IRTI Working Paper Series WP#1437-02
Can Islamic Philanthropy Increase Financial Inclusion?
Abdul Ghafar Ismail, Muhammad Hasbi Zaenal, Umar Taufiq
27 Rabi’ Al-Awal, 1437H | January 07, 2016
Islamic Economics and Finance Research Division
IRTI Working Paper 1437-02 Title: Can Islamic Philanthropy Increase Financial Inclusion? Author(s): Abdul Ghafar Ismail, Muhammad Hasbi Zaenal, Umar Taufiq Abstract
Financial inclusion has become an integral part of many development institutions and multilateral development banks (MDBs) in an effort to promote inclusive growth. Many countries introduce their financial inclusion policies and strategies. Studies that report on financial inclusion are not sufficient. Furthermore, studies that specifically aim to address financial inclusion for the Islamic financial system are very limited too. The studies are limited to banking services. From the institutional perspective, these studies only look at the partial aspects of Islamic finance; whereas the definition of Islamic finance should institutionally cover philanthropy. This study aims to explain theoretically how philanthropy instruments can increase financial inclusion. Our study shows that: first, philanthropy instruments increase the range of financial services available to underserved markets. Second, the more philanthropy instruments available, the more the number of the poor to have an account with Islamic financial institutions and at the same time the poor also get access to financing from the Islamic financial institutions. JEL Classification: D02; D14; D64; G21; G23 Keywords: Financial institutions, Financial inclusion, Philanthropy
IRTI Working Paper Series has been created to quickly disseminate the findings of the work in progress and share ideas on the issues related to theoretical and practical development of Islamic economics and finance so as to encourage exchange of thoughts. The presentations of papers in this series may not be fully polished. The papers carry the names of the authors and should be accordingly cited. The views expressed in these papers are those of the authors and do not necessarily reflect the views of the Islamic Research and Training Institute or the Islamic Development Bank or those of the members of its Board of Executive Directors or its member countries.
Islamic Research and Training Institute 8111 King Khalid St. Al Nuzlah Al Yamania Dist., Jeddah 22332-2444 Kingdom of Saudi Arabia
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Can Islamic Philanthropy Increase Financial Inclusion? Abdul Ghafar Ismail1 Muhammad Hasbi Zaenal2 Umar Taufiq3
1.
Introduction
Economists have different views regarding the importance of financial system for economic development. Bagehot (1873) and Hicks (1969) initiated the first view, arguing that financial system provides capital for industrialization process in England. Then, Schumpeter (1912) suggested that well-functioning banks spur technological innovation by recognizing and funding those entrepreneurs with the best chances of successfully implementing innovative products and production process. In contrast, Robinson (1952) and other development economists assert, “Enterprise leads, finance follows”. According to them, economic development generates demand for financial services, and the financial system reacts automatically to these demands. Due to these contrasting views, Levine (1997) produced the first attempt of empirical evidence on the finance-growth nexus. Since then, research in this area has been continuously explored, as noted by Aizenman et. al. (2015), mainly due to: (i) the reclaimed popularity of growth theory in general; (ii) the availability of huge cross-country data sets; and (iii) a policy interest in stimulating growth. There is even evidence that the level of financial development is a good predictor of future rates of economic growth, capital accumulation, and technological change. It shows that the development of financial markets and institutions is a critical and inseparable part of the growth process. Hence, the financial system should respond actively to economic growth and industrialization. In response to the above findings, policymakers and regulators in financial sector development recognize the financial inclusion system as an important global agenda and emerging priority in ensuring sustainable long-term economic growth. Financial inclusion has also become an integral part of many development institutions and multilateral development banks (MDBs) in an effort to promote inclusive growth. Hence, financial inclusion policies and strategies have been introduced in many countries. In general, the studies that report on the financial inclusion are not sufficient. Some of them were conducted by World Bank (2014), Demirguc-Kunt et al. (2015), and Mehrotra and Yetman (2015). However, studies that specifically aim to address financial inclusion for the Islamic financial system are very limited. Currently, the only studies done in this respect are Naceur, et al. (2015) and Zulkhibri (2015). These studies are limited to banking services. From the institutional perspective (Ibrahim and Ismail (2015)), they only, as discussed in Ismail et al. (2015), look at the partial aspects of Islamic finance. Whereas the definition of Islamic finance, as argued by Ismail et al. (2015), should institutionally cover philanthropy. Hence, the proposition in this study is that philanthropy can increase financial inclusion. In addition, this paper will add a new view about
1
Head of research division and Professor of Islamic Banking and Financial Economics. He is currently on leave from School of Economics, Universiti Kebangsaan Malaysia. He is also principal research fellow, Institut Islam Hadhari, Universiti Kebangsaan Malaysia; AmBank Group Resident Fellow for Perdana Leadership Foundation; Adjunct Professor, Universiti Sains Islam Malaysia. Email:
[email protected] 2 PhD Candidate in Islamic Economic, Institute Islam Hadhari, Universiti Kebangsaan Malaysia 3 Research Assistant in IRTI-IDB. Email:
[email protected]
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philanthropy in relation to Islamic finance, which recently has been discussed extensively by Humanomics journal in five consecutive issues. The objective of this study is to explain theoretically how philanthropy instruments can increase financial inclusion. Section 2 focuses on the definition of financial inclusion and what are the dimensions that have been achieved so far. After that, we will identify the opportunities to remove the barriers that may be preventing people from using financial services that become key to understanding financial inclusion. Section 3 reports the state of financial inclusion in selected Muslim majority countries, and tries to identify and discuss the reasons that cause financial inclusion. Section 4 tries to establish philanthropy as part of financial services. How will the financial system engage with philanthropy instruments? Finally, section 5 examines the transmission channel that links philanthropy instruments to unbanked customers and bankable customers with bankable customers. 2.
Defining Financial Inclusion and Its Dimensions
Global Findex (2014) reported that two billion people, or 38% of adults in the world, do not use formal financial services and 73% of the poor do not have bank accounts because of cost, distance travelled and often-burdensome requirements involved in opening a financial account.4 It shows that the poor do not have the same access to financial products as wealthy individuals; while their needs for financial services may be greater. Access to savings products, in particular, can have important benefits than just increasing the amount of a person's savings: it may help to empower women, increase productive investment and consumption, increase productivity and revenues, and increase spending on preventive health. As a result, over the past few decades, various types of financial service providers were establish to cater the need of the financially excluded community. These include non-governmental organizations, cooperatives, community-based development agencies, commercial banks and the state, insurance companies and credit card, telecommunications and wire services (mobile banking), post offices, and other businesses that provide point-of-sale access and be feasible due to technological breakthroughs. In 2011, the World Bank launched the Global Financial Inclusion (Global Findex) database. The database provides comparable indicators showing how people around the world save, borrow, make payments, and manage risk. The indicators come from the definition of financial inclusion. How do they define financial inclusion and how do we measure it? This section will address these questions. The aim is to provide an understanding of financial inclusion. Financial inclusion, as agreed by many studies such as World Bank (2014), Demirguc-Kunt et al. (2015) and Mehrotra and Yetman (2015), is delivery of banking services at an affordable cost to the vast sections of disadvantaged and low-income groups. Unrestrained access to public goods and services is a sine qua non for an open and efficient society. As banking services are in the nature of public good, it is essential that availability of banking and payment services to the entire population without discrimination is the prime objective of the public policy. Here, banking services are meant to cover bank accounts, immediate credit, savings products, remittances and payment services, insurance and healthcare, mortgage, financial advisory services, and entrepreneurial credit. The Center for Financial Inclusion notes several reasons for financial inclusion. The reasons are due to: poor, socially under-privileged, disabled, old as well as children, women, ethnic minorities, uneducated, mobile population, underprivileged section in rural and urban areas, like 4
http://www.worldbank.org/en/programs/globalfindex
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farmers, small vendors, etc.; agricultural and industrial labourers; people engaged in un-organised sectors; and unemployed. Here, there are three levels of reasons for exclusion from financial transactions: (i) Low income, nil or low savings, lack of assets, unemployment, and use of inappropriate products; (ii) Psychological or disability issues, feeling of being excluded, indigenous or ethnic issues, geographical remoteness, lack of computer or internet access; and (iii) Personal and social factors such as religion, cultural norms, gender, age, and legal identity. In 2011, a study by Center for Financial Inclusion, which surveyed more than 300 practitioners, tried to examine the opportunities and barriers to financial inclusion. Based on the responses, the Center identifies five priority focus areas to achieving financial inclusion, towards creating full financial inclusion roadmap. This process involves dozens of experts and industry participants to develop action-oriented blueprint for achieving new and underserved markets. First, Overcoming Customer Needs, chaired by the Consultative Group to Assist the Poor (CGAP), focused on deepening our understanding of client needs and translating that knowledge into practice while expanding the range of financial services available to underserve markets. Second, Enabling Technology Business Models, chaired by Visa, Inc. analysis of the potential of new technology-intensive channels to reach new customers, lower operating costs, improve security, and diversification of financial products available to low-income clients. Third, Financial capability, chaired by Citi, focusing on empowering clients to know their rights as consumers, and have the skills, attitudes, aspirations and confidence to exercise the rights. Fourth, Customer Protection, headed by the Smart Campaign, outlines steps to deepen the implementation of client protection measures for the benefit of consumers and market stability. Fifth, Credit Reporting, led by the International Finance Corporation (IFC), promotes expanding the credit reporting system in order to expand access to new clients while managing risk for financial institutions. In efforts towards financial inclusion, World Bank has issued a call to action to achieve Universal Access Finance in 2020, which means that basic access to the formal financial system for example, through debit cards or mobile money must be possible for everyone. To achieve this accessibility, World Bank collaborates with some partners including multilateral institutions, banks, credit unions, network cards, microfinance institutions and telecommunications companies which issued a numerical commitment to help promote financial inclusion and financial reach universal access by 2020. World Bank targets enabling as many as 1 billion adults, currently financially excluded, to gain access to transaction accounts. Thus, World Bank has been working with partners to speed up key reforms that can enable and encourage private sector investment and innovation, and ensure access expanded in 25 priority countries that have been identified based on the number of people do not have bank accounts. The reforms include: (i) Requiring the provision of basic accounts that are open to low-income and financially excluded people, by ensuring that the costs for opening such accounts are accessible; (ii) Allowing electronic-money and mobile-money products to be offered; (iii) Allowing entry of non-bank players, in order to introduce dynamism, innovation and lower-cost delivery mechanisms; (iv) Clarifying that agent networks can be used to extend the outreach of financialservices providers, helping them deliver products and services at lower costs; 3
Shifting large payment flows – such as social benefits and wages – into accounts, instead of being paid in cash, and (vi) Ensuring that newly served consumers are well aware about the financial services now available to them. From the above discussion, the measurement of financial inclusion and in identifying opportunities to remove the barriers that may be preventing people from using financial services are key to understanding financial inclusion. (v)
3.
How Much Financial Inclusion is in Muslim Countries
The Islamic banking industry has shown tremendous growth in volume and complexity during the last few decades. By 2009, there were over 300 banks and 250 mutual funds around the world complying with Islamic principles,5 and as of 2014 total assets of around $2 trillion were Shari’ah-compliant.6 According to Ernst & Young, although Islamic banking still makes up only a fraction of the banking assets of Muslims,7 it has been growing faster than banking assets as a whole, growing at an annual rate of 17.6% between 2009 and 2013, and will grow by an average of 19.7% a year to 2018. Despite making significant improvements in all the areas relating to financial viability, profitability and competitiveness, there are concerns that banks have not been able to reach and bring vast segments of the population, especially the underprivileged sections of the society, into the fold of basic banking services. Table 1 reports the state of financial inclusion in selected Muslim majority countries. The degree of religiosity,8 on average is about 85 percent in these countries, implies the important role of religion in the daily life and society. The financial exclusion due to religious reasons accounts for about 9 percent in these countries. Hence, Islamic finance can play a role in bringing more than 40 million financially excluded populations because of religious reasons into the formal financial system. On the other hand, the number of banks in a country that offer Shari’ah-compliant financial services per 10 million adults is very low except for few countries such Kuwait, Bahrain, Qatar and Malaysia. In the following discussion, we will identify and discuss the reasons that cause financial inclusion.
Bank Charges
The term bank charge covers all charges and fees made by a bank to their customers. In common practice, Kamil et al. (2014) says that the term often relates to profit margin paid by customer in relation to financing. These charges may also take many forms including charges for specific transactions (such as telegraphic transfer, legal fee and deposit withdrawal via ATM), taxes for
5
"Sharia calling". The Economist. 2009-11-12. "Islamic finance: Big interest, no interest". The Economist. The Economist Newspaper Limited. Sep 13, 2014. Retrieved 15 September 2014. 7 Yueh, Linda (18 July 2014). "Islamic banking: Growing fast but can it be more than a niche market?". BBC News. Retrieved 14 April 2015. Even in countries where Islamic banking has a strong foothold, such as the Gulf states and in South East Asia, its share rarely accounts for more than one third of the market. In Indonesia, the world's most populous Muslim country, Islamic banking currently has less than 5% market share. 8 Percentage of adults in a given country who responded affirmatively to the question, “Is religion an important part of your daily life?” in a 2010 Gallup poll. 6
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Table 1: Financial Inclusion in Muslim Countries Religiosity and financial inclusion Religiosity (%) 1/
Economy
Account at a formal financial institution {%, age 15+)
Islamic financial institutions {IFIs}
Adults wt.h no account due to religious reasons {%, age 15+) 2/
Adults wth no account due to religious reasons {thousands, age15+} 3/
Nuimber of lFls
Islamic assets per adult (US$} 4/
Number of IFls per 10 mHlion adults
Number of IFls per 10,000 km2
Afghanistan
97
9
33.6
5830
2
1.1
0.03
Albania
39
28.3
8.3
150
1
4
0.36
Algeria
95
33.3
7.6
1,330.000
2
0.8.
0.01
Azerbaijan
50
14.9
5.8
355
1
1.4
0.12
Bahrain
94
64.5
0
0
32
29,194
301.6
421.05
Bangladesh
99
39.6
4.5
2,840
12
14
1.2
0.92
Benin
10.5
1.7
77
0
0
0
0
Burkina Faso
13.4
1.2
98
1
1.1
0.04
Cameroon
96
14.8
1.1
114
2
1.7
0.04
Chad
95
9
10
573
0
0
0
0
Comoros
97
21.7
5.8
20
0
0
0
0
98
12.3
22.8
117
0
2.9
1480
11
146
1.9
0.11
Nuimber 0 of lFls
0 per assets adult (US$} 0 4/
Islamic
Number of IFls per 100mHlion adults
Number of IFls0per 10,000 km2
1.3
0.13
Djibouti
Religiosity and financial inclusion
Egypt Gabon
97 Religiosity (%) 1/
Guinea Economy Indonesia
99
Iraq
84
Jordan
9.7 Account at a formal18.9 financial 3.7 institution {%, age 15+) 19.6
0
0
0
Islamic financial institutions {IFIs}
Adults wt.h no 1.5due to account religious reasons 5 {%, age 15+) 2/
1.5
Adults wth no 12due to account religious 279 reasons {thousands, 2,110 age15+} 3/
0 23
30
0
0
10.6
25.6
4310
14
98
7.4
0.32
25.5
11.3
329
6
1,583
15.4
0.68
Kazakhstan
43
42.1
1.7
126
0
0
0
0
Kuwait
91
86.8
2.6
7
18
28,102
87.2
10.1
Kyrgyz Republic
72
3.8
7.3
272
0
0
0
0
Lebanon
87
37
7.6
155
4
12.4
3.91
Malaysia
96
66.2
0.1
8
34
4,949
15.8
1.03
Mali
95
8.2
2.8
218
0
0
0
0
Mauritania
98
17.5
17.7
312
1
76
4.7
0.01
Morocco
97
39.1
26.8
3,810
0
0
0
0
39.9
2.3
189.0
0
0
0
0
23.6
1,910
0
0
0
0
0
Mozambique Niger
99
1.5
Nigeria
96
29.7
3.9
2,520
0
73.6
14.2
78
3
Oman
0
0
14.4
0.1
Pakistan
92
10.3
7.2
7,400
29
40
2.5
0.38
Qatar
95
65.9
11.6
64
14
1,385
86.5
12.08
Saudi Arabia
93
46.4
24.1
2,540
18
1,685
9.2
0.08
Senegal
96
5.8
6
411
0
0
0
0
15.3
9.9
287
0
0
0
0
Sierra Leone
Source: Zulkhibri (2015) Note: 1/ Percentage of adults in a given country who responded affirmatively to the question, “Is religion an important part of your daily life?” in a 2010 Gallup poll; 2/3/ Number of adults and percentage of adults that point to a religious reason for not having an account at a formal financial institution; 4/ Islamic assets per adult (US$): Size of the Islamic assets in the banking sector of an economy per its adult population.
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specific transactions (goods and services tax and stamp duty), and monthly charges for the provision of an account (current account or checking account). The bank should announce and disclose these charges. The disclosure of bank charges would encourage greater transparency and competition. It shows that the banking industry would not have an intention to provide free services.
Financial Literacy
The fact is that the objective of financial inclusion will remain incomplete unless and until proper steps are taken to promote education among customers. The objectives of financial inclusion will probably automatically achieve once the customer is educated and knows how the banking system works, how to use the technology in their day-to-day live, and how to make deposits etc. Financial literacy may help in making other decisions in a right way. The International Islamic News Agency reports that nearly 40 percent (with varying percentages in the Member States of the Organization of Islamic Cooperation) of the Muslim world’s population cannot read or write.9 It further reports that there are hundreds of millions of illiterates in the OIC countries alone, mostly female. This poses a threat to the development and prosperity of the society and negative impacts on the ability to promote and build a strong growing economy and achieve the Millennium Development Goals (MDGs). It shows that financial literacy may become the barrier for financial inclusion. The trend toward Islamic finance is increasingly requiring the customers to acquire knowledge, which needs educators to take on responsibility for careful documentation so as not to look it lightly in their syllabus while meeting the consumer need.
Islamic Bank is for the Rich
The assets and liabilities structures of Islamic banks show that shares and deposits are the main components on the liabilities side and on the assets side; Islamic banks provide financing to customers and invest in sukuk markets. The requirement of minimum amount deposits, which requires a customer to bring in cash at the time of opening an account, varies from one bank to another. The amount varies also according to nature of account and services required. Ismail (2010a) shows that the main contributors of deposits are government and non-financial firms. Only a big shareholder can afford to provide capital to Islamic bank. For example, Islamic Financial Services Act 2013 of Malaysia requires an Islamic bank to have a minimum amount of capital about RM1 billion. Such capital requirements force banks to impose high minimum amount deposit for account opening or service charges. Islamic banks provide financing to customers mainly to non-financial firms, and only a small percentage goes to house owner who wants to buy a house which is below ten times of income per capita [or one third of customer’s salary is used for house instalment times the number of years for instalment] or provide personal financing for consumption. Islamic banks also invest in sukuk markets. The issuers in sukuk market are government or government-linked firms and “big” nonfinancial firms. Non-financial firms who want to get financing are also needed to produce tangible assets as collateral. In Malaysia, only big firms can issue sukuk if their capital funds are more than
9
http://www.iinanews.com/page/public/report.aspx?id=10377#.VebKsPnzp1s
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RM100.10 In conclusion, the Islamic banks are mainly established to serve the big and rich shareholders and customers who have or need “substantial” amounts of money.
Bank with Multi-Objectives
There exists a prolonged dilemma in conflicting objectives of Islamic banks. As private organizations they are supposed to generate profit for their stakeholders (Kamil, 2014), and as social entities they are obliged (Ismail, 2010b; Ismail et al., 2014), to undertake Corporate Social Responsibility (CSR) and follow policies to channel their services to the different sections of society. In order to match the main Islamic bank goals of providing banking access to low and disadvantaged groups, they are required to offer low minimum saving accounts and at times to educate on the expertise of banking services. Once bank accounts are created, there is no guarantee that holders will actually use them often; hence, banks had to incur maintenance costs without any income on such accounts. This conflicts with the goals and overall objectives of private entities. In short, we believe that in order to meet the goals of financial inclusion the authorities must try to look for other alternatives than putting compulsory policies on banks to adopt responsibility of providing Islamic financial services to the masses. There is the need for a separate institution, which can solely be established for educating the masses in their native languages about importance and transaction expertise of Islamic finance as per individual’s needs and requirements. Many non-profit organizations are providing their services of free education to children and adults; they all need to come under a single umbrella in order to reach the masses and avoid duplication of efforts. A separate course syllabus can be adopted as per different sections of society to take advantage of Islamic finance facilities. For instance, farmers who are least literate (at times) can be provided expertise about incentives available to them in form of low-margin or interest-free (qard hassan) loans and how saving a sum of their hard-earned money can make a difference in the hour of need. Similarly, basic Islamic finance courses can be adopted at primary school level to expose the young minds towards Islamic finance objectives. As mostly in Muslim countries, literacy rate of children goes down from secondary education when they tend to take up tasks to make ends meet. 4.
Can Philanthropy be Considered as Financial Services
Before, we could answer this question, let us discuss what is philanthropy. In Islam, the concept of philanthropy (charity or sadaqah) refers to generosity, social justice, sharing and mutually reinforcing. Sadaqah refers to whatever is given, whether it is properties or actions. It has something meaningful that can benefit the people who are in need, and it can be tangible or intangible assets, example energy, science, practice, etc. Tangible assets as mentioned in al-Quran and al-Hadith (the Prophet’s saying or actions) are among others zakah, donation (infaq), waqf (endowment), and gifts. 4.1 What is Philanthropy? Generally, most of us agree that philanthropy is a form of charity. Etymologically, the word philanthropy comes from the Latin word philanthropia. In Greek, philanthropia is defined as "kindliness, humanity, benevolence, love to mankind" (from gods, men, or things), while the 10
See, the guideline in issuing sukuk, Securities Commission of Malaysia.
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adjective of this word, i.e., philanthropos means "loving mankind, useful to man". This is due to the fact that it is derived from phil- "loving" (see philo-) + anthropos "mankind" (see anthropo-). Hence, the combination of these two words generates a meaning "Love or love to man". 11 Therefore, Andreoni (2015) suggests that philanthropy is defined as a benevolent behavior, usually in the form of charitable gifts, toward others in a society. The term “new philanthropy”, according to Brown (2000), invokes together the descriptions of the hands-on, entrepreneurial style of charity practiced by many new foundations and newly rich benefactors. Thus, it shows that philanthropy is a moral effort for the liberation of man from his troubles. The definition of philanthropy has also evolved from personal activities into one actionoriented economic objective intended by the actions of a group of persons who love others by donating their resources. This definition is clearly mentioned by Payton (1988) who states that philanthropy is a form of showing the collective activities undertaken by individuals through organizations or institutions they represent. He also interprets the practice of giving, relaying services and being engaged in associations to help others in need as an expression of love. As a result, Knight (2003) says that dozens of philanthropic organizations have been established. Their activities and programs come in various forms including the fulfillment of basic needs such as food, clothing, medicine, and housing; the redistribution of power; transformation to develop values of plurality and diversity; the increased capacity of the community (so that the people have the power to act); and public participation in decision-making. As explained above, the general meaning of philanthropy is indeed different from the tradition of Islam. What we can interpret is that philanthropy is a sense oriented by the 'love of man' with moral motivation fueled voluntarily, without any element of obligation from Allah (Subhanahu Wa Ta'ala or The most glorified, the most high). Meanwhile, in Islam, its philosophical basis is the 'obligation' to succumb to 'Allah' to achieve social justice. This understanding may create unity between the love of the human, moral motivation, and the obligations to Allah (The most glorified, the most high) to achieve social justice in this world. Hence, the donor and the recipient have a relationship, which is not only to perpetuate the superiorinferior, but more importantly forming a partnership with balance and equality, and therefore avoiding the bad intentions.12 Thus, the meaning of philanthropy is an example of the meaning that is understood today, i.e. the act of giving voluntarily. In addition, the word ‘philanthropy’ itself can be interchangeable with the word ṣadaqah. Therefore, philanthropy is not limited to the source of wealth that serves as voluntary donation, but it may be derived from the rule that requires an obligatory order. Both voluntary and obligatory donations have the same source i.e. the provisions of al-Quran and al-Hadith. These provisions are based on the fact that the utilization and function derived from the ummah to the ummah towards creating the economics of justice. In practice, there are two kinds of sadaqah, as discussed in Ismail et. al. (2014) and divided into the following categories which have separate rulings: ṣadaqah wajibah (obligatory) like zakāh, waqf, and nadhr; and ṣadaqah nāfilah (voluntary) like waqf, gift and sadaqah (donation). The motives are as follows: firstly, individuals succumb to philanthropy in order to help the distressed directly (al-Qur'an: 02:205). This act is only temporary in nature and it will last for only a short while. Giving sadaqah (under sadaqāh lillah) may fall under this act. For example, giving 11
Online Dictionary, 2012, http://www.etymonline.com/index.php?term=philanthropy [15 March 2013] “Is it they who allocate the mercy of your Lord? We have allocated among them their livelihood in the worldly life, and have raised some of them over others in ranks, so that some of them may put some others to work. And the mercy of your Lord is much better than what they accumulate.” [Qur’an: 43:32] 12
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some money, clothes, food, providing shelter in the form of tangible assets (al-Qur'an, 02: 20) or teaching, caring for the sick, helping others in one’s own effort, giving motivation in the form of intangible assets (al-Qur’an, 03:190) are among the types of sadaqah that could be channeled to individuals or institutions. Secondly, individuals would resort to philanthropy because of obligations as set out in the teachings of Islam (al-Qur'an, 09: 76). This motive, as discussed in Islamic literature, can be categorized as alms that only apply to tangible property only. The examples of obligatory alms are zakāh, nadhr, fidyah, kaffārah and udhiyyah (al-Qur'an, 08: 60) which are addressed to a particular individual or institution. 4.2 Philanthropy and Financial System In the early days of Islam, philanthropy became one of the most powerful public policy tools. Among others, it plays an important role in advancing of education, health and research through establishment of schools, hospitals, madrasas, mosques and public libraries. However, in the context of the 21st century, Islamic financial institutions shall work for the voluntary sector. They should engage in the mobilization of philanthropy funds. This will provide an evidence that philanthropy may potentially come into the financial system. The initial engagement can be seen in their activities. As shown in Table 2, the Islamic financial institutions’ business covers the acceptance of zakah, infaq, sadaqah, and waqf funds. This only legally happens in Indonesia. Although, lately as reported in Ismail and Possumah (2014), Islamic banks in Malaysia also accept and manage cash waqf, but it is not clearly written in the Act. It shows that the legal or functional definitions do not place limits on what are the financial services that can be offered. In the light of the above definition, how does Islamic financial institutions look like? Sources of Funds – First, we look at the sources and uses of funds of philanthropy bank (as one type of Islamic financial institutions). On the sources side, the philanthropy bank is owned by shareholders. Shareholders contribute in terms of equity or cash waqf or sadaqah. Equity comprises common stock, surplus and undivided profits. Philanthropy bank raises the initial capital or paid-up capital among the initial shareholders via ordinary waqf/sadaqah shares. The value of common (and preferred) equity is equal to the number of shares outstanding multiplied by their par value per share. Surplus is the amount of paid-up capital in excess of par value realized by the philanthropy bank upon the initial sale of stock. Finally, undivided profits equal retained earnings, which are the cumulative net profits of the philanthropy bank not paid out in the form of dividends to shareholders. Here, once an equity share is only devoted as a waqf, it remains so until the Day of Judgment and no one can change it later on. Waqf Deposit – Some individuals may devote a waqf for a certain period. In this case, it can be tailored with the maturity of deposit. At the maturity date, the depositors will only receive the initial amount that is endowed. However, philanthropy bank, as trustee, has the right to get the benefits from the utilization of this deposit.
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Table 2: Law and Regulation of Islamic Financial Institutions
Sources: a. Laws of Malaysia Act 759, Islamic Financial Services Act 2013 b. Laws of Indonesia No 21, Islamic Banking Act 2008 c. Islamic Research and Training Institite, Oman - Islamic Finance Country Report 2014
Uses of Funds – there are two main uses of funds, i.e., investment and financing. Investment - the co-mingled between equity and deposits become increasingly well-known cash waqf because of its flexibility which allows distribution to potential benefit of the beneficiaries. In this concept, philanthropy bank as Mutawalli (manager) collects the fund from the Waqif and invests the money in the real sector and in any Shari‘ah-based investment opportunities. Financings - Mutawalli will then allocate all profits and returns gained from the investment to provide financing to any individual for any economic purposes such as a poverty alleviation program, especially to enhance the quality of poor people’s life, free education and health services, cheap basic food, etc. In this concept, The Mutawalli is obliged to maintain the amount of fund in such a way that it does not go below the initial amount. Therefore, the Mutawalli not only should be highly capable but also needs to act as philanthropy bank, which has been proven to be experienced, highly capable and effective in helping development efforts. Therefore, it is necessary to design an instrument which is able to control the Waqf fund management especially cash waqf. 10
Sources of Revenue and Expenditure for Trustee - In this section, we do not want to argue on who should be the trustee (government or non-profit organization because waqf management can be established by both), as long as they become the trustees. The trustee is given the mandate to receive the ownership on the said property. The trustee in the form of individual or group has to be constituted to manage the property for the generation of income, which is distributed as specified by the donor. Furthermore, as argued by Sabiq (1998), the trustee may also utilize from the benefit for her expenses and may use the benefit to feed the needy. This means that the profit from investments will be divided into two; Firstly, it would go into the philanthropy bank that would finance all linked industrial operations (including capital improvements); and it would help to subsidize programs for the needy. Thus, financially the philanthropy bank has been created in such a way that taxpayers are not required to suffer the additional burdens. Intra-governmental multiplier effect also comes into play. At the macro level, government would get more income for its budget; government’s money would eventually be injected into other budgets like staff salaries, inmate wages, and payments to private sector vendors. Secondly, it would be paid for the trustee’s revenues of labor, to purchase goods from the suppliers (to support the beneficiaries’ budget and to pay compensation). 5.
Philanthropy and Financial Inclusion
The title of this paper proposes that philanthropy can increase financial inclusion. What is the channel? In this section, we will examine the transmission channel that provides the financial services to unbanked customers and link the bankable customers with unbankable customers. The discussion on this channel covers three elements: bankable customers, philanthropy instruments, financial institutions and unbankable customers.
A brief explanation on the Transmission Mechanism
The current structure of Islamic financial institutions appears to show that they have a limited ability to serve unbanked customers who would like wire transfers, and international remittances because of compliance concerns under the Islamic Financial Services Act (IFSA), Anti-Money Laundering Act (AML) and other regulatory requirements. Islamic financial institutions also are reluctant to cash checks for non-customers for reasons related to regulatory compliance, identification, and loss prevention (fraud) concerns. For example, the lack of valid identification makes it difficult to serve non-customers. Therefore, the Islamic financial institutions should look into the largest untapped market, i.e., customers who have neither bank accounts (the unbanked) nor incremental financing (the underbanked). Therefore, they need to examine how financial services to the underserved market can help increase financial inclusion and in achieving the Maqasid al-Shari’ah (see, Ngalim and Ismail (2014) and Ngalim et. al (2015)). In addition, how could the Islamic financial institutions transform their business models to address changes in the financial services marketplace via philanthropy instruments, especially in responding to the needs of the underserved market that could make the difference to Islamic financial institutions’ role?
Transmission Mechanism
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Panels A, B and C in Figure 1 explain the channels of transmission mechanism. As shown in Diagram 1, the target is to reach and link the bankable customers (rich and poor customers) with unbankable customers (poor customer). In Panel A, the rich customers pay the zakah on their businesses to Baitulmal. They also have saving accounts in the Islamic financial institutions. The rich customers also pay zakah on their wealth (i.e., saving funds). Here, the rich customers pay zakah to Baitulmal or pay zakah direct to Baitulmal from their saving funds. At the same time, the rich customers that own the Islamic banks and Islamic microfinance institutions also pay zakah to Baitulmal, as shown by bidirectional line between philanthropy institutions and Islamic financial institutions. Figure 1: Transmission Channel of Philanthropy Instruments
Baitumal, then, which has an account at Islamic financial institutions, channels the zakah to the recipients, including the poor. The same also applies to Baitulmal which channels zakah to Islamic microfinance institutions (Hadisumarto and Ismail (2010), Abdullah and Ismail (2014) Smolo and Ismail (2010)). The latter will provide benevolent loan to the poor. In Panel B, the philanthropy instruments (waqf or endowment) come from both rich and poor customers who are also looking for non-monetary rewards. However, both customers channel the cash waqf (see Ismail and Possumah (2014)) into Islamic banks and/or Islamic microfinance institutions by injecting capital in both institutions. Meanwhile, the capital is still intact with them, but the poor (i.e., as beneficiaries) would receive dividend. Alternatively, the financial institutions may receive waqf deposits (and appoint Baitulmal as trustee) from the rich and poor customers and then, both Islamic financial institutions will invest the waqf deposits. The poor customers (and return from this investment) will be channelled to the poor. In Panel C, the sadaqah provides more flexibility for philanthropy and Islamic financial institutions on its utilization. It can be utilized fully for the benefits of the poor. Similar to waqf 12
funds, the rich and poor customers may channel their sadaqah via Baitulmal or Islamic financial institutions. Then, the former will save the sadaqah funds with Islamic financial institutions. The Islamic financial institutions also can channel directly or indirectly (via Baitulmal) as expenses to the poor. The more financial services (via different philanthropy instruments) available, the more the number of the poor to have an account with Islamic financial institutions and at the same time the poor also get access to financings from the Islamic financial institutions. Therefore, it would expect a closed relationship between financial services indicator and real sector. The empirical evidence would be the best to look into this proposition. 6. Conclusion The objective of this study is to explain theoretically how philanthropy instruments can increase financial inclusion. Our study shows that: first, philanthropy instruments increase the range of financial services available to underserved markets. Second, the more philanthropy instruments available, the more the number of the poor to have an account with Islamic financial institutions and at the same time the poor also get access to financings from the Islamic financial institutions. Therefore, authors expect a closed relationship between financial services indicator and real sector. However, believe that the empirical evidence would be the best to look into this proposition.
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