Category Archives: Economics and Finance

Progress on Islamic Banking in Uganda

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Iam not very sure about Bank Of Uganda(BOU)’s opposition to Islamic banking.As a matter of fact i know that the bank has invested substantial resources in training its senior staff in preparation for Islamic banking so that they can regulate it effectively.Some of these trainings have been in Uganda others outside in countries where Islamic banking is practiced.Consequent to that preparation and because of the uniqueness of some of the products sold by Islamic banking a specific law is required.

To my knowledge this law is before cabinet. BOU already has a pending application by NBC to open up a window for Islamic banking.It is also important to know that it is possible to sell some of the Islamic products under the current legal regime once there is a sound contractual arrangement between the bank and the customer complying with Islamic and Ugandan law .

BOU has however asked that such arrangements be delayed until the law is passed. I have had previous meetings with the Governor on this issue and to the contrary he is very open and supportive especially because of the advantages derived from Islamic banking.

yours faithfully,
Salim Makeera
MANAGING PARTNER

MAKEERA & CO.ADVOCATES

Islam Poverty and Microfinance

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Microfinance has been talk of the town since last decade or so. Islamic microfinance is recently entered in market and since then been in experiment mode with varied degrees of success. Islamic Microfinance is based on concept of prohibition of interest and profit and loss sharing. Interest based microfinance has been a success in societies with largely Muslim populations. Our scope of work is to analyze grounds for Islamic Microfinance specially

Why Islamic Microfinance is needed?

What will be the Instruments used by Islamic Microfinance Program?

What can be challenges and opportunities for Islamic Microfinance?

Current section will focus on how Islam sees poverty? What measures are provided in Islam to combat poverty? What is common denominator in Islam, Islamic Finance and Microfinance.

Introduction

Islam is not only a religion but a complete way of life that was revealed to humanity by our creator who is most knowledgeable, wise and just. Islam was revealed as a practical religion to be implemented in our daily life since it covers all aspects of human life. As such, when implemented honestly and correctly, Islam provides solutions to all problems that are faced by humanity. One of the most widespread and dangerous problems faced by humanity is that of poverty, hunger and starvation. Millions of human souls on this planet are living under extreme poverty and very inhuman conditions.

Poverty is as old as the human existence itself. This has been a cause of concern in every society and throughout the history. During current era poverty came under limelight recently and has been a focus of international community. Everybody is talking about poverty reduction and different measures are being suggested for the purpose. Different instruments are being tried with different levels of success. However situation has not improved to such a level where it can be claimed that this Anti poverty drive has paid its dividends.

As we have stated that Islam provides solution to every problem of human life. Here we will theoretically examine that

How Islam sees Poverty? Is it a blessing or a curse
What are the instruments to reduce poverty in Islam?
How effective are these Instruments?
How Islamic approach to poverty reduction is different from a conventional approach?

What is Poverty in Islam?

In Islam poverty is a multidimensional concept. Term used in Islamic literature for a poor person is “Faqeer”. A person is considered to be a Faqeer or Poor who do not have sufficient material wealth in hand to satisfy his/her basic needs which are defined in fiver broad categories.

Protect his/her religion
Protect his/her Physical Self
Seek Knowledge or Education
Protect his/her Family
Accumulate some Wealth

These are necessary to lead a good social, individual and economic life ensured by Islam. People who are not able to meet these necessities are poor.

Islam is not against property and wealth rather it wishes its followers not make the wealth accumulation their sole purpose of existence. Islam considers richness a blessing from their creator as long as it is acquired by halal means and the person fulfills all his responsibilities towards Allah and society.

Islam does not see poverty as a virtue rather it is seen as a social anomaly that is to be removed and alleviated. In many Ahadith Prophet P.B.U.H sought refuge from poverty. To eradicate poverty Allah S.W.T has included built in features in his revealed religion to protect humankind from poverty.

Islamic Instruments to Reduce Poverty

The built-in instruments of Islam to reduce poverty includes

Zakat
Sadaqat
Qarz-e-Hasan

The Obligatory Zakat:

Zakat means ‘purification’ and ‘growth’. It is mandatory for every Muslim who possesses over a prescribed limit of wealth for at least one year to pay a certain amount to poor. This is called Zakat. The Zakat proceeds are to be distributed among poor and needy. To protect the self respect of poor Allah S.W.T has declared that Zakat is the “right” of poor in wealth of rich. Payers of Zakat do not oblige poor by giving Zakat rather they just give them their due “right”. Islam has attached so much importance to Zakat that it is one of the five pillars of Islam. Anyone who does not believe on any of these five pillars of Islam cannot be categorized as Muslim.

Zakat is due on accumulated wealth that has been in the possession of a person for at least one year. The dynamics of Zakat are completely defined in Islamic Jurisprudence. Zakat is payable on accumulated assets i.e. Money, Crops, Inventory, Gold, Silver, Animals, Shares and so. Rates of Zakat differ in certain cases.  As this is on accumulated assets people who does not save do not have to pay Zakat. Zakat recipients are also defined in Quran and cannot be paid out of defined categories. Following verse of Quran mention the people who can be Zakat recipients.

“As a matter of fact, Zakat collections are only for the needy and the indigent, and for those who are employed to collect them and for whose hearts are to be won over and for the ransoming of slaves and for helping the debtors and for the way of Allah and for the hospitality of the way-farers.  This is an obligatory duty from Allah: and Allah is All-knowing, All-Wise: (9: 60)

1.       The Needy

A Person is needy if he depends on others for his sustenance.   This will include all such helpless people who stand in need of monetary help and co-operation of others, temporarily or permanently.  Thus Zakat can be spent to help the invalids, orphans, widows, the aged and the jobless people and those who have been afflicted by unforeseen calamities.  They may be given temporary help or granted pensions permanently The Poor: People who have means of livelihood but insufficient to meet their basic needs.

2.       The Indigent

They are the people who are self-respected. They would neither beg nor ask others for help. They are struggling for their livelihood but due to insufficient resources they cannot make ends meet. According to Hadith, an indigent person is one

“Who does not get enough to satisfy his needs ; who is neither recognized to be poor so that people may render him necessary help, nor he stands up to beg.”
(Bukhari, Muslim)

        3.       The In-Debtors

        These are the people who are heavily under debt and cannot generate enough to pay off their debts.  They can be  jobless or earning a little, or those who may be left with nothing if they pay off all their debts, or those who have been reduced to poverty due to unforeseen calamities like paying heavy penalties and fines, failure of business etc.

4.       Stranded Traveller or Wayfarer:

The wayfarer, whether he is well off and rich at home, can be helped with Zakat money if he stands in need of such help while on a journey.

 

        5.        To Free Slaves:

Zakat money is to be used to purchase slaves and free them.

        6.       To Win over Hearts

People whose hearts are to be reconciled to Islam and in the interest of the Islamic State.  They can be non-Muslims, or even the newly converted Muslims whose faith in Islam is not yet firm and strong enough to motivate them to serve the interests of Islam and the Islamic State.

7.        In the Way of Allah:

Zakat money can also be spent in the path of Allah. This can include many things, basically any project that helps Muslims or Islamic causes.

8.        Amileen-i-Zakat or Zakat Workers:

Those whose job it is to collect and re-distribute Zakat money get their salary from the Zakat money.

There are more regulations in disbursement of Zakat and who is eligible to receive Zakat but that is beyond scope of this topic.

Sadaqat:

Zakat levied by Islam can easily be enough to solve the problems of poverty and starvation in the islamic society in particular and in. However Islam has adopted a multidimensional poverty reduction startegy by encouraging Muslims to give charity in addition to the compulsory Zakat. Islam has given so much importance to social safety and care for others.  For example, the Prophet Mohammad (pbuh) once said that the person who sleeps full while his neighbour sleeps hungry is not a true believer. Islam has promoted charity and giving in may ways like if one Muslim is not able to fulfill his islamic dutiies he is required to feed certian number of poor people. For example, for the persons who are not able to fast in Ramadan, they are required to feed some poor people for each day they do not fast. And there are many such examples.

Charity in the holy Qur’an and the Sunnah:

Like Zakat we can mention of sadaqat on many occassions in Quran and Hadith. We can quote few of these as reference

“O ye who believe! Cancel not your charity by reminders of your generosity or by injury, like those who spend their substance to be seen of men, but believe neither in Allah nor in the Last Day. They are in Parable like a hard barren rock, on which is a little soil; on it falls heavy rain, which leaves it (just) a bare stone. They will be able to do nothing with aught they have earned. And Allah guideth not those who reject Faith.” (Holy Qur’an, Chapter 2, verse 264).

 

”And be steadfast in prayer and regular in charity” (Holy Qur’an, Chapter 2, verse 110).

”By no means shall you attain righteousness unless ye give (freely) of that which you love; and whatever you give, Allah knows it well.” (Holy Qur’an, Chapter 3, verse 92).

Allah (swt) said addressing the messenger of Allah, Mohammad (pbuh): “Of their goods take alms (charity), so that you might purify and sanctify them, and pray on their behalf” (Holy Qur’an, Chapter 9, verse 103).

Allah (swt) said: “So he who gives (in charity) and fears (Allah), and (in all sincerity) testifies to the Best, We will indeed make smooth for him the path to Bliss. But he who is a greedy miser and thinks himself self-sufficient, And gives the lie to the Best, We will indeed make smooth for him the Path to Misery; Nor will his wealth profit him when he falls headlong (into the hell fire).” (Holy Qur’an, Chapter 92, verses 5-11).

When the messenger of Allah, Mohammad (pbuh), sent one of his companions to call the people of Yemen to Islam, he asked him to tell them the basics of Islam, among which was: “… and tell them that Allah has made obligatory on them a charity that is taken from their rich and given to their poor…” (Reported by Bukhari and Muslim).

How Can Zakat Eradicate Poverty?

Zakat is an Integral part of Islamic belief. It is one of the five concept necessary to believe to become a muslim. Besides religious Zakat is an economic concept and has socio economic implications.

If Islam was implemented in the world today, starvation would be eliminated from the planet within the first year. The Zakat due on agricultural products ranges from 5% to 10% of the produce. There is also Zakat due on various types of animals such as sheep, cows and camels. Imagine if 5%-10% of all agricultural production in the world, plus the required amounts on animals are distributed among the hungry and starving people of this world. The problem would be solved immedeatly. In the system we have today, some nations intentionally spoil a part of their agricultural production in order to maintain high prices for their produce. Can you see the difference between the system driven by human greed and the Islam which was imposed by Allah (swt), the most gracious and most merciful?

In addition, Islam can solve the problem of poverty. Consider the Zakat due on money. Zakat is due at 2.5% on money that has been in one’s possession for over a year. Now consider this simple fact: Forbes Magazine reported that in 2004 there were 587 billionaires worldwide, with a combined net worth of .9 trillion dollars. If in 2004 these 587 richest people in the world paid zakat, we would have had .5 billion dollars distributed among the poor.

This calculation has just considered less than 600 individuals on this earth. What about if everyone contributed to a global Zakat fund in the same way? The total world GDP (summation of gross domestic product of all countries in the world) was estimated in 1999 to be ,357.9 billion dollars. The 2.5% Zakat on this would amount to 3.95 billion dollars annually. These are just ball park figures to give the reader an idea of how much money Zakat can generate.

This Zakat money should not only be distributed for immedeate relief to the poor. It can also be given in the form of small business loans. For example, poor farmers can be given loans or even grants from this Zakat money to enable them to purchase the equipment and materials they need to lift them out of poverty. The same can be done for small business owners, or for the poor to set up small workshops or factories to lift them out of poverty once and for all. Within a few years, poverty would be eliminated or at least greatly reduced.

Islam and Microfinance: Common Denominators

Islam and Microfinance are by no means Comparable. Islam is a complete code of life and a divine revelation while Microfinance is just a tiny part of human life and in current form is a human invention. We are by no means comparing both as a system rather just trying to find out the commom objectives. The underlying assumption is that Microfinance objectives tried to be achieved in islamic way will be huge success.

Core Objective of Microfinance is to eradicate poverty. i.e to raise income levels and to broaden financial markets by providing financial and no-financial services to the financially excluded people. Microfinance  targets the poor and the economically active poor in the society to assist them create wealth, accumulate assets and raise income to smooth consumption

Islam also wants its followers to be prosperous, self sufficient, self respecting and enterprising. Islam dislikes people to be dependent on others. Islam has developed such a social safety mechanism that people should become self reliant. Islam does not want people to become beggars. Islam has declared begging to be a curse and declared a person who earns his livelihood by hand i.e by working as friend of Allah (s.w.t)

By this we can say that there is a common goal in islam and microfinance i.e to eradicate poverty, to make people self reliant, enterprising and self respecting. There will be only one ultimate soultion to achieve the target of poverty eradication i.e practice microfinance in an Islamic way and added social safety advantages associated with Islam will help achieve this goal. This is not merely an imagination rather it happened in history when in state of Madina people could not find poor people to pay zakat. Every one was prosperous and zakat payer. This was achieved with zakat mechanism only and without microfinance.

 

Azhar Nadeem

Microfinance Practitioner

http://islamicmicrofinance.info