Islamic student-loan alternatives
I have just sent this to IBFnet, but post it here also to get all the useful ideas that I can:
There is no doubt that education is one of the most important Islamic social objectives (no need to repeat numerous Hadiths here that we all know). Unfortunately, the typical way that Muslims in the west can afford the best education (including college as well as law school, business school, medical school, etc.) is by resorting to student loans.
In the U.S. Sallie Mae and other government sponsored initiatives try to make interest rates on those loans lower than market levels, but the accumulated debt can still be quite substantial. Moreover, I have met a number of young men and women at local masajid in Houston who accumulated student loan debts (some of which were marketed to them quite aggressively) but then failed to complete their degrees and therefore have a terrible problem with debts that they cannot repay with their low service-sector wages.
I know that there are alternatives in the GCC, including tawarruq to synthesize the loan (two spot and one credit trades of a commodity to give the student cash now in exchange for a debt owed later), but those are just inefficient replications that increase the cost of funds to the poor students without reducing the bad effects of debt.
I have read about another alternative based on the banks buying spots at universities and then leasing them to the students. Again, this seems awfully inefficient. One way to structure a similar but better alternative is to endow scholarships at the target elite universities, thus giving the students something to compete for, and then a means to get the elite education that they cannot afford, once they are admitted to the university. I know of some scholarships of this kind (e.g. King Faisal) for graduate studies. However, it would be nice if wealthier Muslims will focus on creating scholarships at elite universities for bright Muslim students who cannot afford those schools otherwise.
I discussed other "Islamic" alternatives in a recent lecture at a local Masjid mostly catering to the Nigerian Muslim community in Houston (some of whose youth either already have problems with student-loan debt, or need access to student-loan alternatives), and at a recent khutba in our main local Masjid. Perhaps I can spell out some of those ideas here and hope to start a useful discussion that can produce good Islamic products.
The starting point is that there is no better Islamic investment than in the education of our community's children: see a summary of the earlier set-up khutba at the earlier posting: Poor Muslim-American Islamic Investment Strategies.
Since this is a forum for financial professionals and those interested in the field, let's focus on the financial mechanics.
One idea that would work relies on cooperatives (why am I not surprised :-) such as credit unions. A very good Muslim banker friend of mine doesn't like credit unions because they are "one member one vote", so we can structure the institution as a mutual savings bank, where it is "one share one vote".
Make the institution not for profit, so that it can also be eligible for (tax deductible) zakah funds used for community development, and deserve the Islamic label (profit is OK, but profit from extension of credit seems awfully close to the essence of riba, as I have argued elsewhere in defense of mutuality).
We can have networks of mutual financial institutions tied to our Islamic centers. As churches do in this country, we can require that young men and women who wish to gain access to our student loan alternatives must be shareholders of the mutual financial institution (one share is, say, $5) and active members of the community (volunteering at the Islamic centers and in the community, etc.).
Funding to those students can be given based on the story of Musa and Shu`ayb [28:27]. Shu`ayb tells Musa that he owes a certain debt, but he can pay more if he wishes. It is well documented that the Prophet (p) repaid debts with more than he owed (unilaterally). We are not resorting to the Malaysian Investment Certificate method, based on the Egyptian Ahli bank investment certificates (C) with "gifts". This is the opposite case, where the debtor is a member of the community who is helped by the community to attain an education and then pays the community by returning more than was lent to him voluntarily, and possibly buying more shares in the mutual to fund the education of later generations, etc.
The adverse selection and moral hazard problems associated with giving money to people who are not obliged to pay interest (and whose debts will be forgiven if they cannot pay) is ameliorated by the requirement of being a member of the community in good standing (again as churches do). Investment in those members of the community should pay off manyfold, iA, as some of them become very successful and pay back by investing more in the community, etc.
Growth and sustainability can also be supported by zakah money, which can be spent on education by the agreement of Dr. Al-Qaradawi (today's authority on zakah) as well as premodern scholars. This can be set up as educational funds that grants scholarships and concessionary student loans, or it can be handled directly by financial mutuals that cater to other social needs of the community.
Suggestions of better products and structures would be greatly appreciated and encouraged. I would be happy to provide free advice to anyone working on this or similar products that justify the "Islamic" label by more than juristic mechanics (to the extent that I may have any value to add, of course :-).
There is no doubt that education is one of the most important Islamic social objectives (no need to repeat numerous Hadiths here that we all know). Unfortunately, the typical way that Muslims in the west can afford the best education (including college as well as law school, business school, medical school, etc.) is by resorting to student loans.
In the U.S. Sallie Mae and other government sponsored initiatives try to make interest rates on those loans lower than market levels, but the accumulated debt can still be quite substantial. Moreover, I have met a number of young men and women at local masajid in Houston who accumulated student loan debts (some of which were marketed to them quite aggressively) but then failed to complete their degrees and therefore have a terrible problem with debts that they cannot repay with their low service-sector wages.
I know that there are alternatives in the GCC, including tawarruq to synthesize the loan (two spot and one credit trades of a commodity to give the student cash now in exchange for a debt owed later), but those are just inefficient replications that increase the cost of funds to the poor students without reducing the bad effects of debt.
I have read about another alternative based on the banks buying spots at universities and then leasing them to the students. Again, this seems awfully inefficient. One way to structure a similar but better alternative is to endow scholarships at the target elite universities, thus giving the students something to compete for, and then a means to get the elite education that they cannot afford, once they are admitted to the university. I know of some scholarships of this kind (e.g. King Faisal) for graduate studies. However, it would be nice if wealthier Muslims will focus on creating scholarships at elite universities for bright Muslim students who cannot afford those schools otherwise.
I discussed other "Islamic" alternatives in a recent lecture at a local Masjid mostly catering to the Nigerian Muslim community in Houston (some of whose youth either already have problems with student-loan debt, or need access to student-loan alternatives), and at a recent khutba in our main local Masjid. Perhaps I can spell out some of those ideas here and hope to start a useful discussion that can produce good Islamic products.
The starting point is that there is no better Islamic investment than in the education of our community's children: see a summary of the earlier set-up khutba at the earlier posting: Poor Muslim-American Islamic Investment Strategies.
Since this is a forum for financial professionals and those interested in the field, let's focus on the financial mechanics.
One idea that would work relies on cooperatives (why am I not surprised :-) such as credit unions. A very good Muslim banker friend of mine doesn't like credit unions because they are "one member one vote", so we can structure the institution as a mutual savings bank, where it is "one share one vote".
Make the institution not for profit, so that it can also be eligible for (tax deductible) zakah funds used for community development, and deserve the Islamic label (profit is OK, but profit from extension of credit seems awfully close to the essence of riba, as I have argued elsewhere in defense of mutuality).
We can have networks of mutual financial institutions tied to our Islamic centers. As churches do in this country, we can require that young men and women who wish to gain access to our student loan alternatives must be shareholders of the mutual financial institution (one share is, say, $5) and active members of the community (volunteering at the Islamic centers and in the community, etc.).
Funding to those students can be given based on the story of Musa and Shu`ayb [28:27]. Shu`ayb tells Musa that he owes a certain debt, but he can pay more if he wishes. It is well documented that the Prophet (p) repaid debts with more than he owed (unilaterally). We are not resorting to the Malaysian Investment Certificate method, based on the Egyptian Ahli bank investment certificates (C) with "gifts". This is the opposite case, where the debtor is a member of the community who is helped by the community to attain an education and then pays the community by returning more than was lent to him voluntarily, and possibly buying more shares in the mutual to fund the education of later generations, etc.
The adverse selection and moral hazard problems associated with giving money to people who are not obliged to pay interest (and whose debts will be forgiven if they cannot pay) is ameliorated by the requirement of being a member of the community in good standing (again as churches do). Investment in those members of the community should pay off manyfold, iA, as some of them become very successful and pay back by investing more in the community, etc.
Growth and sustainability can also be supported by zakah money, which can be spent on education by the agreement of Dr. Al-Qaradawi (today's authority on zakah) as well as premodern scholars. This can be set up as educational funds that grants scholarships and concessionary student loans, or it can be handled directly by financial mutuals that cater to other social needs of the community.
Suggestions of better products and structures would be greatly appreciated and encouraged. I would be happy to provide free advice to anyone working on this or similar products that justify the "Islamic" label by more than juristic mechanics (to the extent that I may have any value to add, of course :-).
posted by Mahmoud El-Gamal at 9:47 AM
6 Comments:
Assalamwalikum
I just finished reading your book and had finished the book by Hayes and Vogel. Both excellent reads for someone like me (interested in transferring to Islamic Finance/Banking). Also am very interested in establishing a Mcrocredit in India.
This post regarding educational financing was direly needed since most members of the community have taken some sort of loan regardless of religosity and there is no serious solution being worked on.
Shukran
One option may be to have that same principle expanded to those in need of loans, and make payment in the form of an education instead of a monetary value. I.e. we give you a medical education with the condition that you give us back one (i.e. pass on the giving to a future med student) the fluctuation in price would be irrelevant, because the object loaned is not a monetary value, plus the charitable nature would be written in, in that if a person passes away or does not gain employment, he would not be held to the loan.
It escapes the problems of "a loan that draws benefit" in that the benefit is directed to a third party, and not the original loaner (which is permissible by consensus if memory serves me correctly).
Exactly. The idea is that one is not investing in money or even in education, but in people. Returns are maximized from a religious viewpoint by focusing on perpetual charity, knowledge, and righteous future generations. Returns are also maximized from a worldly viewpoint by endowing members of the larger community with the most valuable resource today: education. The same methods can be used for financing other activities, but none can give those rates of return given the current state of development.
Salaam,
Here’s an idea.
A community, after conducting the required investigations and research, offers a bright individual sponsorship for his studies. In return, he agrees to give a small percentage, say 2.5%, of his gross annual income back to the community so long as his income is above a certain level and he has not reached old age.
If, after completing his studies, he does not command a high salary the relevant person will presumably not find paying 2.5% of his salary overly burdensome, punitive or unjust. If, however, he commands a very high salary he can either continue paying 2.5% of his salary to the community or he can exit the agreement through a pre-agreed exit route. E.g. he can exit the agreement by paying a lump sum to the community that is sufficient to pay for another person’s studies.
Can't a fixed rate be permissible? I take out a $10k student loan. The fee charged is fixed, and the final amount paid is known, therefore not riba. Say the fee is $600. Say we agree to a 60 month repayment. Therefore $10k/60months = $167/mo plus $600/60mo = $10/mo. My total payment each month is $177 for 60 months. No riba. Total amount paid: $10600. Isn't this permissible?
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