A charitable investment bank (CIB) funded by voluntary interest-free loans and philanthropic investments, including donations and zakat, should be set up to help the less well-off find work and improve living standards, according to an economist in the UAE.
Dr Abdel Fattah M Farah, Economic Advisor to Ajman Chamber of Commerce and Industry (AJCCI), believes there is a great need for such a banking model.
And the plan has been adopted by UAE social and humanitarian activist Mohammed bin Saeed Al Hilli, Chairman of the Green Crescent International Network, which is working to make the bank a reality.
Dr Farah said that at present the rich paid their donations, zakat and almsgiving to charitable organisations, which in turn distributed the contributions in cash or kind to people who needed them.
"Instead of distributing amounts to the poor, it is more important to offer them work opportunities and help them meet their needs sustainably," he added. "This is the idea behind having a charitable investment banking model."
The bank would be Shariah-compliant and the returns of any investment could take the form of either profit or social benefit.
"Both profit and benefit are recommended under Islam when the means used to attain them are ethical."
He defined charitable investment as a profit-making process in a socially responsible project that was intended to eliminate poverty in poor societies.
It should increase the supply of necessities, including food, shelter, drinking water and electricity, as well as building infrastructure and facilitating education and health services.
"The socio-economic returns of charitable investments include increasing per capita income and raising standards of living for poor citizens, best utilisation of unemployed human and natural resources, reducing prices of necessities by increasing supply, expanding demand and finding new local markets for products and expansion of foreign trade.
"Charitable investments will also help reduce violence, instability and terrorism, building good international commercial relations, leading towards technological transfer and advancement, funding stock markets with real shares thereby reduction speculations, and increasing investment, national income and flourishing the economic activity."
Although the proposed new bank would be a charitable venture those funding it would be able to share in the profits if they chose particular types of account. The CIB model offers different types of accounts that suit the particular needs of the rich and those on limited incomes who wish to contribute to charitable investment projects.
"The profit rate from charitable investments will not be exploitative and could be equal to or less than the normal rates prevailing in the market, depending on the nature of the product and the forces of supply and demand.
"While market forces direct investors towards higher profit rates, the focus of a charity giver would be on attaining social benefits irrespective of the profit rates.
"The profit from charitable investments is classed as charity because the investor willingly directs the investments towards non-usurious dealings. A high profit rate is not the best alternative for the investors, who value socially beneficial projects," said Dr Farah.
He said the CIB model offered three types of account – investment, waqf (endowment) and charity.
"In both investment and charity accounts the holder can share profits, whereas with the waqf accounts the holder cannot. In addition the model gives investors the option of contributing funds for a limited or unlimited period.
"There are two types of investment account – savings and charitable investment. The deposit period for the savings account is unlimited, withdrawals are restricted, and the holder will not get a chequebook.
"A charitable investment account holder can donate money for a specified period of time and withdrawals from this account are fixed at a certain level. No chequebook will be issued, profits can be shared and the project area where the amount will be invested should be specified," said Dr Farah.
Under waqf there will be three types of accounts – current, waqf and Qard Hassan. The current account is suitable for every individual whether they are a businessman or have a limited income.
Anyone can open a current account and enjoy all the benefits such as unlimited withdrawals and a chequebook. The difference is that the CIB model offers the holder of this account a chance to support a charity as the money in the account is considered a loan from the depositor to the CIB that can be used to support charitable ventures in line with his wishes.
The waqf account will run for a fixed period and withdrawals will also be fixed and the holder will not have a chequebook.
The money in a Qard Hassan account will be used only for the provision of loans. Loans granted under Qard Hassan should not produce profits.
There are two types of account – charity and zakat – in the charity accounts category. Withdrawals from these accounts are not allowed so holders will not have chequebooks, but they will share in the profits. For the charity account the project where the money will be invested in open, whereas it should be specified in the case of zakat account.
"Funds in the charity account shall be held as liquidity for the bank," he said. "Under the supervision of the Central Bank and specified criteria, other charity organisations would partially settle defaulted payments that the CIB alone would not be able to cover.
"Funds needed for the bank's operations, including salaries and the management of the facility, will come from the profits of the projects set up by the bank. The projects set up by the bank will be classified as either charitable or endowment schemes and will never be under the bank's ownership."
A portfolio system containing data about all dealers will be maintained for reference whenever charitable investment or interest-free loans are offered. Unless the justifications for default are accepted from an Islamic jurisprudence viewpoint, a defaulter will not be liable for any sort of financial support in future.
The CIB shall operate under Shariah board governance and its operations will be monitored by and subject to the rules of the relevant authority such as the Central Bank as any other bank.
Dr Farah said the CIB would be expected to reduce poverty and build stronger local and international foundations for justice, welfare and confidence.
He presented a paper entitled Charitable Investment Banking Model: An Islamic Perspective, at last year's Conference of Islamic Perspectives on Management and Finance at the university of Leicester in the UK.
The CIB model attracted the attention of the UAE-based Green Crescent International Network, which works to improve living standards in poor countries and rural areas by setting up set charitable projects regardless of the religion, ethnic group or colour of the beneficiaries.
Al Hilli said a CIB would offer great support to the network, and added: "We are currently working for the realisation of the bank's model."
The network launched an agricultural project on a 20-acre site in Sikoat West, Sudan, last August. The project provides accommodation for farmers and their families who will also share the profit from the sale of the crops raised.
"The project will help improve the standard of living in the Sikoat area and prevent the emigration of its inhabitants to the cities," said Al Hilli. "The government of Sudan has promised to increase the project's area up to 50 acres."
The CIB's zakat and charity accounts would be run in close co-operation with external zakat charity and Takaful (Islamic insurance) institutions, he said.
"We are co-ordinating with charity organisations, financially sound individuals and governments over the setting up of the bank."
The network's membership includes leading figures from the UAE society and the CIB will help put its charitable activities and investments on a firmer footing.
"We are talking to the governments of 11 countries, including Eretria, Swaziland, Yemen and Mauritania, about setting up projects that suit their needs, including industrial, health and education initiatives.
"The variety of accounts offered by the CIB will give supporters of charities the option of sharing the profits with those who run the investments. Working with specialised consultancy companies, we study the efficiency of a project and ensure the highest possible profits for the investors and beneficiaries."
Asked whether there would be competition from Islamic or conventional banks, Al Hilli said: "Our projects are not financed by commercial banks because of their nature. Therefore, areas of competition between the CIB and the commercial banks, whether Islamic or conventional, are limited due to the difference between their roles."