Tuesday, November 16, 2010

An Islamic microfinance waqf

It has been a while since I wrote about Islamic microfinance, but the latest Opalesque Islamic Finance Intelligence included links to several resources on Islamic microfinance (in addition to other excellent articles). One article was released in August 2008 by the Asia-Pacific Economic Cooperation's Advisory Group on APEC Financial System Capacity-Building (pdf).

One of the ideas that I found interesting was that "Islamic banks can also use income derived from late-payment penalties as well other proceeds, which cannot be included in its income, such as earnings from treasury operations. These proceeds can be categorized as waqf and used for microfinance operations" (p.5). For an example of the types of fees that are not permissible, Bank Negara Malaysia's Shari'ah advisory board released a resolution in June that Islamic banks in Malaysia follow, and are likely to be similar to other Islamic banks internationally.

The key point is that Islamic banks are supposed to be concerned with upholding Shari'ah-compliance in their activities and there is a portion of their income that cannot be recognized as income because it is derived from fees to incentive repayment. Often this income is donated to charitable organizations. However, Islamic banks should also recognize that they are not excluded from conventional ideas of corporate social responsibility (CSR). In my opinion, the ethical basis of Islamic banking should encourage CSR at least as much as in conventional banks (although they are still, and should remain, for-profit companies). Currently, few Islamic finance institutions have embraced CSR in a meaningful way beyond charitable giving. By doing so, they are losing the opportunity to use their expertise in banking (as well as the expertise of their employees), as well as their resources which cannot be recognized as income.

The idea that they could use this money, and also volunteered time from their employees, to create a financing mechanism for Islamic microfinance appears to be a good fit. Their employees have more experience and training in banking than they do in charitable activities (and this should not stop them from charitable activities, which are valuable as well). This does not necessarily have to be a 'one bank, one waqf' activity. It would be much more beneficial and likely to be viewed with less suspicion (that it is promoting the interests of the bank above the microfinance clients) if it were a collaborative effort between several banks in a given country or region of a country. The banks would provide the capital and some volunteered experience of their employees to the waqf, which should be professionally managed by people with either direct Islamic microfinance or related experience in microfinance. It seems to me that this would be a way that Islamic banks could become more involved in developing Islamic microfinance locally, while also expanding their incorporation of CSR into their businesses in a way that does not hurt their profitability or compete for resources within the bank.

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