A New Generation of Banking Model to relieve poor distressed defaulters (SDG1)
Article: Mabroor Mahmood - Principal-Term Finance, ICD
Default in loans is common in all banking systems, regardless of whether it is Islamic or conventional financial institution. Banks keep collateral against the financing, while microfinance institutions keep savings of the clients aside to have a buffer against such default incidents. If a client defaults, he loses everything. This is a hard reality.
In the Holy Quran (Verse 218; Surah Al Baqara), Allah almighty, however, urges the believers not to put pressure if the borrower defaults. But our banking wisdom says, if clients are not under pressure, then it will cause moral hazard and as a result, the long run sustainability of the financing institution will be in question. This is true for Islamic banking as well.
A new generation of banking model named “Biniog Sathi” solves this puzzle with the help of Zakat and Charity. “Biniog Sathi”, meaning “Friend in Investment” in Bangla, says: “Every Bank will have a contractual relationship with an independent Zakat Fund. The Bank will extend financing as usual, but if the client defaults, then the Bank would run an investigation to check whether the default is a genuine one. In case of a genuine default, the bank will issue a certificate to the client, the client will then hand-over the certificate to the Zakat Fund, the Zakat Fund will pay the due amount to the client, and finally the client will come back to the Bank and repay the outstanding dues”.
So the Bank will recover its debt, the client will get rid of debt burden, and the Zakat Fund will utilize its balance for a noble cause that is permissible under Shariah law, because Zakat can be paid to eight categories of people that also
include Debt Defaulters or Gharimeen. The model is depicted in the following diagram.
To check the potential abuse of Zakat, there will be a compliance audit of the Bank and the client by an independent body. The audit report will be shared with the Zakat Fund periodically to make sure that everything is in order.
“Biniog Sathi” is now an official initiative of ICD. It is being piloted in different countries. In Saudi Arabia, the pilot test is being conducted with Jana Bena’a Productive Families, a microfinance entity that extends Qard Hasan loans to poor women. For the testing purpose, a staff Zakat Fund has been formed within ICD and the first round of Zakat has been already paid to a number of poor women who are distressed defaulters. For developing the model, ICD received “Best
Innovative Product” award at Global Islamic Microfinance Forum in 2017.
With the help of the model, distressed clients will be able to continue their productive activities without assuming any high default risk. This will encourage them to be more productive and take more risks in various business ventures that will reduce their poverty and increase their standard of living in the long run. Thus the model helps a country to meet a number of SDGs such as Poverty, Health, Growth and Jobs, etc.