Karachi:
Islamic finance is a field of finance that adheres to Sharia guidelines and Islamic commercial law while avoiding transactions involving interest, speculation, gambling, and artificial financial instruments.
Generally speaking, Islamic finance focuses on the commercial aspects of finance, such as Islamic banking, Islamic insurance, Islamic mutual funds, and sukuk. According to a report by the London Stock Exchange Group, the size of Islamic commercial finance worldwide is over $4.5 trillion and is expected to reach $6.6 trillion by 2027.
However, the field of Islamic finance also includes Islamic social finance, which not only expands the reach of Islamic finance to almost all Muslims, but also contributes to the sustainable growth and economic development of societies at a global level. This is an essential area with potential for contribution.
Islamic social finance is a multifaceted approach that integrates the principles of Islamic finance, with an emphasis on the principles of justice, equity, social responsibility, and community welfare. It aims to address socio-economic inequalities, promote sustainable development and promote community cohesion.
This unique financial framework is aligned with Islamic ethics and values ​​and provides an alternative to the traditional financial system. In essence, Islamic social finance creates financial products that not only comply with Sharia law but also address social issues by integrating ethical and moral considerations into financial practices, creating a more inclusive and just society. I’m trying to build.
Central to Islamic social finance is the principle of Sharia compliance. While emphasizing ethical and fair financial transactions, Islamic law prohibits activities involving interest, speculation, deception, gambling, and unethical investments. This foundation forms Islamic finance as a whole and guides the development of instruments that prioritize the well-being of society in the field of social finance.
Over the past 1,450 years of Islamic history, the field of Islamic social finance has played a vital role not only in supporting Islamic societies in times of need, but also in supporting economic development and sustainable growth. did.
Islamic social financial instruments mainly include zakat (compulsory almsgiving), sadaqah (voluntary charity), waqf (endowments and trusts), and karz al-hasan (charitable interest-free loans). , innovative developments in this field now also cover Islamic microfinance and social sukuk. , socially responsible investing, Islamic crowdfunding, ethical investing. The above instruments, if used properly, can provide much-needed stimulus and support to the economy.
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Islamic social finance reduces poverty, strengthens social welfare, expands safety nets for the needy, provides support to welfare institutions in the fields of education, health and public welfare, generates growth and supports small-scale entrepreneurship. We provide employment opportunities for homes and start-ups, support disaster recovery and recovery, encourage ethical investment, and support sustainable community development.
Let’s take a quick look at some of the main instruments of Islamic social finance and their potential in the economy.
Zakat is one of the main components of Islamic social finance. It is compulsory almsgiving in Islam. Wealthy Muslims are required to donate a portion of their wealth (usually 2.5%) each year to help the less fortunate, which promotes social solidarity.
Zakat acts as a redistribution mechanism and helps reduce wealth inequality and alleviate poverty within Muslim communities. The world’s Muslim population is 1.8 billion, so global estimates of Zakat range from $200 billion to $1 trillion. Meanwhile, Pakistan’s estimated potential is over Rs 2.7 trillion. The correct and transparent transfer of this amount to the poor and needy can bring about an economic revolution in Islamic societies.
Sadaqah refers to voluntary acts of charity that go beyond the obligatory Zakat. Muslims seek spiritual rewards and are encouraged to give charity as a means of helping others.
While zakat has specific guidelines, sadaqa is more flexible and can be directed toward a broader range of charitable activities, such as education, health care, job creation, and infrastructure development.
The concept of sadaqah is found in all Islamic societies and when compared to taxes, people are more willing to donate for good causes and to help others. Especially during the month of Ramazan and the festival of Eid, there is an increased level of charity towards the poor in various forms.
A portion of this charity is also donated to welfare organizations that contribute to social welfare by reducing the burden on governments. Waqf or donation involves the permanent dedication of assets such as land, buildings, financial resources, etc. to a specific charitable or religious purpose. Income generated from Waqf assets is used to support a variety of social, educational, and religious initiatives.
Throughout Islamic history, waqf facilities have held a vital position, providing social benefits such as education and healthcare, important public infrastructure such as roads, bridges, and shelters, important public facilities such as water and sanitation services, and mosques. and provided religious accommodations such as constructing and maintaining burial grounds. It secures land, assists the poor, orphans, and disadvantaged, promotes employment opportunities, and strengthens agricultural and industrial sectors without straining government resources. A World Bank report estimates global waqf assets at more than $700 billion.
Waqf assets can contribute significantly to public welfare and economic growth if utilized efficiently and provided with a corporate governance framework.
Another important aspect of Islamic social finance, Islamic microfinance, typically empowers small entrepreneurs and low-income earners by providing interest-free loans as well as equity-based and trade-based financing. This approach is in line with Islamic finance principles by avoiding the burden of interest payments on the borrower. Social sukuk is a notable development. Sukuk is an investment vehicle associated with a real asset, project, or actual trade transaction.
Social Sukuk offers investors the opportunity to invest in impact-generating ventures, while also funding projects with social benefits such as affordable housing, renewable energy, and healthcare facilities, in accordance with the rules of Islamic finance. To do.
In conclusion, Islamic social finance is a dynamic intersection of Islamic financial principles and social responsibility. Raising awareness of its principles and benefits among both Muslims and non-Muslims is essential to fostering wider adoption. Education and outreach programs can dispel misconceptions and highlight the positive impact of ethical and socially responsible financial practices.
As the global financial landscape continues to evolve, Islamic social finance serves as a testament to the compatibility of ethical finance and sustainable development goals.
Mr. Ahmed Ali Siddiqui is a director at IBA-CEIF and Mr. Syed Hassan Ali is an analyst at a leading Islamic bank.
Published in Express Tribune, March 18, 2024
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