perceptions regarding lack of dependability in flow of donations, zakah 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.

3. Does the state perform better than private institutions in the domain of zakah management?

The success or failure of an institution as zakah collector and distributor 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, which in turn are a function of the integrity, transparency and good governance reflected in its practices and as perceived by the stakeholders.

4. Should zakah payment be made compulsory?

at a macro-level growth in zakah mobilization appears to be influenced more by incentives that make zakah payment an attractive proposition and less by penalties and punishments. Where zakah payment is made compulsory and non-compliance invites penalties and punishment, enforcement is invariably weak for a variety of reasons. strict laws do not combine well with weak enforcement. at the same time, where zakah payment is voluntary, its mobilization has not been any less impressive.

5. Should a muzakki be allowed to choose between public and private zakah collector?

There seems to be nothing inherently wrong with coexistence of public and private agencies as zakah collectors. Zakah mobilization is expected to be institution-elastic just as savings mobilization is. competition 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 zakah sector, it should restrict itself to regulation only, leaving zakah collection to private agencies.

6. Should zakah payment be allowed as a deduction to income tax payable or to taxable income?

Where zakah collection and distribution is entrusted entirely to the state, zakah may be seen as a component of aggregate resources available to the state. In this sense, zakah 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 seems to be merit in allowing zakah payment as a deduction to taxable income only (at par with various kinds of charity flows) where private agencies are permitted to collect zakah. Treating zakah payment at par with taxes to state when the same is made to private agencies might seriously erode state revenues.

7. is corporatization good for zakah management?

corporatization that implies use of a large network of private institutional collectors for zakah mobilization is seen to be far more efficient as compared to a large number of unconnected private individual collectors. The issue of how to remunerate the corporate collector is however a trickier one and calls for putting in place adequate and transparent mechanisms to ensure that a minimal percentage of zakah collected is utilized in this manner. corporatization should not be pushed too far, e.g. private agencies being allowed to offer zakah investment services as this may involve a misalignment of objectives of such private agencies with those of other stakeholders.

8. Should zakah be allocated for other types of beneficiaries only after the needs of the ultra-poor are addressed?

In the light of various legal opinions relating to distribution of zakah among eligible beneficiaries there is a case in favor of a scheme of prioritization among different types of beneficiaries with highest priority being given to the needs of the ultra-poor.

9. how do we ensure that zakah does not create dependence among beneficiaries and leads to their economic empowerment?

Basic consumption needs are, by definition, more urgent than needs that may be deferred to a future date. In this sense, zakah is traditionally viewed as a solution to the consumption needs of the poor. However, there is also merit in using zakah to enhance the wealth-creating

THe IsLaMIc socIaL FInance secToR BRoaDLy coMPRIses THe TRaDITIonaL IsLaMIc InsTITuTIons BaseD on PHILanTHRoPy - ZaKaH, saDaQaH anD aWQaF; THose BaseD on MuTuaL cooPeRaTIon e.g. QaRD anD KaFaLa; anD aLso THe conTeMPoRaRy IsLaMIc noT-FoR-PRoFIT MIcRoFInance InsTITuTIons THaT use FoR-PRoFIT MoDes PRIMaRILy To coveR cosTs anD susTaIn THeIR oPeRaTIons.

This report presents the historical trends, future challenges and prospects for the various segments of the Islamic social finance sector in south and southeast asia, with the following countries under study: Indonesia, India, Pakistan, Bangladesh, Malaysia, singapore and Brunei Darussalam. This report examines the broad regulatory and policy environment at the macro level as well as good and bad practices at the meso and micro levels to seek answers to the following questions as well as to encourage healthy deliberations around them:

How much regulation is right for the Islamic social finance sector? Do stringent laws and over-regulation stifle the sector?

How do we harmonize the different regulatory frameworks governing institutions based on religious and secular philanthropy, co-operation, not-for-profit and for-profit finance? How do we develop a unified and integrated framework for the Islamic social finance sector?

What role do supporting institutions, e.g. networks and associations, institutions of higher learning, trainers and consultants, developers of standards play in the sector?

How do we enhance transparency, accountability and governance in the sector?

More specifically, the following questions relevant to specific sub-sectors have major policy implications. While we need to differentiate between shariah-legal questions and efficiency-related questions for better comprehension, many apparently shariah-legal issues are related to efficiency.

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Islamic Social Finance ReportExecutive Summary

capacity of the poor so that they are able to get out of the vicious circle of poverty and find lasting solutions to their needs. a complete neglect of the empowerment dimension is likely to perpetuate the dependency syndrome among the poor.

10. Does the requirement of tamleek imply unconditional cash transfer?

The term tamleek implies a process of imparting ownership. In the context of zakah, tamleek is seen as a requirement that essentially implies making the mustahiq the owner of donated funds. This clearly rules out the possibility of giving zakah as a loan to be repaid later. The ownership question however, opens up two further issues. should the poor beneficiary have absolute right to decide how he/she is going to use the funds? Where there is a genuine possibility that the poor may not use the donated cash in an optimal way, can the zakah distributing institution place a conditionality on the possible use of zakah, e.g. zakah payment in the form of scholarship to poor students for covering tuition fees. given the recent evidence available in development literature in favor of unconditional cash transfers (ucT) over alternative ways of financial assistance to beneficiaries, the case in favor of interpreting tamleek as unconditional cash transfer appears to be a sound one. However, it is perhaps a good idea to treat the issue more as an efficiency-related than a shariah-legal one.

11. Should zakah be used for giving loans (qard)? Will the answer be different if zakah funds are used to create a revolving fund (credit pool) to leverage the relatively scarce zakah funds for meeting the needs of a much larger number of the poor? Will the answer be different if the revolving fund is owned by the poor?

Traditionally scholars have frowned upon the prospect of giving zakah as loans, since zakah is supposed to make the mustahiq the owner of donated funds and not a borrower of funds. The objections seem to lose weight in the face of the leveraging possibility that loans offer. arguably, a professionally managed zakah-financed microfinance program can potentially serve a much larger population of the poor as compared to the prospect of grant-making to a small number of beneficiaries. Further, a scenario where the poor are also made the sole owner of the revolving fund is on far stronger grounds. While the first scenario appears to involve efficiency-related gains while raising shariah-legal concerns, the second one is clearly superior as it simultaneously takes care of the tamleek requirement.

12. how do zakah institutions enhance trust and credibility?

Zakah payment is an act of worship (ibadah) for the zakah payer or muzakki. It is a matter of grave concern for the muzakki to ensure that his/her zakah is not only paid, but also distributed in conformity with the norms of the

shariah. a zakah institution essentially acts as an agent of zakah payer or muzakki. as the principal, the zakah payer or muzakki would like its agent to ensure that the zakah funds flow to eligible beneficiaries according to shariah. Therefore, fulfillment of the conditions relating to collection and distribution of zakah is the most fundamental requirement for a zakah institution to earn the trust of the zakah payers and enhance its credibility.

13. how important is the need to separate zakah funds from other forms of donor funds?

separation of zakah funds from other forms of donations is a primary concern for a zakah institution acting as an agent of the zakah payer or muzakki for distribution of zakah. since the conditions relating to eligibility apply only to zakah and not to other forms of donor funds, it becomes extremely important to ensure a wall of separation between zakah and other types of funds. The zakah institutions must put in place appropriate standard operating procedures, accounting and governance practices to ensure the same.

14. how important is the need to place a cap on percentage of zakah that may be used to absorb administrative costs?

shariah identifies zakah officials as one of the 8 eligible categories of beneficiaries. Therefore, a part of the zakah mobilized by the institution may be used to absorb the administrative and operational costs of the zakah institution. While some would like to place a legal cap of one-eighth on the percentage of zakah that may be utilized for this purpose, others would like to treat the matter as one of good governance. as a good practice, a zakah institution that typically collects other forms of donations should absorb its administrative and operational costs in such free funds as much as possible.

15. how important is the need to ensure that the utilization of funds is in accordance with the wishes of the giver?

Within the overall eligibility framework stipulated by shariah, a zakah payer or muzakki may have a unique preference or priority scheme in favor of specif ic regions, beneficiaries or projects. In the interest of good governance, a zakah institution should ensure compliance of such revealed preferences. While there may be practical hurdles that come in the way of such compliance for some zakah institutions, an increasing use of IT in zakah management may make a muzakki-to-mustahiq flow a reality as well as a good practice to replicate.

16. Should zakah be used for covering or guaranteeing against credit defaults?

There is a case in favor of using zakah 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. The simultaneous functioning of a micro-credit initiative and a zakah-based initiative to cover credit defaults by poor borrowers under the same organizational umbrella may also involve serious conflict of culture and moral hazard issues.

B. aWqaf

1. What should be the coverage of an ideal legal framework for awqaf?

Waqf law should provide a comprehensive definition of waqf that includes both permanent and temporary waqf. However, it must be recognized that once the waqf has been declared, it is irrevocable. It must explicitly cover various types of waqf: family and social waqf, direct and investment waqf, cash waqf, corporate waqf.

2. how should the regulator strike a balance between concerns of preservation and development?

The legal framework must clearly articulate the permanent nature of waqf arising from the principle of once a waqf, always a waqf. at the same time, it 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.

3. how should the law ensure creation of new waqf?

The legal framework must not put undue restriction on creation of new waqf. There is no reason to disallow individuals from making waqf beyond one-third of their assets, since fiqhi rules permit the same unless made on the persons deathbed. 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.

4. how does waqf compare with trusts and other forms of not-for-profit organizations in terms of financial and non-financial costs?

awqaf in general, have fallen behind common trusts and other forms organizing charitable and not-for-profit activities in terms of responding to evolving societal needs. creation and management of waqf is a relatively more complex and demanding process and involves additional financial and non-financial costs. Incentivizing waqf in a manner similar to secular trusts and other forms of not-for-profit organizations, e.g. tax rebate on contributions for the donor/ endower would make the system both efficient and fair.

5. Must a waqif (endower) always be an individual Muslim?

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.

6. Should waqf be restricted only to immovable properties like land and buildings?

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, and rights of intellectual property. given the many benefits of cash and corporate waqf, law must explicitly provide a framework for them, including their investment dimension.

7. how should family waqf be dealt in the law?

The institution of family waqf must be revived. since the distinction between family and public waqf is largely a matter of nature of beneficiaries, the law must provide for an explicit basis of distinction. For example, where more than 50 percent of the net available income of a waqf property is exclusively applied to religious and charitable purposes, such a waqf may be deemed to be a public waqf. similarly, endowments where more than 50 percent of the net available income is meant for the waqif s descendants, such a waqf may be treated as family waqf.

8. how efficient is the state agency as mutawalli?

Waqf is originally an institution and always meant to be in the voluntary sector with management of waqf entrusted to private parties. However, the 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 seems to be some

| 16 17 |


positive evidence that the state can indeed play the role of an efficient manager of awqaf. contrary to general belief, state control may not necessarily hamper creativity and innovation in awqaf development (e.g. corporate waqf as well as cash waqf in Malaysia and large-scale development of existing awqaf in public-private mode in singapore).

9. Where waqf management is in private hands, what should be the role of the regulator in its appointment, and monitoring?

Where waqf management is in private hands, the state agency as regulator should clearly stipulate 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 of 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.

10. Should the state have absolute power to terminate a mutawalli nominated by waqif and take waqf assets under its own management?

There is every reason for the state to take punitive action against mutawallis who fail the tests of efficiency, integrity, and 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 the state are numerous, as are cases of corrupt mutawallis. There needs to be effective checks and balances in the law against wrongful acts both by 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.

11. how should existing awqaf be preserved and protected?

The law must explicitly prohibit the waqf asset from being used as a mortgage, confiscated, given away, sold, inherited, exchanged or being alienated into any form of right. The waqf asset may however be exchanged

as an exception to the above general rule, when this is deemed to be in the public interest. such exchange would however, require prior permission from the regulator with additional conditions that the same is (i) necessary or beneficial to the waqf; (ii) consistent with the objects of the waqf; (iii) against another asset of equal or higher value; (iv) and with due respect to the inalienability of religious awqaf.

12. how should existing awqaf be developed?

Waqf development must be a mandatory obligation of the waqf management. Innovating financing methods may be employed that bring in new waqf capital for development of existing awqaf. Innovative methods may also be employed that facilitate private-public partnerships (e.g. involving issue of sukuk) that involve transfer of rights to lease as distinct from ownership rights to private financing entities for finite, yet long enough period to provide a fair return on investment capital. Legal constraints motivated by preservation concerns, such as on long-term leasing of awqaf assets should be removed.

13. how effective are the penalties imposed by law against erring and dishonest private mutawallis?

Financial penalties, especially when these are expressed in absolute numbers tend to lose their effectiveness as deterrents over time. These should either be subjected to continuous revision or be linked to the quantum of misappropriation. Physical punishments are potentially more effective.

14. how should the corpus of waqf be invested?

It is compulsory to invest waqf assets, be it real estate or moveable assets like cash. Investment can alone generate returns which may then be applied to the purpose for which the waqf has been created. The assets purchased using the waqf investment returns do not form part of the waqf and therefore, may be resold unlike the original assets that have been given as waqf. Further, the conditions given by the waqif with regard to the investment of the waqf and/or that the returns from investment are to be spent on specific areas, is also binding. It would be rational to seek risk minimization through diversification or avoidance of high risk investment avenues. Risk minimization may however not be sought if the purpose of the waqf itself is to engage in specific risky ventures.

c. iSlaMic financial cooPerativeS & not-for-Profit organiZationS

1. is islamic microf inance better placed than its conventional counterpart to address the needs of the ultra-poor?

There are sound economic reasons why conventional microfinance and especially micro-credit may not be appropriate for the chronically poor and the destitute. Loans to the destitute may in fact make the poor poorer if they lack opportunities to earn the cash flow necessary to repay the loans. While a destitute may or may not be reluctant to incur debt and start a microenterprise because of risk and uncertainty with cash flows, profit-maximizing and risk-minimizing behavior on the part of the microfinance institution (MFI) would lead to exclusion of such clients. usually such clients do not possess entrepreneurial and technical skills needed for wealth creation. such an economically inactive individual would find it difficult to obtain financing from the for-profit MFIs. Indeed, more than financial services, these individuals must be provided for their basic needs, such as food, shelter, or guaranteed employment. such safety nets may be funded through charity. In order to cross the skill-related barrier, such individuals would also need training for skills-development before they are able to make good use of microfinance. The safety nets may then be linked with microfinance programs, so that the same individuals may move through several stages from abject penury to a stage where they are able to meet their consumption needs - then to a stage where they come to acquire necessary technical and entrepreneurial skills for setting up microenterprises - and then to a stage where they are able to obtain required funds from microfinancing institutions (MFIs) and have the microenterprises up and running. Fighting poverty thus, would require an integrated finance-plus approach or the provision of financial services along with business development services and that is linked to social safety nets. This is possible only by bringing philanthropy and cooperation into the model of microfinance. With institutionalization of philanthropy and its integration with for-profit microfinance, Islamic MFIs are perhaps better placed to address the needs of the ultra-poor.

2. Does high-cost microfinance push the beneficiaries into a debt spiral? how is islamic microfinance different in this respect?

There are also sound economic reasons why high-cost microfinance may push the beneficiaries into a spiral of debt. Microfinance entails high administrative charges, monitoring costs and of course, high portfolio risk. as such, it is invariably costlier than the traditional sources of finance. at the same time, both the MFI and its clients may find this an attractive option if they believe that

the expected return on the micro-enterprise is higher than the cost of debt. such expectations may indeed materialize for the successful projects passing through good times. However, the same may not be true for all projects at all times. Debt-related liability can compound and accentuate the financial problems of a project experiencing bad times and hasten its failure. The pace, frequency and intensity of such failure is directly related to the levels of cost of debt. In contrast to debt, profit and risk-sharing mechanisms provide for a clear alignment between profitability of the project and cost of capital. The latter rises and falls in line with the realized profits of the venture. Islamic MFIs as compared to conventional MFIs are more inclined to use profit and risk sharing modes. even when they use modes creating debt, e.g. murabahah, the quantum of debt once created cannot be increased through restructuring if the client fails to clear the debt in time. Further, given the Islamic emphasis on avoidance of debt, an Islamic MFI should refrain from seeking to entrap a client in ever-rising levels of debt.

3. how should charity be integrated with microfinance for isMfis?

charity and philanthropy occupy a central position in the Islamic scheme of poverty alleviation. shariah clearly identifies 8 categories of beneficiaries who may benefit from zakah. out of these, the potential beneficiaries relevant from the standpoint of poverty alleviation programs are the poor (fuqara), the destitute (masakeen), the indebted (gharimeen) and the zakah administrators (amileen). scholars generally agree that zakah may be disbursed in the form of a grant or be used to form a revolving credit pool from which micro-loans may be provided. Zakah could thus form the basis of designing a range of programs for the poor, e.g. (i) safety net programs to meet basic consumption needs, health and education; (ii) economic empowerment programs involving skill enhancement and business development services; (iii) programs to provide emergency grants or credit; (iv) programs to provide micro-takaful; and (v) programs to provide guarantee against credit default. The administrative costs related to zakah management may partially be recovered from the zakah collected, thus paving the way for a self-sustained zakah management institutional infrastructure.

There is total flexibility with respect to beneficiaries of voluntary sadaqah. In case of sadaqah jariya or waqf, perpetuity of endowed assets is an essential condition that ensures that benefits from the assets flow to the beneficiaries on a sustainable basis. Waqf similar to zakah may form the basis of designing various poverty alleviation initiatives as stated above. While in case of zakah the major requirement is that benefits must flow into the hands of the poor, in case of waqf the same must flow to beneficiaries as intended by the donor. However, if the intention of the donor is not explicit, the proceeds may

| 18 19 |


be used for general-purpose community welfare projects including poverty alleviation initiatives. Waqf therefore, provides a definitive mechanism with added elements of sustainability and flexibility. The issue of high cost microfinance may now be addressed by creating awqaf whose benefits may now be dedicated for absorption of specific cost elements so as to make microfinance affordable to the ultra-poor.

In an Islamic system, far greater priority is given to the needs of the chronically poor than those of the poor or the moderately poor or the not so poor. Therefore, an Islamic MFI unlike its conventional counterpart is expected to aggressively integrate the various forms of Islamic philanthropy with for-profit microfinance to address the multiple issues related to poverty alleviation programs.

4. Should financial cooperatives and not-for-profits be grouped with for-profit microfinance institutions and be subjected to a unified regulatory framework?

There seems to be merit in a uniform regulatory framework for all forms of organizations that are engaged in microfinance activities. The laws applicable to the banking sector are deemed to be too restrictive for microfinance activities. at the other extreme the laws applicable to cooperatives may accord the necessary flexibility of operations. on the flip side, a growing microfinance institution, if organized as a cooperative may face funding constraints due to the one-member-one-vote rule. expansion of capital in a cooperative would require steady growth in membership. compared to a cooperative, a corporate entity apparently makes it relatively easier to raise capital where voting rights are proportional to shares held. This realization has led to the search for dedicated laws for microfinance providers irrespective of whether these are organized as cooperatives or corporations or any other organization forms. a general consensus seems to exist on the need for simple regulations that are not over-restrictive, which do not stifle creativity but improve transparency, accountability, good governance, and allow the MFIs to meet the capital needs of growth. Islamic MFIs in general, should be permitted to raise deposits from their members. Raising deposits from the public is likely to bring other prudential norms into place.

5. how does the asset composition of a typical islamic Mfi look like? is there an ideal mode of finance that needs to be promoted?

Murabahah remains overwhelmingly popular among IsMFIs for the following reasons. (i) Murabahah is simple. The straightforward calculation of the installments for repayment is more easily comprehensible by the beneficiary. In contrast to this, the payments under a partnership-based mode are uncertain and therefore,

less favored. (ii) Murabahah is familiar. For conventional MFIs venturing into Islamic MF and using murabahah, the transition is least demanding. among all Islamic products, murabahah comes closest to interest-bearing micro loans.

For Islamic modes of finance involving multiple contracts, e.g. murabahah, shariah-compliance often requires careful sequencing of contracts to ensure that profits are associated with risk-bearing. However, in the context of microfinance involving large number of repetitive contracts involving small values, adherence to desired sequencing becomes practically impossible. creative fiqhi solutions, e.g. istijrar may have significant advantages above murabahah as the former is tailor-made for repetitive transactions.

Partnership-based modes are demanding on the part of the beneficiary in terms of the need for proper bookkeeping and ascertainment of the financial results of the business. Financial illiteracy acts as a constraint. Further, the beneficiaries may be justifiably reluctant to share information relating to all aspects of their business with the MFI. output-sharing modes or revenue-sharing modes may work better in such situations due to the revealed nature of the benefits to be shared between the parties and difficulties, uncertainties associated with cost calculation.

6. Should profit rates be administered in case of micro-murabahah and other modes? What measures need to be taken to ensure that Shariah-compliant modes of microfinance, e.g. murabahah, ijarah, salam, mudharaa, musharakah, mudharabah etc. do not turn into modes of exploitation?

For-profit shariah-compliant modes offer no in-built protection against exploitation and abuse through over-pricing. For example:

a. Rates on micro-murabahah and micro-ijarah financing are deemed shariah-compliant while interest rates are not. However, both can be and often are exploitatively high.

b. In case of participator y modes e.g. mudharabah, musharakah and mudharaa the sharing ratio could be unfairly biased against the poor beneficiary because of their low bargaining power. similarly, in case of fee-based modes, e.g. wakala and hawala, the agent-MFI may charge an exorbitant fee for the same reasons.

c. The permissibility of salam (sale of non-existent produce) is linked to the economic benefits it confers on poor farmers in need of pre-cultivation financing. However,

salam can involve exploitation when the advance price paid to the poor farmer is artificially pegged at low levels due to his/her weak bargaining power.

an Islamic economy promotes free pricing and allows intervention by the regulator only when natural forces of demand and supply are manipulated to result in an artif icial price. By implication, price ceilings or administered prices are to be frowned upon in a market where there is free and fair play of competitive forces in determination of prices. However, in case of modes where the regulator is in a position to determine a fair estimate of the costs for the MFI, it may seek to regulate the profit margin so that prices charged by MFIs ensure full cost recovery and a fair amount of returns in the interest of sustainability.

at times, identifying appropriate organizational structure may offer a bulwark against possible exploitation. In case of salam, an example presented is one of a farmers cooperative replacing the vendor and thus preventing exploitation of individual farmers by the latter.

7. how do we ensure that the actual cost of operations in case of not-for-profit modes, e.g. qard and kafala forms the basis of pricing?

There is no consensus on how to estimate the actual cost of operations chargeable to the beneficiary under not-for-profit modes, such as qard and kafala. There is a need to develop accounting standards for estimation of actual cost of operations and clear guidelines on what should ideally be passed on to the beneficiary. vigilance by shariah scholars to prevent disguised riba may also ensure that actual administrative costs recoverable from the beneficiary in qard or kafala are not overstated.

8. What specific issues confront a conventional Mfi seeking to transform into islamic Mfi?

a conventional MFI seeking to transform into an Islamic MFI is confronted with a range of issues at various levels. It requires an enabling environment, a regulatory and policy framework that permits the MFI to engage in trade, leasing and investment in real projects. This is usually not permitted for a conventional MFI, viewed as a financial intermediary. Law must recognize the special status of Islamic MFIs that are financial intermediaries as well as players in the real economy at the same time. Fiscal constraints in the form of taxes on real transactions must be removed.

9. Should islamic Mfis engage in women-only microfinance?

Islam gives utmost importance to family as the nucleus social institution that plays a major role in shaping the

future of mankind. It also sees a balanced role for men and women in ensuring the economic and social well being of the family. Islam promotes the concept of family empowerment by exhorting men and women to play their respective roles in seeking economic and social well-being of all members of the family. Indeed, the women only approach to conventional microenterprise development and poverty alleviation is alien to Islamic principles and values. Further, there is the possibility that women may be doubly exploited instead of being empowered where they are made to take the loan related liability while the male member in the family manages to pocket the cash. Therefore, there is merit in the argument that Islamic MFIs should aim to empower families and not women alone.

10. Should voluntarism be an integral component of microfinance?

given the discomfort associated with high cost of microfinance making it unaffordable to the ultra-poor, the institutionalization of charity as well as voluntarism is a creative strategy that has the effect of drastically cutting down operational costs. Thus, microfinance may now be provided at low or zero costs, making it affordable to the poorest of the poor.

11. Should philanthropy and for-profit finance be offered under one umbrella, as in the case of BMts?

Models offering philanthropy and for-profit finance under one umbrella, as in the case of baitul maal (BMTs) may involve serious problems due to conflicting organizational culture and conflicting policy and regulatory framework. as has been observed in the case of Indonesian BMTs, most of them have over time, preferred to do away with their philanthropic aspirations (as charity houses) and concentrated on for-profit financing (as financing houses). The twin-track nature of the model seems to have been abandoned for all practical purpose.

Further, combining Islamic charity, especially zakah collection and application with for-profit financing involves serious transparency and governance issues associated with commingling of funds. a major condition with raising zakah funds requires such funds to be directly channeled into the hands of the eligible beneficiaries or the poor and cannot simply be credited to the organization capital. In the absence of relevant accounting standards and regulatory norms to ensure the above, the shariah scholars have generally discouraged the use of zakah funds in economic empowerment initiatives preferring the direct channels of distribution for consumption purposes instead. Law relating to charities must clearly address such governance issues.

answers to the above questions require careful collection and analysis of data and information pertaining to legal

| 20 21 |


office workers cast their shadows as they walk on a busy street in central Sydney June 9, 2011. Australian employment rose by a disappointingly meagre 7,800 in May, a second month of weakness that led investors to slug the local dollar while greatly scaling back expectations of a rate rise at all this year.

REUTERS/dANiEL MUNoZ

| 22

Executive Summary

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 not-for-profit organizations. Methods of data collection involved interviews, focus group discussions and workshops. an initial finding that such research yielded is that the availability of data on the sector in a given country is very much a function of maturity, efficiency, and professionalism in the sector in that country. The less developed a sector is in a given country, the more difficult it is to obtain any relevant data.

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. These are presented as responses to the above mentioned questions and presented in the same order. It should be noted that the responses should not be viewed as definitive answers to the critical questions, but as first-cut answers based on existing regulations and practices in countries and regions that have witnessed impressive growth and may be considered healthy and reasonably well-developed.

Islamic Social Finance Report 25Islamic Social Finance Report 24

REGIONUNDER FOCUS

A Kashmiri fisherman rows his boat through autumn leaves in Kashmirs dal Lake in Srinagar, November 7, 2004. Kashmiri separatists gave a cautious welcome on Sunday to indias offer to allow them to visit Pakistan and said it could help to restart a stalled dialogue process.

REUTERS/FAyAZ KABLi FK/TW

India and Indonesia are the largest countries in terms of both size and population. The estimated population of India was 1,223.2 million in 2012 with average annual growth rate of 1.51 percent during 2000-2011. The Muslim population constituted 14.4 percent of the total population, or 176.1 million, the second largest Muslim population in the world behind Indonesia. The estimated population of Indonesia was 244.5 million in 2012, with Muslim population at 88.1 percent or 215.4 million, the highest in the world. Indonesias average annual growth rate was 1.17 percent during 2000-2011. Pakistan is the third largest country in terms of Muslim population at 172.5 million (96.4 percent), followed by

Bangladesh at 135.6 million (90.4 percent). The population growth of Pakistan and Bangladesh has remained 1.87 percent and 1.40 percent per annum respectively during 2000-2011. The Muslim population of Malaysia was found to be 18.4 million or 61.4 percent of the total population in 2010. The estimated Muslim population of other selected countries like singapore and Brunei Darussalam were 0.8 million (14.9 percent) and 0.2 million (51.9 percent) respectively. The average annual population growth rate of singapore has remained 2.25 percent during 200-2011, which was the highest among the selected countries.

THIs Is a sTuDy oF THe IsLaMIc socIaL FInance secToR In souTH anD souTHeasT asIa. IT Focuses on THe counTRIes In THIs RegIon WITH sIZaBLe MusLIM PoPuLaTIons - InDonesIa, InDIa, PaKIsTan, BangLaDesH, MaLaysIa, sIngaPoRe anD BRuneI DaRussaLaM. IT Is esTIMaTeD THaT THIs RegIon aLone accounTs FoR aBouT 720 MILLIon (45 PeRcenT) oF WoRLD MusLIM PoPuLaTIon oF aBouT 1.6 BILLIon.

| TAbLE 2.1: TOTAL POPuLATION, DENSITy OF POPuLATION AND PERCENTAgE OF MuSLIM POPuLATION

TOTAL POPuLATION (MILLION-2012)

PERCENTAgE OF MuSLIM POPuLATION (2010)*

ESTIMATED MuSLIM POPuLATION IN MILLIONS

BangLaDesH 150 90.4 135.6

BRuneI DaRussaLaM 0.4 51.9 0.2

InDIa 1223.2 14.4 176.1

InDonesIa 244.5 88.1 215.4

MaLaysIa 29.9 61.4 18.4

PaKIsTan 178.9 96.4 172.5

sIngaPoRe 5.4 14.9 0.8

Source: World Development indicators (2013), World Bank * accessed from http://www.guardian.co.uk/news/datablog/2011/jan/28/muslim-population-country-projection-2030#data

2.1 trenDS in econoMic aggregateS

This section focuses on broad socio-economic indicators for the region, such as economic growth, structure of the economies, employment, savings and investment, inflation, business environment and governance issues, which directly and indirectly affect the earnings and poverty levels of the households.

The seven countries under focus are diverse in their natural resources, population, geographic area and levels of economic development. Brunei Darussalam and singapore are very small compared to India and Indonesia. according to the World Bank classification of countries, Bangladesh is a low-income country; India, Indonesia and Pakistan are lower middle-income countries; Malaysia is upper middle income; while Brunei Darussalam and singapore are high-income countries.

2.1.1 economic growth

almost all the economies under study made economic progress over the last decade. The real gDP of Bangladesh, Indonesia and singapore almost doubled over the past decade, while the real gDP of India more than doubled during the same time period (see Figure 2.3). During 2000-2012, the economy of India grew at an average annual rate of 7.03 percent, which is the highest growth rate among the selected countries, followed by Bangladesh (5.93 percent) and singapore (5.61 percent). Indonesia experienced an average annual growth rate of 5.33 percent, while Malaysia and Pakistan registered a growth rate of 5.01 percent and 4.46 percent respectively during the same period. However, Brunei Darussalam recorded a low average annual growth rate of 1.56 percent during 2000-2012.

During the financial crisis that hit the global economy, Brunei Darussalam was adversely affected, and its growth rate was

just 0.15 percent in 2007. It further declined and became negative at (-)1.94 percent and (-)1.77 percent during the subsequent two years. Bangladesh was successful in keeping its growth momentum and was not affected by the crisis. similarly, Indonesia was not affected by the crisis. Malaysia and singapore recorded negative growth of (-)1.51 percent and (-)3.63 percent respectively during the crisis. The economy of Pakistan slowed down during the crisis. India, which was growing at about 9 to 10 percent annually during 2005-2007, slowed down and recorded a growth rate of 6.19 percent and 5.04 percent respectively in 2008 and 2009. However, the Indian economy picked up subsequently and experienced a growth rate of 11.23 percent in 2010 (see Figures 2.4 and 2.5). Bangladesh, India and Indonesia are expected to grow at average annual rates of more than 6 percent over the next 6 years, while Malaysia and Brunei Darussalam are expected to grow at average annual rates of 5.24 percent and 4.60 percent per annum respectively. The economy of singapore and Pakistan are expected to grow at average annual rates of 3.51 percent and 3.21 percent over the next 6 years.

| FIguRE 2.1: gDP PER CAPITA, 2011 (CuRRENT uSD)

Source: World Development indicators (2013), World Bank

0.00 10,000.00 20,000.00 30,000.00 40,000.00 50,000.00 60,000.00

Bangladesh Brunei India Indonesia Malaysia Pakistan Singapore

767.135 41,662.15 1,523.03 3,510.59 9,941.29 1,202.32 50,000.34

BANGLADESH

BRUNEI

INDIA

INDONESIA

MALAYSIA

PAKISTAN

SINGAPORE

| 26 27 |

Islamic Social Finance ReportRegion under Focus

| FIguRE 2.2: gDP IN bILLION uSD

| FIguRE 2.3: AvERAgE ANNuAL gDP gROwTh 2000-2012

| FIguRE 2.4: gDP gROwTh RATE 2000-2012 bRuNEI, INDONESIA, MALAySIA AND SINgAPORE


Source: World economic outlook (oct 2013), international Monetary fund

Source: World economic outlook (oct 2013), international Monetary fund

16.0014.0012.0010.008.006.004.002.000.00

-2.00-4.00

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

IndonesiaBrunei Darussalam Malaysia Singapore

5.932

1.555

7.028

5.328 5.014 4.459

5.62

Bangladesh Brunei Darussalam

India Indonesia Malaysia Pakistan Singapore

0.00 200.00 400.00 600.00 800.00 1000.00 1200.00

BANGLADESHBRUNEI

INDIAINDONESIA

MALAYSIAPAKISTAN

SINGAPORE

Bangladesh Brunei Darussalam India Indonesia Malaysia Pakistan Singapore

2011 88.55 7.02 1046.66 292.48 154.26 118.80 173.81

121.10 2005 61.39 6.65 658.55 207.89 118.22 94.36

2000 47.12 6.00 474.69 165.02 93.79 73.95 95.92

| FIguRE 2.5: gDP gROwTh RATE 2000-2012 bANgLADESh, INDIA AND PAkISTAN

| FIguRE 2.6: AgRICuLTuRE, INDuSTRy, AND SERvICES IN ThE 7 COuNTRIES FOR 2011


2.1.2. Structure of economies

The composition of gDP varies with the average income level of the countries. The contribution of the agriculture sector is low in the countries with higher per capita income compared to the countries with low per capita income. similarly, the relative contribution of services and industrial sectors is high in high-income countries compared to the low-income countries. The relative contribution of the agriculture sector to Pakistans gDP was the highest (22 percent) in 2011, followed by Bangladesh (18 percent) and India (17 percent). The relative share of the agriculture sector of the gDP of Indonesia and

Malaysia was 15 percent and 12 percent respectively in 2011. The value addition of the industrial sector to the gDP of Brunei Darussalam was found to be the highest (72 percent), followed by Indonesia (47 percent), Malaysia (40 percent), Bangladesh (28 percent) and India (27 percent) in 2011. However, the relative contribution of the services sector to the gDP of singapore was the highest (73 percent) among the countries under study in 2011. (see Figure 2.6)

12.00

10.00

8.00

6.00

4.00

2.00

0.00

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Bangladesh India Pakistan

Malaysia Bangladesh Brunei India Indonesia Singapore Pakistan 0%

20%

40%

60%

80%

100%

IndustryService Agriculture

| 28 29 |


2.1.3. Unemployment

In singapore, the unemployment rate as a percentage of total labor force has been low (on average 2.72 percent per annum) during 2000-2012 compared to the other countries under study. It is expected that the unemployment rate will remain at 2.08 percent during the coming 6 years. Brunei Darussalam and Malaysia experienced an unemployment rate of 3.85 and 3.37 percent per annum respectively during the same period, and is expected to be even lower at 2.7 percent and 3.16 percent respectively during 2012-2018. Indonesia and Pakistan recorded high unemployment rates during the last decade, which was on average 8.41 percent and 6.76 percent per annum respectively. Pakistan is expected to experience high unemployment in the future, at around 12 percent during 2012-2018. However, Indonesia is expected to reduce its unemployment rate to around 5.45 percent per annum over the subsequent 6 years. India experienced an unemployment rate of 3.5 percent in 2010, while Bangladesh registered an unemployment rate of 5 percent in 2009.

2.1.4. inflation

In the south asian countries, consumer prices were stable and low in the early years of the last decade, but started increasing after 2004. The economy of Pakistan was badly

hit by increasing consumer prices over the last decade. on average, inflation has been about 8 percent per annum during 2000-2011 and is expected to be in double digits in the following 6 years (2012-2018). During the same time period of 2000-2011, Bangladesh and India experienced an average inflation rate of about 6.3 percent per annum. (see figure 2.7 for annual trend) However, the rate is expected to be about 9 percent per annum for India and 6 percent per annum for Bangladesh during 2012-2018.

except for the year 2008, consumer prices remained low in Brunei Darussalam, Malaysia and singapore during the last decade. Brunei Darussalam experienced an inflation rate of less than one percent on average per annum, while Malaysia and singapore witnessed, on average, an inflation rate of about two percent per annum during 2000-2011. In Brunei Darussalam, consumer prices are expected to increase by 1.6 percent per annum over the period 2012-2018. singapore will register an inflation rate of about 3 percent per annum, while prices in Malaysia are expected to remain stable over the same period of 2012-2018. contrary to the general trend in southeast asia, Indonesia faced high and fluctuating inflation during the last decade, at an average rate of 7.65 percent per annum. since 2009, however, Indonesia has stabilized consumer prices compared to the previous years and its rate of inflation is expected to be about 5 percent per annum during 2012-2018. (see figure 2.8 for annual trend)

| FIguRE 2.7: INFLATION, AvERAgE CONSuMER PRICES, 2000-2011, bANgLADESh, INDIA AND PAkISTAN

Source: World economic outlook (2013), international Monetary fund

20

15

10

5

02000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Bangladesh India Pakistan

2.1.5. Savings and investments

according to the criterion laid down in the World Bank growth Report, countries need an investment of 25 percent or more of gDP for a sustained development.1 not all the countries under study meet this requirement. In Bangladesh however, gross investment stood at about 24.27 percent of gDP over the last decade and has met the required criterion in recent years. Its gross savings as a percentage of gDP has been on average about 27 percent per annum, which exceeded total investment. India has been successful in investing about 32 percent of its gDP per annum on average over the last decade with slight domestic resource deficit, which has been 30.55 percent of its gDP on average during the same period. Domestic resources (gross savings) have been declining over the last few years (see Table appendix 1). Pakistan registered low rates of investment and savings over the last decade, which affected the growth momentum of the country. The average investment and savings as a percentage of gDP has been about 18 percent and 16 percent per annum respectively over the last decade.

Indonesia has been successful in investing about 27 percent of its gDP per annum on average, with savings of about 29 percent per annum. Its investment and savings have been

increasing in recent years resulting in sustained economic growth. Despite sufficient domestic resource availability, Malaysia has not fared well in investing these resources over the past decade. Malaysia has invested on average about 23 percent of its gDP annually, while its savings were about 35 percent of its gDP. similarly, singapore has been saving on average more than 40 percent of its gDP annually, but its investment remained an average of about 24 percent per annum with unstable economic growth (see appendix Table 1).

2.1.6. income Distribution

Table 2.2 depicts income distribution in the region estimated by using the gInI index. Income distribution in Bangladesh marginally improved over the last decade. The decline in Bangladeshs gInI index from 33.46 percent in 2000 to 32.12 percent in 2010 is quite insignificant. The same is true for Pakistan and India. However, Indonesia and Malaysia experienced increasing income inequality during the last decade. In Indonesia income inequality increased from about 30 percent in 2002 to about 36 percent in 2010. as compared to other countries in the region, the income inequality in Malaysia is much higher, and it is increasing. The gInI Index for Malaysia increased from about 38 percent in 2004 to about 46 percent in 2009.

| FIguRE 2.8: INFLATION, AvERAgE CONSuMER PRICES, 2000-2011, bRuNEI, INDONESIA, MALAySIA AND SINgAPORE

Source: World economic outlook (2013), international Monetary fund

15

10

5

0

-5

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

IndonesiaBrunei Darussalam Malaysia Singapore

1 See World Bank 2008, the growth report

| 30 31 |


2.1.7. incidence of Poverty

all the countries experienced reduction in the incidence of poverty over the last decade. Bangladesh reduced the number of extremely poor, those earning under us$ 1.25 a day, from 58.59 percent in 2000 to 43.25 percent in 2010, while the percentage for the poor, those earning under us$ 2 a day, declined from 84.4 percent to 76.54 percent over 2000-2010. using the national poverty line, the incidence of poverty, which was about 49 percent in 2000 declined to about 32 percent in 2010. The incidence of rural poverty was much higher at 52.30 percent in Bangladesh compared to urban poverty at 32.20 percent in 2000. Ten years later, in 2010, rural poverty declined significantly to 35.16 percent and urban poverty to about 21 percent.

about 42 percent of the Indian population were found to be extremely poor (under us$ 1.25 a day) in 2005, but that declined to 33 percent in 2010. The percentage of poor (under us$ 2 a day) declined by about 7 percentage points from about 76 percent to about 69. Poverty estimates for India under us$ 1.25 and us$ 2 a day seem to be high compared to those under national poverty lines. under the national poverty line criteria, about 37 percent of Indian population were registered as poor in 2005, which declined to about 30 percent in 2010. Higher incidence of poverty (about 42 percent) was found in rural India (2005) compared to the urban poor (about 26 percent) in the same year. However, over 2005-2010, rural poverty declined by 8 percentage points compared to a 5-percentage point decline in urban poverty.

Indonesia recorded about 29 percent of its population as very poor and about 67 percent as relatively poor under us$ 1.25 a day and us$ 2 a day criteria respectively in 2002. In the same year, using the national poverty line, 18 percent of the Indonesian population were recorded as poor; 21 percent in the rural areas (using rural poverty line) and about 15 percent in the urban areas (using urban poverty line). Indonesia was

successful in reducing its poverty level to 12 percent overall; this translated to poverty levels of 15 percent in rural areas and to about 9 percent in urban areas in 2012.

Malaysia has been quite successful in fighting poverty. The incidence of poverty has been low. In 2004 only about 8 percent of the population were estimated as poor under us$ 2 a day, which has further declined to about 2 percent in 2009. However, using the national poverty line criteria, about 6 percent of the population were registered as poor; about 12 percent were estimated as poor in the rural areas under the rural poverty line, and about 3 percent were found to be poor in the urban areas under the urban poverty line in 2004. The country successfully reduced the incidence of poverty over 2004-2009. In 2009 about 4 percent of the overall population - about 8 percent in the rural areas and about 2 percent in the urban areas - were found to be poor. Poverty has declined even while the income gap has widened.

Pakistan has been experiencing high incidence of poverty. about 36 percent of its population were very poor (under us$1.25 a day) and 74 percent were relatively poor (under us$ 2 a day) in 2002. However, in the same year the percentage of poor was estimated to be about 35 percent under the national poverty line. The proportion of poor was 39 percent for the rural population and about 23 percent for the urban population. During 2002-2008, the incidence of poverty estimated under international poverty line, declined by 15 percentage points from 36 percent to about 21 percent. The poverty estimates under national poverty lines are available until 2006. During 2002-2006, the incidence of poverty witnessed an overall decline by 12 percentage points from 34.5 percent in 2002 to 22.3 percent in 2006. During the same time, rural poverty declined from about 39 percent to 27 percent and the incidence of poverty in the urban areas declined from about 23 percent to about 13 percent (see Table 2.3).

| TAbLE 2.2: INCOME DISTRIbuTION - gINI INDEx

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

BangLaDesH 3.46 33.22 32.12

InDIa 33.38 33.90

InDonesIa 29.74 34.01 35.57

MaLaysIa 37.91 46.00 46.21

PaKIsTan 30.39 31.18 32.74 30.02


Source: World Development indicators (2013), World Bank1: Poverty headcount ratio at $1.25 a day (PPP) (% of population)2: Poverty headcount ratio at $2 a day (PPP) (% of population)3: Poverty headcount ratio at national poverty line (% of population)4: Poverty headcount ratio at rural poverty line (% of rural population)5: Poverty headcount ratio at urban poverty line (% of urban population)

| TAbLE 2.3: hEAD COuNT RATIO 2000-2012

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

BangLaDesH 1 58.59 50.47 43.25

2 84.40 80.32 76.54

3 48.90 40.00 31.51

4 52.30 43.80 35.16

5 35.20 28.40 21.28

InDIa 1 41.64 32.68

2 75.62 68.76

3 37.20 29.80

4 41.80 33.80

5 25.70 20.90

InDonesIa 1 29.31 21.44 28.63 24.20 22.64 20.42 18.06

2 66.97 53.80 63.35 56.13 54.40 52.68 46.12

3 18.20 17.40 16.70 16.00 17.80 16.60 15.40 14.20 13.30 12.50 12

4 21.10 20.20 20.10 20.00 21.80 20.40 18.90 17.40 16.60 15.70 15

5 14.50 13.60 12.10 11.70 13.50 12.50 11.60 10.70 9.90 9.20 8.8

MaLaysIa 1 0.54 0.00 0.00

2 7.81 2.93 2.27

3 5.70 3.60 3.80

4 11.90 7.10 8.40

5 2.50 2.00 1.70

PaKIsTan 1 35.87 22.59 22.58 21.04

2 73.91 60.31 60.98 60.19

3 34.50 23.90 22.30

4 39.30 28.10 27.00

5 22.70 14.90 13.10

| 32 33 |


2.2 Potential of iSlaMic Social finance

In the face of large-scale poverty among Muslims of south and southeast asia, the role of Islamic social finance assumes great significance. given that the primary objective of Islamic social finance - zakah, awqaf, cooperative and not-for-profit microfinance - is to meet the needs of the poor and to make a dent on their ever-rising levels of poverty, it is important to scientifically estimate to what extent Islamic social funds may meet the resource requirements for poverty alleviation. We proceed first by estimating the resource gap for poverty alleviation and then measure the potential Islamic social funds that could be tapped to meet the resource gap.

2.2.1. estimating the resource gap for Poverty alleviation

The resource gap has been estimated by using the poverty gap index, which is defined as the mean shortfall below the poverty line, expressed as a percentage of the poverty line. The World Bank has used the recently updated poverty lines of us $1.25 a day in 2005 PPP terms for hard core poor and us $2 a day for the relatively poor respectively, which represents the mean of poverty lines found in the poorest 10 to 20 countries ranked by per capita consumption . This reflects the depth of poverty as well as its incidence. The poverty gap index does not provide the total income (consumption) shortfall explicitly. For this purpose, the estimated poverty gap indices based on international poverty lines of $ 1.25 a day and $ 2 a day respectively, have been converted into percentage of gDP for each country under study.

P1 , Where, n is total population, Z is poverty line and yi is the income (consumption) of the ith household. The poverty gap index has been re-arranged to get the absolute resource shortfall of the countries concerned.

P1 nZ

The resultant absolute values have been converted into percentage of gDP. The poverty gap indices under us$ 1.25 a day and us$ 2 a day were not available for Brunei Darussalam and singapore.

Table 2.4 shows that Bangladesh needed 7.57 percent of gDP to push its ultra-poor above us$ 1.25 a day and about 33 percent of gDP to push the relatively poor above us$ 2 a day. India required 2.39 percent of gDP for its ultra-poor and about 13 percent of its gDP for its poor. The resource shortfall to push the poor Muslims above us$ 1.25 a day and us$ 2 a day is estimated at 0.344 percent and 1.813 percent of gDP respectively. Pakistan required 1.62 percent of its gDP for ultra-poor and about 13 percent for its relatively poor. The resource shortfall for the Indonesian ultra-poor were estimated to be 0.35 percent of gDP, while for the relatively poor the same was about 3 percent of its gDP. Malaysia required only 0.02 percent of its gDP for the relatively poor.

2 For more precise estimates, national poverty lines and micro data of each country are required, which are not available Therefore, international poverty lines and the poverty gap indices measured in terms of the same are used for estimation.

| TAbLE 2.4: RESOuRCES gAP FOR POvERTy ALLEvIATION

COuNTRy yEAR RESOuRCE gAP % OF gDP AT $ 1.25 PER DAy

RESOuRCE gAP % OF gDP AT $ 2.0 PER DAy

BangLaDesH 2010 7.57 33.36

InDIa* 2010 2.39 (0.344) 12.59(1.813)

InDonesIa 2011 0.35 2.74

MaLaysIa 2009 0.00 0.02

PaKIsTan 2008 1.62 13.35

*Figures in brackets refer to estimates for Muslim population only

2.2.2. estimation of potential resources from zakah

The estimates for zakah potential of the countries under study are based on Kahf (1989) with some changes. Kahf (1989) estimated zakah potential using national Income accounts and his estimates of potential zakah were based on three different opinions of jurists regarding zakatable assets, which the author denoted as Z1, Z2 and Z3. Z1 was estimated in accordance with the majority traditional view according to which zakah is levied on agriculture, livestock, stock in trade, gold, silver and money. Z2 was based on the views of some contemporary Muslim scholars according to which zakah is payable on net returns of manufacturing concerns, rentals

of building and net savings out of salaries. Z3 was based on Malikite views, where the zakah base includes buildings and other fixed assets except those assigned for personal and family use.

It may be noted that zakah is collected from rich Muslims only and non-Muslim citizens are exempt from its payment. consequently, the gDP of each country under study has been adjusted by taking into account per capita income and the proportion of the Muslim population in each country. The average score of Zs has been applied as a proxy for the estimation of potential zakah collection for the countries in the region.

Table 2.5 depicts that zakah potential under Z1 varies from about 1 percent of gDP to 1.74 percent of gDP in the five predominantly Muslim countries. under Z2, potential zakah ranges from 2 percent of gDP to 3.71 percent of gDP, while under Z3 it ranges from 2.25 to 4.18 percent of gDP of these countries. The Muslim minorities in India and singapore can collect zakah in the range of about 0.26 percent to 0.65 percent of their gDP.

a juxtaposition of tables 2.4 and 2.5 provides a comprehensive picture of whether and to what extent the resource shortfall required for poverty alleviation may be met by potential zakah

collection. It reveals that resource shortfall in the case of Bangladesh is much higher than its potential zakah collection, while in the case of other Muslim countries resources needed for poverty alleviation can easily be provided by the potential zakah collection. Indian Muslims can generate enough resources (0.63 percent of gDP) for providing the resource shortfall (0.344 percent of gDP) to lift their ultra-poor out of poverty.

3 For review of literature see nasim shah shirazi (2006). Providing for the Resource shortfall for Poverty elimination Through the Institution of Zakat In Low Income Muslim countries, IIuM Journal of economics and Management, volume 14, number 1

| TAbLE 2.5: ESTIMATE OF ZAkAh POTENTIAL

COuNTRy yEAR Z1 % OF gDP Z2 % OF gDP Z3 % OF gDP

BangLaDesH 2010 1.63 3.48 3.92

BRuneI DaRussaLaM 2010 0.93 2.00 2.25

InDIa 2010 0.26 0.55 0.63

InDonesIa 2011 1.59 3.39 3.82

MaLaysIa 2009 1.11 2.36 2.66

PaKIsTan 2008 1.74 3.71 4.18

sIngaPoRe - 0.27 0.57 0.65

| 34 35 |


2.2.3. estimation of potential resources from waqf 4

The process of estimation of resources from waqf is more challenging due to gross absence of data in most countries. However, based on limited data available for two countries - India and Indonesia - the potential resources that may flow from awqaf assets can be estimated for these two countries.

according to a report on economic potential of awqaf assets in India5 , there are about 490,000 registered awqaf in India with a total area of about 600,000 acres and with a book value of about InR 60 billion. a good number of the awqaf properties are located in city centers and their current market value is many times more than their book value. The authors of the report argue: as the book values of the properties are about half a century old, the current value can safely be estimated to be several times more and the market value of the properties can be put at InR 1,200 billion (about us$ 24 billion). If these properties are put to efficient and marketable

use the

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