The term ‘Islamic Social Finance’ refers to modes of finance that are rooted in Islamic ethics and intended for social benefit. These include Zakat (almsgiving), Waqf (endowments), Sadaqa (charity) as well as Qard Hasan (interest-free loans).
When one defines ‘Islamic finance’, it is vitally important that Islamic social finance be included. Doing so achieves three crucial benefits. First, it expands the sector’s scale: the Islamic Development Bank Group (IsDB) estimates the potential of Zakat alone to be as much as US$1 trillion per year. The value of endowment assets — which include countless landmarks such as the Taj Mahal — likely far exceeds the US$2.5 trillion assets of the commercial Islamic finance sector.
Second, social finance is far more inclusive and widely-adopted. In Egypt, for example, the market share of Islamic banking is 9 percent, as per the Islamic Financial Services Board. The percentage of Muslims who report engaging in Zakat, by contrast, is 70 percent as per the Pew Research Institute. Similar patterns are seen across Muslim-majority countries. Third, social finance embodies key values, such as generosity and concern for others.
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Progress in 2018
In 2018, Islamic social finance stakeholders achieved many milestones in aligning their work with the Sustainable Development Goals (SDGs). The International Waqf Core Principles were announced at the Annual Meetings of the IMF and World Bank in Bali in October. These principles, developed in partnership with Badan Waqf Indonesia and UNDP, offer important standards on disclosure and transparency. UNDP also announced that it is working with Badan Waqf on the first blockchain enhanced digital platform to increase Waqf collections and enhance the effective use of Waqf land.
Earlier in the year, BAZNAS (Indonesia’s national Zakat collection agency) and UNDP released a report entitled ‘Unlocking the Potential of Zakat and Other Forms of Islamic Finance to Achieve the SDGs in Indonesia’. In addition to conceptual analysis on Islamic social finance and the SDGs, the report provided statistical analysis on Zakat and its impact: for example, the average monthly impact of a Zakat recipient rose by 27 percent after participating in a Zakat-enabled assistance programme.
In February, the International Federation of Red Cross and Red Crescent Societies (IFRC) was recognized in a global Islamic finance competition for an innovative blockchain application for Zakat. Developed in partnership between IFRC and AidTech, the application enables people and organizations to track Zakat contributions even in the most complex humanitarian settings. This represents an important breakthrough for transparency and donor trust.
The momentum in aligning Islamic social finance with the SDGs is strong and is expected to continue in 2019 and beyond. One key trend is enhanced governance and transparency amongst Islamic social finance institutions. Donor expectations in these areas are rising, especially as they have many options for their social finance. The standards outlined in the International Waqf Core Principles apply across a wide range of institutions and regions.
Another key trend is the increased use of digital technology. For donors, digital technology makes it easier to identify, evaluate, and fund causes. For organizations collecting social finance, technology provides greater access to donors, lowers costs, and allows for greater reporting and communication. For institutions implementing projects, technology enhances project management, workflows, and monitoring. Perhaps most importantly, digital technology can help recipients of social finance and their communities by making resources more accessible and distribution more efficient.
Third, explicit alignment with the SDGs is a powerful trend that continues to grow. Organizations like UNDP can help social finance stakeholders identify the specific SDGs they wish to support and then design programmes in support. They can likewise support the implementation of projects, and – importantly – in the impact assessment and measurement of what was achieved.
Islamic social finance has been financing sustainable development for centuries. More explicit alignment with the SDGs – including impact assessment – can help the sector better engage with others in the global development community. Doing so demonstrates the relevance and contributions of Islamic finance to these important global goals.
The importance of Islamic social finance
Social finance is vitally important due to its scale, inclusiveness, and differentiation. Key milestones achieved in 2018 reflect increasing enthusiasm – across a wide range of stakeholders – to enhance the impact, governance, and transparency of the sector.
Social finance has long been a means for Islamic finance to contribute to the world. Embracing new technologies, enhanced governance practices, and international partnerships can help the sector expand its contributions and communicate these contributions as part of a common global cause.
Aamir Rehman is Senior Advisor on Islamic Finance at United Nations Development Programme (UNDP). This article was originally published in IFN News; the views expressed in it are the author’s own and do not necessarily reflect the editorial policy of African Newspage