Short to Long term Islamic Finance Instruments can play a critical role in supporting the proposed economic sustainability plan of the Nigerian Government. The CEO of Jaiz Charity Organization Dr. Abdullahi Shuaib disclosed this in a recent webinar lecture that discussed the role of Islamic finance in achieving economic development.
According to Shuaib one of the ways of improving the current situation occasioned by the COVID-19 pandemic is for the wealthy individuals, corporate bodies and governments to embrace collaboration, solidarity and cooperation to help the poor and vulnerable by offering financing facilities to MSMEs using IFIs.
He identified the following as some of the Islamic Finance Instruments;
- Wakalah Investment Deposit
- Ijarah Istisna’
- Sukuk and Takaful.
He cited Mr. Ventje Rahardjo, the Executive Director of the Indonesian National Committee of Islamic Economic and Finance, who recently called for the maximization of Islamic Social Finance to combat the impact of COVID-19 on the global economy.
Speaking further Dr. Shuaib also stated that the United Nations Development Program, UNDP has highlighted several sharia-compliant tools that could be part of the “Pandemic Response Plan”, PRP including Zakah (Charity), Waqf (Endowments) and Sukuk (Islamic bonds).
The Islamic scholar also supported the position of Aamir Rehman, Senior Advisor on Islamic Finance at UNDP who pushed the argument that IFIs can be part of the COVID-19 response through a range of financing instruments well–suited for each stage of recovery.
He believed that Islamic Finance Instruments could lend weight to the Environment, Social and Governance (ESG) framework supported by the United Nations through the “Principles for Responsible Investment” (PRI) with over 2,500 PRI signatories collectively representing more than $86.3trn in assets that are invested in line with ESG factors.
For the short-term instruments, he mentioned the “Zakah” which serves four purposes spiritual purification from greed, morality, regulate inordinate urge for excessive accumulation of wealth and social impact.
Also, he noted that Sadaqah (Charity) is another instrument that can come from Islamic faith-based organizations or the amount received by Islamic banks during Murabahah financing.
For the medium-term instruments, he listed the following segments;
- Murabahah which is working capital finance that is cost-plus financing in a situation where the seller reveals the cost of a commodity and the amount of profit to be charged Both the seller and buyer agree to the cost and mark up of the asset at inception.
- Ijarah: (Leasing): This facility allows the lease to hire and subsequently purchase assets from the bank at a fixed agreed amount during the financing tenure and make monthly repayment amounts to the bank as well as monthly rent payment.
For example, in 2008, the Al-Baraka Banking group collaborated with UNDP and sought to align over $600million of its financing.
- Mudharabah – This is a silent partnership involving capital or labour. It may be concluded between investment account holders as providers of funds and the bank as a Mudharib.
Looking at the classification of the Long-term instrument he identified the areas below
- Musharaka: (Joint venture/partnership) in which partners share in the profits and losses of a company according to a pre-determined ratio
- Wakalah Investment Deposit: is an instrument used by the depositors to instruct the Wakil (Bank) to invest their funds in ethical businesses for profit-making at expected profit rate over the agreed period of the investment
- Istisna: (Project financing/construction) – This instruct is available to potential customers of the bank who will request the bank to finance their projects. On this note, Both the bank and the customer agree on the selling price which is fixed and remain unchanged until the end of the payment period. This opportunity is available as a bailout for MSMEs.
- Sukuk: (Islamic bonds) are an important source of long term capital for governments and companies engaged in the pandemic response and recovery processes as the COVID-19 has made long term funding for development very crucial, therefore, governments, individuals and private investors should give this a thought.
- Waqf: (Endowment) – This instrument can in many contexts be important contributors to long term resilience(Rehman, 2020) Financial and non-financial assets such as land or buildings are permanently dedicated to social purposes. This can be an important way for stakeholders to contribute to social infrastructure such as hospitals, schools, etc to help the country recover better in the long term.
- Takaful: Takaful is commonly referred to as Islamic insurance; this is due to the apparent similarity between the contract of Kafalah (guarantee) and that of insurance. it is a type of Islamic insurance wherein members contribute money into a pool system to guarantee each other against loss or damage. Takaful-branded insurance is based on sharia or Islamic religious law, which explains how individuals are responsible to cooperate and protect one another.
Dr. Shuaib stressed that in Nigeria opportunities abound for Non-Interest banking because Islamic social finance instruments can be used to drive impact investments and assist the nation as it resets its economy post-pandemic.