Values for money

Against a $15bn global shortfall in aid, Islamic finance and giving is gaining currency for humanitarian actors seeking to bridge the funding gap

Walk into any branch of Al Rajhi Bank and you can be part of a 1,430-year-old giving tradition. The Saudi bank hosts an account in the name of Saidina Uthman Ibn Affan, a companion of the Prophet Mohammed (PBUH), into which you can still donate money. The endowment fund holds his centuries-old store of wealth; a charitable trove that continues to benefit the needy today to the tune of $13m a year.

“Just 1 per cent of zakat would make an enormous difference to the scale of the global funding deficit”Aid agencies are taking note. All eyes are on humanitarian funding in 2017, amid a $15bn global shortfall in aid. The UN in December asked for $22.2bn to help almost 93 million people hit by conflicts and natural disasters over the next year. In 2016, its appeal for $22.1bn was only half met. In the face of a global agenda that calls for the eradication of poverty, among other goals, there is an urgent need for nonprofits to look beyond the confines of their usual donors for fresh funding.

Islamic finance – funds and services that cater to Muslim investors – and Islamic giving are two potential answers to the rising aid bill. From making existing sharia-compliant charitable investments work harder, to better use of zakat (Islamic alms giving) to alleviate poverty, the development sector is looking to Islamic finance as a vehicle for change.

“The very real potential is there for Islamic finance to provide solutions to the global humanitarian financing problem,” a UN panel on aid funding noted last year. “Just 1 per cent of zakat would make an enormous difference to the scale of the global funding deficit.”

Gauging the size of the funding pot is tricky. Global estimates of zakat vary wildly, ranging from $232bn in 2015, to more than $1 trillion. Awqaf, or Sharia-compliant endowment funds, are also thought to control billions of dollars worth of assets, including vast portfolios of real estate, commercial enterprises, cash and equities, donated by Muslims around the globe. Historically, poor management of these asset pools has limited their returns and impact. The challenge, says Tayeb Al Rais, president of the Awqaf International Organisation (AIO), which represents 12 awqaf agencies stretching from Canada to New Zealand, is to persuade the industry to use modern financial tools to reverse the low yields seen from these funds.

“We are in the 21st century, so we must look beyond initiatives that were fine in the 17th or 18th centuries,” he says. “If you want to be transparent and gain people’s trust, you need norms and a clear strategy for awqaf funds.”

Some industry players are taking action. In 2013, Dubai’s Awqaf and Minors Affairs Foundation (AMAF) paired with a local bank to launch Noor Awqaf, an advisory arm that provides asset management expertise to awqaf bodies. The partnership seeks to help smaller endowment funds gain more more return on their investments, says Al Rais, and claims a 7 per cent yield on its portfolio.

The AIO is also poised to launch a tool called Smart Awqaf, a form of temporary endowment. Donors can gift funds to an awqaf organisation for a limited time, say 10 years, after which the capital is returned and yields go to charitable causes.

“It means you can put money you don’t need at that particular time to use by doing good for people in need,” explains Al Rais, who is also head of AMAF, a founding member of AIO.

State-backed projects are also gaining a foothold. In Dubai, which is bidding to become a global hub for Islamic finance, the emirate’s ruler last year unveiled an endowment consultancy to offer free advice to philanthropists on awqaf, and steer investments within the Arab world. Bahrain’s Economic Development Board, meanwhile, has plans for a finance incubator slated to open in 2017, to spur fresh thinking on sharia-compliant social investing.

The Saudi-based Islamic Development Bank (IDB), which represents 56 member states, has crafted a model awqaf law, which countries can use to manage less flexible assets – such as land or real estate – in a more commercial way. Malaysia alone has $272m-worth of land in endowment that could generate better returns for charitable use, says Azmi Omar, director general of the IDB’s Islamic research and training institute.

“We want to professionalise the management of awqaf and take it beyond the tangible asset of real estate,” says Omar. “For the past few years, we’ve been promoting awqaf as an important component of Islamic social finance. More and more IDB member countries are buying into the idea.”

The industry has been slow to put these ideas into practice, however, says Kavi Chawla, partner at US-based consultancy Bâton Global. “While there is nothing that prohibits using modern financial theory on an awqaf portfolio, it’s modern finance and [awqaf institutions] have to be comfortable with that.” Progress on financial innovation hasn’t moved much beyond a “vanilla approach” of managing properties, he adds.

There is reticence, too, when it comes to developing new vehicles to use  sharia-compliant investing (which forbids unethical investments, such as tobacco or arms), to fund projects offering both returns and a social impact. As a result, Islamic social finance lags five to 10 years behind mainstream impact investing. What the sector needs, says Chawla, is a founding father, “the way the Rockefeller Foundation was a catalyst for bringing together traditional investment banks with impact investment and social impact-oriented nonprofits”.

“Nonprofits have wondered if they can separate religion from religious money. But the level of need demands we look at other options”The IDB is one actor that could perform such a catalytic role, although it has taken only tentative steps so far. In 2014 the IDB announced a tie-up with the Bill and Melinda Gates Foundation to set up a $2.5bn sharia-compliant fund to tackle poverty and disease in poor Muslim states. Launched in 2016, the Lives and Livelihoods Fund uses a mix of loans and grant funding to unlock cheap financing. Over the next five years, the IDB will lend up to $2bn for projects in health, agriculture and infrastructure, using $500m in grant funding from the Gates Foundation and others to offer loans on generous terms. By end-December, the five-year fund had raised $400m of the targeted $500m in grant funding.

The IDB is also in talks with the UN, World Bank and others to launch a humanitarian sukuk, or Islamic bond. Like a social impact bond, this would allow the IDB to pool awqaf and private sector funds for programmes to help refugees, for example, says Omar at the IDB.

“We’ve tapped awqaf before, but now we want to have a capital market instrument,” he says. “The governance, transparency and regulation of sukuk gives comfort to investors.”

Rising demand from cash-strapped nonprofits could also be a driver for change. To date, few have dipped their toes in the water, says Azim Kidwai, founder of the National Zakat Foundation UK. “A lot of NGOs are uncomfortable with religion,” says Kidwai, the newly appointed Islamic philanthropy advisor to UNRWA, the UN agency that aids Palestinian refugees. “But Islamic philanthropy is for everybody, not just Muslim beneficiaries.

“Nonprofits have wondered if they can separate religion from religious money. But the level of need demands we look at other options to fill the funding gap,” he adds.

Among the pioneers has been the finance arm of the Gavi Alliance, the world’s biggest funder of vaccines for developing nations. In 2014, the International Finance Facility for Immunisation raised $500m for vaccines through a sukuk. The first round was so successful that a second sukuk was issued in 2015, this time raising $200m.

Financial technology, or fintech, is also helping to catapult sharia-compliant giving into the 21st century. Qatar-based Silatech, which champions youth employment, has a micro-awqaf platform under development. Narwi will use crowdfunding to connect donors in the Middle East and North Africa with individual entrepreneurs. Entrepreneurs receive soft loans, to be repaid interest-free, and then invested in another startup.

A similar platform, Akhuwat in Pakistan, claims to have lent more than $295m in interest-free loans to some of the country’s poorest residents.

Another platform under construction is Human Crescent, a project of Dubai-based startup Finocracy, which has plans to use crowdfunding to steer zakat contributions to aid refugees, trafficking or disaster victims, among others.

“In the next 12 months we’ll see more innovation in leveraging technology to mobilise Islamic social enterprises,” says Chawla at Bâton Global. “But you still need some of the 1,000lb gorillas in the room to support some of the nascent organic activities.”

When it comes to tapping Islamic finance and giving as a new source of funding, the seeds of change have been sown. The challenge now is helping those efforts bear fruit, notes Chawla. “Given the long-term growth trend of the Muslim population globally, Islamic finance has the potential to be a significant portion of the silver bullet the humanitarian sector needs.”

Pure purpose

One potential game-changer in the bid to kickstart the Islamic social finance universe could be purification funds. Earning interest is forbidden in Islamic finance, yet the reality of working in different markets means it can’t always be avoided. These funds are ‘purified’ by giving the interest to charity. As the money’s source is impure, the funds cannot go to ‘wholesome’ causes, such as schools or mosques. Currently they are used for infrastructure or sanitation projects. Still, the relatively loose prescription of how to deal with purification funds is an opportunity, says Bâton Global’s Chawla. The money could fund venture philanthropy activities, microfinance, or innovation in Islamic social finance, for example.

“Purification funds – which are certainly in the billions globally – are a potentially significant part of the ecosystem,” he says. “But it requires banks investing time and human resources to think more strategically about how best to allocate those funds, rather than taking the easy route and just donating to the nearest charity.”