March 25, 2014

Thomson Reuters Releases the Islamic Social Finance Report in Partnership With The Islamic Research & Training Institute

DUBAI, United Arab Emirates - Thomson Reuters, the world's leading source of intelligent information for businesses and professionals, released today the Islamic Social Finance Report 2014 in collaboration with the Islamic Research and Training Institute (IRTI), a member of the Islamic Development Bank Group.

The report is the first of its kind study covering Islamic social finance across countries in South and Southeast Asia with sizeable Muslim populations including Indonesia, India, Pakistan, Bangladesh, Malaysia, Singapore and Brunei Darussalam.

The report studies the historical trends, legal and regulatory environment, supporting infrastructure, success stories, good practices and potential of Islamic social finance by key players in Zakah and Awqaf.

According to the report, Islamic social funds could potentially meet resource shortfalls to alleviate widespread poverty in South and Southeast Asia. The potential of Islamic social funds remains unrealized as actual Zakah (compulsory annual contributions) and returns of Awqaf (endowments) are not fully utilized in most countries. Additionally, most countries in South and Southeast Asia do not have an Islamic microfinance industry, which further diminishes the optimal potential of Islamic social finance.

Both, South and Southeast Asia, account for about 720 million (45 percent) of the world’s Muslim population which totals to around 1.6 billion.

Poverty is widespread in four of the seven countries. Around 76.5 percent of Bangladesh’s population lives on less than US$2 a day, while India is 69 percent, Pakistan is 60 percent, and Indonesia is 46 percent.

Professor Dr. Mohamad Azmi Omar, Director General of IRTI, said: “A sustained flow of social funds demands high degrees of social acceptance and credibility, which in turn, are influenced by levels of integrity, transparency and professionalism in the management of these funds.”

Dr. Sayd Farook, Head of Islamic Capital Markets, Thomson Reuters, said: “Despite overarching goals of social justice and equity, Islamic banking, Takaful and the Islamic capital market are for-profit sectors of the Islamic economy that have been criticised for not doing enough to help the poor. Islamic social finance has a significant role to play in alleviating poverty.”

He added: “The report confirms that transparency and good governance are the fundamental requirements for the success of Islamic social finance institutions. With the increasing calls for corporatization and an increased level of professionalism; the use of a large network of private institutional Zakah collectors is far more efficient as compared to a large number of unconnected private individual collectors.”

According to the report, Zakah collection reached US$1.4 billion in Bangladesh which has the highest poverty level in the South and Southeast Asia region. The report suggests that Zakah collection in Pakistan and Indonesia could fill the resource gap to alleviate hardcore poverty across this region.

With the absence of data on Awqaf data in most of these countries, the study focuses on Indonesia and India as they constitute the largest Muslim populations. Registered Awqaf have an estimated market value of US$24 billion in India and US$60 billion in Indonesia. At a minimum return of 10 percent, Awqaf assets could earn the equivalent of 0.3 percent of India’s GDP and 0.8 percent of Indonesia’s GDP, which is more than the resources required to push the Muslims out of hardcore poverty.

According to the report, there is an overwhelming use of Murabaha among Islamic Microfinance Institutions (MFI) due to the contract’s simplicity and familiarity. However, these sharia-compliant modes offer no in-built protection against exploitation and abuse. The report adds that Islamic MFIs should use profit and risk sharing modes as opposed to debt creating modes to safeguard beneficiaries against a debt spiral.

The report concludes that a professionally managed Zakah-financed microfinance program could potentially serve a much larger population of the poor. Furthermore, the report illustrates with examples from Singapore and Malaysia that state control may not necessarily hamper creativity and innovation in Awqaf development. The report suggests that Waqf development must be a mandatory obligation of the Waqf management and new forms of Waqf should be explicitly covered in the regulatory framework for Awqaf.

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About the Islamic Research and Training Institute

The Islamic Research and Training Institute (IRTI) is a member of the Islamic Development Bank Group, established in 1401H (1981G). The purpose of the institute is to undertake research for enabling the economic, financial and banking activities in Muslim countries to conform to Sharia and to extend training facilities to personnel engaged in economic development activities in IDB member countries. The Institute is located within the headquarters of IDB in Jeddah, Saudi Arabia.