Integration of Waqf and Islamic Microfinance
for Poverty Reduction: Case of Pakistan
Nasim Shah Shirazi, Mohammed Obaidullah, Mohamed Aslam Haneef
18 Jumada’2, 1436H | April 07, 2015
5. Focus Group Results
A focus group discussion on ‘Integration of Waqf and Islamic Microfinance Model (IWIMM) in OIC Member Countries: An Agenda for Poverty Alleviation’ was organized at the International Islamic University, Islamabad, Pakistan on 16th April 2014. The participants were introduced, with the help of PowerPoint Presentation, the objectives of the workshop and significance of the study being conducted jointly by IRTI and IIUM With a view to imparting an understanding about the integrated model of intervention the concept of Waqf was elaborated in its Shariah perspective. In countries like Pakistan, India, and Bangladesh the general perception of Waqf is in terms of endowment of real estate in the form of mazars (shrines), agricultural lands and evacuee properties. The concept of cash Waqf was new to many participants. Therefore, the model was elaborated taking examples of Waqf al nuqud in Ottoman Caliphate and more recently the Kuwait Awqaf Public Foundation and Turkish experience. The participants had already been provided the thematic model and the paper published on the subject in Middle-East Journal of Scientific Research17, which also helped in perceiving the idea before coming for FGD. The following expert comments on the issue were documented.
1. Combining Waqf with profit motive may have some Shariah constraints and be against the true spirit of welfare. In Shariah, Waqf of land or other assets are deemed to be in the ownership of Allah and it cannot be sold, gifted or inherited. After declaring a Waqf, the right of deserving peoples is created in benefits produced by the Waqf establishment. If Waqf property is not productive then it can be exchanged (Istabdaal Waqf). However, there is difference of opinion among the Fuqaha about cash Waqf.
2. The lack of insight of the people and MFIs in Pakistan where one can hardly find any example of cash Waqf is a cause of concern. Such a model could be instrumental in lowering the cost of funds whose benefits may be transferred to the clients. Further, the model should not create a perception of being rooted charity. Rather, it should be seen as a business model seeking sustainability of operations through modest profits.
3. International resources like IDB’s Waqf fund should be used to provide funds to the microfinance operators in IDB member countries instead of relying only on domestic sources. The idea of project financing where long term investments based on partnerships would bring significantly better results than conventional financing modes.
4. The idea is innovative and productive because Waqf is a religious institution and can attract people’s trust. Moreover, unlike waqf of properties, it could invite contributions from people from all occupations who want to donate in the name of Allah in return of eternal reward. Waqf is governed by fiqh rules and therefore, should observe financial discipline. Waqf should not be used for commercial purposes keeping in view its role of welfare of common person. However, the funds’ own sustainability should be kept in view where it should earn operating cost as well as provide for growth margin. Takaful should be used only in necessity otherwise, it will add to the cost of the model. Finally, the enterprising poor should get priority in assistance over the raw and economically inactive clientele. In addition, there should be provision of training to enhance entrepreneurial capacity of those already engaged in commercial activity to become more efficient clients.
5. The model could enlarge existing portfolio without any additional financial cost of raising funds. Such Waqf fund can effectively supplement their efforts in partnership financing.
6. The provincial governments in Pakistan, especially the government of Punjab (being the biggest custodian of Waqf properties) should be approached and convinced to use Waqf assets in more productive way as currently these assets (agricultural land and commercial properties) were producing extremely low and marginal cash flows, being affected by corruption by the vested interests. These properties of billions of rupees can be utilized efficiently in more than one ways. For example, the Government of Punjab may issue sukuk of these assets and cash flows be used for microfinance especially project financing. The groups can be organized around projects where venture capital model can be introduced for long-term financing. Further, the IsDB funded Youth Employment Schemes (YES) Programs for Egypt and Tunisia are good examples and the Waqf fund’s better utilization could be ensured by associating the professional/ polytechnic institutes for youth employment. The groups of these professionals can be organized around skill concentrations with support of incubation centres. The Waqf should then be used for both micro and small enterprises through venture capital – longer term investments with gradual redeemability and takaful insurance. To bring financial discipline, the Waqf should be organized under Section 42 of Banking Companies Ordinance 1984 as non-profit and tax exempt companies.
7. Relying on charities or waqf alone may not always be enough and feasible. Business case may also be essential to ensure self-sustainability of most micro finance projects in the long run. He added that in order to do so, raising low cost funds (thismay still be feasible if micro finance is also earning a relatively higher return on its investments) or no cost funds (for doing micro finance on Qard basis) from wherever possible in a Shariah compliant manner should be welcome. The task could be accomplished by raising money through stock markets on an institutionalized basis (for a listed public limited company) for which details can be set. While Waqf cannot be contributed with profit motive, the involvement of stock exchange would be helpful in formalizing the Waqf initiative.
8. The Waqf fund of Meezan Bank in the name of ‘Ihsan Trust’ is already working with Akhuwat, Wasil Foundation, and Islamic Relief Pakistan. Instead of giving finance to the groups or individual clients out of Waqf, the industrial homes and professional schools may be established and skilled people be produced. However, these pass-outs can be supported with microfinance out of Waqf fund. The need was that Islamic banks, out of CSR, should establish Waqf funds to help poverty ridden segments of society.
9. The Islamic banks should be motivated to observe CSR and establish their Waqf funds invoving MFIs. The model should clearly demonstrate the sustainability and long-term growth to avoid short-term focus. The model as such should frame a standard cash flow framework to be used by Islamic MFIs on the pattern of ‘plug and play’.
10. In Pakistan, the huge endowment of agricultural lands and commercial properties should be managed through market leverage and utilized by issuing sukuk. This can multiply the cash flow, many times, which can be used for poverty alleviation. Especially, the government of Punjab should be approached in this respect.
11. It is appropriate that takaful has been provided in IWIMM model. However, takaful companies should also volunteer to provide risk assurance to MFIs in cases of genuine defaults and assets of the clients.
12. The idea of listing Fund on stock exchange needs further investigation in the light of Shariah issues and, if workable, can be promoted to bring formality to the model.
13. Those MFIs, which already practice Qard Hassan or partnership modes like Mudarabah, should in first place be encouraged to establish Waqf.
14. The IWIMM model may be enhanced to further integrate corporate sector as contributor of Waqf fund.
15. To satisfy the Shariah condition where corpus of Waqf has to be preserved, the cash Waqf certificates should be issued in following manner in case MFIs have to develop their own Waqf funds. Initially, the certificate should receive half of the contribution for Waqf and half as donation for microfinance operations since it will not be possible to draw enough cash flows at this stage. Gradually, the donation part would diminish and Waqf part would increase until the time (say, after 5 years) the quantum of Waqf has increased substantially along with cash flows that subsequent certificates would be issued only for Waqf.
5.1. Interview with Experts
Interviews with practitioners in MFIs and Waqf were conducted to elicit their opinion regarding the integration of waqf and microfinance. They were asked general and some specific questions. The summary of the interview with experts is consolidated as under.
Microfinance can be subsidized to achieve faster poverty alleviation by reducing the operational costs, lowering cost of capital, using qard al hasan and waqf models and by practicing innovative strategies. The support of the government can also help in this regard.
Lower charges / free loans will encourage the tendency in people of considering free loans as their right and problems of efficiency will arise.
Microfinance institutions prefer to give loans instead of partnership financing because trust is a major issue and models such as Musharakah and Mudarabah revolve around trust as well. Moreover, giving loans is easy to operate and to document as well.
There are opposing views to creation of joint ventures by Islamic microfinance institutions. On one side, it is considered a good practice wherein creation of a pool of needy people can make the operation of affairs easy to work on, whereas on the other hand, group disputes are considered a major cause of inefficiency and augmented risk.
Both, Musharka and Mudarabah are considered as better and preferred sources of partnership arrangement between microfinance institutions and the clients.
Mutual trust-deficit, a social environment characterized by unwillingness to bear responsibility on behalf of clients, and the difficulty to monitor the clients, are the major challenges of partnership-based arrangement.
Human resource aspect can be improved for the clients through provision of training and capacity building to improve their skills. Moreover, training of employees is important as well, which will help in the creation of market linkages for clients. Best results can be obtained if such training is provided before the disbursement. Hwever, since targets are to be met and the needy are to be served; human resource development should not be considered a condition of getting loans/finance. Their skills can be focused upon after the funds are provided.
Interviews with Practitioners in MFIs
Islamic microfinance can contribute to poverty alleviation through proper education of clients regarding loan usage and the use of wide range of products such as qard al hasan, musharka and waqf. In addition, skill development institutions can contribute towards poverty alleviation by providing trainings at below-market prices.
People prefer cash to real assets. Moreover, availability of credit lines, change in the mindset of clients and employees, high cost of training of human resources, and the attitude of the customer are the major challenges confronting Islamic microfinance institutions.
Many practitioners identify sources of funds as one big challenge. Fund inadequacy and high lending costs of Islamic microfinance institutions can be resolved via philanthropist activism, better market linkages of beneficiaries for their products, and regulatory authorities' contribution.
Waqf funds can be utilized to subsidize the high operational cost of Islamic microfinance institution and make it interest free. However, some practitioners have raised a fiqhi concern that while doing so, it must be kept in mind that the corpus of a waqf must be kept intact and only its cash flows could be utilized for the desired purpose. At the same time, qard hassan based funding will take care of this concern.
Microfinance can offer partnership based products in businesses such as rickshaw schemes, grocery shops and bookstalls but some consider it as risky and costly due to all round environment of mistrust and dishonesty.
The challenges faced in project financing include recovery issues, trust deficit, and disputes among groups. Staff and client level trainings to have a check and balance on both parties is also an important challenge in this regard.
IMFIs benefit from waqf resources for project financing as it can be considered the richest and cheapest source to MFI. Moreover, due to sustainability of waqf for longer term, the investment modes like ijara and diminishing musharakah can be practiced for project financing of clients' groups.
Takaful is beneficial for both the institution and clients. However, it is considered expensive than conventional insurance and clients have very limited knowledge about it.
Generally, people do not have much idea related to how waqf resources can be helpful in supporting takaful program of IMFIs but some are of the view that waqf can support takaful and as such, it will be attractive as the client will not pay the cost but still get the benefit.
Interviews with Practitioners in Waqf
MFI and waqf can be integrated by creating a Waqf pool, to absorb operational expenses so that the cost of MF program is reduced, ultimately benefiting the clients. Moreover, working capital needs can be addressed through short term products like murabahah and salam while fixed investment can be given through ijara or diminishing Musharakah.
Waqf should provide resources to MFI and MFI should embark on poverty alleviation program if both need to be integrated.
Waqf can be used to contribute directly to poverty alleviation by providing funds such as qard al hasan and strengthening of the social bonds alongside.
The challenges include fiqhi issues, the recovery of qard hasan, and the unavailability of proper regulations for waqf based models. The MFIs have to build confidence in the eyes of public to get resource for waqf fund.
There is mixed opinion as to whether waqf fund should be used directly. While some agree, others assert that the corpus of a waqf must remain intact and only the cash flows related to returns used.
When dealing directly with the borrowers, the management challenges include weak relationship with clients, operational challenges include recovery issues and organizational challenges include lack of expertise on the part of employees and beneficiaries.
Waqf can be used to uplift human resources by establishing training centres for the training of both the clients and the scholars (whom people follow).
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