Islamic Social Finance

Social finance is a term used in the financial world to reflect the approach of managing funds or investments that generate financial returns while including measurable positive social impact.
Islamic social finance refers to the management of the fund based on Islamic principles to create a financial or non-financial return to the community with an emphasis on the poor segment of the community.

Main instruments of Islamic social finance are:

 

 

 

    • Zakat is giving away a certain type of property at a certain rate in accordance with certain conditions to be distributed to certain groups of people. (Click Here to read more)

    • Waqf is the act of surrendering of any property to enjoy its benefits for charitable purpose, whether as a general waqf or a special waqf in accordance with Shariah. (Click Here to read more)

    • Sadaqah is a donation of something to the people in need for the purpose of seeking closeness to God. (Click Here to read more)

 

 

The Islamic Social Finance and MSMEs

With the increase of inequality of wealth globally, governments in many countries are required to seek other financial resources. Hence, Islamic social finance that goes beyond conventional financial institutions is seen as a good option. The revival of these instruments in the modern financial services sectors is getting attention globally, especially in Islamic countries.

Islamic social finance does not only assist the individual but also is a viable instrument to develop Micro, Small and Medium Enterprises (MSMEs). In ASEAN, MSMEs are the backbone of ASEAN’s economy as they stimulate domestic demand, create jobs, innovate, and compete nationally and regionally. MSMEs contribute to an average of 41% of each country’s gross domestic product in ASEAN (Asian Development Bank, 2020).

MSMEs, which normally lack of credit track record and high credit risk position themselves as less favorable by traditional financing. Hence, Islamic social finance serves as an alternative, as long as the credit risk is manageable. ASEAN countries such as Malaysia and Indonesia have been leading in applying Islamic social finance instruments to support MSMEs development and this has been done through many innovative means. ASEAN and global stakeholders should take the advantage of Islamic social finance instruments for social impact investment opportunity.