Sumaira Ghafoor

PhD Scholar, Institute of Business Administration (IBA), Karachi

Siddiqua Alibhai

Independent Scholar, MS Economics, IBA Karachi  

The aim of Islamic social finance is to support socio-economic empowerment, progress, and the development of society. Pooling resources from social finance instruments, like Zakat (alms giving), Waqf (endowments), Qardh al-hasan (interest free benevolent lending), Takaful, and Sadaqah (charity), can establish and lead to growth of lower-income micro-enterprises in the country.

According to Asian Development Bank, 24.3 per cent of Pakistan’s population lives below the national poverty line (2015), unemployment rate is 4.5 per cent (2019) and 2.3 per cent of employed population lives below USD1.90 PPP a day (2019).

UNDP report (June 2020) shares that though Pakistan’s poverty rate declined by 40 percent in the last twenty years to 24.3 percent in 2015, as per IMF a sharp rise in poverty level is estimated in the wake of COVID-19 pandemic. It may lead to 40 per cent of population falling below the poverty line.

As reported by International Labor Organization (ILO), COVID-19 resulted in massive loss in global employment. As many as 144 million people lost employment in 2020. It was also estimated that the loss of global labor income was 8.3 percent due to the reduction of working hours.

In such economic climate, effective social finance is the need of the hour as in line with the study by Dr. Gadaf Rexhepi, which states that social finance works better than philanthropy. The poor would rather be given opportunities to earn via micro-financing than receive dole-outs.

Social finance is finance that supports socio-economic empowerment, upliftment and development. In short, social finance encourages responsible investment intended for social benefit and aims at inclusive growth.

In Islamic finance, there are instruments like Zakat (alms giving), Waqf (endowments), Qardh al-hasan, Sadaqah (charity), and Takaful to help the poor. Takaful should not be limited to an alternative form of conventional insurance as it is a mechanism for mutual assistance.

Dr. Ziyaad Mahomed, Assistant Professor and Associate Dean INCEIF, elaborated at the CEIF Talks: Resurgence of Islamic Social Finance (October 2019) that with Islamic banking asset size at USD 3 trillion, there should be no poor left in the Ummah!

But credit-worthiness checks, affordability checks and lack of collateral come in the way of Islamic banking to help those who really need financial assistance. One major reason for Muslims being poor is that the collection, administration and distribution of Zakat to the deserving has not been done efficiently.

At present, at the government level, Pakistan poverty alleviation fund and Pakistan Bait ul Mal are operating to alleviate poverty. In the private sector, Islamic micro financial services are provided in Pakistan by non-governmental organizations (NGOs) like Akhuwat (provides Interest-Free Micro finance), Wasil Foundation, Kashf Foundation, Naymet Trust, Muslim Aid Pakistan, Islamic Relief Pakistan, Kawish Welfare Trust and Esaar Foundation. This is the extent of the reach of social finance in Pakistan where almost 60 million people are poor.

Therefore, in the prevailing circumstances, effective social finance especially in the context of financing microenterprises is the pressing priority since many people in Pakistan are not aware of the financing products of the (Islamic) banks and do not have access to financial products of the conventional banks.

The Way forward is to have a model on the lines of Akhuwat Islamic Microfinance, which works on the principle of collecting Qardh al-hasan from donors and empowering deserving families. Akhuwat provides these interest-free loans to the family as a unit. It does not discriminate on the basis of gender; thus Qardh al-hasan is not given to a man or a woman, but it is given to the family unit. The family then decides who is more capable of becoming an entrepreneur.

This way the social finance outreach will increase which will create a positive relationship between social finance instruments and social returns in terms of job and wealth creation in Pakistan.

Since Financial Technology (Fintech) is already here, a Fintech-based platform to channelize the funds of Zakat, Waqf, Sadaqah, Qardh al-hasan and other social finance instruments to the eligible micro-enterprises, will ensure the efficiency in the collection, administration, and distribution of these funds for financing the deserving people in Pakistan. This will be the wealth creating channel that will enable to create more wealth and employment after getting self-sustainable. As a result, the outreach of Islamic social finance can further be increased.