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Saturday, 2 June 2012

A Faith-Based Aid Revolution in the Muslim World?

Dubai — Every year, somewhere between US$200 billion and $1 trillion are spent in "mandatory" alms and voluntary charity across the Muslim world, Islamic financial analysts estimate.
At the low end of the estimate, this is 15 times more than global humanitarian aid contributions* in 2011.
With aid from traditional Western donors decreasing in the wake of a global recession, and with about a quarter of the Muslim world living on less than $1.25 a day**, this represents a huge pool of potential in the world of aid funding.
But Islamic finance experts, researchers and development workers say much of the money spent in 'zakat' (mandatory alms) and 'sadaqa' (charity) is mismanaged, wasted or ineffective.
"Wealth is growing in the Muslim world. So is the poverty. Where have we gone wrong?" asks Tariq Cheema, president of the World Congress of Muslim Philanthropists (WCMP), an organization which advises Muslim donors - including some of the thousands of millionaires living in the Gulf - on how to increase sustainability and accountability in their donations.
Islam requires Muslims to give 2.5 percent of their wealth and assets to the poor every year. Much more is given in voluntary 'sadaqa'. But that money is usually donated in small amounts at local levels to feed the poor, help orphans, or build mosques. Muslims say many of them give, almost without thinking, to fulfil a religious obligation. "Our rituals are there, but often they lack the spirit," Cheema told IRIN. "We just give the money and forget."
Very little of the money goes towards sustainable development.
"Billions of dollars worth of giving in 'zakat' and 'sadaqa' are unfortunately ineffective by and large," he said. "Our giving shouldn't be driven by our desire to prove that we are good people... Our giving should be smart and effective."
"We are here to bring that shift in the culture: the paradigm shift from conventional and generous giving to strategic giving... There is a lot of money around that needs to be channelled towards development."
Huge potential
In the early years of Islam, 'zakat', 'sadaqa' and 'awqaf'( religious endowments) played a large role in society - not only in poverty alleviation, but in the building of infrastructure and provision of social services. In Ottoman times, some Turkish towns were almost entirely based on religious endowments - the real estate donated, with the rent going towards charitable or social ends: educational and health facilities, research institutes, even the lighting of streets. The endowments are credited as one of the reasons for the "Golden Age" of Islamic civilization from the eighth to the 13th centuries.
But due to colonization, the stagnation of Muslim institutions, mismanagement of 'awqaf' and the inability of their laws to adapt to changing times, these charitable traditions lost their central place in the organization of society.
Cheema said many Muslims today do not know how to calculate the amount of 'zakat' they should pay and do not have the channels through which to pay it. Governments collect a very small percentage of what they could.
In 2004, economist Habib Ahmed calculated that if all potential 'zakat' were collected in Muslim countries, between a third and half of them could move their poor out of poverty.***
"The potential is tremendous," Ahmed, now chair in Islamic Law and Finance at the Institute of Middle Eastern and Islamic Studies at Durham University, told IRIN. "But in most countries, it is not being used to the potential."
Among the reasons, he said, are that people do not trust governments, who have a history of mismanagement, and prefer to give their money to people they know are in need.
Syed Wafa is a former professor who headed a research group that advised the Malaysian government on distributing 'zakat' funds. He said even Malaysia - one of the most advanced countries in 'zakat' collection - is not strategic in its disbursement of funds.
"The 'zakat' authority does not have a long-term investment plan," he told IRIN. "They depend on the yearly collection... Their mindset is: We get the funds; we try to disburse them as fast as possible."
Wafa's recommendation to the government that it disburse 'zakat' funds through loans or micro-credit financing was rejected based on the perception that 'zakat' should, according to religious edict, be owned by the poor, and thus given in the form of direct assistance. In the Malaysian state of Johor, however, the 'zakat' authority allows funds to be spent on student loans for tertiary education.
Feeding the poor and helping orphans are encouraged repeatedly in the Koran and have thus become preferred forms of 'zakat'. Building mosques has been a popular form of 'sadaqa', largely due to the Prophet Muhammad's saying that he who helps build a mosque will have a castle built for him in heaven.
Muslim NGOs have at times struggled to convince donors to support "intangible" activities like capacity-building or empowerment, over these more tangible causes, according to Marie Juul Peterson, a researcher in politics and development at the Danish Institute for International Studies, who wrote her PhD thesis about transnational Muslim NGOs.
"One thing is clear," said Cheema of WCMP. "Around the Muslim world, there is an increased awareness that if 'zakat' distribution and management is made effective, we can bring revolutions in terms of development - not only for the Muslims, but people around the world."
Role of government
Many countries have entire ministries of 'zakat' and 'awqaf', but they are mistrusted, ineffective and badly managed, Ahmed said. But as they wake up to the potential of proper 'zakat' management, some governments are making efforts to centralize the process, either directly through government, through non-profit corporations created by the government; or through hybrid systems, where NGOs also play a role in collecting 'zakat'.
Malaysia has made great strides: in 2010 it collected 1.4 billion Malaysian ringgit (US$443 million) in 'zakat', up from about $95 million 10 years ago, said Wafa, now head of a Shariah-compliant financial institution called KOPSYA, which finances cooperatives through no-interest loans.
Malaysians who give 'zakat' are given a tax credit. In Pakistan the government deducts 'zakat' on certain categories of assets, with bank account deductions on the first day of Ramadan every year directly deposited in the Central Zakat Fund maintained by the State Bank of Pakistan.
In 2010 the Egyptian government measured, for the first time, the amount of money Egyptians donate to charity, estimating it at about 4.5 billion Egyptian pounds ($745 million) in 2009. Others have made estimates two to four times higher. In strictly financial terms, this government estimate would be enough to pull nearly all of Egypt's poor out of poverty.****
Donor culture built on religion
Others are also targeting the "charity mentality" at the state level - lobbying governments in the Muslim world, especially the Gulf, to be more strategic with their aid.
"Our [Muslims'] whole donorship was built on religious charity," said Ibrahim Osman, director of the Middle East and North Africa region for the International Federation of Red Cross and Red Crescent Societies (IFRC). "That has infiltrated even governments and public institutions... Most Muslim countries do handouts, even with international organizations.
"The Arab world has to change from a charity culture to a humanitarian action business," he told IRIN. "This is what is missing. It's always charity."
But observers say that apart from a few notable exceptions, major reform at the government level is unlikely.
Billions of dollars worth of giving in 'zakat' and 'sadaqa' are unfortunately ineffective by and large...we are here to bring the paradigm shift from conventional and generous giving to strategic giving.
"We academics talk about the role of 'zakat', but ultimately, if there is no political will at the level of the government, there will not be a structural change which can bring this about," Habib said.
"It needs a different mindset," Wafa added. "The ideas have to come from the public."
Increasingly, it is civil society filling the gap. See IRIN's list of efforts to make Muslim aid more effective.
The role of NGOs
In Egypt, a start-up social business called Madad is trying to shift the billions of pounds spent in Egypt every year in donations and charity by highlighting those NGOs working towards sustainable development.
"As Muslims, we are raised that you have to pay 'zakat'," said Sameh Awad, head of Madad. "People just go to the poor people and give them money and they feel that they're fulfilled.
"We are trying to change the culture of giving among the donors," he told IRIN, encouraging them to take more interest in how the money they give is spent and whether it creates any lasting change.
Muslim NGOs, some of whom get up to 80 percent of their funding from 'zakat' and 'sadaqa', are increasingly turning to sustainable development projects like Islamic (interest-free) micro-finance and livelihood support.
Instead of giving money to individual orphans, some NGOs have tried to support them in more strategic ways, introducing human rights, empowerment and "mainstream aid activities", Juul Peterson, the researcher, said. Other projects have included developing sermons for imams on children's rights or training them in disaster preparedness.
"You have these new ideas of how good aid should be," she told IRIN.
In Egypt, a non-profit organization called Misr al-Kheir, led by the Grand Mufti of Egypt, the highest religious authority in the country, and funded by 'zakat' and 'sadaqa', has been a pioneer in the use of 'zakat' for sustainable ends. Leading by example, the Mufti has made it religiously acceptable to invest 'zakat' in Islamic micro-finance projects and scientific research aimed at improving human development.
Al-Rajhi Bank and Yousef Abdullatif Jameel Co. in Saudi Arabia and Amanah Ikhtiar Malaysia (AIM) are Muslim lending institutions which have attempted to replicate the successes of Grameen bank in Bangladesh.
Several people are also trying to involve the $1 trillion Islamic finance industry in the financing of development, by encouraging Islamic financial institutions to transfer a percentage of their capital towards sustainable livelihoods for the poor, or using Islamic capital market instruments to create 'awqaf'.
Sustainable forms of Muslim aid
Historically, 'awaqf' have contributed to sustainable development much more than 'zakat'; and Muslims are increasing finding innovative and modern versions of the old tradition, including collective and corporate religious endowments.
In 2009, the Organization for Islamic Cooperation's Fikh Academy, charged with setting religious laws, passed a resolution evolving the rules around 'awaqf' to make them more flexible, allowing temporary 'awaqf', corporate 'awaqf' (through shares of a company) and 'awaqf' in cash - but regulation is still up to the government in most countries.
NGOs have lobbied Muslim scholars to issue fatwas making it easier for Muslims to give their faith-based charity in non-traditional ways, expanding the forms of acceptable religious charity, reducing waste and increasing sustainability and impact.
In 2007, Egypt's Grand Mufti pronounced that contributions to a civil society campaign - including fundraising by text message - to open a new children's cancer hospital would constitute legitimate 'zakat'. The hospital, financed completely through donations, is now the second largest in the world dedicated to paediatric cancer care.
Muslim scholars have also allowed 'zakat' to be given towards relief operations, which has made a big difference in responding to humanitarian disasters.
Making the most of Eid
One source of waste, historically, has been during the Eid al-Adha holiday, in which Muslims are encouraged to slaughter an animal and donate the meat to the poor - another industry worth millions, if not billions, of dollars. As a result, millions of sheep are estimated to be slaughtered every year in a span of a few days. On such a scale, the meat cannot always be distributed quickly and efficiently enough.
In 2011, well-known Muslim scholar Yusuf al-Qaradawi approved the canning of meat for distribution abroad at a later point.
Other NGOs, like Muslim Aid and Awqaf New Zealand, are combining the ritual, known as 'qurbani' or 'udheya', with livelihood activities, in which poor farmers rear the animals and sell them to the NGOs during Eid or use other parts of the animal to create revenue.
"We maximize the donation for the best interest of the poor," said Husain Benyounis, secretary-general of Awqaf New Zealand. "We turn something out of everything they throw away."
The Koran says the one of the ways in which you can continue being rewarded for your good deeds after you die is by leaving a form of continuous 'sadaqa', a gift that keeps giving. In a Muslim version of "teaching someone how to fish", the Prophet Muhammad is said to have helped a beggar find a sustainable income, instead of giving him money.
"You find very different interpretations of 'zakat' and 'sadaqa'," Peterson said. "[But] people are increasingly using Islamic discourses to argue for sustainability."
Still, though the Arab Spring may speed up the process, most observers say it will be years before there is any significant shift.
Awad, the young Egyptian social entrepreneur, believes Egypt's revolution needs to spread to the civil society sector.
"We need a revolution in all the sectors," he said. "We need a revolution, not only in leaders, but in the mindset itself."
But many continue to have hope in the potential offered through 'zakat', 'sadaqa', 'awqaf' and 'qurbani', especially as social media helps raise awareness and change the feedback loop. Sami Yusuf, a Muslim musician whose involvement in the LiveFeed campaign helped raise funds for the World Food Programme, says people just need the right channels to give.
"I think we're going to be really surprised in the years to come in this part of the world."
*According to the UN's Financial Tracking System, global humanitarian funding in 2011 totalled just over $13 billion.
**Calculated by IRIN as an average of the percentage of population living under $1.25 a day in the 40 member countries of the Islamic Development Bank (IDB) for which there was data in the 2011 Human Development Index.
***See page 69 of the link. Calculated by Habib Ahmed using the upper limit (4.3 percent of GDP) of a model used to measure the impact of full 'zakat' collection in IDB countries. (The lower end of the model is 1.8 percent)
****Calculated by IRIN based on an Egyptian population of 85 million - about 2 percent of which live below the poverty line, according to the Human Development Index of 2011. At today's exchange rate, 4.5 billion pounds works out to about $1.19 dollars per day per person living under the poverty line.
(AllAfrica / 01 June 2012)

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Islamic finance development in Kazakhstan discussed

Kazakh Minister of Industry and New Technologies Asset Issekeshev met with Vice President of Islamic Development Bank Birama Sidibe on Friday, the Ministry's press service said.
The sides discussed further steps to implement the initiatives of President Nursultan Nazarbayev. In particular, they talked about establishing OIC food security fund, fund for development of small and medium businesses, Fund on investments in renewable energy, as well as the development of Islamic finance in Kazakhstan and regional cooperation and integration in Central Asia.
The sides noted the importance of signing of the Country Partnership Strategy between Kazakhstan and the IDB Group (to the amount of USD 1.2 billion), which would be an effective tool to enhance the bank's activities in Kazakhstan, aimed at diversifying the economy in terms of supporting SMEs, developing transport and energy infrastructure, agriculture, Islamic financial sector and regional integration.
As Issekeshev noted, Kazakhstan, during its presidency over OIC, has received strong support for its initiatives from the structural institutions of the Organization, particularly from the Islamic Development Bank.
(Gazate.Kz / 01 May 2012)

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Islamic banking demystified

1. Is Islamic banking meant for Muslims only? Can a non-Muslim bank with you?
Islamic banking is consistent with a moral code set out by Islamic or Shariah law. This law includes the prohibition of investing in any business that goes against principles of Shariah law, like the selling of alcohol or gambling. This moral code is applicable to all and sundry of all religious beliefs.
2. What are the differences between Islamic and conventional banking?
a) Objectives
Islamic Banks: To achieve social as well as  financial goals and development of the Islamic community, subject to compliance with the rules of Islamic Shariah, without overlooking the element of earning profit.
Conventional Banks: Its main endeavour is to generate profit by charging its customers the highest possible interest without any regard to community development. It also acts as an intermediary between the lender and borrower with interest.
b) Principal Activity
Islamic Banks: It is characterised by special methods of investment of its funds according to Islamic Shariah principles such as sale and purchase, trading, murabahah, mudharabah, musharakah, salam, istisn’a, leasing etc.
Conventional Banks: It mainly concentrates on the grant of loans and advance payments in consideration of interest to be specified before hand (either lending with interest or borrowing with interest).
c) Lawful Adaptation
Islamic Banks: It can be a mudharib, musharik, owner of the capital, san’i, mustasn’i, seller, purchaser or operating in such other capacity.
Conventional Banks: They generally accept deposits from individuals and others and provide them as loans to individuals or third parties in which case the bank acts as an intermediary between the lender and the borrower, with interest charged on the principal as a general rule.
d) Guarantee of Profit and Loss
Islamic Banks: The Islamic banks do not play guarantor in respect of deposits except in cases of encroachments, negligence or violation of the terms or the custom of trade.
Conventional Banks: The conventional banks play guarantor because it borrows and lends with interest.
e) Social Solidarity
Islamic Banks: To achieve social solidarity through restoration of the religious duty of zakat by means of zakat funds, through interest free loan or allocation of funds for interest free loans with special terms.
Conventional Banks: The activities do not include any of the social aspects.
3. Can banks transfer credit balance of a customer's Islamic account to a conventional account, or vice versa?
It is always possible to transfer funds from an Islamic bank account to a conventional account upon customer request. On the other hand, only the principal amount can be transferred from a conventional account to an Islamic account. No element of interest is allowed to be transferred.
4. How do Islamic banks make a profit if they are not allowed to charge interest?
Islamic banks operate by making profit like any other business, though they avoid charging interest on loans borrowed by people. There are two ways to generate profit. One is by buying a product, like a house, and selling it to the customer at a higher price, allowing the fee to be paid in instalments.
Another way is where the bank and the customer buy a house together in partnership. The customer will then make payments that are partly meant for rent, and partly buying out the bank.
In fact these methods have often proved more profitable for Islamic banks than the methods of their counterparts. Whereas banks’ interest rates can rise and fall, the fee charged by Islamic banks remains the same regardless of economic changes.
5. What is the concept of Wadiah (safekeeping)?
For deposit product or Wadiah contract, a bank is the custodian and trustee of funds. A person deposits funds in the bank and the bank guarantees refund of any part or the whole amount of the deposit when requested by the depositor. The depositor, at the bank's discretion, may be given hibah (gift) as a form of appreciation for the use of funds by the bank.
6. What is the concept of Mudharabah (profit sharing)?
Mudharabah is a form of partnership where one group provides funds and the other provides expertise and management. Profits that are accrued are shared between the two parties on a pre-agreed ratio, while the capital loss is borne by the fund provider. If fund providers are more than one, then loss is borne by them in proportion to their capital.
Rabul-Maal (Capital Investor)
In a mudharabah contract, the person who invests the capital is called rabul-maal.
Mudarib (Manager)
The entrepreneur or investment manager is called a mudarib who invests the investor's funds in a project or portfolio in exchange for a share of profits accrued.
7. What is the concept of Musharaka (joint venture)?
Musharaka means sharing. Technically, it is an investment contract whereby both parties contribute capital and enjoy an entrepreneurship together. They share profits on the agreed terms while the loss is borne by the parties according to the proportion of their invested capital.
There are two main kinds of sharika:
Shirkat ul-Melk (Co-ownership)
It is defined as the existence of an asset in the exclusive co-ownership of two or more people. In this type of sharika, each and everyone has undivided ownership even in the smallest part of the asset. This ownership is of two kinds:
a. Compulsory co-ownership
It is a partnership, which becomes effective without any action on the part of the partners, such as inheritance.
b. Optional co-ownership
It is a co-ownership, which is made effective through the act of parties e.g. joint purchase or joint acceptance of a gift.
Sharikatul-Aqd (Contractual Partnership)
Sharikatul-Aqd means an agreement between two or more parties to combine their assets, labour and/or liabilities for making profits. Following are the kinds of sharikatul-aqd:
a. Shirkat ul-Wujooh
Partnership between two or more parties whereby each partner contributes no capital but enjoy their creditworthiness in the society which helps them to obtain goods on credit, sell the goods and share the profit.
b. Shirkat ul-Abdan/ Sharikat ul-Taqabul
Partnership between two or more parties whereby each partner contributes the work and management (devoid of capital).
8. What is the concept of Wakala (agency)?
Wakala is a form of contract, whereby an individual delegates his right or business to other people to act as his agent or wakil (agent). The agent applies his knowledge and skills to complete the task assigned to his clients.
9. What is the concept of Qard (interest-free loan)?
The meaning of qard is 'to cut'. It is a loan offered on goodwill of the debtor, who is only required to repay the amount borrowed. In that case, the debtor does not have to pay an extra amount to the creditor and the transaction is termed as an interest free loan. Legally qard means to give a loan to the borrower, on the condition that the loan would be paid back on demand or at settlement.
10. What is the concept of Ijarah Thumma Bai' (hire purchase)?
This is a contract that begins with an ijarah contract for the purpose of leasing out the lessor’s asset to the lessee. Subsequently, at the end of the lease period, the lessee will buy the asset at an agreed price from a lessor by executing a purchase (bai’) contract. On the other hand, there are two contract executed in this concept. IjarahThummaBai’ is normally used in financing consumer goods, especially motor vehicles.
(Business Today / 01 June 2012)

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Saudi Arabia - The case for sukuk remains compelling

(MENAFN - Arab News) After a long period of relatively minimal bond market activity, the period of the global economic crisis has seen bonds and sukuk increasingly claim their place as the third pillar of the traditionally heavily bank-dominated GCC financial markets. 

While much of the issuance, especially in the financial services area, has been conventional, the regional sukuk markets have made particularly impressive progress as an alternative funding sources at a time when bank financing has been relatively scarce. And although the provisioning cycle in the region is largely over, the challenges of European banks in their home markets fuel uncertainty about the availability of syndicated loans.

A number of factors suggest that the sukuk market is likely to continue to see significant positive momentum in the Gulf. The wave of default-type situations appears to have passed, at least for now, and has left a legacy of a much better understanding of how to deal with them, as well as a pool of qualified professionals needed for such tasks. 

Consequently, risks are better understood and likely to be dealt with much more quickly. This has also contributed to the broader process of market clustering around certain widely accepted structures which are seen as more structurally robust and in keeping with Shariah law than some offerings before the crisis. Finally, there has been considerably innovation in the sukuk space, both in terms of tenors and structures. In particular, the emergence of project sukuk provides a potentially important instrument for financing the massive pipeline of infrastructure projects in the region. 

Such paper can serve as an important source of pooling capital from non-government sources, as well as offering an attractive investment opportunity into one of the most important growth stories of the coming decades. As far as concrete issuance prospects for project sukuk are concerned, we are increasingly moving from the stage of innovation to replication which is much faster and cheaper and should contribute to the positive market momentum.

While the 'textbook fundamentals' for the developing bond and sukuk markets are very strong the macroeconomically stable Gulf countries, the most compelling case comes from the region's economic imperatives and resources. In the words of Chief Economist Jarmo T. Kotilaine of the National Commercial Bank, "The region faces an enormous economic diversification challenge linked to the ongoing efforts to employ its growing population and to create a basis for sustainable economic growth for the post-oil era. At the same time, the Gulf countries are home to exceptional pools of private and public wealth which could be much more effectively mobilized to support economic development locally. 

In both cases, bonds and sukuk provide an important bridge between the existing resources and these future economic opportunities." Kotilaine was speaking at the "Strengthening the Debt Capital Markets in the Arab World" conference organized by the Arab Monetary Fund, the International Monetary Fund, the World Bank, and the European Bank for Reconstruction and Development in Abu Dhabi on May 23.

Project sukuk issuance in Saudi Arabia began with the $1 billion Saudi Aramco Total Refining and Petrochemical Co. (SATORP) offering in October, which will be used toward the company's Jubail refinery. Highlighting intense interest, total subscriptions reached SR3.7 billion. An even more encouraging development was the landmark SR15 billion "Jeddah airport" sukuk issued by the General Authority for Civil Aviation (GACA) in January. 

The 10-year murabaha structure enjoyed a sovereign guarantee which allowed it to be priced at "only" 2.5 percent - only 50 bps above US Treasuries. In spite of this, the issue was 3.5 times oversubscribed. SAMA has approved the issue for repo arrangements with zero risk for capital adequacy calculations. Functionally, the GACA issue is therefore the closest thing Saudi Arabia has to a sovereign sukuk.

Similar issuance is likely to continue and the level of the recent oversubscriptions highlights the intense pent-up demand for quality long-term paper. Although some market practitioners resist the idea of government-guaranteed bonds/sukuk as more complex and expensive that direct government issuance, the GACA issue suggests that such considerations need not constitute a major obstacle. The Saudi authorities have repeatedly indicated that government bond/sukuk issuance should be based on a genuine fiscal need, which clearly does not exist in the current oil market environment. 

By the same token, however, the government recognizes that the absence of budgetary pressures does not have to prevent the emergence of sovereign benchmarks. Finance Minister Ibrahim Al-Assad recently noted that he would expect more sukuk issuance by government agencies that "can generate income and operate commercially." 

A number of such projects are planned with airport, seaport, and overland infrastructure ventures, not to mention the massive housing needs which would further benefit from the implementation of the eagerly awaited mortgage law.

The GACA precedent offers an attractive solution for government-sponsored sukuk market development with a direct government issuance program. 

While reducing the demands on the government budget by tapping other funding sources, such a model will clearly require well defined procedures and a high level of transparency about the use of government guarantees. The experiences of some of the Dubai government-related names highlight the need for caution and proper planning. 

On the other hand, success in this area promises to create virtual benchmarks, thereby facilitating the pricing of corporate issuance. The potential for relatively swift progress is considerable as recent developments point to growing interest by issuers and buyers alike. 

Better defined procedures should in turn reduce costs and increase the pool of potential market entrants beyond the largest, often government-owned blue chip companies.

(Mena Fn.Com / 30 May 2012)

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