Displaying items by tag: Islamic Finance
Shariah-compliant investments are known to be resilient and even tend to perform better than their conventional peers in troubled times. This was proven during the first half of the year, when the average returns of global and Malaysian equity shariah funds were higher than those of their conventional counterparts.
According to data by Morningstar, Malaysian equity shariah funds in the large-cap and mid- and small-cap categories provided average returns of -3.47% and -5.03% respectively from January to June 30. In comparison, Malaysian equity funds in the same categories provided average returns of -5.58% and -8.3% respectively. Shariah funds that invest in the broader Asia-Pacific ex-Japan region returned -1.38% over the same period, compared with their conventional counterparts’ -7.60%.
Year to date (as at Aug 12), shariah funds are still outperforming their conventional peers. Malaysian equity shariah funds in the large-cap and mid- and small-cap categories provided average returns of 7% and 13.11% respectively. In comparison, Malaysian equity funds in both categories provided returns of 5.87% and 6.55% respectively. Islamic funds that invest in the Asia-Pacific ex-Japan region returned 10.85%, compared with their conventional counterparts’ 1.67%
Meanwhile, global Islamic equity funds outperformed their conventional peers, albeit marginally, according to Lipper’s data for the six months ended Aug 7.
The performance of most asset classes took a big hit in the first quarter of the year as there was almost zero economic activity owing to the lockdowns imposed by governments around the world to stem the spread of the Covid-19 pandemic. Akmal Hassan, managing director of AIIMAN Asset Management Sdn Bhd, says against this backdrop, few asset classes were spared from the volatility.
“Similarly, the performance of shariah funds was also impacted. However, the shariah space fared relatively better due to the exclusion of the conventional banking, gaming, tobacco and alcohol sectors, which took a big hit and are likely to see a delayed recovery,” says Akmal.
Ismitz Matthew De Alwis, executive director and CEO of Kenanga Investors Bhd, notes that shariah funds in general have outperformed due to their lack of exposure to the banking sector and a higher weighting in defensive sectors such as healthcare and telecommunications. “As such, shariah funds in general have outperformed. Going into a recovery, the shariah outperformance could reverse as cyclical sectors such as banks rebound faster,” he adds..............to read the full article please click on the Source link below
Published in: The Edge Markets on Monday, 24 August 2020
They say hard times bring out the best and worst in people. Long queues at Labour Department offices, soup kitchens and homeless shelters have become common sights after Covid-19 unleashed its wrath.
Covid-19 has shown us the frailty of the life we live and of the system that the capitalist ideology has built. This is exactly what our society has looked for as long as we can remember — a constant tug of war between the capitalist class and the working class.
The capitalist class represents the rich capital owners, owners of large corporations and of vast investment wealth.
It subjects the working population by buying labour at the labour market to service its capital through vehicles called corporations. Corporations have to borrow money since they cannot raise all the capital they need from issuing shares which means that another capitalist, the creditor, now has a staked interest in the corporations.
Banks, large money managers and other non-financial institutions participate in funding corporations through debt and equity. This combination of owner and creditor capitalist interests is put to the test during times like these.
Capitalism has created a hostile system where a corporation is threatened with the proceeding of its creditors against it if doesn't meet their demands.
Corporations scramble to save on any expenses they can to meet their debt payments and often resort to the easiest way to cut costs, laying off their workers.
With virtually no bargaining power, there's nothing workers can do when creditor interests are threatened.
Capitalists come first. They built the system and set the rules. Without employment, the economy comes to a virtual halt, which only exacerbates the predicament of creditors.
Consider Hertz, a car rental business which has run a very successful model for over 100 years withering due to the rise of unique and formidable compe-titors, such as Uber, and the ultimate foe of traditional business, technology.
There's one such adversary that Hertz could never hope to stand against: its creditors — large banks and other major corporations that have lent Hertz huge loans which it has failed to repay.
On the evening of May 22, Hertz filed for Chapter 11 bankruptcy protection for its United States business.
The typical procedure requires the reorganisation of assets and debts and the liquidation of certain non-inventory assets, perhaps at large losses, for the creditors to recuperate some of their capital.
The layoff of thousands of workers should come as no surprise. The failure of Hertz demonstrates a fundamental flaw of the capitalist system: its tendency to decimate perfectly good businesses and decades' worth of progress, all for the capitalist to recover a meagre portion of its investment.
Islamic finance attempts to relink the financial system to the real economy, strike a fine balance between asset-based and debt-based finance, and establish justice in the economic system through arrangements that do not allow the capitalist to wield such unfettered power.
Without profits, financiers are disincentivised to loan and in-stead opt to invest in ownership.
Consider if Hertz had instead issued sukuk. Sukuk are essentially bonds, but which are not standing debt obligations.
Instead, they represent an investment in the ownership of the issuing corporation's assets which pay dividends. Sukuk are issued to raise capital which the investor pays and receives certi-ficates backed by the underlying assets, held by a trustee in the interest of sukuk holders.
Any proceeding against the issuer in the case of a failure would not necessarily be in the interest of the sukuk holders, especially if the business model, like that of Hertz, has worked for over 100 years! They may instead opt to allow the business to recover in hopes that the value of their certificates also recovers. Hertz could have been saved in this way.
Hertz is only a prelude to the great economic chaos that's
predicted to ensue as an inevitable consequence of the forces of Covid-19 and capitalism. While Islamic finance practice is far from ideal due to the pressures from the hegemony of conventional finance, it does provide an ideal solution, theoretically.
After 400 years of a failed capitalist experiment, it's only sensible that an alternative such as Islamic finance is considered.
The writer is a researcher in Islamic finance. He holds a BBA in Finance from the University of Toronto, a BA in Islamic law, and an MSc in Islamic finance from the International Islamic University of Malaysia
Published in: New Straits Times, June 19, 2020
As the global development community responds to the COVID-19 pandemic, a diverse and inclusive set of stakeholders must be engaged to address the enormous challenge. While the crisis has created immense human suffering, it has also sparked worldwide action from institutions and people eager to help.
The UN Secretary-General’s Call for Solidarity, on March 19th, outlines three components; tackling the health emergency; focusing on social impact in the response and recovery; and helping countries recover more sustainably for the long term.
UNDP’s Integrated Response to COVID-19 offers support and guidance to counties to prepare, respond, and recover. The immediate priorities identified in the response include health systems support, inclusive and integrated crisis management and response, and social and economic impact needs assessment and response.
Islamic finance can be part of the COVID-19 response through a range of financing instruments well-suited for each stage.
Emergency support in the short term
Zakat can be an important component of national and NGO emergency support programmes. Donors typically require that Zakat be disbursed within one year of being given. This focus on immediate benefit is well suited for crisis response. Zakat donors support both the poor and the economically insecure, an area of increased need in the pandemic. Zakat donors often give cash transfers, which can be especially important in emergencies.
Individual philanthropy is a broad tool that can be used to support health care, food and other immediate needs. Corporate philanthropy can be a way for businesses to contribute not only money but also goods and expertise.
UNDP’s partnership BAZNAS, Indonesia’s national Zakat collection agency, has been in place since 2017. This collaboration is an example of how Zakat stakeholders can systematically link their projects with the Sustainable Development Goals, including in response to crises. UNDP’s partnership with the World Zakat Forum launched in 2019, lays the groundwork for members to work with UNDP on SDG alignment worldwide.
UNDP’s recently-announced partnership with the Dubai Islamic Economy Development Center is a reflection of how UNDP can support private-sector companies on social impact. UNDP has tools and frameworks by which firms can align their business activities and corporate giving with specific SDGs.
Response and recovery in the medium term
The financing of equipment, vehicles, and other sources of livelihood and trade finance are key mechanisms by which Islamic banks and financial institutions can support recovery. Aligning their financing activities with the SDGs is a significant opportunity for Islamic banks. In 2018, the Al Baraka Banking Group launched a collaboration with UNDP that seeks to align over US$600 million of its financing portfolio with the SDGs in the Middle East, Asia, Africa, and Europe. The coronavirus pandemic makes such initiatives all the more urgent.
Impact investing – private investment prioritizing businesses with social impact – can play a central role in the recovery. UNDP’s Global Islamic Finance and Impact Investing Platform, launched in 2015 in partnership with the Islamic Development Bank Group, brings global impact investing expertise to Islamic finance.
Long-term recovery and resilience
SDG-aligned sukuk (bond equivalents) can be an important source of long-term capital for governments and companies engaged in the COVID response and recovery. UNDP’s support of the Government of Indonesia’s Green Sukuk, including a US$1.25 billion issuance in 2018, is a prime example of how issuers can partner with UNDP to identity, track, and report on their SDG impact. They provide a decade of funding for Indonesia’s National SDG Plan.
UNDP has, through its Green Sukuk Initiative, held workshops and other outreach with partners in Malaysia, Pakistan, and beyond. As the pandemic has made long-term funding for development all the more crucial, UNDP stands ready to help.
Waqf endowments can, in many contexts, be important contributors to long-term resilience. Financial or non-financial assets such as land or buildings are permanently dedicated to social purposes. This can be an important way for stakeholders to contribute to social infrastructure that serves the SDGs and, in the words of the UN Secretary-General, help countries “recover better” over the long term.
This is a time for new ways to help tackle the devastation of COVID-19 and invest in sustainable development. Islamic finance has the tools for each stage of the response. UNDP stands ready to help countries and communities unlock these vital partnerships and instruments to respond to the pandemic.
Published in: UNDP.org
The COVID-19 outbreak has led to the implementation of the Movement Control Order (MCO) in Malaysia since the 18th March 2020. The MCO has mandated the closure of all government and private premises — except those involved in essential services. This measure has impacted the cash flow of both the general public and SMEs, affecting their capability to fulfill bank obligations.
In view of the aforementioned, the government on the 25th March 2020 announced a six-month moratorium on loan/financing repayments starting the 1st April 2020. According to Bank Negara Malaysia (BNM), this moratorium is expected to ease the cash flow of SMEs and individuals that are mostly affected by COVID-19. This brief article sheds critical light on the repayment moratorium from the perspective of Shariah.
In Islam, the creation of indebtedness — within the capability to repay it, be it resulting from a benevolent loan or deferred sale contracts, is permissible. However, a debtor is responsible for paying his obligation in a timely manner or as demanded by the creditor. Failure to fulfill a timely payment by a solvent debtor is deemed a breach of other rights and may be subject to punishment. However, if a debtor is facing genuine difficulty in paying his obligation in due time, the creditor should grant the debtor a time extension for payment. According to the Quran: “And if someone is in hardship, then [let there be] postponement until [a time of] ease (2:280).”
Muslim jurists agree that a creditor is obliged to provide a postponement of payment to an insolvent debtor until he is financially capable of paying it. They also prohibit any increase over and above the outstanding amount of the obligation as a result of the given postponement of payment, for this will trigger the issue of Riba Jahiliyah or Nasiah.
The BNM’s new release on the 1st May 2020, however, allowed the recognition of accrued profit over the deferment period for hire purchase and fixed-rate Islamic financing. This has invoked various contentions and criticisms on how BNM communicates its policy. Nevertheless, this position was later reversed by the minister of finance on the 6th May 2020, which affirms that the moratorium will not invoke any extra charges, including modification loss.
On the whole, a debtor in Islam is classified into two types: a solvent debtor and an insolvent debtor. A solvent debtor is compelled to fulfill his timely obligation, thus is not entitled for an extension of payment. The debtor’s refusal to make a timely payment, while being able to pay it, might be subject to punishment. In some incidents, the forced selling of collateral and court action are necessary to recover the creditor’s outstanding debt. On the other hand, an insolvent debtor shall be given a sufficient extension of time to settle his obligation until he is financially capable of paying.
The moratorium policy should, therefore, take into consideration the status of bank customers and apply only to insolvent customers, with the exclusion of solvent customers. The banks are, therefore, granted the authority to identify their customers’ eligibility for a moratorium. This approach is line with the ultimate objectives of the shariah on the protection of both life and legally-owned property of customers.
For Islamic banks, the approach on the selective moratorium policy will ensure their financial liquidity and business sustainability amid this extraordinarily challenging time. Applying an automatic moratorium for all customers, irrespective of their financial capabilities, would deepen further the fall in Islamic banking revenues.
This is particularly true since Islamic banks in Malaysia have already suffered from low margins resulting from the slashing of BNM’s base rate to 2.5%, low fee-based income due to lesser demand for certain banking services, slow growth in financing amid COVID-19, lower oil prices and a drop in investment avenues due to a capital market slump.
Besides, COVID-19 has exposed Islamic banks to an increase in non-performing financing or credit default risk due to a high number of business closures and increase in unemployment. Currently, thousands of consumers are being placed under quarantine as part of the Enhanced MCO. As a result, these consumers might lose their ability to pay installments, particularly of mortgages. The closure of businesses would lead to cash flow problems, which in turn will affect their capability to fulfill the bank installments.
The pandemic might also bring liquidity risk to Islamic banks because new depositors have an increasing preference for short-term safe assets and safe haven investment portfolios such as gold. On the other hand, as indicated earlier, credit risk will increase significantly due to the rise in the number of business shutdowns and the unemployment rate. Consequently, demand for liquidity arises. Even existing depositors have now started withdrawing their savings for their daily spending, to sustain their life and livelihood.
Siti Fariha Adilah Ismail, a Masters in Islamic Finance Practice (MIFP) student at the International Centre for Education in Islamic Finance (INCEIF), The Global University of Islamic Finance assisted in authoring this report.
Published in: Islamic Finance News (IFN), 22 May 2020
The global Islamic finance industry will continue to grow at a comparably slow rate of around 5% in 2019 and 2020 in terms of assets, according to the newly issued “Islamic Finance Outlook 2020” by US-based business intelligence firm S&P Global Ratings. This follows a 10% growth rate in 2017 but only 2%-3% growth in 2018, which was mainly owing to flat sukuk issuances and generally weaker economic conditions in the industry’s core markets, with the notable exceptions of Malaysia, Indonesia and Turkey, as well as Qatar where a number of issuers have returned to the capital markets as of late.
The report says it does not expect a quick rebound in the market, but acknowledges that the sukuk sector has improved from a total issuance volume of close to $130bn in 2018 – which was only slightly more than around $125bn in 2017 – to $162bn in 2019, according to Mohamed Damak, global head of Islamic finance at S&P Global Ratings. For 2020, he expects an issuance volume of up to $170bn, with accelerators being environmental, social and governance (ESG) sukuk, including green sukuk, and more medium-sized companies and financial institutions issuing Islamic bonds due to better standardisation in legal documentation and Shariah interpretation, which makes it cheaper and less complex to issue sukuk.
More commitments to environmental standards and the green economy in general in Islamic jurisdictions are also driving ESG investments, which – in turn – will attract a new type of investors to Islamic bonds, particularly in segments where ESG-related concerns and Shariah-compliant financing overlap, Damak said.
Apart from regulatory improvements, legal standardisation and ESG investments, the report sees another main opportunity to unlock further potential of Islamic finance, which is – unsurprisingly – Islamic fintech, although the S&P analysts are reluctant to predict a quick adaption of technological innovations in the Islamic finance industry since banks will first have to deal with the disrupting effects of fintech. As an example, the report notes that new digital financial services can equally be a potential threat to some business lines such as money transfer, especially in the Gulf Co-operation Council (GCC) region where expatriates send more than $100bn back home every year.
However, over time, fintech is expected to spur growth of Islamic finance by enhancing the speed and ease of transactions, particularly through blockchain technology, which also helps increase transaction security and improves the traceability of transactions. It will also allow for a range of new digital banking solutions and will simplify and streamline regulatory and legal processes.
“We believe fintech will have only a marginal influence on our Islamic bank and sukuk ratings over the next two years,” the report says.
“[But] we consider that Islamic banks will be able to adapt to their changing operating environment through a combination of collaboration with fintech companies and cost-reduction measures. We also believe that regulators across the wider Islamic finance landscape will continue to protect the financial stability of their banking systems. Furthermore, we think that blockchain could help the operational management of sukuk, but will not induce any changes in the legal substance of the transactions.”
In money terms, the S&P forecast would translate into growth to $2.63tn in Islamic finance assets in 2019 and to $2.76tn in 2020. While the report is not providing a forecast beyond 2020, another study does: The “Islamic Finance Development Report 2019” compiled by Thomson Reuters and the Islamic Corp for the Development of the Private Sector forecasts that the Islamic finance industry will reach total assets of $3.47tn by 2024, based on a compound annual growth rate of 5.5% calculated from $2.52tn in assets in 2018.
Rating agency Moody’s in an earlier report also predicted stable growth in Islamic banking in most core Islamic markets, with an additional factor being mergers between Islamic and conventional banks in the GCC, where Islamic banks are the remaining entities, which could also drive one-off increases in Islamic banking assets in the years to come
Published in : Gulf Times, 20 January
Syariah is the backbone of Islamic financial institutions (IFIs).Ensuring syariah compliance is essential for maintaining the confidence of stakeholders and the public at large.
Inadequate attention to the whole process of syariah compliance inevitably triggers negative repercussions for IFIs, such as financial loss and massive withdrawals.
Over the last two decades, many cases have been brought to the courts challenging the syariah compliance aspects of some Islamic banking products.
The decision by some judges to annul the underlying contracts of several Islamic banking products has posed the threat of financial losses for the banks.
As a case in point, in the Arab Malaysian Finance Bhd versus Taman Ihsan Jaya Sdn Bhd case, the court declared that bay’ bi thaman ajil (BBA) was invalid on the basis that the BBA facility was a bona fide sale transaction.
Therefore, when the bank recalled the facility at a higher total price, the sale no longer represented a bona fide sale transaction but was merely a financing facility similar to a loan under the conventional system.
Nevertheless, the Court of Appeal in the case of Bank Islam Malaysia Bhd versus Lim Kok Hoe reversed this decision, upholding the validity of the BBA as an enforceable contract.
Against the above backdrop, on Oct 26, 2010, Bank Negara Malaysia (BNM) introduced the Syariah Governance Framework (SGF) for IFIs operating under its purview (notably Islamic banks, conventional banks offering Islamic financial services and takaful companies).
The SGF aimed to strengthen the syariah governance structures, processes and arrangements of IFIs to ensure syariah compliance. The SGF required IFIs to institute clear internal control and remedial rectification measures to address Syariah non-compliant incidents holistically.
In response to emerging IFI business complexity and market maturity, on Sept 20, 2019, BNM issued a new, revised version of the SGF, namely Syariah Governance Policy (SGP), which supersedes the exiting SGF.
This new framework set out to enhance board oversight and the responsibilities of syariah governance, increase the requirements for syariah committees providing objective and sound advice to IFIs, raise the expectation that board and senior management promote a syariah compliance culture, and improve the quality of internal control functions.
This article highlights some of the new, enhanced features of the 2019 SGP in comparison with the 2010 SGF.
FIRST, the new SGP restricts the tenure of syariah committee members to a maximum of nine years in a single IFI, in comparison to the 2010 SGF, which had no limit.
This limit addresses concerns regarding complacency, which may affect the professional
objectivity of syariah committees.
A fresh and new composition of syariah committee members is expected to deepen syariah deliberation and the overall competence of syariah committees.
This particular requirement, however, will only be effective from April 1, 2023, to allow for transitional arrangements and sufficient time for IFIs to reconstitute their syariah committee compositions.
SECOND, the previous SGF allowed syariah committees to adopt more stringent syariah decisions than the published rulings of the Syariah Advisory Council (SAC).
The new SGP, however, mandates that banks notify the BNM about any additional restrictions that go beyond the SAC rulings, together with any documented deliberation and justification by their syariah committees (para 10.7).
THIRD, the preceding SGF was silent about the status of a politically-exposed person acting as a member of a syariah committee. The 2019 SGP, on the other hand, explicitly prohibits active politicians from becoming syariah committee members.
FOURTH, the new SGP mandates that boards establish effective communication with their syariah committees on all matters relating to syariah requirements, syariah governance, or syariah non-compliance risks.
The boards must also regularly review the quality and frequency of their engagement with their syariah committees. This is to enable both the board and syariah committee to discharge their respective responsibilities effectively. The 2010 SGF was, however, silent on this requirement.
FIFTH, the former SGF required that the syariah review function be conducted by a qualified syariah officer, holding at least a bachelor’s degree in syariah, including in ushul fiqh and fiqh muamalat.
The new SGP removes such requirements and situates itself as part of the overall compliance responsibility under the control function.
In this regard, the syariah review function is required to have a sound understanding of those syariah requirements applicable to Islamic financial businesses and operations.
Finally, while the 2010 SGF required the establishment of a dedicated syariah research function by a qualified syariah officer, the 2019 SGP removes this requirement by consolidating its role under the syariah secretariat function.
The approach taken by the new policy places more emphasis on ensuring effective management of syariah non-compliance risks through control function.
From a broader perspective, we can conclude that the new SGP demonstrates BNM’s heightened expectations towards effective syariah governance and culture.
This is yet another step in the impressive development profile of Islamic banking and finance in Malaysia, which it is is hoped will see an increase in public confidence in the often questioned syariah compliance credibility of Islamic banks and financial institutions in this country.
The writer is a research fellow at the International Institute of Advanced Islamic Studies (IAIS) Malaysia
Published in: The New Straits Times, Saturday 05 October 2019
Issues of child abuse, neglect, malnutrition and exploitation are the focus of renewed attention from governments, policymakers and multilateral institutions.
For instance, the United Nations Millennium Declaration 2005 and the Sustainable Development Goals (SDG) 2017 have listed children’s rights to survival, health, and education into their main agendas.
Research has shown that children are the most vulnerable segment of a society and are exposed to abuse and violence. Each year, an estimated 0.5 to 1.5 billion children are involved in physical violence, 150 million girls and 73 million boys are raped or subjected to sexual abuse, 115 million children engaged in dangerous work and 264 million children have no access to school.
In Malaysia, 17.7 per cent of children below the age of 5 are stunted (Health Ministry 2017 records), 22 per cent are underweight and 23 per cent are either overweight or obese (United Nations Children’s Fund [Unicef] 2018).
The Malaysian government and policymakers, therefore, have shifted their attention towards strengthening the social protection system. For example, the Bantuan Sara Hidup (BSH) programme launched in 2018 offers unconditional cash transfers to B40 households to assist with rising costs of living. However, the existing protection schemes are not specifically designed to address the welfare of children during their first 1,000 days — the most vulnerable phase in their life, in which nutrition and beneficial healthcare are paramount.
This article, therefore, proposes the utilisation of corporate zakat — an annual religious obligation paid by business entities under the purview of zakat on wealth — to develop a child grant that seeks to complement existing government programmes.
An ongoing study by the International Institute of Advanced Islamic Studies (IAIS) Malaysia, in collaboration with Unicef and Iman Research, discovered that corporate zakat has the potential to address the required needs of children in Malaysia in terms of survival, nutrition, healthcare and education.
There are 693 Syariah-compliant listed companies under the Securities Commission and 16 Islamic commercial banks in Malaysia that are supposed to pay zakat. However, as of October last year, only 21 companies and 12 Islamic banks disclosed their zakat payment with an average payment of RM4 million accumulating a total collection of RM130 million. This is a far cry from its true potential, which is estimated to reach RM2.9 billion in 2019 and more than RM3.4 billion by 2031. This projection, however, does not include non-public Syariah-compliant firms, sole-proprietorships, Islamic cooperatives and small, medium enterprises in Malaysia.
On the other hand, the total budget of the child grant only amounted to RM1.9 billion, to cater approximately for 832,940 children under the age of 2 in 2019, with each child to be allocated RM150.
In Islam, zakat can be used for various socio-economic purposes such as education, healthcare and humanitarian causes as long as they fulfil the criteria of zakat beneficiaries (asnaf).
The Quranic verse (9:60) listed eight categories deserving of zakat: the poor (al-fuqara’); the needy (al-masakin); zakat collectors; those whose hearts are being reconciled (with Islam); freeing war captives; persons in debt; those who are in the path of Allah; and the wayfarers.
In this regard, the overwhelming majority of jurists from four established schools (Hanafites, Malikites, Syafi’ites and Hambalites) are of the view that children are also eligible to receive zakat if their guardians fall among the above eight categories.
A hadith narrated by al-Daruquthni from Abu Juhaufah reported that the Prophet Muhammad (PBUH) once sent a zakat collector who collected zakat from the rich people and distributed the collection among the poor. At that time, Abu Juhaifah was a young orphan who did not possess any wealth, so the zakat collector gave him a middle-aged camel. Thus, according to the Hanafi school, children of wealthy parents could not receive zakat because they are considered rich if their parents are rich.
In a report attributed to Caliph Umar al-Khattab, it is stated that the first poor (fuqara’) refer to Muslims and the second needy (masakin) to non-Muslims. Difference of religion is thus not a bar to zakat.
In a nutshell, corporate zakat is a high potential source of funding for a child grant programme in Malaysia, particularly for children of households belonging to the B40 category. Other potential avenues such as corporate social responsibility (CSR), sadaqah and waqf, can also be explored as complementary funding sources for the proposed grant.
From an Islamic viewpoint, the use of corporate zakat and other Islamic social finance instruments for a child protection system correspond to the higher objectives of Syariah (maqasid) on the protection of life and mind, and is supportive of the government’s new motto to promote Islam as rahmatan lil ‘alamin (a mercy to all creation).
To achieve corporate zakat’s fullest collection potential, this article proposes that relevant authorities, such as the Securities Commission (SC), Bank Negara Malaysia (BNM), and the Companies Commission of Malaysia (SSM), increase the promotion of zakat among Malaysian companies.
The corporate zakat payment needs to be emphasised as a tax obligation. This is particularly so since the National Fatwa Council of Malaysia (2001) and Selangor Fatwa Council (2003) have resolved that Islamic banks and Syariah-compliant firms are obligated to pay zakat.
It is also recommended that zakat payment becomes one of the determining criteria in achieving Syariah-compliant status for public-listed securities under the SC.
The writer is a research fellow at the International Institute of Advanced Islamic Studies (IAIS) Malaysia
Published in: New Straits Times, Thursday 18 April 2019
Financial inclusion or access to finance at an affordable cost has, since the early 2000s, been a focus of renewed concern for many governments and central banks.
The World Bank’s 2017 Global Findex Database discovered that about 1.7 billion people worldwide remain unbanked — without an account at a financial institution or a mobile money provider. The United Nations Development Programme’s Sustainable Development Goals (SDGs), therefore, seeks to improve financial access into its main development agenda.
A plethora of academic evidence confirms that financial inclusion can support the achievement of broader sustainable development goals.
As a business established within the ambit of Syariah principles, values and goals, Islamic finance aims to promote economic wellbeing and creates socio-economic justice; and serve as a catalyst for development, in line with the spirit of the UN sustainable development agenda.
The International Monetary Fund, in its press release on May 9, also acknowledged that “the growth of Islamic finance presents important opportunities to strengthen financial inclusion, deepen financial markets, and mobilise funding for development by offering new modes of finance and attracting unbanked populations that have not participated in the financial system.”
Islamic finance could contribute to the financial inclusion agenda through two main mechanisms: profit and loss sharing (PLS) or risk-sharing instruments, like musharakah and mudharabah, as an alternative to conventional debt-based financing and risk transfer; and Islamic social finance instruments, such as zakat, waqf (endowment fund), shadaqah, and qard hasan (benevolent loan), which complement PLS instruments.
PLS promotes the financial inclusion agenda because the concept can offer access to finance to low-income segments at an affordable and fair rate: the imposition of cost and the distribution of profit are based on the actual performance of the business.
As a result, the optimum application of PLS will create an equitable distribution of income and wealth among partners or between wealth owners and entrepreneurs, presenting the concept of justice and fairness in financial dealings.
Risk transfer underlying the conventional financial system, on the other hand, implies asymmetric exposures to economic risk, and does not, therefore, promote economic justice and financial inclusion.
Furthermore, social finance, mandated or otherwise, is an integral part of the Islamic financial system to offer equal opportunity to financial access to the low-income segments, that is, the underserved and poor, “so that it may not (merely) make a circuit between the wealthy among you” (QS 59:7).
Islamic social finance instruments help improve financial access via various initiatives, such as microfinance empowerment and poverty alleviation programmes.
Financial technology (fintech) is a perfect device to reinforce the role of Islamic finance in promoting the financial inclusion agenda. The use of digital finance, such as blockchain and crowdfunding, can lower transactional costs and minimise asymmetric information.
Santander FinTech issued a report in 2015 estimating that blockchain could reduce transactional costs attributable to cross-border payment, securities trading and regulatory compliance between US$15 billion (RM62 billion) and US$20 billion per annum by 2022.
Furthermore, the ability of blockchain to transmit and to record the ownership of the digital assets and immutably store information — where all blockchain participants have access to the same information — might significantly reduce information asymmetries.
Fintech can also open financial access to unbanked individuals. According to World Bank estimate, there are approximately 240 million to 334 million people in developing economies that could participate in crowdfunding.
It is also a powerful tool to widen access and outreach of Islamic social finance instruments such as zakah, waqf and sadaqah.
Bank Negara Malaysia Assistant Governor, Datuk Ahmad Hizzad Baharuddin, at the Association of Shariah Advisers’ Shariah Fintech Forum 2017, affirmed that fintech promises to revolutionise finance and bring a broader range of benefits to financial institutions and the public.
The writer is a research fellow at the International Institute of Advanced Islamic Studies Malaysia
Published in: New Straits Times, Friday 19 October 2018