Title: Rural Islamic Investment Companies

Rural Islamic Investment Companies

Dr Saad Al-Harran

Dr. Al Harran is an international Business Consultant.

He is the Managing Director of Global Horizon Limited, a New Zealand-based company.

Contact : Fax: +64 3 3831451

THE MALAYSIAN GOVERNMENT’S sound economic and financial policies and political maturity have played an important role to achieve a fair and balanced budget for 1994. The main objectives of the 1994 Budget according to Finance Minister Anwar Ibrahim are economic growth, reducing inflation, enhancing skills and technological advancement and fostering a balanced and equitable distribution of wealth in the society.

This article intends to determine what practical steps have been undertaken thus far by the local policymakers concerning the 1994 budget to achieve an equitable distribution of wealth between the rich urban sector and the poor rural society. There is no denial that the government through its New Economic Policy (NEP) has played a vital role to reduce the rate of poverty from 49.3 per cent in 1970 to 13.6 per cent in 1992. But we are of the opinion that more hard work will need to be done among the rural poor to bring before any real hope can be brought to these ‘forgotten’ people. The fishermen, the farmers and the rural women will prove to be the main engine for change and real economic growth in the society once they have equal opportunities. If a restructuring of the rural economy is made on the basis of a just and fair system, more social and financial prosperity will come to the society. Therefore, once a conducive financial environment has been created in the rural economy, the rate of inflation will be further reduced and Malaysia will then indeed be a worthy model for other developing nations in the East to follow. This writer will only be focusing on the current problems of the fishermen and why there is an urgent need to establish rural Islamic investment companies.

If we are responsible and vicegerents of God on earth then it is our duty to understand the grass-root problems of the fisherman when he makes the critical decision to change his vocation and leaves his family and children behind. Is it because of the meagre reward of marketing fish or is it something else? In my earlier applied research, entitled "Marketing Strategy for Rural Poor: An Islamic Perspective," I discovered that the fishermen’s problem is not merely a marketing problem but a socio-economic one; a problem which policymakers must critically examine.

Undoubtedly, the fishermen are frustrated and will continue suffering all their lives as long as there is no formal credit institution to serve their needs. Therefore, they have no alternative but to rely on the informal credit system which is mainly controlled by the middlemen and the moneylenders. If they do get credit then they must pay very high rates of interest--and very often these can reach 60-70 per cent, as in some African countries.

The fisherman, like us, needs the credit to work in order to survive and to support his extended families that usually consist of seven to nine children. The informal credit system in the rural area is without question unfair and unjust and has played--and will continues to do so for many years to come--a vital role in encouraging the Malaysian fishermen to go for other jobs in urban areas.

Therefore, should we put the whole blame on the informal credit sector only or on the formal one? Actually, both should be blamed. Still, the formal credit system is meant to serve the needs of the urban society only. Furthermore, it is not meant to go beyond that because it was set up to serve the needs of the people in the cities and to create a consumer society--through the credit card system--rather than a productive one. For instance, according to the experience of Bank Islam Malaysia, the last decade has shown a widespread preference for murabaha (trade financing), and a lesser degree of preference for mudarabh financing. Since these modes of financing are short term in nature and such operations will not bring any social benefit to a large segment of the society. In contrast, musharakah (partnership) financing has mostly been avoided due to the mistaken presumption that it is an economically non-viable (high-risk) instrument. However, if the concept of project financing were introduced in the corporate sector these institutions will not have the problems of huge surplus funds. Project financing requires hard work, commitment and responsibility in identifying viable projects to bring real change in the society, not only in the urban area but also rural economy.

It has been due to the above situation and the absence of formal financial institutions to serve the need of the rural society that the informal credit system has come to play its powerful and exploitative role in the rural areas. Thus, the poor fishermen and farmers have no alternative but to deal with them. Is it really fair and just that the fishermen who work extremely hard for survival yet are taken advantages of and left in debt all their lives? If we are responsible people, who understand our mission in life as vicegerents of God on earth, then we should not leave matters to worsen but should create an alternative system based on practices and regulations that are just and fair. What then will be the alternative system to the unhealthy environment prevailing in our rural society that has played a major role in increasing the prices of agricultural commodities and subsequently increasing the rate of inflation?

The solution is to establish new, dynamic Islamic investment companies in the rural areas to serve the needs of the poor fishermen. This process will require a major restructuring of the economy and, more specifically, the financial system through the introduction of a new concept of Islamic finance: musharakah financing in the rural economy. Thus, in the new hope equation, the poor fishermen will be partners with the investment banks, sharing the profits and losses. Through the incentive system which partnership financing will bring, the fishermen will learn their duties in business because their success or failure depends fully on their efforts. Partnership financing can help make the poor fishermen financially independent, decent human beings and entrepreneurs through time. Societal harmony will be fostered due to the co-operation between the parties.

Once the new system (partnership financing) is established there is a need to launch a grant (provided by the government or Permodalan Nasional Bhd.) which will be used as revolving funds, to be loaned out to the new shareholders (fishermen and farmers) as advances for their urgent needs. And once they have accumulated their capital they must repay their loans. The new system has to be closely monitored by specialists who should initiate various development programmes for the fishermen and his family, centring in vocational training, creative and innovative projects.

Long-term financing through musharakah will definitely create a healthy and conductive environment in the rural areas. The new system, if successfully monitored, will gradually reduce the exploitative roles of the middlemen and the money lenders in the rural areas. Also it will play a major role in reducing the prices of agricultural commodities and, in effect, the inflation rate; this will ultimately stabilize the financial and economic system in the country.

Surely, this is the right time for the policymakers to critically examine the new system based on the concept of musharakah as long-term policy objectives before it is too late.