Islamic Economic System and Poverty Reduction

Dr. Saif Siddiqui, Assistant Professor, Centre for Management Studies, Jamia Millia Islamia (A Central University),  New Delhi – 110025 , India

Abstract

Poverty is an economic condition of lacking basic necessities needed to live a reasonable life. This includes need for money, food, water, education, and shelter. Poverty reduction is a process, aiming to reduce the level of poverty in a group of people or countries. World Bank suggests that poverty can be reduced by various means and methods, which includes economic growth (increase in income and living standard) and direct aid / private charity.

World so far has followed two economic systems, communism and capitalism. The communism was based on an emotional reaction against evil consequences of the capitalist economy, specially, against the element of inequitable distribution of wealth. But capitalism prevails, which still suffer from inequities in the distribution of wealth. The world needs a Third Economic System. Elements of Islamic Economic System involve: financing /trading, Zakat and Interest free loans. Even poor persons, with some credibility, can survive in this economic system. Islamic economics prefers co-operation to competition. . This aspect of co-operation is a key to poverty reduction. It is possible to reduce poverty by following Islamic economic system because it takes care of society and social justice.

Keywords: Islamic Economic System, Poverty Reduction JEL Classifications: P51

Electronic copy taken from: http://ssrn.com/abstract=1332618

Islamic Economic System and Poverty Reduction

Poverty is an economic condition of lacking basic necessities needed to live a reasonable life. Basic necessities include money, food, water, education, and shelter. Poverty reduction (or poverty alleviation) may also be describe as a process which aims to reduce the level of poverty in a group of people or countries. The World Bank defines extreme poverty as living on less than US$ 1 per day, and moderate poverty as less than $2 a day. It has been estimated that in 2001,

1.1 billion People had consumption levels below $1 a day and 2.7 billion lived on less than $2 a day. The proportion of the developing world’s population living in extreme economic poverty has fallen from 28 percent in 1990 to 21 percent in 2001.

Some of the popular methods for poverty reduction as suggested by World Bank are:

• Economic growth (increase in income and living standard)
• Direct aid / private charity,and

Poverty is prevalent in all types of economic systems (capitalism and communism) due to their inherent shortcomings.

Is it possible to reduce poverty by following the islamic economic system ? Islamic And Other Economic Systems Mufti Taqi Usmani once opined at the International Conference of the World Muslim Congress that:

“The twentieth century has witnessed the rise of communism and the conflict between capitalist and communist countries and lastly the fall of communism. The communism was based on an emotional reaction against some evil consequences of the capitalist economy, specially, against the element of inequitable distribution of wealth, which has been experienced in the capitalist countries throughout the centuries. The capitalist economies still suffer from inequities in the distribution of wealth. There is still a large gap between the haves and the have-nots and ‘poverty in the midst of plenty’ is still the major problem of their economy. These are the real problems created by capitalism and unless they are satisfactorily solved, it may give birth to another reaction that may be more aggressive than communism.

The world, therefore, is badly in need of a Third Economic System. The Muslim Ummah can work out this system based on the Islamic norms”

J.R. Presley wrote in his book, directory of Islamic financial institutions, that, western financing (with interest) have allowed individual enterprises, countries and even part of the world to rise to a debt level which are beyond their capacity to repay. H.I. Leibling in his book, U.S. Corporate profitability and capital formation, also says that,’’ in US the main reasons of secular decline in the growth of capital stock has not been the lack of aggregate demand but higher interest’’

The third economic system is a system as taught by the The Holy Qur’an and Sunnah of the Prophet (PBUH), which is capable of solving the economic problems being faced by the world today. Benefits of this system, which combine the benefits of both communism and capitalism, are:

1. Private ownership and market economy,
2. Profit motive
3. Justice in distribution, and
4. Elimination of inequities

These benefits are related to the methods of poverty reduction as stated earlier. Economic growth is possible with private ownership; aid or charity can be a symbol of justice in distribution, which may eliminate inequities also.

Islamic economic system not only allows the market forces of demand and supply but also provides mechanism to keep them operative with their natural momentum without creating monopolies and concentration of wealth.

It is known that production; consumption and distribution are three basic functions of economics. Islam, which teaches justice and equality, clearly puts these functions as follows:

Production function:

1. Demand/ supply of prohibited goods should fall to zero
2. Production of luxury goods be checked
3. Producers should not maximize profits
4. Competition among producers should be healthy

Consumption function:

1. Prohibited goods cannot be consumed.
2. Consumption cannot be extravagant
3. Consumption should lead to an efficient and pure life
4. Every individual should consume enough goods to lead a reasonable life

Distribution function:

1. Prices should be reasonable, neither too high nor too low
2. Interest must not be paid
3. Wealth concentration should be avoided

These basic functions also provide a socialistic approach of Islamic economics, which help in reducing poverty. This system gives an opportunity to persons with lesser income to live a reasonably dignified life. As a matter of morality, Islamic economics prohibits speculative transaction and forward trading to avoid circumstances of instability. S.J. Phansalkar in his book, how not to ruin your small industry, also concluded that.’’ speculative transaction are not in favour of entrepreneurs’’

Elements of Islamic Economics

Elements of Islamic economics involve:

1. Islamic mode of financing /trading
2. Zakat
3. Interest free loans

1. Islamic Mode of Financing /Trading

Mudarabah (capital trust)

Mudarabah is a special kind of partnership in which one partner gives money to another for investing it in a commercial enterprise. The investment comes from the first partner who is called “rabb-ul-mal”, while the management and work is an exclusive responsibility of the other, who is called “mudarib. Mudarabah may take two different forms:

Al-mudarabah al-muqayyadah (restricted mudarabah)

The rabb-ul-mal may specify a particular business for the mudarib, in which case he shall invest the money in that particular business only.

‘Al-mudarabah al-mutlaqah” (unrestricted mudarabah)

The mudarib shall be authorized to invest the money in any business he deems fit. It is necessary for the validity of mudarabah that the parties agree, right at the beginning, on a definite proportion of the actual profit to which each one of them is entitled.

Musharaka (Islamic partnership)

Musharaka can be defined as a “form of partnership where two or more persons combine their capital or labour together, to share the profits, enjoying similar rights and liabilities” It is a limited period contractual agreement between the partners, to use both human and financial resources and distribute whatever profit and loss they make in accordance with capital and human resources invested.

In such a kind of Islamic partnership, partners need not have equal shares, or equitable responsibility for the management. Losses would be shared in accordance with capital contribution. It is not only the contribution of capital that governs Musharaka in Islam. In practice labour, skills, management, goodwill, credit-worthiness and contacts can also form the partners’ contribution.

Murabahah (mark up sale)

Murabahah is a kind of sale where the seller mentions the cost of the sold commodity he has incurred, and sells it to another person by adding some profit thereon. Thus, Murabahah is not a loan given on interest; it is a sale of a commodity for cash/deferred price.

The Murabahah may involves purchase of a commodity by a bank on behalf of a client and its resale to the latter on cost-plus-profit basis Murabahah is a mode of financing as old as Musharakah. Today in Islamic banks world-over 66% of all investment transactions are through Murabahah.

A simple sale in Arabic is called Musawamah – a bargaining sale without disclosing or referring to what the cost price is. However when the cost price is disclosed to the client it is called Murabahah. A simple Murabahah is one where there is cash payment and Murabahah Muajjal is one on deferred payment basis.

Ijara (Islamic leasing)

Ijara is an Islamic form of leasing. Here the bank buys capital equipment or property and leases it out under installment plans to end-users. As in conventional leasing there may be an option to buy the goods at the end of the Ijara built into the contracts .The installments consist of rental for use and part-payment.

The customer selects the asset to be financed and the bank then purchases it from the supplier and leases it to the customer for an agreed period. Refinancing of assets owned by the client in a sale and leaseback arrangement is allowed under certain circumstances.

2. INTEREST FREE LOANS (Al-Qard al-Hasan)

Islam prefers a loan as a form of social service by the rich to help the poor. Islam does not recognize any loan with interest for the benefit of the debtor. M. Umer Chapra, an authority on Islamic economics, has given the definition of qard al hasan as: “Qard al-hasan is a loan which is returned at the end of the agreed period without any interest or share in the profit or loss of the business.” The receiver of qard al-hasan is only required to repay the original amount of the loan.

Economic objectives of qard al-hasan are:

1. The mobilization of wealth among all people in the society.
2. To strengthen the national economy.
3. To facilitate the poor to create new jobs market and business ventures by using their merits, skills and expertise.
4. It can remove social and economical discrimination from the society, and

Social objectives of qard al- hasan are:

1. To help needy peoples.
2. To establish better relationship among poor and the rich.
3. Non-Muslims, who might be attracted by knowing the beauty of Islam. There is a great reward in the Hereafter for giving qard al- hasan

Some verses in favour of interest free loan are mentioned as under:

He who will give Allah qard al hasan, which Allah will double into his credit and multiply many times. [Surah-Baqarah (2): 245]

Establish regular prayer and give regular charity and give Allah qard al hasan [Surah-Muzzammil 73): 20]

Prophet (PBUH) said, “In the night of the journey, I saw on the gate of heaven written, ‘reward for sadakah is ten times and reward for qard al-hasan is eighteen times’. So, I asked the angel, how is it possible? The angel replied, “Because beggar who asked had already had something but a loanee did not ask for loan unless he was in need.” [Ibn Hisham & Ibn Majah].

M.G. Bokare former VC of Nagpur university has written in his book, Islamic economics, that.’’ Many social thinkers other than Marx, in the period of ethos of socialism had expressed their views in the favour of interest free capital in economy. These are G.D.H. Cole, William Petty, Lousie Blanqui, Sismondi and Ferdinand Lasalle.’’ It is not surprising that inspired by the benefits of qard al hasan, Jews has also established an association namely; Jewish Free Loan Association in USA. In bible following verses can be found:

[God says] “If you lend money to any of my people with you who is poor, you shall not be to him as a creditor, and you shall not exact interest from him” Exodus (22:25)

“You shall not lend upon interest to your brother, interest on money, interest on victuals, interest on anything that is lent for interest. To a foreigner you may lend upon interest, but to your brother you shall not lend upon interest; that the Lord your God may bless you in all that you undertake in the land which you are entering to take possession it.” Deuteronomy (23:19-20)

In Vedic literature too condemnatory remarks on interest can be traced. Rig Veda says, ‘’ save us from usurers’’. Atharva Veda prays.’’ Let us die with debt so that our children do not carry our burden’’.

3. ZAKAT

The word Zakat means ‘purification. It is the amount of money that every mentally and financially able, free adult, Muslim, male and female, has to pay to support specific categories of needy people. Islam believes that all things belong to God, and that wealth that is held by human beings is a mere trust. .It can be purified by distributing a prescribed proportion for those in need.

“The alms are only for the poor and the needy, and those who collect them, and those whose hearts are to be reconciled, and to free the captives and the debtors, and for the cause of Allah, and (for) the wayfarers; a duty imposed by Allah. Allah is knower, Wise.” [Surah - Tauba (9): 60]

The prophet (pbuh) said: “Any owner of gold and silver who does not deliver from them their right, on the Day of Quiyamah (Day of Judgment), (the gold and silver) will be shaped as foils of fire. Then it will be heated in the fire of Hell; (and) then with it he will be ironed on his side, his forehead, and his back”(Muslim)

Zakat is obligatory after a time span of one lunar year (approximately 355 days) passes with the money in the control of its owner. Then the owner needs to pay 2.5% (or 1/40) of the money as Zakat. The owner should deduct any amount of money he or she borrowed from others Poverty reduction through Islamic economics Islam hates state of poverty due to accompanying one hundred and one evils with such a person. Dr. M. Nijatullah Siddiqui has written clearly in his book, economic enterprise in Islam,that “poverty is not a desirable state in the eyes of Islam but love of worldly wealth is also a source of evil.” It shows that a person should rise from the level of poverty but must keep only that much wealth that is sufficient to carry him and his dependents. The surplus or a predetermined share should be distributed among poor.

The Prophet (PBUH) once said that “when Allah gives you in plenty be liberal in your livings”. These words can be analyzed with a simple principle of economics that rise in expenditure can boost the economy. In simple words, demand for a new dress by a richer person provides work for weaver, tailor and cobbler. Demand for good food by him may provide employment to a cook.

The Prophet (PBUH) also said that” your faith is not complete till you like the same for your brother as you like for yourselves”. He also mentioned that “I testify that all Muslims are brethren” It can be concluded that Islam prefers co-operation over competition among Muslims. This aspect of co-operation is a key to poverty reduction. Islamic trading, qard- al hasan and zakat, all are based on the co-operation theory. Even poor persons, with some credibility, can opt Islamic form of financing

Conclusion

Two methods suggested by World Bank to reduce poverty, are integral part of Islamic economics. But it is largely in theoretical form for which no consistent example is available.

Most of the Muslim countries do not follow the basics of Islamic economy. Some of them have given a modest start in the form of Islamic banking, but others are still following the capitalist system, which has made the economic atmosphere much worse than that of the developed capitalist countries. Some countries like Malaysia are following a dual system, based on both Islamic and conventional economics.

Shariah have given the clear cut Islamic principles that could have reduced poverty and the inequities existing in Muslim countries and others. Islamic economic principles provide answers to every economic problem with a human touch. Muslim world has to restructure their economic system on the basis of The Holy Qur’an and Sunnah to provide a living example. If the principles of Islamic economy are implemented sincerely, the third economic system can overshadow the prevailing system.

Lastly, it is said that it is possible to reduce poverty by following Islamic economic system because it take care of society and social justice , which is ignored by western economy. It is the system, that says:

‘’He who sleeps on a full stomach whilst his neighbour goes hungry is not one of us.”      (Saying of Prophet Muhammad PBUH)

“Allah will deprive usury of all blessing, but will give increase for deeds of charity” [Surah-Baqarah (2): 276]

“If the debtor is in a difficulty, grant him time till it is easy for him to repay. But if ye remit it by way of charity, that is best for you if ye only knew.” [Surah-Baqarah (2): 280]

Islam, Poverty and Micro Finance “Best Practices”

By Dr Mohammed Obaidullah

How does one go about reducing poverty levels and providing micro finance (MF) in Muslim societies? How does one make a choice between the Islamic model of MF and the MF “best practices” that reflect wisdom and lessons learnt from decades of “real life” MF experiments. The former is normative and largely an untested proposition in the context of a modern economy, notwithstanding a small number of recent experiments. The latter, on other hand, as proponents claim, are well-experimented and well-documented and made widely available among the global MF community. A significant contributor to this exercise has been the Consultative Group to Assist the Poor (CGAP), a multi-donor consortium dedicated to advancing micro-finance. CGAP envisions a world in which poor people everywhere enjoy permanent access to a range of financial services that are delivered by different financial service providers through a variety of convenient delivery channels. It is a world where poor and low-income people in developing countries are not viewed as marginal but, rather, as central and legitimate clients of their countries’ financial systems. In other words, this vision is about inclusive financial systems, which are the only way to reach large numbers of poor and low-income people. As a way forward to realize this vision, CGAP has come up with a set of key principles of MF that together constitute the essence of “best-practices” MF.

These principles broaden the definition of MF from micro-credit to provision of an array of financial services, such as, savings, insurance and remittance as a panacea for the poor and the under-privileged to move out of poverty into a state of increasingly better standard of living. The principles advocate free pricing of the services. They emphasize that access to MF and not cost of MF should be under focus in designing and implementing a poverty alleviation strategy. The strategy should aim at sustainability through a shift from a charity-based donor-dependent approach to a market-based for-profits approach emphasizing systemic efficiency and transparency and restricting use of donor funds to temporary support in the initial stage of an MFI and capacity building. Recent writings advocate use of charity for providing social safety nets for the extremely poor who are unbankable and therefore, unserved by the for-profit MFIs. The principles also underscore inclusiveness and integration of MF with the formal financial system.

How should one deal with poverty under Islam? All principles or laws in Islam owe their origin to its holy book – the Quran and the sayings and deeds of its Prophet (peace be upon him) encapsulated in books of Hadith. Consider this saying of the Prophet (peace be upon him) that forcefully drives home the central message of Islam regarding poverty, “Poverty is almost like disbelief in God.” On another occasion the Prophet (peace be upon him) is reported to have said “There is no asceticism in Islam”. Islam views poverty to be a curse to be eradicated through productive efforts unlike some world religions and philosophies (such as, Sufism) that celebrate asceticism. There is therefore, a convergence between the objectives of Islam and the avowed aims of “best practices” MF.

While poverty eradication remains the cherished goal of Islam and MF “best practices” is there a degree of commonality too in their approaches and strategies to poverty alleviation? Lessons from real-life experiences reflected in the “best practices” MF indicate a dual approach – use of charity as well as “for-profit” micro finance. At the same time, donor funds should complement private capital, not compete with it. The charity-based approach should be restricted to either providing temporary start-up support designed to get an institution to the point where it can tap private funding sources, or devoted to capacity building to take care of the shortage of strong institutions and managers. A charity-based approach is also needed for providing social safety net to the extremely poor and the destitute and therefore, unbankable.

How does the above compare with the Islamic approach to dealing with the poor and alleviating poverty?

Zakat and sadaqah as instruments of charity occupy a central position in the Islamic scheme of poverty alleviation. Zakat is the third among five pillars of Islam and payment of Zakat 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 Zakat and who can benefit from Zakat. The first and foremost category of potential beneficiaries is the poor and the destitute. A greater degree of flexibility exists with respect to beneficiaries of sadaqah.

The primary issue with Zakat and sadaqah-dependent institutions is the issue of sustainability as they are essentially rooted in voluntarism. Funds mobilized through charity could fluctuate from time to time and may not lend themselves to careful planning and implementation.

The issue of sustainability is addressed in the institution of awqaf through creation of permanent and income-generating physical assets. Awqaf has historically been the major vehicle for creating community assets. There are however, restrictions on development and use of assets under waqf for pre-specified purposes that introduce rigidity into the system.

While Islam strongly encourages charity from the giver’s point of view, it seeks to minimize dependence on charity from the beneficiary’s point of view and restricts the benefits to flow to the poorest of poor and the destitute, who are not in a position to generate any income and wealth.

A famous hadith not only underscores the above, but also demonstrates how to design and implement a strategy of poverty alleviation. The essence of the hadith is broken down into numbered statements so as to highlight the key principles and components of the strategy that follows from the hadith.

A man of the Ansar community came to the Prophet (peace be upon him) and begged from him. (#1) He (the Prophet) asked: Have you nothing in your house? He (the man) replied: Yes, a piece of cloth, which we wear, or which we spread (on the ground), and a wooden bowl from which we drink water. (#2) He (the Prophet) said: Bring them to me. He (the man) then brought these articles to him and he (the Prophet) took them in his hands and asked to the assembly of people: Who will buy these? A man said: I shall buy them for one dirham. He (the Prophet) asked twice or thrice: Who will offer more than one dirham? Another man said: I shall buy them for two dirham. (#3) He (the Prophet) gave these to him and took the two dirham and, giving them to the man of the Ansar, he said: Buy food with one of them and hand it to your family, and buy an axe and bring it to me. (#4) He then brought it to him. The Prophet (peace be upon him) fixed a handle on it with his own hands (#5) and said: Go, gather firewood and sell it, and do not let me see you for a fortnight. (#6) The man went away and gathered firewood and sold it. When he had earned ten dirham, he came to him and bought a garment with some of them and food with the others. (#7) The Prophet (peace be upon him) then said: This is better for you than that begging should come as a spot on your face on the Day of Judgment. Begging is right only for three people: one who is in grinding poverty, one who is seriously in debt, or one who is responsible for compensation and finds it difficult to pay. (Sunan Abu Dawood, Kitab al-Zakat, Book 9, Number 1637)

The components of this hadith can be seen to emphasize the following fundamental conditions of a successful micro-finance program:

#1. Access of the poorest of the poor to the program:

The Prophet (peace be upon him) was the spiritual as well as the political leader of the Muslims and he was accessible to the poor and the needy at all times for economic and financial assistance;

#2. Careful assessment of the financial health of the poor; enquiry blended with empathy; insistence on contribution and beneficiary stake:

Many failed MF programs owe their failure to inadequate evaluation of the client’s financial condition. Provision of micro finance does not stand to reason for a person in need of social safety nets resulting in the funds being consumed away instead of being invested. The poor come in disparate categories with varying needs of consumption and productive investment and risk of delinquency and default. Micro-finance programs involving indiscriminate funding of the poor, such as, most government-managed ones are destined to fail. This is one of the cornerstones of MF “best practices” that assert the government should have no role in direct or indirect provision of financial services and its role should be restricted to providing a supporting and enabling environment. Insistence on beneficiary stake is of course, a device to reduce moral hazard and enhance efficiency.

#3. Transformation of unproductive assets of the beneficiary into income generating ones through rigorous valuation (on the basis of price discovery through auction method); Involvement of the larger community in the process:

Often the poor own high-market-value assets, such as, land in a prime city location without being able to derive income or benefit from the asset. While ownership of land does provide them with a bulwark against unforeseen adversities, this is an uneconomical and wasteful method of insurance. What is desirable here is a way to transform the unproductive asset into a productive one that could generate income. The original asset is not lost but transformed into an income-generating one.

The price at which the original asset is disposed of must be fair and should not take the form of a distress sale resulting in loss of value to the seller. Contemporary finance theorists find the auction system to be the most efficient process of discovery of the intrinsic worth or the fair price.

The involvement of larger community in the poverty alleviation program is also highly desirable for success of the program. For many contemporary successful MFIs, the right strategy is to involve grass-root NGOs in the process.

#4. Meeting of basic needs on a priority basis and investment of the surplus in a productive asset:

Once again this highlights the need to take into account the consumption needs of the clients before expecting them to create wealth. The realization about the need for a social safety net and to link the same to micro finance at a later stage has come only recently in the MF industry.

#5. Direct involvement of the program in capacity building in the run-up to income generation and technical assistance to the beneficiary; Commitment of top management of the program:

This part of the hadith demonstrates a unique form of commitment and involvement on the part of the Prophet (peace be upon him) in the program of poverty alleviation. The involvement could not be more direct and the commitment more pure.

#6. Technical assistance in the form of imparting requisite training to the beneficiary for carrying out the business plan/ income-generating project; monitoring through a time-bound schedule and impact assessment through a feedback mechanism:

The need to establish an effective linkage between financial assistance and technical assistance is emphasized among MF professionals as never before. Also the importance of impact assessment can be hardly overemphasized.

#7. Transparent accounting of operational results and liberty to use part of income to meet higher needs.

In short, the Islamic approach to poverty alleviation is more inclusive than the conventional one. It provides for the basic conditions of sustainable and successful microfinance, blending wealth creation with empathy for the poorest of the poor. There are certain aspects of the Islamic approach that need added emphasis.

One, transparency through meticulous accounting and proper documentation is a fundamental requirement of financial transactions in the Islamic framework. As the holy Quran asserts:

“O ye who believe! When you deal with each other, in transactions involving future obligations in a fixed period of time, reduce them to writing” and “Let a scribe write down faithfully as between the parties” (2:282)

The import and significance of this verse is often not fully understood. Indeed, lack of proper documentation and accounting by beneficiaries is a major challenge confronting microfinance. Proper accounting and accurate measurement of results of operations or profits is a pre-requisite for profit-sharing based mechanisms. They are no less important for lending operations. Indeed MF “best practices” emphasize on documentation and transparency as a fundamental requirement for success of any MF project.

Two, as discussed earlier, a common feature of successful microfinance experiments is group-based financing and mutual guarantee within the group. This is a highly desirable feature of Islamic societies. Mutual cooperation and solidarity is a norm central to Islamic ethics. The second verse of Surah Al Maida in the holy Quran says:

“Assist one another in the doing of good and righteousness. Assist not one another in sin and transgression, but keep your duty to Allah” (5:2)

The following hadith by the Prophet (peace be upon him) reinforces this principle of cooperation and mutual assistance.

“Believers are to other believers like parts of a structure that tighten and reinforce each other.” (Al-Bukhari and Muslim)

Our discussion so far, has excluded the issue of product design. Conventional MF products are interest-based. Islamic MF products must be free from interest and several other elements forbidden under Islamic law. Contemporary mainstream Islamic finance has expended considerable effort in developing Shariah-compliant products and services for deposit mobilization, financing, remittance etc. using Shariah-nominate contracts that are free from the forbidden elements. These products with minor modifications if required can be used for MF as well. Islamic scholars strongly favor “free pricing” of these products and services as the same is a fundamental norm. It may be noted that MF “best practices” also argue against price ceilings, even though the justification provided may be quite different.

Based on the discussion above, one finds that the Islamic approach to poverty alleviation should involve several layers of intervention. All kinds of assistance should be preceded by enquiry and assessment of financial health of the client. A charity based intervention inherent in the institutions of Zakat and sadaqa is recommended to take care of consumption needs of the extremely poor and the destitute and create a social safety net, notwithstanding the never-ending debate on the desirability of using Zakat funds for investment and financing. The other institution of charity – the awqaf is ideal for creation and preservation of assets that can build capacity and provide technical assistance for skill improvement and development of human resources. The social safety net and technical assistance may then be linked to financial assistance. The financial assistance should aim at wealth-creation using Shariah-compliant for-profit modes with free pricing. The entire process of course, would need to be completely transparent with proper documentation, accountability and responsibility with a time-bound schedule. Along the way, less or zero productivity assets may need to be transformed into more productive ones while ensuring minimal transaction costs. Provision of financing could involve formation of groups and be made in a graduated manner.

Before we conclude that the Islamic approach to MF and the MF “best practices” converge in many respects with the notable exception of product design, it is important to sound a note of caution. The above analysis is based on a rather tiny sample of hadith. Therefore, care must be taken to avoid rigidly labeling the suggested approach as the solitary and distinct Islamic model of MF. The purpose of the present discussion is simply to demonstrate that there may not be any inherent conflict between the Islamic approach and much of the MF “best practices”. At the same time, the religious and cultural sensitivities of the poor Muslim clients need to be taken into account while designing financial products and services. This should be emphasized as an imperative for achieving the goal of poverty alleviation through enhanced financial inclusion in Muslim societies.

The author is an Economist with Jeddah-based Islamic Development Bank. Views expressed in this paper are those of the author and not of his employer organization. He may be reached at m_obaidullah@yahoo.com

Islam Offers Viable Options Of Poverty Eradication

By S A Hannan

President Iajuddin Ahmed on the last Saturday said Islam and its Shari’ah, as the complete code of life, does offer viable practices for all aspects of eradicating poverty from the society.

“Islam is for all believing in peace and social harmony and tranquility,” he said speaking as chief guest at the inaugural session of a three-day international seminar on ‘Islamic Alternative to Poverty Alleviation: Zakat, Awqaf and Microfinance’. Islamic Research and Training Institute (IRTI) of Islamic Development Bank (IDB) Group, Jeddah, Islami Bank Bangladesh Ltd, Islamic Economics Research Bureau (IERB), Dhaka, and Prime Bank Ltd, Dhaka jointly organized the seminar at Dhaka Sheraton Hotel in the morning.

Former chief election commissioner of Bangladesh Justice Mohammad Abdur Rouf and IRTI Research Adviser Dr M Umer Chapra attended the inaugural session as special guests. President Iajuddin said the seminar is a timely response to deliberate on the issues of great importance for the poverty stricken developing countries, specially the Muslim world, including Bangladesh.

Bangladesh has been making concerted efforts since her independence to eradicate poverty and establish social justice in its society, he said. “Much has been achieved in this regard but much more remains to be done.”

The president mentioned that Islam looks upon poverty as an acute social menace, which erodes ethical values of human beings, retards their dignity and blurs their character. Poverty is a great threat to peace and stability of the society, he said. He said Islam aims at eliminating poverty by providing the basic human needs, bringing gap between the rich and the poor and developing

resources of the earth for the welfare of all human beings. “Within the boundaries of its philosophy, Islam has devised various ways and means to cure the problems of poverty.”
Islam presents unique opportunities and obligatory measures to eradicate poverty and create balanced and exploitation free society in the world, he added. Dr Iajuddin said Islamic instruments like Zakat, Awqaf and Quard-e-Hasanah are some of the effective instruments to eliminate poverty from the society. “Islam, thus, makes a social inter-mediation for building social capital and development. It helps the poor to be self-reliant.” He said successful operation of Islamic tools like Zakat, Awqaf, micro-finance and Quard-e-Hasanah throughout the world can create an opportunity for mobilization of esources at grassroots level to address poverty.

We agree with the President. We have not taken many steps at the state and social level to organize Zakat and Awqaf. These instruments can mobilize fund for poverty alleviation and also provide fund for micro-finance .In the seminar it was also mentioned by the Chairman of the session Shah Abdul Hannan that if all big industrial and business houses in Bangladesh set up one waqf foundation each and donate ten percent of their wealth to these foundations, there can be much headway in eliminating poverty. These foundations can build hospitals, clinics, schools, provide scholarships, give assistance for payment of debt to those who can not pay back debt, build shelters for the destitute, old people and distressed women and all sorts of other activities. These foundations can co-ordinate their program. These foundations can also collect Zakat until state does it and this will supplement their fund for their program. Micro- finance can be organized in various forms under Islamic norms, on Mudarabah basis, on Murabaha or Bai Muazzal basis (cost plus a profit as the difference between buying and selling price ), on Qardul Hasanah basis as in Iran, on half grant and half interest free fund basis ( this can be done by the government and waqf foundations).We feel that we need a new waqf movement in the Muslim world and similar other program in Non-Muslim countries . We draw attention of all in this matter.(editorial of Asia Post,23.4.07)