Micro, small and medium enterprises (SMEs) and the agriculture sector are vital for world prosperity and have played crucial roles in the development of economies. Most Asian countries, including Pakistan, are considerably dependent on the performance of these sectors, which contribute significantly to foreign exchange earnings as well as providing employment. Despite these crucial roles, financing to these sectors often remains neglected, especially to small economic agents. This is due in part to lack of collateral. Religious considerations may also prevent many individuals from approaching conventional financial institutions. Therefore, Islamic banks should offer help to these sectors by providing financing based on qarḍ ḥasan. This would be in line with maqāṣid al-Sharīʿah, specifically when directed towards the growth and development of the society.
In view of this issue, the study discusses the financing needs of small and relatively poor farmers and small businesses and proposes viable solutions through Sharīʿah-compliant qarḍ-ḥasan-based structures of financing. Islamic banks need to be convinced to provide qarḍ-ḥasan-based financing to small economic agents. They also have to be persuaded to initiate social welfare schemes based on ṣadaqah, waqf and qarḍ ḥasan through direct financing or instruments such as charitable ṣukūk. These initiatives would comply with the spirit of Sharīʿah and fulfill the real objectives of the Islamic economic system. The study suggests feasible models that may facilitate banks’ initiation of qarḍ ḥasan under the framework of welfare-based schemes for needy farmers, small traders, home-based businesses and SMEs. It also points out the implications of the proposed models and structures for Islamic banks, governments and researchers.
While focusing on the main objective of suggesting feasible models, as stated above, this study pursued the following specific objectives:
(1) To understand the need to include qarḍ ḥasan among the regular Islamic banking products for financing small farmers and entrepreneurs having no, or meager, tangible resources to offer as collateral;
(2) To study the likely response and viewpoint of Islamic banks’ management and Sharīʿah scholars associated with banks if qarḍ-ḥasan-based financing schemes are offered to Islamic banks for implementation;
(3) To find, study and understand arguments from the Sharīʿah and social responsibility perspective to convince Islamic banks to adopt qarḍ-ḥasan-based financing schemes for small farmers and SMEs;
(4) To study how charity ṣukūk or similar instruments may enhance financial inclusion in the society; and
(5) To study the possible problems associated with efficient use of finances and recovery of qarḍ ḥasan and their solutions.
The study found that Islamic banks should play their financial intermediary role while also keeping in view the spirit of maqāṣid al-Sharīʿah. They would be fulfilling their corporate social responsibilities (CSR) by initiating qarḍ-ḥasan and social-welfare schemes which also fulfill the real objectives of the Islamic economic system. If Islamic banks follow in the footsteps of conventional banks by only offering facilities to big corporations and do not involve themselves in CSR-related practices, they might lose their integrity as Islamic financial institutions.
The incorporation of qarḍ ḥasan in Islamic banking services through any specialised mechanism will not only protect the interests of the poor but will also uphold the principle of financial inclusion. Hence, the study proposes three models:
(1) Adoption of qarḍ ḥasan as a normal mode of financing to small farmers and SMEs who have lower creditworthiness, provided that a sizeable cost-absorbing fund is accumulated.
(2) Creation of separate pools of funds within the core banking operations of Islamic banks by giving separate legal entity status to such funds in the form of trusts or waqf. Lessons could be learnt from the well-known social welfare institution Akhuwat, a sustainable qarḍ-ḥasan program in many cities in Pakistan.
(3) Issuance of charitable perpetual and/or time-bound ṣukūk (al-khayr ṣukūk) which would be exchangeable on the secondary market.
The study recommends that Islamic banks, by implementing the proposed models, should focus on giving qarḍ ḥasan to poor farmers, micro-businesses and SMEs. It also suggests certain safeguards against potential problems of recovery and calls for creating awareness about the importance of timely repayment of loans as per Sharīʿah instructions. Community guarantees, as well as social pressure by the members of groups of financing recipients, could produce the best results in this regard. Governments may be required to provide incentives to the banks to implement the proposed models and to attract the rich to donate for this social cause. Researchers can play a role in refining the model by elaborating the details of issuing and trading charitable ṣukūk.
qarḍ-ḥasan financing, small landholders, SMEs, waqf, charitable ṣukūk, corporate social responsibility (CSR)
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