Portfolio Management in This World and The Hereafter

By Associate Prof Dr. Ahcene Lahsasna, Deputy Director, Centre of Research and Publication, INCEIF.

There is a beautiful saying formed from precious words which are very well known among Muslims and widely reported in many traditional books. The saying is: Work for your life in this world (dunia) as if you are living eternally and work for your Hereafter as if you will die tomorrow. As one can see, there are two portfolios to deal with, where both of them should be handled properly through high level of skills in management.

For the first portfolio, the person should work for his dunia through building his assets by accumulating wealth such as money and a house, with endless time in mind to acquire these material wealth. The benefit of this mindset is that the person will keep working in managing his life and affairs in a gentle and easy manner without rush, because he has been given endless time to do so. So there is no need to hurry, and what he missed today will be obtained tomorrow and so on.

The second part of the saying should motivate a person to be very productive with innovative and creative thinking because the sky is the limit. Hence, many goals can be set, including short term goals, medium term goals and long term goals. The other benefit is that a person will be working for his life in the hereafter enthusiastically as if he is going to die tomorrow. This approach makes the person closer to Allah (s.w.t), where he will be actively doing good deeds with extraordinary quality performance such as prayers, recitation of Quran, seeking forgiveness from people, forgiveness from Allah (s.w.t), repent for his sins, be more decent and nice in dealing with everyone in the society. This course of action and behavior will have a positive spillover on society.

There are two portfolios managed by the same person, one related to this world and the second is related to the Hereafter.

The assessment of this world is done by looking at the assetsand liability, where normal overall assessment is conducted to obtain the net worth value according to the following equation: total asset – total liability = net worth. When the net worth is positive the person will be financially healthy, but in cases where the net worth is negative the person has some financial problems and he is in a deficit financial position. Due to this, he can get some advice or consultancy from financial advisors on how to manage his deficit and improve his financial assets in this world.

With regards to the Hereafter portfolio, there is a problem with its assessment due to the lack of human ability in accessing the data because no one has the details about his asset status. There is no information about the good deeds (hasanat), no statistics about the bad deeds (sayyia’t). Hence, there is no stand to take against the status of the Hereafter assets.

However, there is an indication that can be referred to in order to get an idea about the status of the assets. This indication is derived from the same saying we are discussing; the person should ask himself whether he is ready to die on the second day i.e. tomorrow or not? If the answer is yes, it means his assets in the Hereafter is in good status, and it is an indication that he is not in deficit. On the contrary, if the answer is no it means his assets is in deficit. Furthermore he also has to determine how long he needs to get the yes answer in order to improve his condition. The number of days needed represent the gap required to be closed. We have to note here that the answer with yes or no is self-exercise, self-assessment, meaning the person should ask and answer himself to check his status.

The challenge faced by everyone is the struggle in the management of the two portfolios whereby the same person is behaving daily in different ways according to the course of action of each portfolio. On the one hand he is working for this world full of energy realising the principle of khilafah in this universe which includes accumulation of wealth for his benefit, and for benefit of his family, neighbours, society, and for the humanity at large. In this portfolio he is acting in a way that he will never die; hence, his agenda is full of programmes with long-term vision. On the other hand, the same person is managing another portfolio related to the life in the Hereafter, where he is working as if tomorrow is his last day to live. Hence, one action is based on long-term action with endless time, and the other action is short-term based on one day to live.

By right according to Shariah the Hereafter portfolio is more important compared to this world portfolio whereby the first should serve an objective whereby the former is regarded as means. This is based on the provision of the Quran. (But seek the abode of the Hereafter in that which Allah hath given thee and neglect not thy portion of the world, and be thou kind even as Allah hath been kind to thee, and seek not corruption in the earth; lo! Allah loveth not corrupters) (al Qasas; 77).

However, due to our nature, we are always interested to cultivate the asset related to this world at the expense of the asset related to the Hereafter. In addition to that, the devil i.e. Shaitan is always trying to disturb the sequence of the priority by making the asset of this world as the objective and making the asset of the Hereafter as means, or even something negligible. In the case whereby the mixed-up happened, the person will be in chaos heading to a direction which ends with a total loss.

In order to smoothen the calibration of the two portfolios, there are compulsory stations made by Shariah where every person is obliged to make a stop and balance up his portfolio. These include the five daily prayers, where the person starts his day before the sunrise with Hereafter asset by offering Fajar prayer, and closes his day by Isha prayer. In between his daily journey, he crosses other stations where he must stop to do calibration. These are Zuhor, Asar and Maghreb. Because Shariah knows that these station may not be sufficient for calibration, other compulsory stations have been provided on a weekly basis that is the Friday prayer and the biggest station on yearly basis that is Ramadan where the entire month is regarded as precious time for building the Hereafter assets.

In addition to these, there is a larger station set through overseas trip to the Holy Land much related to the life after / life after death/ afterlife where more focus will be placed on enhancing the quality of asset of the Hereafter and making a full Shariah audit of one’s life. There are also other voluntary stations for the person who needs more time to do the calibration and balancing, such as prayer of duha, the prayer before and after the compulsory five prayers. Voluntary fasting is another important tool which is regarded as a good example of integration between this world and the Hereafter where the person is fasting during his day to get an asset in the Hereafter. It can be fasting on Mondays and Thursdays while at the same time he is productively active and engaged in the affairs of this world.

I have presented the problem statement of the two portfolios and its challenges in the context of daily management. Hence, everyone should skillfully manage these two portfolios to ensure success in both worlds. The possible results are whether the person will fail in managing both portfolios, or succeed in this world portfolio and fail in the Hereafter portfolio, or succeed in the Hereafter portfolio and fail in this world portfolio, or try his best by struggling to manage both portfolios within his ability and best effort. From a Shariah perspective, all of the previous scenarios are losses except the last one with the mercy and blessing of Allah.

2016 IS PROMISING YEAR FOR ISLAMIC FINANCE IN EAST AFRICAN COUNTRIES.

2016 is very promising year for Islamic Finance in East Africa following current developments that have taken place early in January. In Jan 11, news was all over the world that Uganda has taken the lead to amend her Financial Institution Act 2004 to allow Islamic banking and gave it legal framework to stand and grow.

Before the jubilation mood rests, Kenya has finalized setting up of Project Management Office (PMO) for the implementation of Islamic Finance in Kenya. IFAAS (consultancy firm specialized in Islamic Finance) and Simmons and Simmons (international Law firm) has been commissioned to lead the PMO to work closely with the financial sector regulators on the development of an institutional, Policy and Regulatory Framework for the Islamic Finance Industry in Kenya.

In Tanzania, ABRAR Solutions Limited-the first consulting firm specializing in Islamic Finance started operations with the noble goal of promoting Islamic Finance in the country. The company aims is to be catalyst for the development of the IF sector by bringing together regulators, industry players and academicians in order to bring in reforms required to create level playing field and spur growth for the sector and all stakeholders. More importantly, to promote awareness, supplement capacity building initiatives and support institutions to achieve their goals of having Islamic financial products on their menu.

Tanzania having three academic institutions offering Islamic finance courses have a competitive advantage to provide workforce required to the local sector and the neighbors.

However, much needs to be done on development of required knowledge and human capital to instill required competencies for the industry in the region.

Yes in deed, 'Opportunity favors prepared mind', let us wake up and be prepared, good things are coming.

How Islamic Finance Can Spur the Growth of Small and Medium Enterprises

By Jaafar S. Abdulkadir.

Just how can Islamic finance spurthe growth of Small and Medium Enterprises (SMEs)?

SMEs have been billed as the engine of social economic growth and poverty reduction through the creation of employment opportunities and generation of income particularly in developing countries. Statistics indicate that formal SMEs contribute up to 45 percent of total employment and up to 33 percent of national income (GDP) in emerging economies and 51 per cent in high income countries.

In the face of growing demands for social services, the dwindling tax revenue sources and the bulging levels of public debt that undermines governments’ capacity to meet its social obligations, SMEs if well facilitated could help ease these burdens. Although the sector has remained significantly underfunded, banks are increasingly looking at developing products and services to cater to these businesses. Additionally, the SME’s preference for Shariah-compliant banking services has also opened up significant opportunities for banks to invest in this segment.

The Potential of Islamic Banking

That Islamic finance has tremendous potential to serve as a tool for financial inclusion through leveraging the entrepreneurial potential of micro, small and medium enterprises (MSMEs) across sectors and bringing the financially underserved into the economic mainstream is not in doubt. Furthermore, the risk-sharing characteristics of Islamic financial products can facilitate access to finance by small and medium-sized enterprises (SMEs) whilst the asset-backed nature of Sukuk makes them suitable for infrastructure financing that can help spur economic development, including creating an enabling environment for private sector investment.

However, market conditions and regulatory environments are not always supportive of the growth of SMEs and access to formal finance is one of the main obstacles they face. The International Financial Corporation in its 2012 report indicated that medium and small enterprises have a huge financing deficit of USD 2.4 trillion in the developing countries. Given that financial institutions rely heavily on the use of collaterals and
sound credit history for their financing decisions, many SMEs in the developing countries fail to access the much needed and deserved credit facilities.

In order to reach out to SMEs demanding Islamic products, there is need to better understand the market from both the demand and supply sides in order to identify any gaps or niches where Islamic Finance could assist and add value. Research has shown that the un-served and under served SMEs do not borrow from conventional banks, only owing to religious reasons. This potential is a “new to bank” funding opportunity, which is still untapped, as banks and other financial institutions lack adequate strategic focus on this segment to offer Shariah-compliant products.

The risk sharing nature of Islamic-financial products and indeed the asset-backed nature of the financial transactions fosters entrepreneurship that can contribute immensely towards social-economic development. The Islamic principles of asset-backed financial transactions helps to promote real economic activities and minimizes the incidence of speculative transactions and excessive risk taking behaviours of economic agents. The model of profit and loss sharing works towards aligning the interests of financiers and entrepreneurs and promotes healthy partnership for their mutual benefits.

The strong emphasis on the application of participatory approaches of financing like the Mudarabah and Musharakah models helps promote active involvement in economic activities and limit the conventional practice of risk transfer to the borrowing party. Mudarabah is a partnership
between an entrepreneur who acts as a fund manager (Mudarib) and a capital provider (Rab-ul-Mal) to invest the capital in a project on condition that losses are borne by the capital provider unless there are incidences of negligence and fraud by the Mudarib.

Arrangements involving the provisions of advance payment for commodities to be delivered at a future defined date well known as Salam can be applied to provide working capital for the SMEs especially in the agricultural sectors. This financing approach may innovatively be utilized to cater for the financing needs for farm inputs like fertilizers, seeds, irrigation kits, machinery among others.

Way Forward of SME Financing

There is need to continuously improve the branding of Islamic finance as a sound alternative system owing to its inclusive approach that seeks to promote social and ethical practices in our economic and financial engagements. The showcasing of success stories involving the Islamic finance
equity-based financing model with the SMEs shall help inspire the financial sectors players and governments to support the equity financing model.

Governments have to proactively develop progressive policies and create enabling environment that supports the growth of SMEs by expand their innovative sources of funding like Islamic finance. Appropriate policies and resources have to be deliberately focused on developing human capital, enforcement of contracts, tax laws, research and quality data generation and management.

Ugandan parliament agrees to introduce Islamic banking, but central Shariah advisory board needs to be in place first

As the Ugandan government seeks to do away with laws prohibiting Islamic banking transactions, the onus has fallen onto its central bank to form a central Shariah advisory board in order for Shariah banking to be included into the East African Republic’s financial system.

In a landmark development, the Ugandan parliament has given its stamp of approval to the Financial Institutions (Amendment) Bill 2015 which will see key features of the country’s banking system dissolved and drastically altered in the name of greater financial inclusion for the landlocked nation of 39 million. These changes include lifting a ban on Islamic banking products and allowing, for the first time ever, for financial institutions to engage in insurance activities. Under the recommendations of the Committee on Finance, Planning and Economic Development, banks would also be granted licenses to offer Takaful solutions.

“The committee recommends that the proposal to introduce Islamic banking and its products be adopted subject to the establishment of a central Shariah advisory board in the central bank to regulate banks providing Islamic banking products,” it said in its report on the amendment bill. The committee also confirmed that it will introduce this particular amendment at the committee stage.

The government’s decision is in line with its ambitious 30-year plan – branded as Vision 2040 – to hoist itself out of the low-income bracket to become a competitive upper middle-income country. In a bid to boost its economic fundamentals and broaden its financial spectrum, Uganda is positioning itself to tap the burgeoning US$1.8 trillion Islamic finance industry as it aptly recognizes that “the provision of Islamic banking and financial products by banks is growing rapidly in many countries”. It is noted that half of the 22 licensed conventional and commercial banks in Uganda have voiced interest in providing Shariah banking products. Should the proposed regulation be implemented, this could usher in new opportunities for domestic banks and significantly give the much-needed boost for Uganda’s Islamic finance industry which has so far lagged behind its regional peers (such as South Africa, Senegal, Kenya and Nigeria) which have already dipped their toes into Shariah banking, Sukuk and Islamic insurance.

Source: IFN Alert.