Islamic Venture Philanthropy: A Tool for Sustainable Community Development Nafis Alam Lecturer (School of Business) Monash University, Sunway campus [email protected]

Abstract: The magnitude of philanthropic giving in Muslim communities is estimated to total between USD 250 billion and USD 1 trillion annually. In spite of having such a huge philanthropic wealth base, in most countries it is being either mismanaged or misappropriated. The current research proposes that this Islamic philanthropy can be interpreted using conventional models of venture philanthropy. This can be done by applying tailored financing. For example it can be used for professional financial advice and assistance to build strong communities. Philanthropic wealth can be invested in Shariah compliant activities and the returns can be further used for larger community development. This model will encourage networking of local business people and Islamic investors; a true partnership based on shared risk and profit and with clear development objectives. This model measures both social and financial impact of Islamic venture philanthropy for Muslim communities at large.

Philanthropy in Islam

Charity is one of the five pillars of faith in Islam and is obligatory for every Muslim. As such, it channels massive wealth, both in material and human forms. Throughout this paper charity and philanthropy will be used interchangeably.

Charities have played many significant functions in Islamic societies and have contributed to making these societies more just and fair through a number of mechanisms, in addition to the ultimate objective of upliftment of the poor. Islamic charities served as an instrument for narrowing social distance and reducing inequalities.

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In particular, these charities served as a linkage between the haves and the have-nots. They have provided a way, by which the wealthier elements of society interact with poor individuals, and to assist them in combating poverty, its causes, and effects.

Charitable giving in the form of Zakat is one of the basic tenets of Islam, a donation equal to 2.5 percent of annual income required for all Muslims who have resources remaining after meeting the basic requirements of their family. While Zakat is the only obligatory from of charity, additional voluntary giving is also prevalent, and takes various forms, such as Infak (a voluntary gift for restricted purpose) and Sadaqah (voluntary or discretionary charity, not necessarily monetary in nature for unrestricted purposes).

In addition to individual giving, Islam also has a highly structured pattern of institutional religious foundations called Waqf (pl: Awqaf). These foundations can be endowed by individuals, families, or institutions and they often have income-producing activities attached. Not all awqaf have served strictly religious purposes, however. A study of Turkish awqaf founded in the eighteenth century showed that less than one-third were clearly religious while almost one-half provided secular services (Kuran 2001, 13).

The practice of philanthropy and accompanying institutional arrangements differ significantly across the different cultural zones of the Muslim world. No reliable statistics exist for the magnitude of philanthropic giving in Muslim communities, but it is estimated to total between $250 billion and $1 trillion annually. Geographically this distribution of Islamic charitable wealth varies across regions. For example, figures from the Charity Commission, which collects annual returns for the UK's 1,332 registered Muslim charities, provide an indication of the scale of funds raised each year by Muslims for charitable causes. Total income in 2006 was £214.7 million across the 1,076 charities that filed returns, compared with the £203.6 million raised the previous year. Total expenditure amounted to £176.6 million, up from £159.8 million in the previous year (June 21, 2007: Why charity begins at home for Britain's Muslims). According to estimates Waqf boards in India own property worth Rs 70,000 crore or USD 18 billion. (Source: All India Muslim Personal Law Board: AIMPLB)

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Problems surrounding management of Islamic Philanthropy

Although philanthropy is high, and there is a promising giving culture in Muslim world, the challenge remains how to mobilize and manage these resources to achieve development, and help save this enormous wealth from being lost in never-ending circles of charity that on the long run create dependency and do not achieve whether development nor attempts to solve issues of community development.

Over the centuries, Islamic charities emerged as the major provider of large economic wealth devoted for development purposes of the weaker section of society. Unfortunately, concomitant with the rapid growth of institutional Islamic philanthropy, poor governance and mismanagement also became a problem within the sector, providing the modern states just the excuse they needed to step in and expropriate Islamic charitable assets (Bremer, 2004). Even Muslims are less concerned about the use of their philanthropy, arguing that their responsibility ends with fulfillment of the obligation to give, and that charitable institution have to account for their use of funds.

Islamic charities worldwide exist in a culture of dysfunction, a mix of limited capacity and modest outcomes pervade critical organizational elements such as strategic planning, staffing, management, financing and outcome measurement. This dysfunction makes their success highly improbable and thus raises the issue of its sustainability and capitalizing its future growth. These charities often ignore the value added by superior management, usually preferring to be managed by organizational founders rather than experienced managers. They almost always neglect systems of staffing and personnel advancement which are proponents of quality and measurements of productivity.

As the charities grew in number the sector suffered from poor governance. While many charities continued to serve the communities and families for which they were created the assets of many were diverted to illicit private use or fell into a pattern of seemingly endless legal disputes. In many countries, the state seized upon these abuses as the excuse it needed to repress privately managed charities. In the name of reform the state moved

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to assume control over how charitable assets could be used to take the revenues for its own, and then to seize the assets themselves, greatly limiting or even eliminating privately managed charities altogether.

In this regard it can be seen that mismanaged awqaf are becoming a nearly insurmountable block to development. Since awqaf properties could not be sold, unutilized or mismanaged waqf properties could fall into abandonment and ruin, thus undermining the financial stability of the social services that depended on them. Disputes over poor or corrupt awqaf management are common and could drag on for decades while properties committed to crumble. A recent study by the Aga Khan Foundation on Pakistan finds that giving by Pakistanis is four times the amount of foreign aid that Pakistan receives. However, the muzzling of endowments (awqaf) has thwarted the philanthropic capability and aspiration of the Muslim communities.

Shariah based Venture Philanthropy

The concept of venture philanthropy is nothing new to Islamic investment community. Venture philanthropy is based on basic principles of venture capital, but in the Islamic context, it serves the purpose of generating both a financial and social return for Muslim communities at large. Whereas returns from venture capital are returned to investors, returns from venture philanthropy funds are reinvested into the fund to allow it to expand both its investment portfolio and developmental impact.

Before the paper go into the in-depth analysis of Shariah based venture philanthropy it would be appropriate to define what venture philanthropy in practice is? Venture philanthropy can be defined as:

“The use by grant-makers and investors of certain principles traditionally associated with venture capitalists to either build the capacity of a non-profit organization or to invest in a social purpose business venture. Key elements include long-term relationships (three to six years), development of business plans, provision of cash and expertise, and an exit

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strategy. Donors and/or investors make long-term funding commitments, closely monitor performance objectives through pre-defined measurement tools, and problem-solve jointly with the leadership team on a regular basis” (The Institute for Social Entrepreneurs).

Where as Social Venture Partners defined it as: “Venture Philanthropy takes some of the principles of venture capitalism and applies them to philanthropy. Venture Philanthropy is the process whereby, (usually wealthy) individuals invest time and money in voluntary organisations and social enterprises. Venture Philanthropy means funding organizations with not only financial resources, but also management and technical support. This support is focused on enabling nonprofits to build greater organizational capacity and infrastructure via long term, engaged relationships with investees.”

It is apparent from both the definitions above that whereas both traditional and venture philanthropy funds seek to raise capital from high net-worth individuals and institutions, Shariah-compliant venture philanthropy funds will focus on raising money from Zakat Sadaqah and monetary waqf, the charitable contributions given by faithful Muslims. While public institutions in a few Muslim countries are very well developed in both collecting and allocating Zakat and Sadaqah, in many Muslim and non-Muslim countries, no such developed collection and allocation mechanism exists. As a result, Zakat and Sadaqah resources are often under-leveraged and not effectively applied towards helping the Ummah. Venture philanthropy funds will provide an effective mechanism for pooling Zakat and Sadaqah funds towards maximising their impact upon the Ummah and promoting greater sustainable community development.

Proposed Model: Establishing a Shariah-Compliant Venture Philanthropy Foundation

This section will discuss the model or mechanism on which Shariah based venture philanthropy will be applied for an establishment for International Islamic Charitable Foundation. This foundation will act in deliberate and planned manner to for poverty

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alleviation and sustainable development for Muslim communities worldwide. The proposed model is shown in figure 1.

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4 Islamic Banking Investment

1 2

Country 1

3

Relief Work

International Islamic Charitable Foundation

4 1 2

Islamic Projects

Education Projects

Islamic Capital Market

Community Empowerment

Country 2

3 4 1 2

Country 3

3

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Fig. 1: Islamic Venture Philanthropy Model 7

Represents Small Charitable Bodies

As in establishing any successful global financial firm, the development of Shariahcompliant venture philanthropy foundation will be a long and tedious process. In additional to the traditional steps and partnerships required in establishing this foundation, stakeholder analysis, partner identification as well as project selection will be essential steps in order to generate both economic and social returns from the establishment.

The first and foremost step in successful establishment of this foundation will be approval from all the countries having exorbitant wealth base from Islamic charities. A charter has to be formulated clearly outlining the objective and mission of this global entity duly approved by all the member countries. The ultimate objective of International Islamic Charitable Foundation (IICF) will be generating profit from different Islamic investment projects which in turn can be applied for the betterment of the weaker section of societies.

In order to establish IICF, all member countries have to mobilize the funds from scattered charitable bodies, state and national level charitable institutions and NGOs receiving charitable contributions from individuals and organizations. A national level institution will monitor this work and will prepare the accounts of charitable amounts available for the nation as whole. This process will be replicated among all the member countries of IICF to create centralized account at IICF. IICF will maintain the books of each member country and its corresponding contribution. Rest of the work will now be solely vested on IICF which is explained in the following section.

The first step in the operation of the foundation will be to conduct a meticulous and robust stakeholder analysis that will include all possible vested interests that could be affected by the development and execution of the funds at IICF. Following stakeholder analysis, it will be crucial to find appropriate partners and projects within both the Islamic financial and social services sectors. The costs of poor or inadequate partners and projects identification will not only hamper financial returns, but will also threaten to destroy rather than generate social returns.

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Once projects have been selected in the area of Islamic banking investments and Islamic capital market the next step will be to decide on appropriate investment decision. Funds from respective member countries will be invested in proportion to their total contribution to IICF. Profit generated from these investments will be subjected to two fold purpose. A part of profit will be kept aside for needy Muslim communities at international level while the remaining will be given back to member countries in proportion to their contribution for local community development.

Fund kept aside for global Muslim communities will be utilized for community development programmes such as education projects, humanitarian works and community empowerment, while the country specific profits will be used for local development purposes. This will benefit respective countries in getting substantial profitable return from vast amount of wealth lying idle for long time.

Successful Implementation of IICF

For IICF to be successful in its objective, it has to undertake the following key elements of operation to generate the greatest social impact. These elements can be listed as: •

Investment in projects for societal change: Comprehensive plans for societal change at regional and global level with an impudent goal and meticulous action plan to achieve it.

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Managing stakeholders’ relationship: It should encompass comprehensive written agreements among the members’ countries, project partners, investors and beneficiaries that will define the roles and responsibilities of each of the stakeholders.

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Accountability for results: A rigorous methodology that holds all the stakeholders accountable and delivers measurable results on annual basis.

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Provision of expertise: IICF will provide business expertise, project matter know how, investor forums, evaluation expertise, etc. all necessary for tackling the biggest social issues enveloping Islamic community.

Thus with the application of this Islamic venture philanthropy model, disorganized and mismanaged charitable bodies that often lack the business, leadership and planning capacity to impact social issues at significant scale can make a difference at larger scale. With the support of managerial expertise and guidance from proposed IICF they can develop effective program assessment techniques and improve technology systems to demonstrate the value of services for Muslim communities at large.

To further strengthen this proposed foundation, International Islamic institutions such as the OIC, IDB and other international agencies can play a key role in sharing their experiences and the development of norms relating to efficient management of IICF. The example of Kuwait could be considered a best practice in this aspect. In addition to its own efficient waqf administrative process, it has embarked on providing technical cooperation and exchange of experience with other Islamic countries, academic centers, and international organizations; coordinating activities to develop foreign waqf investments in collaboration with other partners'. Professional management of the Islamic charity can have significant benefits for society at large.

Benefits and supporting the Needs of the Ummah through IICF

As we are aware that the needs of the Ummah are diverse and vary significantly between countries and even within any specific region. Nevertheless, there are certain needs that are global, the first of which is education. Human capital, as any entrepreneur knows, is the essential element to development, and one of the key criterion used when assessing an investment opportunity. When we look at investment in education, especially in the Muslim world, we find there is significant underinvestment, especially at the lower levels of the socio-economic stratum. Investment in educational institutions be it in their

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construction or operation within local education centers, such as Masjids and schools, can generate significant return on both the financial and social levels.

A second identified need is that of basic transport and communication infrastructure. In the realm of Shariah-compliant venture philanthropy program, this will not necessarily refer to the development of major transportation or telecommunications networks, but rather to the needs of local infrastructure.

All Muslim countries are preparing Poverty Reduction Programmes (PRP) required by donor agencies to provide funds for development. Many of these countries have extreme poverty as people are suffering from starvation, hunger, diseases, absence of potable drinking water. Even though some of these countries have an organized system of collection and distribution of Zakat and are also supervising Awqaf under government machinery. But none of these countries has integrated the institutions of Zakat and Awqaf in their PRP. With this proposed model of IICF, these countries will have a solid platform for better management of these funds and integrating them with PRP.

One more important aspect will be informal activities of IICF. One such activity is responding to natural disasters such as earthquakes and floods. Muslim charities have earned acclaim for their performance in such circumstances, often providing more rapid and effective responses than government agencies with the same tasks. Their quick provision of emergency aid to victims of the tsunami that hit Indonesia and Sri Lanka in December 2004 is a recent example. At the country level, profit will be directed towards society’s infrastructure, especially healthcare, social housing, community care, environmental programs, education and training. IICF with its local counterpart will also s arranges funding for these services.

Islam requires us, and in fact blesses us, with the obligation to give to others. We can assert that this Shariah-compliant venture philanthropy program in leveraging Zakat and Sadaqah can be an essential driver in addressing the development needs of Muslim countries while simultaneously generating significant financial returns and growth.

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This combined approach of wealth creation, wealth transfer, and openness to inter sectoral and market-based approaches for social change could attract and unleash an unprecedented level of new financial resources and better community development through Islamic venture philanthropy. Islamic venture philanthropy incorporating new approaches for social investment and the creation of social capital using new tools and approaches will stretch philanthropy beyond traditional grant making into more growth and development oriented models.

To further develop the Islamic finance industry as an alternative to the conventional financial system, as well as to the conventional paradigm that no longer trumpets the need to help Muslim communities, Islamic venture philanthropy offers a unique product that allows us to leverage the sophistication of contemporary Islamic finance while fulfilling our obligation to serve social justice.

Concluding Thoughts

It is high time to recognize that Islamic charities are important and potentially powerful tool for sustainable community development, but in order to be effective in its ultimate objective of development of weaker section of society they must overcome several internal and external challenges if they are to carry out their duty effectively. To overcome these obstacles a well planned strategy like proposed model of IICF have to be well established in practice. Issues related to Islamic philanthropy have its implications for different aspects of the reform agenda for Muslim communities: economic growth, social harmony, reform of social services and sustained community development. Despite growing interest in Islamic microfinance in last few years, the Islamic charitable sectors remains poorly understood. Case studies, working paper series and comparative studies are urgently needed to help build an understanding of this wealthier sector within Islamic world.

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