How Islamic Social Finance Helps Low-Income Countries Reduce Poverty

Friday April 22 2022 / 11:00 am / by Bukola Akinyele-Yisau for WebTV / Header image credit: WebTV

Muslim scholars believe that Islamic social finance is a vital mechanism for alleviating global poverty, especially in low-income countries. Mr. Shehu Nasiru Muhammad, Managing Director of the Samaaha Training and Research Institute, made the observation when assessing the “role of Islamic social finance in alleviating economic hardship”.

Citing the holy book, the scholar noted that Muslims are required to live in harmony, in a society where they help each other by sharing richness. He said that God encourages the fair distribution of richness.

Islamic social finance, according to him, emphasizes the social well-being, equity and poverty reduction. The eradication of poverty is among the main objectives of Islamic finance.

He said: “The role of Islamic social finance is important, especially for Muslim countries with high poverty. The objective of Zakat, Sadaqat, Waqf, Qard Hassan and Islamic microfinance is to meet the needs of the poor. It can be used during the month of Ramadan to achieve economic and social well-being.”

Speaking on Islamic social finance products, he highlighted Zakat, Waqf, Qard Hassan and Islamic Microfinance as Tools to Save Money accountability. According to him, Zakat is one of the five pillars of Islam and compulsory for Muslims. He observed that giving Zakat improves love between rich and poor, while the 2.5% payment on wills, bank savings, investment income, bonds and other securities is mandatory.

He noted that Zakat is payable on residential properties, rentals, produce and goods purchased for profit and investment and extends to agricultural produce.

The waqf, on the other hand, is irrevocable and involves the perpetual gift of a property for social welfare and the community. Mohammed observed that it is an Islamic mechanism for the economic welfare of the Muslim Ummah. While Sadaqat is voluntary almsgiving, Islamic microfinance is the center of activities of financial companies. This type of alms giving helps entrepreneurs relieve them of their burdens and make them independent.

The scholar advocated for the use of Zakat, Sadaqat, Waqf and Islamic microfinance to help the most vulnerable in society, such as internally displaced persons (IDPs) and the less privileged. He said he had to for mass media campaigns, increased advocacy, awareness and sensitization on the value of Islamic social finance.

Furthermore, he noted that a community-based approach could be explored in organizing and establishing corporate non-governmental organizations (NGOs).

He called for an effective legal framework that would allow the collection of Zakat to serve as a source of revenue for the government. This, he added, would require proper guidance, transparency, accountability and fairness, which should correspond to Makasud Shariah. This would help support the collection and distribution of Zakat.

“Transparency and accountability will help in the collection and redistribution of Zakat. Government must ensure strong governance policies for Zakat with monitoring and compliance between government and Shariah authorities. Capacity building and raising awareness of the importance of Islamic social finance will go a long way to reducing poverty if deployed effectively.

Islamic social finance is focused on achieving the common good and prohibits exploitative practices such as:

  • financial speculation, known in Arabic as maysir (investing at great risk in the hope of gaining value)
  • interest, riba (mainly selling money but also goods at a price higher than their value) contractual ambiguity, gharar (fine print financial agreements that could mean weaker parties are exploited).
  • According to Islamic Relief Worldwide, global Zakat contributions are estimated at between $200 billion and $1 trillion per year.

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