CHAPTER 2 THE ISLAMIC MICROFINANCE APPROACH TOWARD POVERTY
2.1.2. An Islamic Approach to Poverty Alleviation
Economists argue that poverty is an outcome of market failure. Johnson (2009) points out that the economic system allows resources and wealth to be accumulated by particular persons and/or parties and ultimately leads to the domination of some people
over others. In this situation of asymmetric power relations, people who lack capability cannot access resources and accordingly they are excluded from the economic mainstream as well as in social respects.
It has been commonly accepted that poverty is a complex and multidimensional problem (Sirageldin 2002). Therefore, to deal with the complexity of poverty, there have been numerous approaches and policies introduced, in particular the donor programs led by the World Bank (World Bank 2013) and other regional donor institutions, i.e. the Asian Development Bank in the Asian region (ADB 2007). In association with the global poverty alleviation program, in 2006, the Islamic Development Bank (IDB) introduces poverty alleviation program using south-south approach with specific Islamic characteristics (IDB 2012).
According to Sabra (2000), the essential element of poverty alleviation in Islam is focused on assisting people who are unable to be self-sufficient, through the provision of the basic necessities. The support is mainly aimed to help the destitute and the needy who have insufficient income to fulfil minimum needs in their daily lives, for instance, food, clothing and shelter, but also including non-physical needs (Debasa 2009). The Prophet introduced this approach through the establishment of the House of Treasure (Baitul Maal), which was designed to collect and manage almsgiving and charitable funds, and to distribute this to the poorest and other rightfully beneficiaries. After the era of the Prophet, accordingly, His successor companions enhanced the system that was expanded during in the medieval period (Lev 2005).
In the modern context as the concept of basic needs and community welfare have broadened, Islamic thinking on the poverty alleviation concept such as Baitul Maal and almsgiving has been developed, to include the provision of health services (Udiutomo et al. 2009), education (Helmanita 2006) and humanitarian and relief provision (Latief 2012). In other words, the Islamic poverty alleviation framework is a social security mechanism to support the poorest and the most needy (Gusfahmi 2009).
Another fundamental approach of the Islamic teachings in alleviating poverty is empowerment by providing the means and pathways that encourage poor people to become involved in income-generating activities (Dogarawa 2006). In this context, a Muslim is strongly encouraged to be a self-reliant and successful person (Abdul-Rauf
2010); this doctrine is revealed in several verses of the Quran. According to Qardhawi (1980), work for wages is the main strategy, and entrepreneurship is another pathway (Hamid and Sa’ari 2011; Ibrahim 2012; Sultan 2012). In other words, Islamic teachings has a holistic approach that highlights equality, generosity, justice and empowerment as the core values.
The historical literature of Islam describes how The Prophet, before His prophetic duty, was orphaned at a young age. He worked hard for a living, including as an assistant to a wealthy merchant to sell goods and commodities from city to city across the Arab world. Through hard work, honesty and smart trading strategies, the venture grew and finally He became a successful entrepreneur (Rahman 2010).10 This lesson clearly demonstrates that social status should not prevent Muslims from becoming prosperous, affluent and respected in society as long as there is strong willpower to make a living.
Given this history, it can be understood why The Prophet prohibits an ordinary Muslim from begging for charity and earn from the generosity of others (Dogarawa 2006).
In a different context, the prophetic tradition is to encourage Muslims to be entrepreneurs. A narrative literature, as summarized by Ibrahim (2012, p. 83) explains
‘a poor man came to the Prophet asking for financial help. The Prophet recommended the man to sell any assets he has (a piece of cloth and a utensil) valued at two dirhams.
The Prophet suggested the man to buy an axe and cut firewood for money. He asked the man to come back again in two weeks. When he returned to The Prophet, he brought ten dirhams generated from his effort’. Sultan (2012) points out that The Prophet’s teachings demonstrates a different approach in dealing with poverty. In this case, the solution suggests that poverty can be alleviated by helping poor people to earn a living in self-employment or as an entrepreneur rather than asking for financial help from others.
Clearly the examples of the Islamic poverty alleviation approach suggests that productive activity is the most effective means to support poor people to be self-reliant and confident in dealing with economic hardship. Empowerment is a proven tool to enable the poor to help lift themselves out of the cycle of poverty.
10 The young Muhammad worked as an employee of Siti Khadijah’s venture by delivering tradable commodities from Mecca to Syria. He was not only trustworthy but a bright entrepreneur, hence He successfully expanded the business. Finally Muhammad married Siti Khadijah (Rahman 2010).
Another important element of the Islamic poverty eradication doctrine is prohibition of Riba (Kaleem and Ahmed 2010). Literally, Riba in Arabic means ‘an increase’.
However its interpretation usually is related to usury, the payment of interest, and other financial and commerce transactions (Saeed 1999). The fundamental issue in Riba is about moral ethics and justice (Tripp 2006). In this regard, one party takes advantage of another, for example, where the wealthy exploit the poor for profit and/or benefit. Saeed (1999) notes that Riba has been banned since the early period of Islam because it caused chronic poverty. In the pre-Islamic period, Riba was widespread and the rich practised usury by charging poor people very high interest rates on loans or goods even though the poor borrowed money to make a living. In effect, this situation created widespread inequality and poverty in Mecca society.
Rahman (2010) states that Islam eliminates Riba through introducing benevolent loans (Qard al Hasanah). This model encourages affluent Muslims to lend money to poor people without seeking interest or profit, instead only asking reward from God. Also, the poor borrower would not be obliged to pay back the loan whenever he/she experiences financial difficulty. Thus the nature of the benevolent loan will not create a burden to the poor hence it is ideal as a poverty alleviation tool (Bhuiyan et al. 2012). In brief, the comprehensive poverty alleviation principle in the Islamic belief system seems very relevant in the current context especially in Muslim countries, including Indonesia, where poverty and inequality remain evident.
2.1.3. Institutionalized Almsgiving for Poverty Alleviation
As previously discussed, almsgiving is a teachings that was introduced by The Prophet in the early Islamic era. During the Prophetic era, there was a House of Treasure with a primary function to collect and administer almsgiving (Iqbal 2002). In the medieval period the practice of almsgiving was carried out by The Prophet’s companions and Islamic nations (Debasa 2009; Latief 2012; Sabra 2000). In particular, the organisation of almsgiving was developed into a sophisticated institution (Kasam 2008;
Qardhawi1980), and was integrated into the Islamic state fiscal system (taxation) and welfare program (Latief 2012).
However, with the imposition of colonial rule in much of the Islamic world, institutional almsgiving managed by the state declined (Chapra 2006). Under colonial rule, almsgiving became a socio-religious tradition, embedded in mosques and other
small religious organisations. Institutionalized almsgiving was re-established in some Muslim countries with the revival of Islam following the Iran Revolution in 1979.
Recently, two almsgiving and philanthropic models have emerged in Islamic nations.
First, the almsgiving is institutionalized into governmental structures and the national budget system, as well as a poverty alleviation framework, as in Malaysia (Kasam 2008). Second, the state involvement is only in a regulatory or supervisory role, which allows the Islamic civil societies to develop almsgiving and poverty alleviation, as in Egypt and Jordan (Harrigan and El-Saeed 2009) and Indonesia (Helmanita 2006; Latief 2012).
In the case of Indonesia, the government role is providing legal and support arrangements; officially almsgiving activity is regulated under Law No. 38/1999 regarding Zakah collection and management.11 The law provides general rules for almsgiving and also recognizes two almsgiving organisations: the government- sponsored institution (Badan Amil Zakah Nasional or BAZNAS) and the Islamic civil society-based agency (Lembaga Amil Zakah or LAZ). So the almsgiving and charitable system has been transformed into modern organisations and embraced good governance including a greater variety of poverty alleviation programs.
In line with re-institutionalized almsgiving, in many Muslim nations there is a new paradigm of integrating the traditional almsgiving framework in poverty alleviation into the Islamic economic system (Latief 2012), so that the almsgiving and religious fundraising activities are enhanced to generate significant impact for the poor beneficiaries and the wider society, and more importantly it should be sustainable in the long term. There is a growing movement that the practice of almsgiving has been associated with Islamic banking and microfinance institutions (Al-Harran 1993; Kaleem and Ahmed 2010; Kamil 2006; Meisami and Hasanzadeh 2012; Rahman 2010; Zarka 2012).
The integration of almsgiving into the microfinance system has some advantages. First, this model aligns the Islamic poverty alleviation spirit with self-employment and entrepreneurship, and the elimination of Riba. Second, the arrangement and modus
11 It is important to note that the Almsgiving Law was introduced by the President Habibie who had led the ICMI.
During the Suharto presidency, almsgiving was recognized by the government but it was not formally institutionalised through government regulation.