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GEO-ECONOMICS
Fuad ALIEV
Ph.D. Candidate (Econ.) at the Azerbaijani State Economic University (Baku, Azerbaijan).
WAQFS AND POVERTY ALLEVIATION IN AZERBAIJAN
Abstract
This article discusses the functions and mechanisms of Islamic charity organizations (waqfs) within the framework of the liberal (non-Islamic) financial and economic system. The author analyzes a model for creating, managing,
and controlling the activity of these organizations in Azerbaijan and offers his assessment of their potential for supporting small and medium businesses, as well as their contribution to poverty alleviation in the country.
I n t r o d u c t i o n
In the context of the Islamic economic doctrine, the efficiency of any redistribution policy largely depends in the long run on non-utilitarian behavior in the form of “distributional sacrifice” rather than on government measures.1 Keeping in mind the importance of both trends, it is nevertheless worth taking a look at the collapse of the radical socialist model, as well as at the current rather inefficient functioning and growing non-competitiveness of the “welfare state” model. Globalization
1 S. Tag el Din, “The Elimination of Riba: A Measure Truly Dedicated to Poverty Alleviation,” in: Islamic Economic Institutions and Elimination of Poverty, The Islamic Foundation Leicester, U.K., 2002, pp. 187-207.
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processes have undermined the government influence on the market both in developed and developing countries.2
Waqfs and Poverty Alleviation
The Islamic conception of redistribution is based on non-utilitarian behavior related to the corresponding form of property of the public sector (irfag). The institution of irfag existed as early as the times of the Prophet Muhammad and continued to develop as a way of providing social security. It consisted of waqfs (charity organizations) and other voluntary endowment mechanisms. This kind of public sector (with a religious base) also existed in non-Muslim countries.3 As Gary S. Becker notes, “charity is a form of self-insurance that is a substitute for market insurance and government transfers.”4 It was precisely the widespread use of the latter that led to a decrease in the social role of charity.
All the same, there has been an increase in the West recently in the role of philanthropy and the conception of social business responsibility, which is in complete correspondence with the conception of redistribution in any Islamic economic model. Relying on his research studies, Tag el Din claims that even when the emphasis is placed on an increase in material productivity, its higher rates are achieved by introducing special human development programs that also advance technical productivity regulations and ethic standards of fair distribution.5
It is worth noting too that in spite of all the social orientation of the Islamic economic model, it rejects extreme paternalism on the part of the state.6 Under normal circumstances individuals should take care of themselves. If for some reason this becomes impossible, close relatives, neighbors, and society as a whole become responsible for their care.7 The state as a public institution should create conditions in which a person can be provided with the necessary help only in an emergency.
So the state itself should be free of negative elements. While parents, the education system, and society form a springboard for enterprising and independent thinking, only transparency in the state management system, the rule of law, and other democratic institutions create conditions conducive to shaping individuals as self-fulfilled citizens of their country and a competitive workforce.8
Recently time and effort have been put into elaborating an institutional approach toward poverty alleviation. M. Çizakça notes that many basic social services—health care, education, municipal, and communal, and so on—have never been offered at the state’s expense throughout history.9 They were not implemented by means of redistributional taxation, as in the West, but by voluntary contributions and local initiatives. In this way, the institution of waqf has been the main tool for fighting poverty in the Islamic world. Moreover, it was in the West that this institutional approach experienced
2 See: J.E. Stiglitz, Globalization and Its Discontents, First Edition, W.W. Norton & Company, New York, April 2003, 318 pp.
3 See: S. Tag el Din, op. cit., pp. 187-207.
4 G.S. Becker, “A Theory of Social Interactions,” Journal of Political Economy, University of Chicago Press, Vol. 82 (6), pp. 1063-1093.
5 See: S. Tag el Din, op. cit., pp. 187-207.
6 See: M. Igbal, “Introduction,” in: Islamic Economic Institutions and Elimination of Poverty, pp. 1-24.
7 See: S. Tag el Din, op. cit., pp. 187-207.
8 See: I. Sirageldin, “The Elimination of Poverty: Challenges and Islamic Strategies,” in: Islamic Economic Institutions and Elimination of Poverty, pp. 25-112.
9 See: M. Qizak9a, “Latest Developments in the Western Non-Profit Sector and the Implications for Islamic
Awqaf,” in: Islamic Economic Institutions and Elimination of Poverty, pp. 263-296.
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a rebirth through the tempestuous development of the nongovernmental (nonprofit) sector.10 The most vivid example is Germany, where the principle of subsidiarity is used, that is, the nongovernmental sector is responsible for resolving local social problems and rendering social services.11 This approach, in which there is no duplication of activity and clear division of labor between the government and nongovernmental sector, is worthy of attention and application in countries with a transitional economy.
A waqf is established by donating private property for charitable purposes to be used perpetually and on the condition that the revenue it produces be spent correspondingly. A distinction should be made between religious and philanthropic waqfs.12 The latter may be more beneficial in securing poverty alleviation.
A look at history of waqfs reveals that this institution has existed for one millennium.13 It provided social services through voluntary contributions from the wealthy strata of society, thus being a voluntary institution of poverty alleviation in the Islamic world.14 Azerbaijan also has a rich history of waqfs; they played a leading role in financing social projects and building infrastructure.15
So, at the turn of the 20th century, the Azeri bourgeoisie directly and through the charity funds it created began to finance educational, cultural, religious, public health, infrastructure, and other development projects. The names of G.Z. Tagiev, M. Mukhtarov, A. Ashurbekov, A. Dada-shev, A. Guliev, Sh. Asadullaev, I. Gajinsky, and others, as well as the Neshr-Maarif, Nijat, Safa societies, the Baku Muslim Charity Association, and so on, have gone down for perpetuity in Azerbaijan’s history.16
By rendering important services to society without drawing on budget revenue, the system of waqfs can significantly cut back on state spending. This, in turn, is helping to reduce the budget deficit and size of the state debt, as well as the effect of private investments being squeezed out by government spending, which means lower interest rates and stimulated investments and growth.17 This also makes it possible to lower the tax burden, thus raising the income of consumers and producers, as well as having a positive effect on aggregate production with a simultaneous decrease in outlays. So prices are falling, opening the way to noninflation growth of production.18
Waqfs also solve the problem of insufficient supply of the social benefits frequently seen in a contemporary market economy.19 Here the state’s role consists of ensuring their normal functioning by providing an efficient judicial system and protection of the property rights of waqfs.
History is abundant in cases of the state’s violation of waqf property rights. The development of waqfs was cyclical, involving the expansion then confiscation of property and sequential centralization and decentralization processes. Western countries and colonizers played an immense role in ultimately undermining this institution. For example, in 1860, at the end of the Crimean War, when a peace treaty was signed, the British government insisted on waqfs being abolished.20 Europe, which
10 See: M. Igbal, op. cit..
11 See: M. Qizak9a, op. cit.
12 See: H. Ahmed, “Role of Zakah and Awqaf in Poverty Alleviation,” Occasional Paper, No. 8, Islamic Development Bank, Saudi Arabia, Jeddah 2004, 48 pp.
13 See: D. Creselius, “Introduction,” Journal of the Economic and Social History of the Orient, Vol. 38, No. 3, 1995, p. 260.
14 See: M. Qizak9a, op. cit.
15 See: R.S. Hüseynli, The Azerbaijani Clergy, Kür, Baku, 2002, 266 pp. (in Azeri).
16 See: S.G. Talybova, Kulturno-prosvetitelskaia i blagotvoritelnaia deiatelnost azerbaidzhanskoi burzhuazii (konets XIX-nachalo XX vv.), Dissertation for Ph.D. in Historical Sciences, Baku, 1994, 202 pp.
17 See: M. Qizak^a, op. cit., p. 264.
18 See: J. Wanniski, “The Mundell-Laffer Hypothesis,” The Public Interest, Vol. 39, Spring 1975, pp. 49-50.
19 !
20 See: N. Öztürk, Waqf Institution in the Context of the History of Turkish Revival, TDV, Ankara, 1995, 199 pp.
' See: M. Qizak9a, op. cit., pp. 263-296 See
(in Turkish).
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believed in those days in the strength of the state and was suspicious of “intermediary organizations,” did not hesitate to impose this approach on the Islamic world, where the absolutist regimes were happy to accept it and centralized alternative sources of financial resources and influence.
Now the opposite process is being observed throughout the world, guided by the example of the U.S., where the nongovernmental (nonprofit) sector is having a real heyday. Conditions are being created in one form or another in Western countries for developing this sector. This could also have implications for the Muslim countries in the form of a revival of the institution of waqf.
In countries that function under common law, the closest to waqf in the organizational respect is a trust that places a particular person (trustee) in charge of the endowed property to administer it in keeping with the donor’s wishes. In countries (like Azerbaijan) that function under Roman law, the closest to waqf is a fund that is also entrusted with a certain endowment donated by a sponsor.
Regardless of its form, the relations between the principal and the agent are important in this type of institution, as well as the motivations of the latter regarding efficient resource management. In the West, a special group of managers has also been formed who specialize in administrating nonprofit organizations. The question of efficient management should not be underestimated since most waqfs historically suffered from poor administration and inefficient management, corruption, and lack of transparency. This also applies today in the NGO sector, which at times is no worse than state management in this respect.
The principle of subsidiarity practiced in Germany can be considered the closest to the conception of waqf. Here the state does not provide social services where an NGO is rationally operating. In this way, subsidiarity helps to establish cooperation and promote division of labor between the government and the nongovernmental sectors. This conception is being actively implemented by other European countries and the international community as a whole. For example, the growing international support of emergency and humanitarian aid development projects is being provided precisely through the nongovernmental sector. According to the estimates of the International Red Cross, NGOs are now spending more than the World Bank.21
Particular attention should be paid to the taxation of nongovernmental organizations, which should be divided into taxation of NGOs themselves and taxation of the donations to them. For example, in the U.S. all the income of nonprofit organizations is exempt from federal profit tax, and donations to charity organizations enjoy benefits.22 Waqfs were traditionally exempt from taxes. In contemporary Muslim countries they are taxed to the fullest extent of the law.23
Present-day NGOs, like traditional waqfs, are actively engaged in commercial activity, which in many countries is taxed. The logic of this approach lies in the fact that benefits create unequal opportunities for commercial and nonprofit structures, which undermines the foundations of fair competition. An exception is Australia, where any commercial activity is exempted from income tax if it is used for charitable purposes.24
So reform of the waqf system in the Islamic world, including in the post-Soviet republics, would be very conducive to alleviating poverty. This primarily requires amending the current legislation and studying the practice of other countries, particularly regarding cooperation between the state and NGOs, as well as the relations between waqfs and companies. Cases in point are the experience of the Turkish Kog Company,25 the multitude of waqfs in Kuwait, India, Pakistan, Malaysia, and so on. For example, as early as 1993 the Kuwait Awqaf Public Foundation was established to reinforce the status
21 See: The Economist newspaper, 29 January-4 February, 2000, p. 25.
22 See: M. Çizakça, op. cit.
23 See: Ibidem.
24 See: M. Salamon, S. Toepler, The International Guide to Nonprofit Law, John Wiley & Sons, New York, 1997, 222 pp.
25 See: M. Çizakça, op. cit.
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of waqfs as a third sector and to participate in the country’s development policy. One of its tasks is to activate the role of waqfs as an efficient institution in socioeconomic development and the resolution of social problems.26 Incidentally this institution is an excellent example of a successful state-independent waqf which is managed as a nonprofit charity fund and is actively engaged in socioeconomic development programs.27
The experience of other states shows that the activity of waqfs can be enhanced even more by coordinating all charity organizations, which will help to avoid duplication of activity and promote division of labor. A single data base of target groups will be another plus in the coordination of these institutions. This will help to resolve the problem of identifying the poor and monitoring the actions carried out. A mutual exchange of information among these organizations, as well as between the corresponding state structures and NGOs, will be useful in planning projects, policy, and strategy for alleviating poverty.
The governments of some countries are conducting a corresponding policy in order to encourage charity and develop the institution of waqf. For example, the tax legislation of Malaysia (which is a secular state with a mainly Muslim population) allows zakat to be paid from tax credits. In this way, physical persons can pay their zakat donations by means of mandatory tax payments.28
Although traditionally the revenue from zakat and waqfs were used for providing direct material aid, in the fight against poverty efforts must also be made to raise potential and improve prosperity. In addition, direct material aid is related to high moral risk and encourages dependency psychology. For example, the Central Council for zakat in Pakistan uses most of the available funds to finance rehabilitation and professional training.29
The potential of the institutions of zakat and waqf in poverty alleviation depends on several factors. It stands to reason that as the financial resources of these structures increase so does their ability to attend to as many poor people as possible. Moreover, as the population’s prosperity increases so does the taxable base and, correspondingly, charity activity. In turn, the development and expansion of these institutions will depend on several operational and organizational factors.30 Here we should make a stipulation about zakat and other Islamic taxes. Due to the secular structure of the Azerbaijan Republic these taxes (primarily zakat and khums) will have to be voluntary and so will be included in the revenue for waqfs. Whereby attracting charity donations in the form of Muslim taxes requires raising the efficiency of collecting and distributing these funds, which causes people to trust these organizations and want to contribute to them.
This money could be used to acquire all kinds of social benefits and increase the prosperity of able-bodied people by providing them with human and financial capital and rendering direct material assistance to the disabled.
One of the reasons for the small number of waqfs in the world is that they are associated with land and real estate, the cost of which is very high nowadays. This limits the number of potential donors. So we need to move away from the traditional forms toward monetary waqfs similar to the philanthropic humanitarian funds in the West. NGOs with a trustee board that controls the fund’s operations and employs professional managers are the most optimal organizational structure for waqfs.31
The success of waqfs also depends on the efficiency of their organizational structure and management, as well as on their understanding of the importance of their social mission. So the institution’s success is based on a clear and precise social task, legitimacy, support, and organizational
26 See: H. Ahmed, op. cit.
27 See: Ibidem.
28 See: Ibidem.
29 See: Ibidem.
30 See: Ibidem.
31 Ibidem.
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possibilities, that is, the prestige of the public organization is measured by the degree to which its mission is realized. Keeping in mind the dependence of this kind of structure on donors, it is important that their activity is transparent, which can be achieved by establishing financial reliability and an internal mechanism that makes it impossible to use the funds unconscientiously. In addition, the responsibilities for making, carrying out, and monitoring financial decisions should be divided among different branches of the organization. Conducting independent audits which present the public with a full report of their results is extremely important. Unfortunately, our country’s NGOs and religious organizations are not quite up to this yet.
The participation of respected and well-known people on the trustee or supervisory boards of these organizations will also help to raise trust in them. As the literature notes, the managerial procedures of waqfs depend on their size, whereby the larger ones have the advantage of scale effect. In addition, they will also have more opportunity to attract qualified managers and employees and introduce innovations for achieving efficiency. Small organizations are valuable in that they are more flexible and closer to the target groups. This factor is especially important for efficient local socioeconomic development (the development of communities).
In order to render help directly to those who need it most, these structures should create a network of volunteers that does not require a lot of spending and helps to identify and assist target groups directly in the regions. Then these organizations will also be able to join together and coordinate their efforts in order to achieve better results. As we have already noted, the most important thing is to have a coordinating independent structure.
The Waqf Property Investment Fund created by the Islamic Development Bank (IDB) in 2001 can assist the institutional development of waqfs. It is called upon to mobilize financial resources for promoting and developing the property of waqfs throughout the world and informing Muslims about waqfs, as well as to help the IDB achieve its goals with respect to the socioeconomic development of member countries and other communities.
In this context, waqfs can perform the following functions:
1. Collection and accumulation of zakat, khums, and donations from Muslims. This function implies a streamlined and transparent system for collecting and using funds, as well as educational and marketing activity to increase the number of “taxpayers” and donors and attract more contributions and payments.
2. Support and insurance of the socially vulnerable strata of the population in order to keep them above the poverty line. As we understand it, the Islamic economic model offers several alternatives. First, it grants interest-free loans (gard al-hasana) to this segment of the population. One of the loan conditions could be helping to finance the particular waqf after improvement of the family budget. For example, in Sudan, the Divan al Zakat organization issues interest-free loans to farmers at the beginning of the agricultural season so that they can buy all they need. The loan is returned after the harvest has been gathered.32 This policy has increased the productivity of farms and the collection of zakat from farmers to 74.4% of the sum of the issued loans.
3. Funding of waqfs. This method was proposed by H. Ahmed and implies issuing certificates to waqfs33 at an acceptable nominal cost. Anyone wishing to contribute to and help the waqf can do this by buying a certificate. This method is called sukuk al intifa and implies the transfer of the right to use certain assets of a waqf to the purchaser of the certificate for a certain length of time.
32 See: M. Kahf, Shariah and Historical Aspects of Zakah and Awqaf, Islamic Research and Training Institute, Islamic Development Bank, Jeddah 2004, 47 pp.
33 See: H. Ahmed, op. cit.
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4. Islamic microfinancing institutions based on waqfs. Accumulated funds can be used to finance small businesses and individual businessmen from among the low-income population based on the division of profits and losses or by granting the poor interest-free consumer loans for improving their standard of living. This principle of microfinancing in different forms is actively used in Western countries and has been named “community cap-italism.”34
Nevertheless, the significance of waqfs in poverty alleviation should not be overestimated, nor should we expect them to replace state intervention in socioeconomic processes. At the present stage in development, full delegation of communal, educational, medical, and other social services to the nongovernmental sector is unrealistic and undesirable. This sector should play an auxiliary role.
Waqfs and Microfinancing
In principle, waqfs can apply two approaches to revenue spending. According to the first, the roots of poverty lie in the fact that the low-income strata of the population are disorganized and in an economic, social, and political trap. Therefore the only long-term solution to the problem of poverty will be to offer this category of people help in overcoming their unenviable status by increasing their awareness and education.
The second approach is more materialistic. It suggests that poor people need more than just increased consciousness and greater awareness; they need material assistance that will help to raise their income. Loans are a key element in this approach. It is called upon to help poor people extricate themselves from debt dependence and invest in their own income-yielding business.35 But studies show that the official banking sector is unable to reach poor people (particularly in rural areas) due to high operational costs.36 In this respect, the main principles of Islamic economics lead us to believe that the most realistic Muslim approach would be to create micro-lending institutions and credit unions in the spirit of Islam.
An example of how Islamic NGOs can help to alleviate poverty is the extensive rendering of microfinancing services to the poor in Bangladesh. In contrast to the traditional micro-lending organizations, Islamic NGOs do not issue money loans but apply the concept of bai muajal—the sale of productive assets with deferred payment and a margin of approximately 12%.37
Micro-lending is an efficient way to create jobs, raise family income, and alleviate poverty.38 But there is another opinion, according to which, despite its declared intention to fight poverty, micro-lending rarely reaches the low-income strata of the population, that is, the recipients of loans are families that are not so poor. The microfinancing mechanism can be briefly described as follows. Poor women and men form groups that are responsible for paying each others’ loans in the event of a default. In order to receive a loan, a small deposit must be placed in an account as a form of mandatory
34 M. Stegman, The Rise of Community Capitalism (with focus on Community Development Venture Capital), Presentation for The Humphrey Seminar, University of North Carolina, Chapel Hill, April 2006.
35 See: J. McGregor, “The Growing Gap between the Banking System and the Poor in Rural Bangladesh: Problems of Financial Liberalization and the Rise of NGOs,” Occasional Paper, No. 3, Center for Development Studies, University of Bath, 1994, pp. 94-116.
36 See: M. Hassan, D. Alamgir, “Microfinancial Services and Poverty Alleviation in Bangladesh: A Comparative Analysis of Secular and Islamic NGOs,” in: Islamic Economic Institutions and Elimination of Poverty, pp. 113-168.
37 See: Ibidem.
38 See: Ibidem.
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savings. The difference between secular and Islamic NGOs lies in the interest rate. Credit unions that are also close to Islam in spirit are another example of microfinancing and the rendering of financial services to the low-income strata of the population, who are frequently of no interest to the banking sector.39
According to Islamic doctrine, the state and society are responsible for fighting poverty. As stated above, the economic philosophy of Islam requires that poverty be alleviated primarily by meeting basic human needs, as well as reducing the difference in income between the low-income and well-to-do strata of the population and using the available resources for the benefit of human prosperity.
Islamic public organizations should try to use mosques to achieve their goals and encourage the clergy and believers to take a more active civil stance. The clergy needs to be reoriented in order to adapt to today’s realities. In this respect, radical reform of the status and structure of the Spiritual Administration of the Muslims of the Caucasus and its interrelations with other Islamic organizations and corresponding state structures is on the agenda.
The Potential of Waqfs and Islamic Microfinancing in Azerbaijan
Waqfs on the whole and monetary waqfs (essentially charity funds) in particular are undergoing revival today in the Muslim world. Their role in financing social projects, including by means of micro-lending, is also growing. To be fair, it should be said that most waqfs are property-related and religious. But in secular countries with a Muslim population, monetary waqfs are just as important, which is due to the weakness of traditional waqfs.40 In this respect, it is worth noting the experience of the National Awqaf Foundation of South Africa (AWQAF SA). Established in 2001, the organization’s aim is to mobilize the capital of the Muslim community and reinvest it in social development. Community development and support of poor Muslims and the low-income strata of the population are the main priorities of the AWQAF SA’s plan of action. AWQAF SA is engaged in mobilizing and collecting funds, while the substructure it created, the South African Islamic Development Agency, implements development and target group support programs, including by means of microfinancing. In spite of its young age, AWQAF SA has already carried out several successful projects and gained recognition not only in the country, but also abroad. In so doing, it should be noted that the SAR Muslim community comprises the minority of the population (approximately 2%), and most Muslims, being dark-skinned, suffered from the apartheid regime and are among the low-income segment of society. The success of AWQAF SA, which led in a short time to the development of the Muslim part of the country, indicates the great potential of waqfs in fighting poverty and promoting the development of local communities with efficient management even under unfavorable conditions.
The institution of waqf has not been legally enforced in Azerbaijan, although the word “waqf" is used in the Law of the Azerbaijan Republic on Freedom of Confession. But in the event a corresponding law is adopted on charity activity and charity funds, the institution of waqf (particularly monetary) will acquire a clearer legislative base for its activity and development.
39 See: M. El-Gamal, “Mutuality as an Antidote to Rent-Seeking Shari’a-Arbitrage in Islamic Finance,” Rice University, available at [www.ruf.rice.edu/~elgamal], April 2005, 13 pp.
40 See: H. Ahmed, op. cit.
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As President of the Heydar Aliev Foundation Mekhriban Alieva noted, a national conception for the development of charity in Azerbaijan should be drawn up which sets forth the main areas for building a charity system as a tool of social policy in which the state as well as businesses and NGOs participate. In addition, the main problems in carrying out charity activity should be identified, as well as ways to resolve them, and mechanisms for streamlining partner relations among the executive power structures, local self-government structures, and public institutions should be set forth.41
In the context of poverty alleviation in Azerbaijan, the following problems can be singled out which microfinancing institutions based on waqfs could resolve:
■ Shortage of financial resources and access to banking services in the rural regions and among the urban poor;
■ Non-performance of the principles and values of the Islamic economic model to the benefit of society in spite of the growing interest in Islam in the country;
■ Non-attraction of alternative sources of financial resources;
■ Poor cooperation among the population;
■ Low level of social business responsibility;
■ Mistrust of the traditional ways of collecting donations and religious endowments due to their lack of transparency;
■ Ethics crisis and lack of trust (low social capital).
These problems are encompassing different aspects of the country’s socioeconomic life. A comprehensive solution to the problems could be found by carrying out measures that would affect them all. This means that mechanisms for evaluating this influence must be identified.
Introducing a community development model by creating credit unions involving waqfs in keeping with the principles of Islamic economics could meet the challenges posed by all the abovementioned problems (including if the necessary prerequisites exist for forming this type of microfinancing institution).
The experience of different countries shows that when forming the corresponding institutional structure and during efficient management various interest-free micro-lending schemes are extremely effective in alleviating poverty at the meso level.
In this respect, there are two main ways to provide the low-income strata and rural residents with the necessary access to financial lending services. One of them involves developing principles of so-called “community (national) capitalism," the execution mechanisms of which are credit unions and other cooperatives. The second is the development of Islamic financial institutions and instruments. But attempts have been made recently to join these two approaches (keeping in mind their many similar features) and develop community capitalism among the religious Muslim population.
The development of “Islamic community capitalism" is an extremely realistic project. This strategy is aimed at obtaining profit and attracting additional investments, as well as creating jobs and economic opportunities in impoverished communities with support of the state and civil society. The latter consists of rationalizing the legal environment, encouraging investments in the infrastructure and services which exist in more prosperous regions (communities), improving the business environment, and increasing the potential of the workforce, all other things being equal. This will make it possible to strengthen cooperation in society and mobilize market forces, which in turn will enhance
41 See: Mekhriban Alieva: “There are several serious obstacles to the development of the charity sector in Azerbaijan today," available at [www.day.az], 20 March, 2008.
a healthy economic environment that provides jobs, income, and prosperity for the local population at rates that at least do not lag behind the average level nationwide.
The Islamic component consists in
1) ensuring the requirements of Islamic law (for example, interest-free loans);
2) minimizing any possibility of exploitation;
3) incorporating Islamic funds, waqfs, where monetary resources are accumulated.
So it seems the following measures can be carried out within the framework of a pilot model:
1. Creating waqfs on the basis of existing well-known shrines, that is, pirs where large donations are collected.
2. Carrying out public awareness campaigns to inform the population about waqfs and credit unions.
3. Increasing money endowments to waqfs by means of religious “taxes” and voluntary donations, grants from international organizations, and so on.
4. Creating a credit union in which a waqf holds a share of the authorized capital.
5. Providing technical support of the efficient work of such credit unions.
6. Strengthening waqfs and credit unions, encouraging their independent activity.
Of course, a waqf can also act as an NGO that will engage in microfinancing, but this will be harder to carry out since such organizations can only conduct limited operations. This will be difficult to adapt to the existing legislation, which is still not very “friendly” toward Islamic financing. Based on the Law of the Azerbaijan Republic on Credit Unions, these financial institutions issue loans under the conditions enforced in their charters, which provides more freedom for introducing the Islamic models of financing we will show below.
Fig. 1 shows the activity of waqfs based on the Model. A waqf is created on the basis of an existing shrine in a village where the residents are distinguished by religiosity and a community spirit,
Figure 1
Activity of Waqfs in the Model
that is, where there is the necessary social capital. In addition to funds from the waqf founders, there are donations (grants and contributions) from donors, community members, other physical persons, the business sector (endowments, religious taxes, and so on), and the waqf’s business activity, including the credit union’s to be mentioned below.
In turn, functioning of the Model itself is shown in Fig. 2. The waqf, residents of the community, and companies working in the village voluntarily create a credit union. The waqf, on the strength of its financial possibilities and contribution to the authorized capital, is the main founder. It also intends to obtain profit from the credit union in order to carry out its charity mission. The credit union will strengthen cooperation and interaction among the community members and with the waqf, which will help to increase the social capital.
Figure 2
System of Model Functioning
According to Islam, a credit union can carry out the following lending services:
■ Loan with deferred payment (murabaha)—the credit union buys the commodities the borrower needs in its name and resells them to the borrower with a service charge on the condition of deferred payment agreed upon in advance.
■ Interest-free loan (gard al-hasana) issued for purchasing goods and services in keeping with the requirements of Islamic law. At the end of the year, the borrower must pay a certain surcharge in addition to the amount of the loan, in order to partially cover the effects of inflation and the credit union’s operational costs relating to the issue of this loan. The service charge is established in advance and does not depend on size of the loan.
■ Leasing (ijara)—the credit union rents out its equipment and transportation means.
■ Mortgage loans—the credit union buys housing for the borrower, but in its name, with deferred payment. Until the loan is repaid, the borrower pays the credit union rent.
■ Other operations in compliance with the legislation of the Azerbaijan Republic.
The organizational foundations of the Model imply principles and special features of the organizational structure of corresponding waqfs and credit unions. The difficulty lies in the fact that the
institution of waqf as such does not yet have any legal underpinning and is purely hypothetical. However, on the whole, this institution can function on the operational principles of nongovernmental religious organizations. The organizational structure of credit unions is regulated by the corresponding legislation of the Azerbaijan Republic.
In so doing, three main aspects should be kept in mind:
1. Management structures and procedures: this includes not only the adoption and implementation of decisions but also issues relating to transparency, personnel, innovations, efficiency, and profitability.
2. Augmentation of profit and revenue: issues relating to interaction with existing and potential donors, marketing and information, image and trust.
3. Distribution of revenue: identifying the recipients of aid and loans, service provision system, coordination of activity with other organizations, assessment of financed projects, distribution of profit, and so on.
Figure 3
Approximate Organizational Structure of the Model
So the organizational structure of the Model implies the existence of such structures as a General Assembly, Supervisory Board, Board of Directors, and Credit Commission. The latter should include specialists in Islamic law and business project assessment. The representatives of the waqf, as the main founder, should be members of the Board, which carries out direct supervision of the credit union.
A waqf, in tum, should have a General Assembly of Founders, Board of Directors, Board of Trustees, and Revision Commission in its structure. The Board of Directors carries out direct management of the waqf and creates corresponding organizational units for managing the waqf’s affairs.
C o n c l u s i o n
If it is successfully implemented and all other things being equal, the Model will be able to resolve corresponding problems (see Fig. 4).
Figure 4
How the Model Effects Problem-Solving
The Model can be evaluated in the absolute (with respect to the set goals) and relative (compared with traditional credit unions) sense after a certain amount time set in advance (for example, 5 years) and providing monitoring is carried out on a regular basis.
Samir SEVIMOV
Master of Economics (Baku, Azerbaijan)
ISLAMIC FINANCE AND ITS USE IN AZERBAIJAN
Abstract
This article examines some theoretical and applied aspects of Islamic economics. The author underscores its fundamental differences from Western models and explores the foundations of the Islamic eco-
nomic system, the essence of loan interest and its influence on economic well-being. The question of the development of Islamic banking in Azerbaijan is seen through the prism of Islamic financial instruments.
I n t r o d u c t i o n
In economic theory, the economy is taken to mean the national economy of a given country or part thereof, including certain industries and lines of production. The theoretical foundations of Islamic economics were developed by such jurists as Abu ‘Ubaid al-Qasim ibn Sallam, Muhammad ibn ‘Abd al-Malik al-Baghdadi (better known as Ibn Zandjavaih), Muhammad ibn Muhammad al-Ghaz-ali, Ahmad ibn ‘Abd al-Halim al-Harrani (known as Ibn Taimiyyah) and others.
The Islamic economic model based on the principles of the Quran and the Sunnah (the body of Islamic custom and practice derived from the words and deeds of Prophet Muhammad) is aimed at achieving broad public welfare in contrast to the material well-being of individual members of society. Based on the free expression of the will of business entities, open competition and rejection of monopoly, this model is gradually finding its way into the traditional capitalist formation.
Specific Features of the Interest-Based Banking System
Banks are a key institution in the financial system of any country. They ensure the operation of the national payment system and act as financial intermediaries. From the standpoint of Islam, a banking system based on interest has several negative aspects.
