A Proposal For An Inclusive Islamic Banking And Finance System By Embracing The Social Welfare Sector

28 Oct 2014

Speech by Dato’ Dr. Abdul Halim Ismail


The Islamic economy may be conceived of as being made of three sectors.

The first sector is the Siasi  Sector.  This is the Government Sector or Public Sector.  In this sector, Government deals with the Private Sector in the areas of economic activities, administration, maintenance of law and order and the like.

The second sector is the Tijari  Sector.  This is the Private Sector.  In this sector, people deal among themselves largely in the areas of economic and social activities.  This is the nerve centre of the economy.

The third sector is the Ijtimaai Sector.  This sector may be referred to as social welfare sector.  In essence, funds are raised in the Government Sector and Private Sector and distributed to the poor and the needy in this sector.


We have thus far developed Islamic banking and finance products to serve the Government sector in its relationships with the people in its economic and financial dealings.  There is now a flow of funds from the Government Sector to the Private Sector and vice versa through various instruments of Islamic banking and finance. There are various instruments of Government Certificates, various types of Sukuk and various types of investment management instruments.

The development of Islamic banking and finance is even more impressive within the private sector for the people to conduct economic activities and financial dealings among themselves.  Here are array of institutions have been set up.  These include commercial banks, leasing companies, Takaful companies, stock-broking companies, investment management services and the like.  The contractual arrangements or Uqud  are also varied centering on Uqud al-Ishtirak (i.e. profit-sharing), Uqud al-Mudayanat (i.e. debt financing) and so on and so forth.

Another dimension of development in this areas has been the increasingly cross-border dealings in the international arena.

In short, the development of Islamic banking and finance services for the Government Sector and the Private Sector thus far has been comprehensive and impressive.


However, the situation is in stark contrast in the Ijtimaai or social welfare sector.

Both the Government Sector and the private sector have a role to play in the social welfare sector.  The duties here as we have said earlier, are almost solely to raise funds from the two sectors and distribute these funds to the poor and the needy in the social welfare sector.  And the function of Islamic banking and finance is to develop products and services to facilitate the flow of these funds.

But what had Islamic banking and finance done so far along this line of its duty?  The answer is almost nothing.  It is true that there is now the collection and distribution of zakat and, to some extent, of Waqf.   But this is done by the Government Sector, not the Private Sector, and largely not through banking and finance services.

Clearly, there is a void here.


This is not, in my humble view, in line with what Islam stands for.  Islam teaches a wholistic approach.  Any development should encompass all the three sectors.  That is the whole Ummah.

I would like to quote in particular, the following verses from the Al-Quran:

Ayat 01_speech Dr Halim _wief 2014

Sahih International
[Such niches are] in mosques which Allah has ordered to be raised and that His name be mentioned therein; exalting Him within them in the morning and the evenings

Ayat02 Speechdrhalim Wief2014

Sahih International
[Are] men whom neither commerce nor sale distracts from the remembrance of Allah and performance of prayer and giving of zakah.  They fear a Day in which the hearts and eyes will ]fearfully] turn about

In these verses, in short, Allah SWT praises men and women who, while they daily conduct Tijarah and Bai’ , this however does not cause them to ignore and neglect Zakat.

Now, the term Tijarah means trade in general.  In detail, it includes all contractual activities of al-Mudharabah  and al-Musharakah  and all other  Uqud al-Ishtirak  (i.e. profit sharing contract).

The term Bai’  means sale and purchase in general.  In detail, it includes all contractual activities of Uqud al-Muawadhat (i.e. contract of exchange) such as al-Bai’, al-Murabahah, al-Ijarah, al-Istina’ and the like.

Now we may ask: who are these people referred to in these verses as daily dealing in Tijarah and Bai ? The answer is: a group of them are officers in Islamic banking and finance.  They develop the facilities and services of Tijarah and Bai’ in their institutions, they offer them, and they operate them.

And, more, the verses continue to state while these men and women routinely do that, this does not cause them to ignore the remembrance of Allah, performance of prayers, and significantly the giving of Zakat.

The term Zakat or tithe is sometimes used interchangeably in Al-Quran with Sadaqah or charity.  Hence Zakat  here may be taken to mean all form of Uqud al-Tabarru’at (i.e. contract of charity) which includes al-Sadaqah, al-Waqf, and al-Hibah.

Clearly, therefore, there verses of Al-Quran are referring to the Islamic banking and financial dealings of Tijarah and Bai’  which take place in the Government Sector and Private Sector, and Zakat and Sadaqah  which are supposed to take place in the Social Welfare Sector.  This then is the wholistic development of Islamic banking and finance in the three-sector Islamic economy.

It is therefore my humble proposal that from now on the Islamic banking and finance will embark on efforts to develop products and services for the social welfare sector.  This is to be just one new line of development.  Other lines of development may continue as usual.


The service which we wish to develop revolves around Sadaqah. To make things easy, let us take the existing Takaful Service as a model.  And let us call the equivalent of a Takaful Company a Sadaqah House (Bait as-Sadaqah).  Therefore the Sadaqah house would be in the business of providing products and service to collect various types of Sadaqah, Waqf, Hibah and etc. mainly from the private sector and distribute these to the poor and the needy in the social welfare sector.

The form of organisation of a Sadaqah House might be a foundation formed by the owner or a subsidiary company of the owner.  An important requirement here is that the Sadaqah House is owned and controlled by the banking group or any other organisation which is given the licence.

Like a Takaful Company, a Sadaqah House would be a financial institution.  It would operate in the Islamic banking system and the Islamic Capital Market.  It should therefore be under the supervision of the Central Bank and the Securities Commission of a country as appropriate.

There should be a need for such an Act of Parliament and various Central Bank Guidelines which specifically spell out important matters such as licensing of Sadaqah Houses, financial requirements and duties of Sadaqah Houses; ownership, control and management of Sadaqah Houses; powers of supervision and control over Sadaqah Houses; and the like.

Finally in this area, if I may, I thought that in the initial five to ten years a country, where possible and appropriate, might give a number of licenses to the relevant organisations to operate Sadaqah Houses.  The multiple number is in order to ensure adequate coverage, to foster competition and to offer diversification of products and services to the potential donors.

It is to be emphatically recommended that the licenses are strictly given to an Islamic bank, or better still an Islamic banking group.  The Sadaqah  House is intended to be part and parcel of the Islamic banking and finance system.  Attaching the Sadaqah House to the Islamic banking system comes naturally and gives it many advantages.

Functionally deposit-taking, transfer of funds, disbursement of funds and other similar operations which are required by Sadaqah House are very forte of banks.

The required expertise and skill of fund management and wealth management are also the bread and butter of banking groups.

The level of integrity of an institution is difficult to assess, but bank with experience of daily handling large sums of money and, more importantly, under close supervision of the Central Banks and Monetary Authorities, should certainly be assessed more positively than many others.

Banks have a high probability of perpetual existence.  Banks are usually public companies, and many listed companies.  The large number of shareholders, and the masses of other stakeholders of depositors, investors, financing customers, suppliers, government departments and public at large, and the supervision by Central Banks and Monetary Authorities might assist to ensure its perpetuity.


We shall now turn to the possible products and services as a Sadaqah House might offer to its customers.  Every Sadaqah House should perhaps have a few products on offer, for competition and in order to allow its customers to diversify.

Where it is possible, waqf and its variants are meet good products to offer.

The Sadaqah House might also devise a range of products and services through varying the nature of the related charities. For example, it might offer charities for specific or general purposes. Likewise, it might offer one-off charities, medium-term and long-term charities.

But I want to turn to a product which I consider to be very crucial in many ways at this stage of the development of the Islamic economy. The product is crucial to the giver, with a view to his life in the Hereafter (Akhirah); crucial to the receiver, with a view to his long term sustenance and climbing out poverty; and a challenge to the expertise and skills of Islamic banking and finance. The product is called, in the terminology of the related hadith, Sadaqah Jariah. Sadaqah Jariah means, approximately, charity in perpetuity.

There is a famous Hadith on the substance of Sadaqah Jariah:-

Ayat03 Speechdrhalim Wief2014

Abu Hurayrah Rahimahullah reported that Allah Messenger S.A.W said: “When a human being dies, all of his deeds are terminated except for three types: an ongoing Sadaqah, a knowledge (of Islam) from which others benefit, and a righteous child who makes Du’aa for him.” (Muslim and others).

The Hadith, in a liberal translation, says that when a person dies, all his channels of good deeds from which the reward flows will be stopped, except from three channels: (1) Sadaqah Jariah (2) beneficial knowledge which he has imparted and which people continue to practice, and (3) a pious son or daughter who continuously pray for him.

Now, let us strategically look at these three sources. Not many of us would have the beneficial knowledge and the opportunity to impart this knowledge, except perhaps for those who work in the teaching profession or in Dakwah fields. Similarly, the pious son or daughter may not be reliable. A person may not have a son or daughter; or he has but the son and daughter may not be pious; or they are pious but unfortunately they may die before he dies. Thus the best channel of the three is Sadaqah Jariah. This channel you can do it yourself here and now. You can plan and implement it how you want it to be.

As Sadaqah Jariah is Charity in Perpetuity, in essence in this category of charity, the principal charity amount is to be preserved intact forever, and only the profits are distributed regularly.

As mentioned earlier, the Sadaqah House might accept this Sadaqah in the form of the many Shariah Contracts of Sadaqah, Waqf, Hibah, etc. but it must make sure that it follows the variants of those contracts which transfer the ownership of the charity to the Sadaqah House in perpetuity. This is in order to maintain the perpetual nature of the Sadaqah.

In my view, it is highly advisable for the Sadaqah House to accept Sadaqah only in cash, but it may also wish to extend this to other Islamic banking and financial instruments which may be converted to cash.

The Sadaqah House may accept Sadaqah at a minimum of, say, RM10 at one time at any time through deposit, bank transfers, salary deduction, etc.

I would like to pause a moment here and point out the significance of this event. You would notice that through the Sadaqah House, the Islamic banking and financial system would be able to offer to the Muslim the services of creating Sadaqah Jariah for themselves to everybody, at anytime and anywhere. This is totally new phenomenon. Up to now, Sadaqah Jariah is only available through donating big-ticket item, such as land and buildings, only by the wealthy.

The mechanism for implementing Sadaqah Jariah would be for the Sadaqah House to treat the principal amount of Sadaqah as capital to be carefully preserved and prudently investing it to generate profits which will be regularly distributed. I would suggest that the investment should generally be confined to Islamic banking and financial instruments within the banking and financial institutions such as various types of deposit, investment accounts, Sukuk and various investment management products.

In Malaysia, we need only to look at Tabung Haji and Permodalan Nasional Berhad (PNB) to be convinced that this method of investment will work and attain its objective. Tabung Haji has been successfully managing the deposit of its investors for the last 50 years, while PNB has done the same for its unit-holders for the last 40 years.

My view is that the Sadaqah House should provide this and other similar services at no loss to itself, but at a profit like any other financial institution, although it might intentionally moderate its profit motive. Subject to the decision of the relevant Religious Supervisory Council, Sadaqah House should be allowed to charge the initial fee and annual fees on the amounts that is manages. Further, it is also my view that a Sadaqah House should be allowed to keep all or a large part of the businesses that it generates within its respective banking groups, at arm’s length.

We come now to a question which is perhaps on everyone’s minds that is; will there be demand for this product? Will Muslims in the Private Sector give Sadaqah Jariah? Allow me to offer my views on this subject, with particular reference to the case in Malaysia.

  1. Regardless of the outcome, we in Malaysia have come to the stage where it has become our duty to organize our Islamic economy which integrally incorporates the Social Welfare sector.
  2. There is healthy growth of population of Muslims in Malaysia. Their standard of living is continuously improving. Their level of education is also improving. Consequently there is evidence now that their savings are increasing. Sadaqah is in a way a function of the level of income and savings.
  3. In general, Muslims in Malaysia have become more conscious of the requirements of their Religion. I am amazed at the term they use to describe this type of Sadaqah. They say “Saham Akhirat”, i.e. stock of The Hereafter or investment for the “Hereafter”.
  4. Perhaps we could be guided by what has happened in the collection of Zakat in the Government Sector. In Malaysia, the collection of Zakat is nearly always undertaken by a body under the Religious Departments of the various states. The amounts collected appear to be continuously rising over the years. In some states, the collection is now in excess of RM 100 million a year.
  5. A large part of the success of the introduction of Sadaqah Jariah would hinge on how the Sadaqah House managed the information flow, the publicly and the advertisement of the Sadaqah Jariah. For example, many Muslims would be touched if they are correctly and clearly explained the meaning of the Verse of Al-Quran:
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O you who have believed, fear Allah. And let every soul look to what it has put forth for tomorrow – and fear Allah. Indeed, Allah is Acquainted with what you do.

(Surah Al-Hashr: 18)

This verse says that Oh you who believed, fear Allah, and everyone should look closely and carefully at what he has done to prepare for his future, i.e. his days in the Hereafter. And then gently inform Him Sadaqah Jariah is precisely one form of preparation that has been designed for his requirement.

Finally the Sadaqah House will need a clear and concise plan for the periodic distribution of the profits. Perhaps the individual Sadaqah House may prefer to specialize in one or two specific areas such as the livelihood of the poor and the needy, health services, education services, and so on and so forth.

In the initial years, however, the Sadaqah House may want to concentrate on getting the Sadaqah and may opt to use the existing channels for distribution such as the State Religious Department, Dakwah bodies and the Government Social Welfare Department to do the distribution on its behalf.


People often ask me; what is the difference between Islamic banking and conventional banking? Now, if this proposal catches on and becomes a reality, I shall tell the people; Islamic banking and finance is based on a three-sector Islamic economy, and it integrally incorporates the Social Welfare Sector, whereas the conventional banking and finance does not.

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