Leveraging financial technology 
to support Islamic social finance

By OTHMAN ABDULLAH / Pic By MUHD AMIN NAHARUL

Through collaborations with IFIs, Islamic social fund bodies could distribute the funds electronically with social smart card concept

At A recent Islamic finance symposium, a session was dedicated to financial technology (fintech). But the subject found mention throughout the day.

It just goes to show that Islamic finance stakeholders have come to appreciate the potential of fintech innovations in providing solutions to some of the social finance challenges.

I took part in the “Islamic Finance, Inclusion and Poverty Alleviation” symposium organised by the World Bank, International Centre for Education in Islamic Finance and Islamic Research and Training Institute last month. The aim of the symposium was to continue the conversation on the Sustainable Development Goals (SDGs), focusing on no poverty (SDG1) and zero hunger (SDG2).

I was a panellist in a session on Islamic finance and technology entitled, “Leveraging fintech to support Islamic social finance”. In this entry, I would like to share some of the issues discussed and the solutions recommended.

One of the fundamental issues raised was the lack of access to financial services. There are three billion people globally who have little to no access to financial tools that could improve their lives. Most adults in emerging economies do not have a bank account and, what’s more, a financing facility. Some do not even have valid identifications. Consequently, credit information coverage
is low, thus limiting poor people’s chances in getting funding from traditional financial institutions.

The concept of Islamic social funds (waqf, zakat and sadaqah) has been there to assist the destitute. However, various issues have been associated with the management of such funds.

Cash distributions could lead to abuse and misuse by either the caretakers or even the beneficiaries. The caretaker could siphon off the money or the beneficiary could spend irresponsibly by buying alcohols or cigarettes.

More importantly, there needs to be a mechanism for productive use of these funds in order for the hardcore poor to be financially inclusive in the future. Otherwise, they will forever be trapped in the vicious circle of poverty.

Electronic payment systems could address this issue. Through collaborations with Islamic financial institutions (IFIs), Islamic social fund bodies could distribute the funds electronically to the beneficiaries. In this case, a social smart card concept could be deployed.

The beneficiaries of the social funds can be registered and issued with a smart card which is an electronic identity document with integrated payment functionality. As IFIs issue the smart card, a bank account that links to the card is created.

The social funds could then be credited into the bank accounts linked to the social cards. The utilisation of the funds can be controlled by the usage of the cards. For example, funds for the poor can be earmarked for buying basic foodstuff such as rice, flour, bread and cooking oil. This can be done by making the beneficiaries use the smart cards when purchasing food items at participating merchants only.

For monitoring purposes, there are various smart card programmes that have already been implemented in a number of countries. One such example is the Social Family Card for the implementation of a benefit system for low-income families in Egypt. It is designed to control the distribution of subsidised funds and goods. There is also the Orphan and Vulnerable Children card in Kenya for cash transfer and fair distribution of benefits.

The social smart card with an integrated payment facility could address the issue associated with cash distribution of Islamic social funds. It provides the means to control the recipients of the funds (validated by the biometric identification embedded in the card) and the money spent by limiting the cards’ acceptance at participating merchants. Most importantly, the mechanism will create data that allow monitoring of the whole programme, track the funds movement and provide transparency.

More sophisticated mining of the data employing the latest technology such as artificial intelligence (AI) could also help future planning and more efficient management of Islamic social funds. On the beneficiaries’ part, the usage of the smart card over the electronic payment systems will leave a digital footprint which could be extracted for credit-scoring purposes, thus enabling them to apply for micro-financing facility from financial institutions.

In summary, IFIs could help distribute the Islamic social funds through a creative use of technology that makes it possible to control who receives the money and how the money is spent.

In the process, electronic forms of data are created for more transparency and better management of the funds. The beneficiaries will also benefit from the digital footprint that can be further leveraged for credit scoring to access financing facilities. Indeed, they are huge opportunities for fintech to support Islamic social finance.

  • Othman Abdullah is CEO for Islamic banking and innovative services delivery at Silverlake Sprints Sdn Bhd, a unit of the Malaysian-based Silverlake Group. The views expressed are of the writer and do not necessarily reflect the stand of the newspaper’s owners and editorial board.

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