A number of Shariah concerns were raised in response to the Biniog Sathi model published in IFN (Vol.11 issue.31) under the title ‘Zakat and Islamic financing – a revolutionary new model?’ MABROOR MAHMOOD, inventor and founder of the model, would like to clarify the model’s position regarding the issues raised by the honorable Shariah scholars.
The concerns raised are mainly centered around three broad areas: namely (1) moral hazard, (2) definition of Gharimin, and (3) the Biniog Sathi product and concept. In the below sections, responses are provided on each of these issues.
In the initial report it was noted that: “Providing loan defaulters with Zakat funds would in the long-term cause more people to exploit the Zakat funds for their own personal gains — it would encourage more people to default.”
We completely agree with this viewpoint. In order to reduce such moral hazard, Biniog Sathi requires the adopting bank to comply with certain standards, which include the formulation of detailed procedures to check whether the defaulted borrower has sufficient wealth to repay the obligations. If it is later found that the bank has not complied with such requirements, the bank will run the risk that Biniog Sathi as well as the Zakat fund will terminate its relationship with the bank.
Under the model, the Zakat fund will always have the right to say “no”, if a suspicion is raised as to the authenticity of the claims by the borrower. Therefore, under the Biniog Sathi model, the Zakat and Charity funds are not actually providing any blanket guarantee to the defaulters. It is actually an option, which will be exercised at the discretion of the bank officials as well as Zakat and Charity fund managers.
Besides the above mechanism, we are also suggesting some regulatory measures, which one can read at our website; http://biniog-sathi.com/addressing-moral-hazards/
Definition of Gharimin
The Shariah scholar noted: “Gharimin (debtors) are normally interpreted by some scholars as those who are indebted to loan sharks… their loans cause great hardship in their lives and Islam provides them with a solution through Zakat. Loan defaulters cannot be included in this category because most banking customers are people with good credit status. How could persons with good credit status be accorded with Zakat funds which are mostly meant for charity?”
During the early stage of Islamic era, there were only informal lenders and individuals from whom people used to borrow. At that time, Zakat was permitted to be disbursed to such people who faced a crisis in such loan repayment. They were referred as Gharimin in the Holy Quran.
Now in the modern era, these informal lenders have almost entirely been replaced by formal microfinance institutions and banks. But still there are informal lenders in the villages who are lending to potential borrowers. Now our question is, if today all the formal lending institutions replace all the informal lenders from the industry, does this mean that the payment of Zakat to the Gharimin will no longer be applicable and such provisions provided in the Holy Quran will no longer be exercised?
We would like to highlight here that the Holy Quran provides only a general guideline of the concept of Zakat and Sadaqah, and it remains silent about the details of the concept. As a result, all these detailed issues were addressed differently by jurists and rulers in subsequent periods depending on the circumstances they faced. The Zakat Law that we have today has gone through considerable changes during the last 1,400 years, and many items were incorporated in different periods while keeping the broad principles intact.
For example, Caliph Umar (r), during his reign instructed to charge Zakat on horses, although Prophet Muhammad exempted horses from Zakat during his time. The intention behind this decision was to pay more attention to the spirit and purpose of the law rather than its literal wording.
We see the same principles even today when our Shariah scholars allowed including new items in Zakatable properties, such as income on housing assets, stocks, etc., which were not in place during the early Islamic periods. The rates on Zakat also went through considerable changes during the last centuries.
As regards whether a defaulted borrower of a bank with past good credit record can be classified as Gharimin, we are providing below some realistic examples to discuss the issue further:
1. Rashid, a poor farmer, obtained several micro loans to cultivate his farmland, which he repaid on time, thus being considered a good borrower by all microfinance banks in his village. But recently, he defaulted on his loan because flood has destroyed his cultivation. So he had to borrow more to run his family and also to cultivate again during this season. But now, he also faces crisis due to heavy drought. Now he has to borrow even more to survive. He realizes that he is falling into a ‘debt trap’ and he cannot find any other way to avoid such a crisis.
2. Karim, an auditor, repaid all the loans to the bank during his career, and he is considered as a good borrower. Now he obtains another loan for buying an apartment. But after five years, Karim dies all of a sudden. Now, Karim’s wife Amina, who has two school-going children, is responsible for repaying the outstanding debt. She finds a job to run her household, but her income is not sufficient to pay off the monthly installments. After a repeated default and rescheduling of the loan, the bank now decides to exercise the claim on the apartment where Amina is residing now. Now Amina realizes that she has nowhere to go if the bank takes away the apartment from her.
3. Imran, a successful businessman, obtained loans from the banks to start steel trading, and after 15 years, Imran could set up three steel mills. Recently, the steel prices started to rise. In order to book a lower price for raw materials, Imran purchased a huge amount of inventory through bank financing. But after 12 months of such a high trend, the steel price plummets. Now Imran finds himself stuck with overpriced inventory, and it is hard to sell steel due to high competition. Imran starts to incur losses. After repeated rescheduling of the loan and eventual default, the banks now want to claim their rights over the factories, personal house, and personal BMW car of Imran. Now he is running from bank to bank to request them to delay the liquidation procedures.
Now obviously in all the above-mentioned three examples, the defaulted borrowers can be classified as “distressed borrowers”, but can they also be classified as Gharimin as stated in the Holy Quran?
Product and concept
Biniog Sathi’s product is the model itself – Biniog Sathi banks will be using the same traditional Islamic banking financing products such as Murabahah, Ijarah, etc. Therefore, there is no need for a renewed shariah scrutiny of the financing products. What we have invented is a workable relationship between the bank, the Zakat and charity fund, and the borrower. Now we present below the relevant Shariah issues in the above structure and provide our responses with detailed references:
Is it permissible that a bank enters into a contractual relationship with a Zakat/Charity fund?
Yes, it is permissible. Any individual or entity can enter into an agreement with another individual and entity as long as the contractual obligations are legal.
Is it permissible that a Zakat/Charity fund provides assistance to a defaulted borrower?
Yes, it is permissible according to the verses of the Holy Quran (9:60).
Is it permissible that a Zakat/Charity recipient hands over the assistance to any other party including a bank or a financing institution?
Yes, it is permissible. The verse 9:60 of the Holy Quran describes eight categories of Zakat recipients, but mentions four of them using the preposition “to” — with the first four categories — and uses the preposition “in” with the other four categories.
Scholars opined that the use of the preposition “in” for the last four categories indicates that Zakat is given to these categories in such a manner that they do not become its owners. In other words, Zakat is given to the master of the slave to gain the slave’s freedom; it is also given for the sake of God, to the creditor of those under debt, or to help the wayfarer reach home.
Any Shariah concerns regarding the Biniog Sathi model should be evaluated in light of many benefits the model is offering. This model is a blessing for the microfinance borrowers because it will help them to get rid of falling into the debt trap, which is a problem for the microfinance industry. Since the model requires Shariah compatibility of adopting banks, it will encourage many conventional banks to convert to Islamic banking operations. The model will also help Zakat funds to be more involved with real economic activities of the economy. As a result, more donors would be willing to pay their Zakat/Charity through these institutions instead of paying directly to the beneficiaries.
On the basis of the above discussion, if anybody has any Shariah concerns with regard to the model, s/he is kindly requested to share his/her ideas either through the print media or by sending us an email at
. We invite a healthy and constructive debate on the issues raised.
Mabroor Mahmood is the inventor and founder of Biniog Sathi. He can be contacted at the above email address.