Saturday, March 28, 2009

A Potential Model for Islamic Microfinance I.5: RoSCA permissibility

In my previous posting, I referred to this article for a summary of juristic opinions in Saudi Arabia on the permissibility of Rotating Savings and Credit Associations known as gam`iya or jam`iya in most Arab countries. Here's a translation of this article:
Workers' Cooperative (جمعيات الموظفين)
Among the popular financial dealings between people is that known as "workers' cooperative." There are three main forms of such cooperatives as explained by Associate Professor Abdullah bin Abdulaziz Al-Jibrin in the Teachers' College in Riyadh:
  1. A group of people agree each to pay the same amount each month. At prespecified periods, they take turns collecting the entire pot. A full round is finished when each member has collected the pot once. At each step, the payments are equal, and the pot is of the same  size. Thus, everyone pays the same and collects the same as everyone else. The cooperative may continue for two or more rounds if all parties wish it. Most often, the "banker" of the cooperative collects first followed by the next person to join the cooperative. Sometimes, a lottery determines who collects if all parties to the cooperative were equal. At other times, the one most in need collects first.
  2. ...
  3. Another variation would require that two or more rounds must be completed, with the order of collection changing from round to round so that the first borrower in the first round would be the final collector in the second, and so on.
... This is an old practice that has been addressed by classical scholars, including Abu Zar`a Al-Razi, who was one of the leading narrators of Prophetic Traditions, and he indicated that it is permissible, as stated by Dr. Khalid Al-Mashqih, a Saudi scholar.

Scholars' Rulings on the Practice

... Contemporary jurists have issued two opposite opinions:
  1. One group of scholars forbid such cooperatives. This group includes Sh. Abdulaziz Al Sheikh the Mufti of the Kingdom of Saudi Arabia, Sh. Saleh Al-Fawzan, a Saudi scholar, and some members of the Saudi Council of Major Scholars
  2. The majority (جمهور العلماء) opinion among contemporary scholars is permissibility of this practice. This was the opinion of the late Sh. Bin Baz, the late Sh. bin `Uthaymin, Sh. Muhammad Salih Al-Munajjid, Sh. ibn Jibrin, Dr. Abdulla Al-Faqih, and other scholars, including the majority of the Saudi Council of Major Scholars who thus adopted this majority opinion as its official position in opinion #164 dated 26/2/1410 H, during the 34th round presided upon by the late Sh. Abdulaziz bin Baz...
Grounds for disagreement

The reason for differences in opinion regarding this practice is how it is classified juristically. Some viewed it as a loan that is beneficial to the lender, and thus forbade it, and others saw it otherwise and permitted it.

The reason that some saw it as a beneficial loan is that participants extend a loan with a stipulated condition of another later loan, which is beneficial. Thus, those who adopted this position cited the Prophetic Traditions: "every loan that is beneficial to the lender is [forbidden] riba" and "if one of you makes a loan and then receives a gift or a favor to ride the borrower's animal, then he should neither ride nor accept the gift, unless such courtesy had occurred before" (reported by Ibn Majah).

Those who permitted the practice argued that the benefit that accrues to the lender does not result from any financial loss to the borrower. On the contrary, they argued, the benefits were mutual and virtually equal. Thus, both the lender and the borrower are beneficiaries, without any harm imposed on either party or any benefit at the expense of the other. In this regard, the benefit that is forbidden in loans is the type that accrues only to the lender. However, mutually beneficial loans that benefit both lender and borrower are permissible...

Those who permitted the practice also argued that the default ruling for financial transactions is permissibility. Therefore, prohibition requires proof, and there was no valid proof for prohibition in this case. On the contrary, they argued, this is classified under mutual assistance, good charity, and assistance of fellow Muslims.

In addition, the "proof" of prohibition is based on the Tradition "every beneficial loan is [forbidden] riba", which is a weak tradition with faulty chain of narration. The scholar of Tradition ibn Hajar said that its chain of narration is weak. In this regard, the weak tradition was admittedly accepted as a juristic rule, but not every benefit in a loan is deemed forbidden. The other tradition ostensibly presented as proof for forbidding the practice is categofically invalid, as Al-Haythami said in Al-Zawa'id: "it contains `Utba ibn Hamid Al-Dabi, whose narrations are rejected by Ahmad and Abu Hatim. 

Therefore, all proofs of prohibition are weak. In contrast, the proofs of the majority who permitted the practice is much stronger...

In this regard, the great scholar ibn Taymiya listed examples of permissible mutual benefit when he said: "There is no harm for a farmer to say to another: `help me to do my work and I will help you to do yours; you work with me today, and I work with you tomorrow'."

In summary, "financial cooperatives" (الجمعيات المالية) are permissible Islamically, and it is best to use collateral or guaranty (ضمانات) for participation, to minimize disputes, and to document the mutual debts for all participants in a manner that guarantees each party's rights. 
(My emphasis at the end, because this is rarely done in a systematic way: which is the opportunity for microfinancial improvement)
The Egyptian Dar Al-Ifta (opinion #5568) went further by arguing that such mutually useful practices are not only permissible, but commendable because mutual cooperation is one of the best religious works.


Blogger Fulaan ibn Fulaan said...

Assalamaleikum Wa Rahmatulah

Couple of points - I understand that traditionally devaluation of currency and inflation is ignored for Qard - and that is because a Qard is an act of worship which does not fall under the same conditions as trade, and so if you lend someone $1000, and next year that $1000 dollars has the same purchasing power of $950 of last year money, as long as that percentage is 'negligible' - you take it on the chin as by giving the Qard you have already given up the right to profit from investing the $1000, so the devaluation in your capital is just the additional cost of getting the reward.

The issue where this may arise is how the time order of who collects the pot is decided, as the person who gives $100 for 12 months can collect at say 6% inflation and time value of money, an amount equivalent to $1200 to $1128 depending when they get the cash back.

Thus the order in which the money is returned, and totally disregarding time value of money will have an inherent favour to the first person - the banker in your example, compared to the person who joins last.

In the subcontinent they modify the scheme so say the agreed aount is $100 each - the total pot being $1200 for 12 ppl, everybody bids for the pot at lower than its face value - i.e. they say I will accept $1150 this month, and whosoever's bid is the lowest - takes the pot and everyone chips in a little less that month, BUT the next month's obligation is still $100 - which leads to unequal cash flows and riba.

Just something you may want to consider in your proposal if it impacts it.

7:38 PM  
Blogger Mahmoud El-Gamal said...

wa `alaykumu s-Salamu wa raHmatu Allahi wa barakatuh

(incidentally, why not use your real name?)

I am familiar with the "chit fund" scheme that you mentioned, a RoSCA where participants bid for the pot at each stage of the round. You called it a common practice in the subcontinent, so I would be quite curious if it is also common in Pakistan.

I agree with your characterization of qard as charity, which is definitely the way it is characterized in the Canon (Qur'an and Sunnah). I also agree with you that bidding for the pot would constitute riba (the price paid for the pot now is smaller than the sum of your payments, some before and some after; but the rules of riba require equality).

I was planning to post a disclaimer this morning on the dangers of trying to imitate conventional bank loans (the standard, in my opinion failed, program of the late Dr. Sami Humud, the late M. Baqir Al-Sadr, and the later practical industry that gave us "commodity-murabaha finance"). I'd be curious to know what you think of that discussion (which I have to write after I finish my morning coffee).

6:33 AM  
Blogger ainain said...

Assalamwalikum Prof El-Gamal,

This is a great series of posts on Islamic Microfinance and I am eagerly waiting to see what the proposed specific model will be.

A real workable model (self-sufficient, sustainable) is long overdue.


7:37 PM  
Blogger said...

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