2.3.1. Conventional Perspectives
Recently, the potential for developing MEs as a poverty alleviation strategy has been recognised globally. Among others, the UN poverty alleviation strategies emphasise the importance of human empowerment and building the assets of the poor, not only the economic assets but also the social and personal assets of both men and women (UNDP, 1997: 6). In supporting the policy position on this strategy, Todaro’s policy suggestion on the importance of low-interest loans to MEs should be considered, as it aims to encourage MEs with adequate support and help them provide an outlet for the poor to graduate from poverty (Todaro, 2003: 241-242). Islam (2003: 27) states that MEs are one possible solution for poverty reduction in rural Asia, providing evidence that Grameen Bank, by providing micro financing for MEs, has successfully helped around five per cent of its borrowers to income levels above the poverty line every year.
A number of empirical studies provide findings evidencing MEs’ significant potential (ADB, 2009; Servon and Bates, 1998). For example, Kimhi (2010) finds that encouraging rural entrepreneurship has increased income and reduced income inequality in Ethiopia; thus, such a strategy should be directed to communities with low incomes, low wealth and a lack of education. In addition, a study in Africa also found that microenterprises in Africa that trade in natural products play a significant role in poverty alleviation due to the increase of financial and non-financial benefits (Sackleton, et al., 2008).
Therefore, to some extent, MEs have the potential to cover both strategies discussed earlier, i.e. increasing incomes and achieving equal distribution. The next section will provide further discussion of MEs and their role in poverty alleviation.
2.3.2. Islamic Perspective
Since Islam views poverty not only from a material perspective but also as a moral responsibility issue, this raises the question of how Islam can play a role. Chapra (2008b:
258) considers that Islam has a potential role in encouraging economic development through the positive values it offers: (i) Islamic teaching of high moral values; (ii) strong stress on socio economic justice; (iii) providing more suitable solutions, to economic, social and political problems, that differ from Western concepts; (iv) its ability to motivate people to do good things in life by considering social accountability in the hereafter; (v) giving examples of simple lifestyles, preventing people becoming corrupt; (vi) strong orientation to family and communal harmony, etc. Such values, rooted in the Quran and hadith and well known by the majority of Muslims, should be at the centre of the Muslim way of life; thus Islam might really contribute to solving the long-standing problem of decline.
In poverty alleviation strategies, adalah (justice) and khilafah (the individual’s role as God’s vicegerent on earth) remain the most important sources to develop solutions. Mannan (1986: 323) suggests that the foundational solution to poverty alleviation lies in establishing justice, as the Qur’an declares that: “Allah comment justice, the doing of good, and liberality to kith and kin, and He forbids all shameful deeds, and injustice and rebellion: He instruct you, that ye may receive admonition” (Qur’an, 16:90). In support of this, Chapra (1992: 213-224) points out that efficiency and equitable resource utilisation and distribution in Islam can be achieved by using dual moral filters: (i) to strike a blow against the greedy and their unlimited wants by forcing them to stay in line with khilafah
and adalah; (ii) to utilise resources only for good purposes which can be performed through: (a) moral filter of the inner self; (b) motivation to find balance between self- interest and the interest of other people/public interest; (c) ‘restructure the whole economy’ with the goal of maqasid and limiting of scarce resources that must be utilised effectively; (d) a government highly-committed to actively practising Islamic values in economic policies to realise public wellbeing. Therefore, Islam, theoretically, recognises a thorough approach, blending the material and spiritual and not just relying on a single strategy on the material side.
As Akhtar (2000) points out, three main aspects of Islamic rules in poverty reduction can be mentioned: basic needs fulfilment, providing fair earning opportunities for all, and equal distribution of income and wealth. In expanding on this, Iqbal (2002: 4) identifies
four basic points to alleviate poverty based on Islamic values: “endowment, opportunity, distribution and growth”. First, obviously people must own capital, labour, physical resources and non-physical resources to create income. Second, ‘opportunity’ is also encouraged by restricting interest charged on financing because it can avoid injustice in wealth allocation and also overcome financial exclusion. Thus, the poor are expected to have better access to financing through the opportunity space created. Third, it is through ‘distribution’ that the rightful assets of society can be returned to society through zakah,
waqf and charity for building capacity to empower the less fortunate. Consequently, the Islamic strategy of distribution aims at “guarantee[ing] fulfilment of basic needs of all, equity but not equality in personal incomes, and eliminating extreme inequality in personal income and wealth” (Iqbal, 2002: 6). The last aspect is ‘growth’, which is essential for delivering development and reducing poverty.
In further contributing to the strategy development, Mannan (1986: 334) suggests a comprehensive Shari’ah-based solution for poverty alleviation that includes the following:
(i) Providing guaranteed minimum provision (GMP), determined by the level and stage of social and economic development, to all concerned;
(ii) Initiating institutional and non-institutional reforms through legal and non-legal measures such as stress on agricultural and rural development, subsidies for the acquisition of skills, the removal of monopoly practices and regional disparities, and minimum wages in low-paid industries.
(iii) Reconstructing and reactivating the conventional tools of redistribution such as the collection and disbursement of zakah to achieve pre-planned objectives; redefining the scope and limits of intra-family obligatory allowances and the obligatory social provision of certain goods and services in a particular social context; the fuller implementation of Islamic laws of inheritance, and so on.
Besides, in considering absolute and relative poverty, Mannan (1986: 333) argues that Islam focuses on those in absolute poverty, the poor who are truly in a state of deprivation and starvation, as zakah recipients. Since zakah and waqf are considered
among the main sources of financing any strategy for poverty alleviation, Ahmed (2004), by investigating the role of zakah and awqaf in poverty alleviation, discovered that GDP level affects the amount of zakah distributed to the poor, implying that countries with higher GDPs will be more effective in using zakah in poverty reduction (Ahmed, 2004). Oran (2009: 152) recommends a strategy to encourage the zakah performance in poverty alleviation by implementing a long-term strategic plan, focusing on the programme called “ruminant livestock raising programme” which provides help to the rural poor in particular. Yasin and Tahir (2002: 17) point out that the comprehensive implementation of full Islamic values through profit- and loss-sharing, in place of the interest system, and encouraging zakah will prove to be the best way of solving the poverty problem. It should be noted that elimination of interest alone is not sufficient; it must be supported by setting up an institutional body to force the rich to pay zakah as a compulsory obligation, because the rich sometimes do not perform this obligation due to lack of awareness, responsibility or even knowledge (Tag el Din, 2002: 187). Thus, the importance of zakah
in reducing poverty is widely accepted and recognised. However, the collection and distribution side of zakah, to achieve optimum performance in taking some of the wealth of the rich and providing maximum benefit for the poor, remains a mission to be accomplished.
Another institutional approach is the awqaf institution, which might play an important role if it can persuade the wealthy in society to take part. Based on his research results, Ahmed (2004) proposes several policy recommendations for this, such as building institutions that incorporate zakah and awqaf into one development strategy, creating laws and regulations to increase zakah by avoiding double tax, increasing people’s trust through trustworthy and transparent distribution of collected funds, and developing various zakah and awqaf institutions (Ahmed, 2004). Furthermore, Cizakca (2002: 263) also draws attention to the importance of the waqf system in poverty alleviation, suggesting the application of the waqf in providing public facilities such as health, education etc in Muslim societies. He believes that, if the waqf system is built well, those public facilities need not be the government’s responsibility completely; thus, in the long run, it can reduce the government budget, cut state debt, decrease interest rates, and then promote higher growth in the economy (Cizakca, 2002: 263). Therefore, it can be
assumed that both zakah and waqf can be utilised as among the main tools to alleviate poverty if they can be managed properly for the benefit of the ummah.
In line with the above strategy but specifically in regard to the financing issue for MEs through Islamic strategy, Obaidullah (2008b: 4) argues that “Central to the challenge of ending poverty is creating wealth through development of micro enterprises”, for which microfinance has to be considered an essential institutional response. Obaidullah (2008b 13-22) proposes two Islamic approaches to poverty alleviation: (i) “charity-based and not-for-profit modes” in the form of common charity institutions such as zakah, awqaf, and qard hassan together with “economic empowerment”, “debt avoidance”, “cooperation”, “family cohesiveness” and “Shari’ah compliance contract”; and (ii) ‘market-based and for-profit modes’ which include micro savings, micro credit and micro equity. Islamic strategy, hence, promotes economic empowerment including, but not limited to, providing for the needs of the poor, transformation of idle assets into income- generating assets, capacity-building, and transparent performance reports (Obaidullah, 2008b: 17). In addition, Islam demands mutual cooperation and unity as a fundamental rule (Qur’an,5:2); on this basis, group-based financing and mutual guarantee within the group are accepted (Obaidullah, 2008b: 18). Family empowerment and role-balancing between men and women is recognised in Islamic development strategy; hence, in MEs development, the ‘women-only approach’ is not accepted in the Islamic view (Qur’an, 51:49; Qur’an, 4:32) (Obaidullah, 2008b: 19). Finally, he also believes that, basically, there is no primary contradiction between the global microfinance ‘best practices’ and the Islamic approach to poverty elimination (Obaidullah, 2008b: 22). Therefore, the concluding remark from Obaidullah (2008b) is very comprehensive: “Islamic approach to poverty alleviation is more inclusive than the conventional one. It provides for the basic condition of sustainable and successful microfinance, blending wealth creation with empathy for the poorest of the poor…also…composite of mission-based and market- based interventions…favors equity-based and cooperation-based models in contrast to mechanisms that create and perpetuate debt.” (Obaidullah, 2008b: 23).
Microfinance, particularly Shari’ah financing in micro credit for MEs, seems to be able to offer the potential for poverty alleviation. Chapra (2008: 36) argues that “In the
present-day world, microfinance has proved to have great potential for expanding employment and self-employment opportunities and needs to receive high priority in Muslim countries”. Based on the CGAP best practices, Obaidullah (2008b: 11) asserts that “Microfinance is a powerful tool to fight poverty”.