Islamic finance award winner’s charitable concept

Abdul Halim Ismail is the 2014 winner of the Royal Award for Islamic Finance at the Global Islamic Finance Forum 2014. This is given by the government of Malaysia for outstanding contributions towards the global advancement of Islamic finance. Mr Ismail, the first Malaysian to receive this award, was recently in Dubai to speak at the 10th World Islamic Economic Forum. He has been working on ways to encourage Islamic financial institutions to use their expertise to help manage the voluntary charitable donations Muslims make, called Sadaqah.

What is wrong with the current way people make charitable donations?

There is nothing wrong but my proposal is to do with Islamic banking and finance. My feeling is that Islamic banking and finance are not yet complete in terms of answering the duties Muslims are called upon to fulfil. There is a void because the whole Ummah, the whole population of a country, is one unit; we have Islamic banking and finance for the government sector and for the private sector but there are no facilities for the social welfare sector. The proposal is really to make Islamic banking and finance more complete in the sense that it should be inclusive and cover all the Islamic population or all the population of a country.

What sort of mechanism should be put in place?

My proposal is to set up an new institution, I call it the Sadaqah House. This new institution – an Islamic bank or better still an Islamic banking group – will be licensed and supervised by the central bank of each country. Its task is to collect funds from the private sector and use these funds to help the poor and the needy.

Who exactly will it collect money from?

It’s really for individuals. Muslims are encouraged to give charitably and there are two types. Zakat is an obligation and is compulsory. In some countries, if a person does not give Zakat, he or she might be brought to court as it is related to state enforcement. Hence it is best that this is left to the government sector. In Malaysia, Zakat collection is done by the state religious department and it’s best to continue as such.

But there is also voluntary charity, Sadaqah, and that is what I am focusing on in my proposal. In particular, Sadaqah Jariyah, or continuous charity. The task of collecting funds is already the work of a bank. Under my proposal, the bank would collect those funds and invest them over a long period of time. The annual profit would be distributed. So the capital builds up year over year and the profits are channelled out in perpetuity. A lot of charity is done at the moment but is not really organised in the sense that the banking system is organised.

How would the bank distribute the money?

This part actually needs some work. In the initial years, the task is more about collecting the funds rather than distributing the funds. The bank needs to draw up plans for distribution but it could use the existing channels through, say, religious departments. Later on, it should set up its own network of distribution.

And what would the banks get out of this?

I propose a management fee of between 1 and 1.5 per cent to be taken from the yearly profit on the invested capital.

The conventional banking system has been a bit of a mess in recent years. Should we really trust banks to handle our charitable giving?

Thank you for that question [laughs]. I would have thought that among the various institutions, banks should come up top in terms of integrity, in terms of efficiency. Banks are in the area of collecting funds, of accepting deposits, of transferring funds and so on. This is part and parcel of the banking world. Charity would benefit from work of that sort. Secondly, I am suggesting that the money, having been collected should be invested to generate a profit. Fund managers, wealth managers, it is bread and butter of their business so banks again come up top. With regard to integrity, banks are under the supervision of the central bank and monetary authorities, so the likelihood of integrity would be high. And finally, from the standpoint of long-term existence of the institutions, banks are usually listed companies or public companies, so there are a lot of stakeholders who are interested in the banking business and therefore these will guard the long life of the bank.

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