This blog represents the well received presentation by the author, he gave as a guest at the launch of the Birmingham City University’s UK’s first Islamic Finance undergraduate degree course.
Islamic Finance has become a multi-billion dollar industry and is fast growing. Despite this growth and reach, this industry has had little to offer Mosques, charities and for the wider uplifting of the state and economies of disadvantaged Muslim societies worldwide.
Islamic Finance has worked to make wealthy Muslims wealthier by helping them avoid the guilt that comes with breaching shariah guidelines – Although there is nothing wrong with that, in my opinion Islamic Finance has a bigger role to play in promoting the finances and impact of Mosques and charities, especially in the UK context.
Islamic Finance is a component of the Islamic Economic system which aims to create a fairer and just society in which hard work is rewarded, those that are at disadvantage are supported, business and entrepreneurship is promoted, and infrastructure is built that benefits all – Mosques and charities play an equally important role in achieving these objectives.
In UK, the top 20 International Muslim charities raise around £400m with around £100m raised in Ramadan alone (see blog). In total when combined, the UK Muslim charity sector can be estimated to be raising around £500m each year. This is despite it being a relatively young sector (only 30 years +) but a fast-growing sector.
Mosques are built using Qard-e-Hasan financing
The majority of Mosques in UK are successfully built using Qard-e-Hasan, interest free community loans, and this is also the case when they extend their facilities. There is no Islamic Finance solution in UK that provides this interest free facility to Mosques in spite of the underpinning strong business model of Mosques.
Each Mosque has a ever growing number of worshippers and donors. They are engaged in a never-ending cycle of Friday prayers and Ramadan worship, during which funds are raised to return the loans.
Mosques are the heart of Muslim community – this is where everything starts from (i.e. marriages), sustains (i.e. prayers and education) and ends (i.e. funerals) – promoting them should be the first priority of the Islamic Finance sector.
Islamic loans for buildings and ICT systems
The UK Muslim INGOs have seen a significant growth in their income. With this growth, a time comes to upscale the back-office facilities and the ICT systems – this is crucial for good governance. Some of these required investments are significant and can’t be covered by the general funds raised in one year and therefore the financing solution makes business sense.
Despite the fact that these charities have stable income and have the ability to payback loans, there are no interest free solutions available to them. The existing solutions are too focused on private and commercial initiatives.
Ultimately the beneficiaries suffering in the most remote parts of the world pay the price for the inefficiencies and weak governance caused by this lack of investment.
Foreign exchange (forex) costs with no hedging solutions
UK Muslim charities transfer around £250m each year worldwide to support beneficiaries. Sometimes the transferred currency has to exchanged up to three times before it reaches the beneficiaries. This poses a significant cost on the charity finances.
Unlike the mainstream non-Muslim charities where they have hedging products available to mitigate their forex costs, the UK Muslim charities have none.
Surplus cash – nowhere to go
In 2020, I analysed the accounts of the top 20 Muslim charities and noted that they held around £107m in cash balances (see blog). UK Muslim charities raise around 40% of their annual income in the month of Ramadan. This is then spent through out the year based on the need and ability to deliver.
The business model of the UK International Muslim charities is such that there will always be surplus cash held by them. It is unfortunate that there are lack of suitable Islamic Finance short term investment / finance solutions in place that can provide low risk returns and at the same time provide benefit to the UK community.
Islamic Finance products – Sustainable relief of poverty
The UK Muslim sector often lacks the required focus and priority on activities that are at the heart of sustainability and capacity building for the long term relief and impact in UK and worldwide. The nature of these activities requires Islamic Finance input and initiative. For example:
a) Micro Finance – building capacity and self-reliance
These are small interest free loans to the poor and disadvantaged individuals for business and self-reliance. Micro finance projects are carried out by some household UK Muslim charities worldwide but not on the scale needed and required on the ground – partly because this is not popular with UK fundraisers and also due to local registration restrictions.
However, In my opinion this activity has a significant potential in UK where a significant number of unemployed or disadvantaged youth and old can benefit. For this to work, an Islamic Finance approach is needed where businesses, professionals, charities, and government agencies need to partner and devise solutions.
b) Endowments (Waqf) – investment in the future
Waqf has historically been at the heart of Muslim charity with its long-term benefits in this world and in the hereafter. However, this approach is often ignored by donors over activities that provide benefit today (i.e. food projects) and also by charities due to their lack of ability to deliver such projects – these projects could be investments in self-sustaining buildings, infrastructure and businesses.
Endowments are investments and although are a charitable product, there delivery is no different from any commercial endeavor. This requires the right and experienced business and commercial skill, hence endowments projects to succeed have to be large in scale so that they can afford the required delivery cost efficiently and effectively.
Muslim charities often lack the right corporate structure, skill and will (due to the long-term nature) to understand and manage the risks associated with endowment projects – this is where Islamic Finance sector can play a role in coming up with large scale funds and delivery partners.
In summary, there is a significant role Islamic Finance sector can play within the Mosque and Muslim charity sector – this is often ignored over profits for the wealthy. By focusing on the Mosque and charity sector, the impact of Islamic Finance can reach far and wider in UK and beyond.
Author: Nasir Rafiq is the Founder and Director of Dua Governance Chartered Accountants and Business Advisors – He is a widely experienced Fellow Chartered Accountant (ICAEW) and a Charity Financial Governance Expert.