IsDBI’s Pioneering Work Highlights How Islamic Social Finance Can Help End Poverty

15 Jan, 2020

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Islamic Finance has steadily evolved over the last several decades with the spotlight shifting from Islamic commercial banking, insurance, investment funds and financial markets to Islamic social finance. However, the focus has often remained on the former, the for-profit segments of the Islamic economy. Studies and estimates for the Islamic financial services sector have traditionally excluded the Islamic social, philanthropy-driven and not-for-profit segments and focused on Islamic banks accounting for the bulk (nearly 80 percent) of global assets with the Islamic financial services sector. The other components under focus include: sukuk (15 percent), Islamic investment funds (4 percent), and Islamic insurance (1 percent). A steady double-digit growth in these sectors has also resulted in Islamic Finance maturing as a discipline with a proliferation in the number of teaching and research programs across the globe focusing on Islamic commercial banking, Islamic funds, sukuk, Islamic capital markets, and takaful.

The Islamic Development Bank Institute (IsDBI) of the Islamic Development Bank Group, however, noted quite early that there has been a gross imbalance in resources committed to research and documentation relating to the Islamic social, philanthropy-based and not-for-profit sector. There were not many initiatives around to strengthen and mainstream this component of the Islamic financial services sector. The concern about this imbalance led IsDBI to embark on a multi-year project that resulted in publication of the annual Islamic Social Finance Reports (ISFR). IsDBI launched the maiden issue of ISFR in February 2014. It was the first ever publication to use the term “Islamic social finance” to describe the Islamic philanthropy-based and not-for-profit sector. The report, focusing on the zakah, awqaf and microfinance institutions in South and South-East Asia, brought to the fore some mind-boggling facts. A small upward push in zakah and waqf mobilization in many countries could generate enough funds to meet the resources gap for poverty eradication. Such resource raising was also a clear possibility, given that countries that were proactive in reforming their respective Islamic social finance sectors were also the ones with steady double-digit growth rates in the flow of social funds.

Soon, IsDBI’s pioneering efforts in underlining the significance of Islamic social finance led to a number of forums, seminars and conferences being organized around the theme. In a meeting of the Governors of Central Banks and Monetary Authorities of the OIC Member States, in Surabaya, Indonesia on 6 November 2014, the OIC Secretary General called for the rejuvenation of Islamic social finance (i.e. zakah and waqf) for the purpose of mobilizing adequate resources to address the problems of financial exclusion, poverty and unemployment among the vulnerable groups of population in OIC countries. Based on the deliberations, the meeting adopted its communique containing a set of recommendations to further increase intra-OIC cooperation in this domain.

The second issue of ISFR released in March 2015 contributed further to bridging the information gap relating to the sector. It focused on zakah, awqaf and not-for-profit microfinance sectors in selected countries in Sub-Saharan Africa, including Sudan, Nigeria, Kenya, Tanzania, Uganda, Mauritius and South Africa. In October 2017, the third issue of ISFR was released. This issue of the report analyses the Islamic social finance sector in the Russian Federation, Kazakhstan, Kyrgyzstan, Tajikistan, Bosnia and Herzegovina, and Macedonia. The forthcoming fourth issue of ISFR, to be released in 2020, will focus on countries in North and West Africa.

Barely a year after the launch of the second issue of ISFR, in May 2016, a special session at the first ever World Humanitarian Summit, organized by the UN at Istanbul, was dedicated to the theme, “Islamic Social Finance as a New Alternative for Humanitarian Financing.” The speakers at this session, including the Sultan of Perak, OIC Secretary General, IsDB President, and experts from the World Bank, UNDP, WFP and other international agencies, acknowledged the significance of this sector. They called for efforts to strengthen the sector to significantly enhance its contribution to humanitarian financing. The summit also witnessed the launching of a seminal document “Core Principles for Effective Zakah Supervision”, an outcome of a collaborative initiative by IsDBI , Bank Indonesia and the National Board of Zakah of Indonesia, to develop core principles of supervision and management, uniform standards and performance indicators for the zakah sub-sector. Among the other documents produced under this initiative are: Technical Notes on (i) Good Amil Governance and (ii) Risk Management for Zakah Institutions. A document on “Core Principles for Awqaf Supervision” is currently in advanced stage of preparation. Theses principles and standards are expected to significantly contribute to mainstreaming of the Islamic social finance sector.

IsDBI has sought to build the capacities of zakah and awqaf institutions by organizing and conducting events – research conferences, workshops, seminars and training programs on related issues year after year. It has developed and published training packages in the areas of zakah and awqaf management in order to assist and enable such institutions conduct in-house and external training by themselves.

Given the archaic nature of and diversity witnessed in waqf laws across countries, IsDBI has led efforts to develop a model law of waqf for Muslim countries. The model law has already formed the basis of waqf legislation in Senegal and is being consulted by a few countries that plan to have dedicated waqf laws. In the field of zakah, IsDBI has helped Maldives design a legal framework for zakat mobilization and distribution in recent years.

Dr. Mohamed Obaidullah, Lead Economist at IsDBI , has been leading the ISFR project since inception. He explains the successes of IsDBI’s work in the Islamic Social Finance sector: “IsDBI , as part of its flagship research and publication program, has dedicated significant resources to publication in the field of Islamic social finance. Since inception, IsDBI has produced as many as 26 books and monographs and 30 policy/working papers relating to zakah, awqaf and Islamic microfinance in multiple languages. Indeed, due to the pioneering efforts of IsDBI , Islamic social finance is now firmly etched as the new paradigm that reflects the objective and spirit of Islam, perhaps far better than the for-profit financial institutions and markets.” The IsDBI ISFR project will continue to take stock of the Islamic social finance sector by focusing on other regions in the subsequent studies.


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