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HomeISFIRE Vol 9 – Issue 6 December 2018Implementing Islamic Social Finance: Challenges And Proposed Solutions

Implementing Islamic Social Finance: Challenges And Proposed Solutions


Social finance is an approach to managing investments that generate financial returns while including measurable positive social and environmental impact. Under the conventional practice, social finance typically involves investments in some forms of socially sensible equity or debt financing, microfinance and social impact bonds.

As for Islamic social finance, it is found that Islam has already provided a social-based financing or investment mechanisms, which are not only able to benefit individuals but also the society at large. Islamic social finance inclusively covers the traditional Islamic instruments based on philanthropy (such as zakah, sadaqah and waqf) and cooperation (such as qard and kafalah). It also covers the modern forms of Islamic financial services such as Islamic microfinance, sukuk and takaful, which resonate with the objectives of solving societal challenges.

In short, contemporary Islamic social finance can be divided into three main categories: (a) traditional Islamic philanthropy instruments such as zakah, sadaqah and waqf; (b) cooperation-based instruments such as qard and kafalah; and (c) other modern forms of Islamic financial instruments including Islamic microfinance, sukuk and takaful. It is maintained that the proper implementation and practice of Islamic social finance will contribute to the protection and preservation of Maqasid Al- Shari’ah.


In simple words, Maqasid Al-Shari’ah can be defined as the purposes or objectives behind the Islamic rulings. According to Al-Raysuni (1995), “Maqasid al-Shari`ah are the objectives for which the Law (Shari`ah) has been ordained to realise the maslahah (good) of the servants (of Allah, i.e., mankind)”. These objectives are deduced through the observation and examination of the texts of the Shari`ah as a whole to render a clear and conclusive understanding about them.

In a way, Maqasid Al-Shari‘ah can be considered as the supposed end results, which are intended from the application of the rules derived from Shari’ah injunctions. It is the fruit of the Shari’ah. It is also a yardstick which can be used to measure the success of the application of Shari’ah prescriptions.

A failure in attaining Maqasid Al-Shari’ah may be perceived as an indication of less than proper application of the Shari’ah rules and a re-alignment will be necessary.

Muslim jurists have different ways of classifying the objectives of the Shari’ah.4 The most prominent classifications are: (a) the classification based on level of necessity; (b) the classification based on the scope of rulings and aim in achieving certain objective; and (c) the classification based on the scope of people that are included in achieving certain objective. The first classification (i.e. based on level of necessity) is perhaps the most frequently used and referred to in discussing Maqasid Al-Shari’ah.5 This classification is normally attributed to Al-Ghazali’s description of what is meant by maslahah that translates as:

“What we meant by maslahah is the safeguarding of the objective of the Law-Giver, and the objective of the Law-Giver for the creatures are five, i.e.: to safeguard for them their religion, their life, their intellect, their progeny and their wealth. Everything that guarantees the protection of these five essentials is maslahah (good); and everything that denies these essentials is mafsadah (evil) and to prevent this (evil) is maslahah (good).”

Therefore, when preservation and protection of Maqasid Al-Shari’ah is mentioned, it is normally understood as the preservation and protection of deen (religion), nafs (life), nasl (progeny), ‘aql (intellect), mal (property). Some other scholars add ‘ard (honor) into the list.

It is argued that the six essentials above can be protected and preserved through the Islamic social finance and its instruments. For example, through Islamic microfinance, a small-scale micro-credit can be initiated using Shari’ah-compliant instruments. A sustained provision of such micro-credit facilities creates businesses and employment opportunities for members of the society. Simultaneously, it increases financial inclusion, boosts income and production, as well as provides job. This leads to better socio-economic conditions, higher quality of life, and improvement in the general well-being of people and their survival; hence, the protection and preservation of nafs (life).

In addition, the traditional Islamic social finance instruments of zakah, sadaqah and waqf have the potential of supporting not only alleviation of poverty, but also educational infrastructures such as schools and universities. These are the golden gates of knowledge that allow for the nurturing and preservation of intellectual capabilities (‘aql). With the combined opportunities of employment and education, other societal challenges can be tackled. These include alleviation of poverty; elimination of abuses towards the vulnerable, women and children, in particular; and overcoming of other social ills like crimes, drug addiction and prostitutions. These will strengthen families and homes, ensuring the protection and preservation of nasl (progeny) and ard’ (honor).

Instruments, such as takaful can be aptly utilised to provide protection in facing calamity; while socially responsible investment (SRI) or green sukuk can be used to protect the environment for future generation. Similarly, Shari’ah-compliant social impact bonds (SIB) or SRI sukuk can also be utilised to develop social development programs to rehabilitate delinquents towards positive and religious values so that they can normalise into law-abiding citizens.

These efforts could potentially lead to reduction of mischief (mafsadah) in the society and promotion of good conducts among the people. At the same time, religious and moral consciousness can also be inculcated through similar programmes to up-lift the spiritual and moral state of the people for a better and morally up-right society. This will contribute to the protection and preservation of deen (religion) among the general public.


Islamic social finance has its presence among the OIC member states, which consist of 52 countries (OIC, 2016). The OIC member states are progressively practicing the Islamic social finance and utilising its instruments. Listed below are some of the practices of Islamic social finance by the OIC member states:


These instruments of Islamic social finance are already practiced widely in OIC member states. However, the administration and management of these instruments may require further improvements to increase efficiency and impact.

The said instruments are also majorly used as funds for Islamic microfinance issued by the religious authorities.


An orphanage sponsorship based on kafalah is consistently done in Indonesian Aceh Pidie and Aceh Utara, especially since the aftermath of 2004 tsunami tragedy. It is known as Orphan Kafalah programme. The programme is a collaborative initiative by the Islamic Development Bank (IDB), the OIC and zakah management institutions. The total fund collected for the programme reached IDR 10.9 billion. The said programme with contribution from the Baitulmaal Muamalat (one of the zakah management institutions) also provides training and rehabilitation programmes. It covers activities such as handicraft, machine repairing, handphone services, tailoring skill and basic computer training.


Initiatives based on Islamic microfinance are developed in countries such as Nigeria8 and Pakistan9 for alleviation of poverty. Earlier, Malaysia and Indonesia have adopted similar instruments for small-scale businesses and investments.10


The first green sukuk was issued in 2012 for a 50MW photovoltaic project in Indonesia. The said sukuk was structured out of Labuan, Malaysia. Its funding was entirely based on a power purchase agreement.

The companies responsible for the project (Solar Guys International and Mitabu) managed to collect an amount of AUS$100 million for the project investment. Later in 2015, the United Arab Emirates (UAE) followed such footstep with a plan to issue green sukuk for renewable energy project. The sukuk was planned to be issued by the Dubai Clear Energy Business Council and the Dubai Supreme Council of Energy.

With similar interest, the IDB indicated that they preferred to issue sukuk for climate-related projects. Such indication was made in the United Nations Global Warming Conference 2015 in Paris. In July 2017, Tadau Energy Sdn Bhd issued Malaysia’s first SRI Green sukuk under the Malaysian Securities Commission SRI sukuk framework. The RM250 million Green SRI Sukuk Tadau was to finance the construction of large scale solar photovoltaic project of 50MW in Kudat Sabah, with a tenure of 2 to 16 years.

Following the success of Tadau Sukuk, Quantum Solar Park Malaysia Sdn Bhd launched another green SRI sukuk of RM1 billion in October 2017 to fund the construction of Southeast Asia’s largest solar photovoltaic plant project in three districts: Kedah, Melaka and Terengganu. Indonesia then became the first country to issue a sovereign green sukuk in February 2018 with a US$1.25 billion, five-year sukuk to finance climate or environment related projects, such as renewable energy, sustainable transport, waste management and green buildings.


Takaful has the potential to be developed as a sustainable safety net for the society at large by providing protection for basic needs, especially at times of calamity such as a tsunami or an earthquake. In Indonesia, proposals for micro-takaful has been made for people with low income.12 The micro-takaful also has potential to be applied in post-war Iraq.


It is clear that Islamic social finance has a huge potential to be used for protection and preservation of Maqasid Al-Shari’ah. However, there are several problems that need to be addressed in the implementation of Islamic social finance in OIC member states.

First, there is absence of standardisation of laws for collection of zakah, sadaqah and waqf in a number of OIC member states. When laws are not standardised within a country, it will affect the effectiveness of fund collection. Inevitably, it can grossly affect the distribution of fund to the suitable candidates. The same problem can be found in laws relating to waqf. Without adequate law to monitor the creation of waqf, the status of waqf can be easily refuted. In addition, proceeds from the waqf assets can be easily misappropriated by unscrupulous parties.

Another challenge is the refusal to pay zakah. Although zakah is one of the five essential pillars of Islam where it is compulsory to be paid by those who are qualified, there are a lot of cases where people simply refuse to pay zakah. Lack of enforcement in terms of zakah collection, further exacerbate the problem. Moreover, in many OIC countries, there are no incentives given to zakah payers where the zakah payment is not tax-deductible, resulting in double taxation effect on them.

Corruption and mismanagement is one of the problems faced when it comes to implementing Islamic social finance effectively. Without proper laws, the administration of collected funds or management of assets cannot be implemented properly. This may open the doors for corruption, mismanagement and misappropriation of the funds and assets.

Conflicts within or between countries are sadly continuing in the OIC member states. This can be seen in the conflicts in Syria, war in Yemen, Palestine-Israel conflicts, the sanctions against Qatar, and unrests in a number of other countries as well.

There is also the issue of lack of skills and inadequate follow-up in doing business or investment. Without proper skills and training, the failure rate in the business ventures or investment is potentially higher. This will be very detrimental to the success rate of micro-credit initiatives, regardless of the amount of microfinancing given through such programmes.

Another important challenge is the absence of records or reliable database. Often, there is an absence of reliable database on those who are in need. Without proper records, the needy will go undetected and the distribution of funds or proceeds will not reach the right people for whom the funds are intended to help.


In finding solutions for the problems in implementing the Islamic social finance in OIC member states, it is important to realise that every country is unique. One country’s problems are often not similar with those of another country. Hence, it is perhaps not wise to apply a “one-size fits all” approach to solve the problems listed above. However, a few general suggestions are proposed here for consideration of the OIC member states.

In light of the absence of standardised laws for collection of zakah, sadaqah and waqf, the relevant authorities should be alerted on the need to standardise the laws.

As for the issue related to the refusal to pay zakat, appropriate enforcement mechanisms should be implemented by the relevant authorities, subject to the applicable legal provisions in the country. Incentives should also be given to zakat payers, for example, through income tax deduction to prevent double taxation.

In handling corruption and mismanagement, a proper processes and appropriate governance system must be put in place to prevent, detect and report corruption and mismanagement. Independent investigation should be carried out in cases of corruption and mismanagement, without fear or favour. Whistle-blowers and witnesses must be protected from any possible threats. Appropriate punishment should be imposed by the laws to penalise wrongdoers and adequately deter future misconduct.

The OIC must play an aggressive and effective role in making peace and resolving the conflicts within or between countries. Such action must be done without fear or favour. Necessary intervention is needed to stop a conflict, such as, the prolonged war in Syria. Concerted efforts must be made toward effective mobilisation and management of humanitarian funds, as well as proper channelling of the same to the needy in conflict areas, displaced communities and refugees.

It is essential for all member countries to overcome political differences and sectarian conflicts. The solidarity among Muslims must be strengthened. Coordination among countries must be arranged to allow for effective collection and allocation of funds based on actual needs regardless of the political borders. Fundraising may not necessarily be charitable, but can be in the form of investments from one country to the other. Proper arrangements for humanitarian aid and specific socio-economic projects to assist the less fortunate Muslims should be done. Strategic management of the collected funds must be employed to ensure long-term sustainability of available resources.

In addressing the lack of skills and inadequate follow-up in doing business or investment, necessary trainings should be conducted for those who are involved in business or investment funded through the Islamic social finance instruments. This is important to increase the potential of success for the business or investment. Continuous follow-up through one-to-one or group meetings should be made to identify problems and find solutions. Follow-up workshops and seminars may also be necessary to further build skills and technical knowledge.

The absence of records or reliable database can be addressed via the usage of technology. Comprehensive database must be developed to keep track of the records of socio-economic conditions of the population. The advancement in technology can be leveraged to automate and analyse the collected data using big data analytics and artificial intelligence so that relevant policy decisions and strategies can be planned and implemented.


The preservation and protection of Maqasid Al-Shari’ah, which majorly focus on the six essentials (religion, life, progeny, intellect, property and honor), are important in preventing mischief (mafsadah) in the society. It is also crucial in ensuring public interest and public good (maslahah). Undoubtedly, the effective application of Islamic social finance will contribute towards the preservation and protection of Maqasid Al-Shari’ah.

Focusing on the practices of OIC member states, it can be said that some of the OIC member states are already on the right track in implementing the Islamic social finance. If implemented properly and holistically, they can ultimately achieve the preservation and protection of Maqasid Al-Shari’ah. However, as pointed out above, there are problems that are hindering the effective and impactful implementation of Islamic social finance.

These problems must be properly identified and solved. Within the limited space of this write-up, only a cursory mention of some of the problems is made. Due to the unique circumstances of each of the OIC member states, the problems may vary from one country to the other. The proposed solutions for the listed problems are not exhaustive, but they are hopefully able to provide some impetus; or at least, some insights towards better solutions, moving forward.


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