Islamic Foundations: a new financial model

Many keen observers of Islamic banking & finance are not satisfied with the current “banking” based model of Islamic financial intermediation and hence suggest that a new Islamic model must be developed for the savers and users of the surplus funds in society.

One such model could be called Islamic Foundations. An Islamic foundation is a collective saving and investment programme that allows its members to save together in order to do business together.This could be a deposit taking institution in itself or may have a deposit taking institution as part of its overall operations.

An example of a conventional foundation is Fauji Foundation in Pakistan, which was set up in 1954 as a charitable organisation. And, now it is one of the largest industrial conglomerates in the country with total assets over 250 billion Pakistani rupees ($3.5 billion), serving over 7 per cent of the beneficiary population in Pakistan.

It has investments in industrial production, education, healthcare and financial services. A similar model can be adopted for an Islamic foundation, which should first identify its objectives. Examples of such objectives could be welfare of the elderly, women, and needy children etc.

The members of the Islamic Foundation must demonstrate efficiency, ethics and responsibility. While members of the Islamic Foundation must be the direct beneficiaries, the goods and services it produces must be sold in the market for competitive prices to make profit.

The profits must be reinvested within the foundation and members of the Islamic Foundation should enjoy benefits in terms of free or highly subsidised goods and services. Similarly, they must have easy and affordable access to healthcare and other social services.

Furthermore, if the Islamic Foundation runs a finance programme, it must give preferential treatment to its members. For example, the Islamic Foundation could provide interest-free loans to its members.

The foundation model is completely different from a banking-based Islamic financial model. It may be based on Waqf (a form of Islamic trust) so that the assets are locked into a structure that creates socially responsible assets.

Unlike an Islamic bank, which collects money and finances goods and services and in some cases businesses as well, an Islamic Foundation is an institution that organises and runs real businesses for the benefits of its members.

As examples of such social projects abound in the West as well as in the Muslim world, there is a need to study these different models to develop a new model of Islamic financial intermediation.

The author is aware of some notorious examples of foundations in different parts of the world but they should not hide the fact that these are excellent models of social enterprises; if regulated properly. It must, however, be emphasised that many of the problems with foundations are primarily due to either non-existence or poor regulation of such entities.

It is proposed that special arrangements be made to list such Islamic Foundations on a stock exchange to ensure that investments could be redeemed However, to remain within the spirit of a foundation model, the listed stocks must be non-dividend paying and the investors should have a choice of donating their capital gains back to the foundation.

In Pakistan, an excellent model in the form of ‘mudaraba’ companies exists, which can be modified to come up with a framework for the proposed Islamic foundations.

in conclusion, we can see that Islamic financial innovation has dramatically increased and Islamic financial products have been developed over the last decade. These innovations have opened up a whole new array of asset classes to Islamic investors enabling them to gain access to the risk/return profiles of previously untapped areas.

This trend is expected to continue as the industry develops and undoubtedly product innovation will be an important factor in the continued growth.Innovation in Islamic finance has largely been driven by the need to imitate the economic effects of conventional financial products and this has somewhat been achieved via the presence of Islamic structured products, hedge funds etc.

Shari’a compliance can no longer be the sole factor considered in innovation as it is important that the industry develops its own unique selling point as competition soars in the industry. One possible way to achieve this is the development of alternative Islamic financial institutions with a focus on societal improvement; these alternative institutions together with traditional Islamic banks, can work in tandem for the realisation of these objectives.

http://www.pakistantoday.com.pk/2011/10/islamic-foundations-a-new-financial-model/

Leave a Reply