Islamic Banking & Finance Page 10th May 2019

Can Islamic social finance be the key to end poverty and hunger? Case Example of Malaysia

By Mukhtar Aqil

In 2015, countries around the world adopted a set of goals to end poverty, protect the planet, and ensure prosperity for all as part of a new sustainable development agenda. Formulated on the principle that no one gets left behind, the Sustainable Development Goals (SDGs) has defined the world’s priorities and aspirations for 2030.

But to mobilize these efforts, we need to effectively uplift groups at the bottom where poverty plays a main obstacle. Although poverty levels have fallen dramatically since 2000, there are still 783 million people living below the international poverty line of $1.90 a day. We may need more creative and effective solutions to end poverty. In the recent 4th Annual Symposium on Islamic Finance in Kuala Lumpur, we discussed how Islamic social finance might just be the key to alleviating poverty and hunger.

What we found was that Islamic social finance tools like waqf (Islamic endowment) and zakat (an obligatory contribution or dues payable by all Muslims having wealth above nisab which is the threshold or exemption limit) can effectively support the SDGs if they are properly developed, managed and utilized with transparency, accountability and efficiency. Some of our key takeaways include:

Islamic social finance tools such as waqf and zakat can be leveraged to bridge financing gaps and can also be used to create social safety nets. A clear example can be seen in Indonesia where a zakat fund of $350,000 was used to finance the construction of a Micro Hydro Power Plant in Jambi, thus providing electricity for households, schools and clinics, benefiting at least 4,448 people directly and many more businesses and services indirectly.
Here in Malaysia, the zakat fund could be leveraged to alleviate urban child poverty and provide food to the poor. The key findings from the UNICEF Report on Children Without, a study of urban child poverty in low-cost flats in the city showed how poverty impairs the access of children living in low-cost flats to early education and makes them more vulnerable to malnourishment. With 99.7% of children in low-cost flats living in relative poverty and another 7% in absolute poverty, this could have long-term impacts on the bottom 40%. At the moment, the majority of zakat is spent on redistribution to eligible recipients including the poor and needy.

Building affordable houses on waqf land for the bottom 40% was recently mooted by the Malaysian federal government. Previously Saudi Arabia, Singapore and the state of Selangor in Malaysia allowed the development of waqf land by way of leasehold basis for commercial properties. This method uses the waqf’s principle of perpetuity, meaning that there is no transfer of ownership involved.  This same method could be applied for affordable housing development in Malaysia to aid the bottom 40% further.

Harnessing financial technology (FinTech) through block chain technology to monitor operations can provide more efficiency and transparency for Islamic social finance institutions. This could eliminate asymmetric information, fraud, and distrust between counterparties. Block chain technology also reduces the ambiguity in the operations and business models of counterparty transactions and creates positive ripple effects throughout the entire supply chain.
To address the issues associated with the distribution of Islamic social funds, a social smart card is a powerful tool that can make it more effective. The Social Family Card in Egypt, Orphans and Vulnerable Children Card and Hunger Safety Net Program in Kenya are among the examples of how the card can be used to facilitate cashless transactions, leverage citizen involvement in the banking/government sector and reduce fraudulent activities associated with cash handling.   
Block chain technology has also been employed in the fight against hunger such as the Building Blocks project led by the UN World Food Program (WFP) for Syrian Refugees camps in Jordan. Building Blocks project has benefited more than 100,000 refugees to redeem WFP-provided assistance. With Building Blocks, the WFP has a full, in-house record of every transaction that occurs at that retailer, ensuring greater security and privacy for the Syrian refugees. It also allows for improved reconciliation and significant reduction of transaction fees. The Building Blocks has integrated UNHCR’s existing biometric authentication technology that allows refugees to identify themselves with the blink of an eye.

These findings allow us to look at Islamic social finance as an option for policymakers to consider in efforts to achieve the SDGs.  With technology playing a key role in implementation, this makes it more targeted and effective – an important move that we must take to lift people at the bottom of society from poverty, and end world hunger to ensure that no one is left behind.

Use of Islamic finance for infrastructure Development



Using Islamic finance for infrastructure development attracted more attention recently in the quest to maximize finance for development.

At the recent World Bank-IMF Annual Meetings in Bali, the World Bank and the Islamic Development Bank (IsDB) co-hosted a symposium on Islamic infrastructure finance, building on the institutions’ strategic partnership. As we note in Mobilizing Islamic Finance for Infrastructure Public-Private Partnershipsthe asset-backed, ring-fenced, and project-specific nature of Islamic finance structures and their emphasis on sharing risks make them a natural fit for infrastructure public-private partnerships (PPPs).

However, we see that concerns remain about using Islamic finance for infrastructure PPPs. At the Middle East and North Africa (MENA) PPP Forum in Dubai in September we fielded many questions from attendees that included PPP practitioners from the public and private sectors, leaders of MENA government PPP units, high-ranking ministerial representatives of Gulf Cooperation Council states, bankers, investors, and consultants.

Essentially, they can be reduced to two: cost? We believe the World Bank Group, with the help of IsDB and other development partners, can address these issues and raise awareness around the attractiveness of Islamic finance by tackling two of the major impediments to its deployment: lack of awareness and capacity, and the higher cost of Islamic finance.
We are currently experiencing a defining moment in development finance. Over the past several years, the international community has acknowledged the need to gather all stakeholders and potential sources of finance in service of development; see the UN Conference on Financing for Development in Addis Ababa in 2015, the adoption of the 2030 Sustainable Development Agenda, and the 2017 Hamburg principles. These efforts have been translated at the World Bank Group through the Maximizing Finance for Development approach.

Multilateral development banks (MDBs) can play a two-fold role in this approach: they’re best placed to demonstrate to developing countries the value of the private sector by playing a bridge-building role; and MDBs can improve the risk-return profile of individual investments through an array of instruments—improving project viability, building markets, and thus attracting commercial capital at a lower cost.

The role the World Bank Group is taking towards the private sector—catalyzing resources for governments and at a higher level to create an enabling environment for their access—is exactly the same role Islamic finance needs the World Bank to undertake and what we are on our way to do.

Now is the time to not only bring awareness to Islamic finance as an additional—and relatively untapped—source of financing, but also to facilitate its use. There is a wide variety of Islamic finance structures, instruments, and actors to be explored that can work alone or combined with conventional financing in blended structures.

The Islamic Financial Services Board recently released the Flagship Islamic Financial Services Industry Stability Report 2018, which found that the Islamic capital market has grown 8.3 percent over the last year, with its total worth now surpassing the $2 trillion mark.

For Islamic finance to reach its potential, MDBs can render it more attractive and eventually scale its use by reassuring both client countries and commercial banks and reducing transaction costs. This means building awareness and capacity among stakeholders, and some degree of standardization in terms of both access to Islamic finance and instruments used.

The World Bank Group has been involved in Islamic finance and its use for infrastructure PPPs for quite some time now, and has a role to play in demonstrating its value. Lessons learned from projects financed under Islamic modes or with an Islamic tranche can address the concerns of conventional lenders and show with specificity how this is accomplished. In that vein, we are continuing to develop case studies to enhance the body of knowledge on experiences where Islamic finance for infrastructure PPPs has been successful.

As project-related documents and contracts become standardized, the higher cost of structuring attributed to Islamic finance will even out, creating a more equal playing field for conventional and Islamic finance actors. This is why our team is developing a Reference Guide for Islamic Finance and Infrastructure PPPs, a road map of sorts.

While each transaction is unique and its documentation must be tailor-made, a base level of standardization can help Islamic finance practitioners understand the most common credit and legal aspects they are likely to encounter. Our reference guide will include a portfolio of standardized contracts and other documents to offer a starting point and framework.

Islamic Financing Facility for Renewable Energy schemes in Pakistan

Muhammad Arif

Muhammad Arif

In order to make available SBP’s “Financing Facility for Renewable Energy” to Islamic Banking Institutions (IBIs) and Islamic DFIs (collectively referred as Participating Islamic Financial Institutions – PIFIs), a Mudarabah based “Islamic Financing Facility for Renewable Energy” is being launched. Under this facility, SBP acting as Rab-ul-Maal shall make Mudarabah investments in general pool of PIFIs. Mudarabah investment would be provided up-to 100% of financing, provided by PIFI to the eligible projects subject to maximum financing limit of Rs. 6 billion. The exposure of SBP shall be on all assets of the PIFI’s general pool to the extent of SBP’s investment, and therefore shall not be limited to the assets financed under the Facility.

The financing under this facility shall be available for power projects / installations using alternative / renewable energy sources (solar, wind, hydro, biogas, bio-fuels, bagasse cogeneration, and geothermal as fuel). The facility is available under following two categories:

Category I – Financing to the prospective sponsors desirous of setting up of renewable energy power projects with a capacity ranging from more than 1 MW to 50 MW shall fall under Category – I of this facility.

Category II – Financing to the consumers (domestic, commercial or industrial) for installation of facility using renewable energy source for generation of electricity ranging from 4 KW to 1000 KW (0.004 MW to 1 MW) for own use or for supply to the distribution company shall fall under Category II of this facility.

All Islamic Banking Institutions (IBIs) including full-fledged Islamic banks, Islamic banking subsidiaries and Islamic banking branches of conventional banks and all DFIs having authorized Islamic financing operations (IDFIs) under permission of SBP (collectively referred to as PIFIs) may participate in the scheme by submitting an application to the concerned department of SBP.

  1. PIFI should meet the minimum capital adequacy requirements set by SBP from time to time.
  2. PIFI should have minimum 3 years experience of project financing/long term financing (Applicable only for financing under Category I of the scheme).
  3. PIFI should have profitable operations during last consecutive three years.

Each year SBP shall allocate / assign financing limits to individual PIFI under the facility on the basis of SBP’s internal criteria. The total sum disbursed during a financial year by the PIFI under the scheme shall not exceed such assigned limit.

After sanction of limits for each fiscal year, the PIFI shall submit a duly executed agreement for availing the facility as per prescribed format (IFRE: 1 – Master Mudarabah Agreement) along with the names of offices of SBP BSC from where it intends to avail the facility.

The funds made available under the facility to PIFIs shall be provided by the designated offices of SBP BSC under the limits conveyed by the concerned department of SBP, Karachi in favor of each PIFI, on yearly basis. The financing under this facility shall be available for a maximum period of 10 years with no grace period. The retirement of financial obligations/redemption under this Category shall be made by the customer on monthly / quarterly basis.

The profit/return/ rental shall however be payable on quarterly basis. The expected rate of return on financing once fixed shall remain locked-in for the entire duration of the financing, provided that the customers continue to pay all scheduled amounts at the respective due dates. In case the customer(s) fails to make payment of the amount of installment as per the original payment schedule, provisions of the late payments as stipulated in the underlying financing agreement with the customer shall apply for the overdue period besides taking other actions to recover the same as per its approved policies for recovery in similar cases.

In cases where the financing amount has not been disbursed in full during the validity of an applicable rate, the un-disbursed amount shall attract the new expected rate of return applicable from the date of disbursement by the PIFI.

SBP’s investment in the general pool, under both the categories shall be assigned profit sharing ratio and weight ages keeping in view SBP’s expected rate of return as well as PIFI’s policy and practice for such type of depositors in the general pool. This weight ages shall be used to calculate profits on the SBP investments under the facility. At the end of every month, but not later than the 7th working day of the following month, after calculating actual profit of the general pool by the PIFI, SBP’s share of profit will be credited into a separate non-remunerative account held with the PIFI in the general pool. The profit accumulated in this account shall be transferred to SBP on quarterly basis, including during the grace period, if any, within 7 working days of completion of each quarter. No profit shall accrue or be applicable on the amount standing to the credit of the reserve account. The determination of profit will be made in line with “Instructions for Profit & Loss Distribution and Pool Management for Islamic Banking Institutions (IBIs)” issued vide IBD Circular No.3 dated November 19, 2012, as amended from time to time.




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