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icant Muslim population in 2007 interestingly observed that
20–40 per cent of respondents cited religious reasons for not
accessing conventional microloans and suggested Shariah-
compliant microfinance as a way “to expand access to finance
to unprecedented levels throughout the Muslim world.”
Islamic economists invoke the framework of Maqasid
al-Shariah (MaS), or the objectives of Shariah, to chart the
trajectory for finance in the Islamic world. It is interesting
to note that many SDGs clearly align with the objectives of
Shariah. According to Shariah, human beings, as vicegerents
of God, have the mission of faithfully observing the values
given by their creator. They may utilize the scarce resources
of the planet as trustees and must interact with each other
in accordance with rules with a view to not only ensuring
the well-being of all humans but also, protecting the envi-
ronment, including animals, birds and insects. A clearly
articulated objective of the Shariah is preservation of wealth
(
maal
) that includes natural resources and the environment
and it calls for avoidance of excess (
israf
) and balanced use
of resources. Pioneering research by the Islamic Research
and Training Institute (IRTI) has demonstrated the align-
ment of the SDGs with the MaS framework, and argued that
MaS-driven Islamic finance, therefore, would work towards
achieving the SDGs.
Contemporary Islamic finance as it has evolved over the
last four decades has focused on the commercial banking,
insurance and capital markets. The emphasis on the for-profit
modes and institutions has led to an increasing concern that
the sector may be experiencing a mission drift. This has
led to calls for responsible finance as well as reversion to
Maqasid-driven Islamic finance. This would imply greater
concern for alleviation of poverty and hunger as well as envi-
ronmental stewardship.
The IsDB Group as a development finance institution
is perhaps an exception that has incorporated social and
environmental themes as the basis for many of its strategic
priorities, which include:
• Inclusiveness and solidarity focus in addressing the needs
of poorer and marginalized communities
• Connectivity for growth-promoting cooperation among its
member countries
• Promoting the development of the Islamic financial sector.
For the purpose of climate change management, IsDB has,
in the past, funded a mix of both adaptation and mitigation
projects. Investments in such projects, e.g. climate-smart
agriculture, and clean and renewable energy, have increased
exponentially over the years. It has employed a mix of
grants, not-for-profit and for-profit mechanisms to finance
such projects. The Islamic Research and Training Institute, a
member of the IsDB Group, recognized early that the Islamic
social finance sector comprising
zakah
,
awqaf
, mutual and
not-for-profit components needs a strong fillip and must not
lag behind the mainstream Islamic banking, insurance and
capital markets. To this end, IRTI has embarked on produc-
ing periodic reports on the sector focusing on specific
regions. So far, it has covered over twenty countries in three
regions – South and South East Asia, Sub-Saharan Africa and
Central Asia – and the annual Islamic Social Finance Reports
offer significant insights into the status and challenges facing
the Islamic social finance sector.
SDGs and role of Islamic social finance
Islamic social finance refers to institutions and instruments
of Islamic philanthropy, e.g.
zakah
,
sadaqah
and
awqaf
, as
well as those of not-for-profit Islamic finance, e.g.
qard
and
kafala
. These occupy a central position in the Islamic scheme
of poverty alleviation. The broad term for philanthropy in
Islam is
sadaqah
, and when compulsorily mandated on an
eligible Muslim, it is called
zakah
. When
sadaqa
results in
a flow of benefits that are expected to be stable and perma-
nent (such as, through endowment of a physical property),
it is called
sadaqa jariya
or
waqf
.
Zakah
is the third among
five pillars of Islam and its payment is an obligation on the
wealth of every Muslim based on clear-cut criteria. Rules of
Shariah are fairly clear and elaborate in defining the nature
of who are liable to pay
zakah
, at what rate it must be paid
and who can benefit. There is total flexibility with respect to
beneficiaries of voluntary
sadaqa
and
waqf
.
Qard
refers to interest-free loans while
kafala
refers
to uncompensated guarantee. Islamic microfinance that
advocates use of such cost-less funds to absorb high admin-
istrative and operational costs associated with financing the
poor is widely believed to resolve the issue of affordability in
microfinance and bring financial services within the reach of
the poorest of the poor.
In the area of climate finance,
zakat
can play a similar role
in absorbing the incremental costs with clean technologies
where subsidies are not forthcoming to absorb the same. For
zakat
funds to be used for the purpose, an additional condi-
tion has to be met, i.e. the beneficiaries must be poor.
The institution of
waqf
can play a major role in climate
finance. Along with
zakat
and
sadaqa
it can certainly help
in coping with humanitarian crises resulting from climate
change.
Awqaf
-like foundations may directly engage in the
Use of Zakat for a guarantee institution
The concept of guarantee is well-established in Islamic law.
In the contract of
kafala
, a party accepts to guarantee or take
responsibility for a liability of another party. However, it is an
uncompensated contract in Islamic law and the capital needed
for creating a
kafala
-based institution cannot be sourced from
mainstream for-profit modes. Theoretically,
zakat
funds may be
used to clear the liability of an indebted party. Indeed, the law
of
zakat
identifies eight categories as potential beneficiaries. Of
these, the indebted (
gharimeen)
, have traditionally received an
insignificant part of
zakat
proceeds, with the bulk being directed at
the poor and the needy.
In perhaps the first documented example of the organized
utilization of
zakat
for the
gharimeen
, a security portfolio was
created through a partnership between the body for
zakah
management in Sudan (
Diwan zakah
) and the Sudanese
commercial banks engaged in microfinance. The portfolio has a
capital of GBP 200m with 25 per cent contributed by the
Diwan
zakah
and the balance by the banks. The portfolio provides an
insurance to the microfinance programme against genuine defaults
by clients at the second level. At the first level, the default is
covered by individual personal guarantor(s) brought in by the client.
The portfolio covers all productive sectors, commercial, agricultural
and vocational, across Sudan.