Unlocking Islamic social finance to assist micro small medium enterprises in Brunei Darussalam

Khairul Hidayatullah Basir and Mohd Hairul Azrin Besar

12.1 Introduction

Many businesses around the world, particularly micro, small, medium enterprises (MSMEs) have been greatly impacted by the COVID-19 outbreak. According to the results of surveys carried out by the Organisation for Economic Co-operation and Development (OECD) on the impact of COVID-19 crisis on SMEs worldwide, more than half of SMEs face severe losses in revenue and one-third of SMEs fear they will be out of business without further support within one month and up to half within three months (OECD, 2020).

Micro-businesses are more vulnerable than SMEs due to their smaller size, lack of access to credit, and the risky nature of business. This has forced governments around the world to find ways to help fund SMEs through government relief funds, direct lending to SMEs, and providing loan guarantees to commercial banks. Generally, the expansion of funding to help MSMEs is in the form of loan schemes with lenient terms. For instance, the easing of the accessibility of loan schemes means extending the group of potential beneficiaries, simplifying and speeding up procedures to receive loans, and offering more favourable terms and reduced interest rates (OECD, 2020).

The introduction of these loan instruments may sound promising. However, even if the economy is set to recover, it would take some time for MSMEs to recover and they will take a longer time to pay off their loans. Therefore, an alternative mode of financing is required to help ease the burden of MSMEs that simultaneously promotes their growth and development.

Brunei Darussalam (herein Brunei) is not an exception in experiencing the impact of the pandemic. Shopping malls and stores see fewer patrons. Businesses and tenants are struggling to meet monthly rent payments and salaries. There are efforts by the government to help these businesses in order to stimulate the economy. Islamic finance has the potential to be a crucial tool to offer governments a strong non-traditional source of financing and has the possibility of being a game-changer, especially in Islamic economies.

12.2 Brunei’s response to COVID-19

Brunei recorded its first imported COVID-19 case on 9 March 2020. Since then, Brunei has taken several preventive measures and restrictions in order to curb the spread of the pandemic such as temporary closure of several tamii (stalls) in Temburong, Tutong, and Bêlait districts; the cancellation of all Ramadhan (Ramadhan stalls) under the provision of the Municipal Department, District Department, and Youth and Sports Department; food outlets such as restaurants, cafes, food courts, and tamu and its equivalent are not permitted to provide dine-in sendees and only permitted to provide takeaway sendees; the temporary closure of all sports complexes and facilities in the country, including private gyms and golf courses; temporar}' closure of schools and higher institutions; and closing borders which affects trade and the tourism industry. In efforts to help local businesses survive the downturn, the government provided an economic stimulus package with measures such as loan payment deferrals, wage subsidies, and social security contributions (Haji Abu Bakar, 2020).

The use of Islamic social finance tools to support MSMEs in Brunei was reflected by the Brunei Islamic Religious Council (MUIB). The MUIB, through their general administration fund, has also given financial assistance to microbusinesses and the self-employed whose income was affected due to the outbreak of COVID-19. A total of BND1.93 million was distributed among 2,154 people identified by the council’s task force. This welfare assistance was also rendered to non-Muslims. The MUIB welfare aid recipients are made up of small business owners, self-employed individuals, and low-income workers officially registered under four ministries - the Ministry’ of Home Affairs, Ministry’ of Primary' Resources and Tourism, Ministry’ of Transport and Info Communications (MTIC), and Ministry’ of Culture, Youth, and Sports (MCYS).

The welfare assistance funds were derived from MUIB’s general administration fund, which collects money from religious services such as halal certification and permit fees; revenue from syariah courts; bank interest; shop rentals; sale and acquisition of government land, and money’ from Baitul Mai as well as unclaimed assets. The bulk of the financial aid was channelled to market vendors registered under the home affairs ministry, with BND1.72 million to be distributed among 1,910 market vendors. A total of BND72,900 was shared between 81 tour guides, while BND104,400 was handed out to 116 taxi drivers, ride-sharing DART drivers, and speedboat drivers registered with MTIC. Forty-seven small business owners received cumulative welfare assistance of BND 42,300 from the MCYS.

In addition, the country' also provided financial relief for businesses considering the effect of the pandemic where people was encouraged to stay' home and only go out if necessary’. As a result, business slowed in tandem with the reduction in the consumption of goods and services in the economy.

12.3 Islamic social finance tools

MSMEs have always been assessed as high-risk entities by' financial institutions, mainly' due to the lack of assets to be collateralized and the lack of business

Unlocking Islamic social finance 187 track records and accounts (Abdul Rahman, 2007; Rahman, 2010). Considering these risks, financial institutions would normally apply stringent credit checks and rules to ensure they are protected or at least able to mitigate the respective risks (Ahmed, 2007). Acknowledging this and the importance of providing inclusive banking to all members of society, the notion of microfinancing was pushed to the mainstream with success stories such as those of the Grameen bank model, village bank model, credit union model, and self-help group model (Mobin & Ahmad 2017).

However conventional, microfinance still does not eliminate the element of interest, which is considered riba (Ahmed, 2007; Haneef et al., 2015; Mobin & Ahmad 2017; Rahman, 2010), where loans are still charged at a high rate of interest making it difficult for those with low incomes, in this case, MSMEs, to repay the loans. From another point of view, these institutions lack financial resources in the first place; extending interest-based loans will definitely increase their financial burden as they not only have to pay the capital but also the interest charged. Supporters of conventional microfinance would argue that the investors and depositors will require certain returns from the use of their funds considering the opportunity and cost of investing their funds in other safer, high-yielding instruments (Ahmed, 2007; Rahman, 2010).

Although these Islamic social financing instruments have been used since the emergence of Islam 1,500 years ago, its modern and contextual application remains to be explored and developed. The beauty of Islam as a way of life proved that these instruments have survived the journey of time and will always be relevant across time and space.

It is in this juncture that Islamic social financing instruments may be viable in providing a source of funding and finance for MSMEs, as the basis of these instruments is benevolent contribution, a one-sided contract without considering returns to the contributors (Ahmed, 2007; Rahman, 2010). The paper further examines three social financial contracts, namely sadaqah, zakat, and waqf in the Islamic sphere, which can conceptually assist MSMEs in obtaining the financial resources they need. This is also extended to the unprecedented environment of the CO VID-19 pandemic, in which regulators, custodians, and the community in Brunei have leveraged these social contracts to sustain the economy at large and assist business entities (including MSMEs) and consumers (especially those with low incomes).

12.3.1 Sadaqah

The first social contract is the contract of sadaqah, which is a donation or voluntary charitable contribution (Zuhayli et al., 2007). The nature of the contract is an onerous one where the contributor or donor gives away his or her assets to a preferred charitable cause without expecting any return. Sadaqah has proven to be a flexible contract where the assets are not restricted to certain recipients or need to be preserved (Zuhayli et al., 2007). Although in its original context, sadaqah is used for benevolent intentions rather than economic benefit or business growth, the COVID-19 pandemic has shown that the contract can be invaluable in the sustainability of MSMEs badly hit by the pandemic. In Brunei itself, although there was no formal lockdown, the notion of social distancing and avoiding crowds has impacted many businesses, especially the service sector. Restaurants, barber, tailors, and to some extent retailers saw fewer customers subscribing to their service. In the midst of the pandemic, most business premises were ordered to close, resulting in them bearing fixed costs such as rent and employee expenses. Businesses, especially MSMEs, must find alternative and innovative business models for their survival. It was observed that MSMEs, especially in the food and beverages industry, started to open up their services to serve those on the frontline by inviting members of the public to contribute sadaqah in the form of food that is then cooked and delivered. This has provided a platform for the public to be involved in charitable causes while at the same time providing for MSMEs through the engagement of their service.

The potential of sadaqah, as a voluntan’ benevolent platform, can be seen in the collection of the Brunei Covid Relief Fund, which has been set up with proper governance and transparency by the government to provide financial assistance to the nation in its endeavour to combat CO VID-19. As of 13 May 2020, the fund has collected BND14,128,776.79 from public contributions.

12.3.2 Zakat

The second social contract is contribution through zakat, or compulsory tithe, chargeable to individuals or corporations that possess the capacity and wealth in accordance with the requirement of zakat( Rahman, 2010). The zakat is to be distributed to the eight groups identified the Quranic verse, At Taubah 9:60. Zakat, unlike sadaqah, is mandatory' in Islam on specific assets owned by' individuals or entities. The eight groups are the needy' (Al-Fuqara), the poor (Al-Masakin), the zakat administrators (Al-Amilin), those whose hearts are keen towards Islam (Al-Muallaf), those in bondage (Ar-Riqab), the debt-ridden (Al-Gharimin), those in the cause of Allah (Fi Sabillilah) and the wayfarer (Ibn-Sabit). Zakat слп be an important component of national and NGO emergency' support programs. Donors typically' require that zakat be disbursed within one year of being given. This focus on an immediate benefit is well suited to crisis response. Zakat donors support both the poor and the economically' insecure, an area of increased need in the pandemic. Zakat donors often give cash transfers, which can be especially' important in emergencies.

Relevant to the extension in the definition of recipients, in Brunei, this is shown through the contribution of capital to those with low incomes to sustain them. The program named ‘Program Pengupayaan Asnaf Zakat’ (PROPAZ) was created to provide capital to MSMEs and provide them with training to ensure they’ will be able to stand on their own. Acknowledging the loss of income, especially’ for MSMEs, zakat disbursement has included entrepreneurs in the service industry' such as taxi drivers, boat operators, small stall market operators, and others identified by' the authorities to receive financial assistance.

Zakat agencies can adopt a structured approach to the United Nations Sustainable Development Goals (SDG) alignment and COVID-19 impact, while banks, investors, and other financers can likewise optimize their SDG impact. However, zakat agencies need to be more proactive in their collection and zakat fund management to properly serve the population. A good point to consider is the situation in Indonesia where the potential of zakat is valued at around 286 trillion rupiah a year, according to the national zakat body BAZNAS. But the actual collection is a far cry, at around only 9.5 trillion rupiah (USDS577.3 million) in 2019 (Winosa, 2020).

12.3.3 Waqf

The third contract is waqf, also known as charitable endowment, which is not compulsory but is highly encouraged in Islam. Brunei, since the discover)' of oil in 1929, has been blessed with abundant natural resources of oil and gas that has enabled the country to finance its public spending, including generous welfare benefits (Horton, 1986). In the provision of such public amenities, the current generation is unaware of the previous benevolent contribution of the older generations who have willingly contributed assets such as land, buildings, and other public assets in the form of waqf. The utilization of waqf as a source of assistance for MSMEs has not been rigorously explored, although, in other countries such as Singapore, Malaysia, and Indonesia, it has been shown to produce competitive business entities that contribute to the economic development of the country. In addition to that, w^fhas also been utilized in providing education to the masses, as seen in the establishment of Al-Azhar University in Egypt (Ahmed, 2007).

Most of the literature on waqf as instruments of microfinance provide cash waqf as the seed fund or initial capital outlay to be paid back to the waqf fund without charging any interest. The fund used for finance may be taken from the contributed fund itself or from the return of investing the capital contributed pursuant to the requirement of preserving the waqf asset. It is interesting to open the idea of microfinancing instruments not restricted to financial assets, which are prone to rent-seeking behaviour (El-Gamal, 2003; 2007), but extended to common assets required by MSMEs. The main burden for any businesses is the initial setup, which includes the procurement of fixed assets directly or indirectly used in the operation of the business. This normally results in sunk costs to the business, which it needs to painstakingly shoulder even before production or selling their goods or services starts. If such a cost is commonly shared or provided by an independent entity that ensures the assets are working efficiently for the users, this will help MSMEs more than financial assistance, which they will have to repay in the future.

During the COVID-19 pandemic, due to the requirements to close premises, most fixed assets were left idle. However, from a financial point of view, this incurs expenses such as rent, depreciation, maintenance, and insurance. These expenses exert financial effects on the accounts of MSMEs even though there is no active production or business activity. Fortunately, big businesses such as restaurants have also been observed willingly loaning their fixed assets for benevolent use, such as a temporary kitchen to provide food for those on the frontlines, vehicles for delivery of goods, hotel rooms for quarantine purposes, and even paying employees their full salaries so they can volunteer on the frontline. If this were translated through the provision of waqf assets in easing MSME operations, such as common machinery', premises, vehicles, it would save them incurring fixed expenses and ensure their sustainability in a time of hardship.

The Islamic social finance instruments have their own unique characteristics enabling them to be used in different circumstances tailored to the respective needs of the recipient. Combining the three in the quest to empower MSMEs would be interesting as there is no one definite solution to assisting MSMEs to promote their growth and sustainability’.

There is much talk about microfinancing, and when people talk about Islamic social finance, it is all about zakat, waqf, and sadaqah. In most of the literature, each of these is studied on its own. The needs of different MSMEs might be different. Some MSMEs may' need financial assistance to pay' rent and wages, and some may need capital in the form of machinery' and equipment for their businesses.

Previous studies have looked at individual contracts. Each contract has its own unique features and serves their purposes. In order to cater to the needs of MSMEs, a combination of contracts is recommended.

12.4 Prospects, issues, and challenges

In 2018, the total collection for zakatfitrah amounted to BND967,188.51, and zakat harta totalled BND16,588,175.08 (Mahmud, 2019). However, the use of zakat funds is limited to eligible recipients only. Therefore, sadaqah can be considered for those who are ineligible to receive zakat funds. This section will discuss the prospect, identifiable issues, and challenges of funding MSMEs through sadaqah, waqf, or zakat.

12.4.1 Sadaqah

Sadaqah is very' flexible in nature. However, careful implementation is required as sadaqah funds will be large as it aims to help MSMEs. Funds from sadaqah can also be channelled to non-Muslim-owned MSMEs as long as their business operations are shariah-compliant. There are two factors that need to be taken into consideration, namely, transparency and custodian. As the pool of funds is from public contributions, reports on its utilization must be as transparent as possible in order to gain public trust. Proper formal and informal reporting could be done through press conferences, websites, or social media on a regular basis. Formal disclosure may' include minimum information such as the sources and utilization of the fund, which can mirror the report of charitable funds for the Islamic financial institutions advocated by the Accounting and Auditing Organization for Islamic Financial

Institutions (AAOIFI). This is important to ensure that the donor is aware of the proper use of the fund, even though in its initial context, the sadaqah contributor may not demand such information. Nevertheless, it is still important that the custodian of this fund is transparent in their operation, taking it as their responsibility to the trustee who is accountable not only to the donor but ultimately to Allah.

While financial reporting, as usual practice, can be done on an annual basis, timely reports are also important as it provides more meaningful information to the donor. The custodian of the fund can either be a person or an entity in a formal or informal capacity, which highlights the flexibility of sadaqah. The COVID-19 situation has inculcated the notion of social distancing and reduced direct human contact, and technology has been leveraged as a mechanism of payment or transfer of funds. Hence, there is an increase in the use of digital platforms such as online payment, mobile payment, and virtual card transfer used by people. On the one hand, this raises the concern of digital security and safety, ensuring the fund for sadaqah is properly transferred for the said purpose and not misused for other activities. On the other hand, a positive side of technology is the easy access and quick processing of the sadaqah, which can provide financial assistance to the respective receiver without delay, as digital transactions are mostly prompt and can be executed at any time.

During this digital era, the use of technology' must be secured, particularly in mobilizing the fund. Every transaction must be properly traced so that the source of the fund is known. In the Brunei context, most of the online transactions for sadaqah are made through online and mobile transfer platforms offered by the Islamic Bank in Brunei. In addition to that, short messaging services (SMS) have also been used as a platform for the public to donate. A major challenge for online transactions however is access to the people, especially those in need and senior citizens. In accessing the digital platform, the public need to be aware of the respective tools needed to access the service, from the availability of access points such as computer terminals and mobile devices, connectivity to the internet, the availability on online access accounts, such as emails, and in some instances security peripherals such as dongles.

On the other side, MSMEs must also be able to access this fund from the trustee. Unlike funding from formal institutions, such as a bank or any other regulatory' authority, sadaqah can be received informally, and its distribution may' not be subject to the strict financial evaluation of the receiver. This is due to the fact that the donor is not required to give back the donation or generate any returns. Once sadaqah is given, the donor expects the fund to be used for the specific purpose, as mentioned earlier, or general utilization such as to assist MSMEs. The restriction would centre on the utilization of the fund for shariah compliance purposes, which means the MSMEs and fund custodian are responsible for following through on this. The custodian as the trustee of the fund would have to evaluate, ensure, and stress to the receiver that the fund has been donated for a certain purpose, or in general that it should be used for shariah-compliant activities. This needs to be reported to the donor in discharging the custodian duty as trustee.

However, MSMEs needs to be transparent and act in a trustworthy capacity ensuring the fund is utilized as directed. Perhaps the major challenge for social finance through sadaqah is its informal and flexible nature, where the element of trust is important. If the process is done in the absence of trust, it will be subject to opportunistic and unethical behaviour, such as fraud. However, to formalize the process of sadaqah would discourage donors as they have to go through tedious processes that are not needed in the first place as their intention is mainly to donate to a cause.

During the COVID-19 crisis in Brunei, sadaqah worked effectively in sustaining and supporting MSMEs, especially those in the food and beverages sector. Faced with the difficulty of losing their sales due to restrictions imposed on businesses, the vendors had to find alternative ways to ensure they sustained their businesses. Opportunities opened up in supporting those on the frontline who were busy caring for patients and those involved in efforts containing the virus and stopping it from spreading in the community. In appreciating their effort and contribution, calls were made to provide those on the frontline with proper food and drinks so that they could concentrate on the tasks they were given. The food and beverage vendors were assigned to achieve this goal by producing food and beverages for those on the frontline; this was wholly funded through the sadaqah of the public. It worked efficiently, sustaining MSMEs while at the same time supporting the greater good of providing food to those on the frontlines.

The application of social media as a platform to match donors with vendors was seen as a tool fostering an environment of trust between the two, where the vendors, in their good faith, provided pictures of the food delivered to those on the frontline as proof. As a result, this attracted more donors to come forward and choose vendors to execute their sadaqah. The anonymity of the donors was also preserved by the vendors, which was much appreciated. This fostered a good relationship between the donor and the vendors, creating another bonus outcome of customer loyalty in the provision of the service. Although there is no formal governance structure to monitor the sadaqah process, it has enabled MSMEs to weather COVID-19 while at the same time gaining customer loyalty, trust, reducing waste, and importantly sustaining their businesses.

12.4.2 Waqf

Islamic Religious Councils Act and Kadis Courts Act, Chapter 77 states that the Islamic Religious Council (MUIB) is responsible for all religious matters in Brunei including zakat, waqf, baitulmal, halal certificate of pilgrimage, and mosque. The MUIB’s role can be split into two categories. Firstly, as the sole trustee of all baitulmal property, all waqfs, all general vows, and all trusts of any kind MUIB can make any charitable trust to support and promote Islam in accordance with Islamic law. Secondly, as a nazir (manager of waqf) and trustee of all mosques in Brunei. In short, the MUIB is the ultimate custodian for waqf and zakat properties in the country.

Although waqf of wealth, which mostly constitutes land and properties, had been traditionally given by the public at large, the upkeep, maintenance, and development of the property is done by the custodian. Hence the scope of waqf application in Brunei is still limited and mainly focuses on mosques, schools, land, and cemeteries. According to a study done by Abu Bakar et al. (2020), the majority of Muslims in Brunei still believe that waqf is only limited to religious activities such as mosques and cemeteries without any element of development and investment of w^fproperty. Currently, there is an agency under the purview of the custodian, an investment body that is responsible for managing part of the properties for the purpose of expanding and developing it for the benefit of Muslims in Brunei. The commercialization or alternative utilization of waqf assets to spur economic activities is yet to be developed.

On the one hand, in any business, the main part of their expenses is in the procurement and maintenance of fixed assets. On the other hand, the procurement of these assets does not guarantee profit to the business entities as these assets are just tools to assist in the production of goods and the provision of services. Either way, businesses will need a large amount of funding in their initial operation to finance these fixed assets, which will eat up their working capital. These assets may be common within the industry, such as specialized machines or tools, or among businesses, such as the need for premises to serve their customers. Ironically, during the COVID-19 pandemic, it was observed that rent was still collected, even in the situation where businesses were mandated to close down their premises. In Brunei itself, the government encouraged property owners to have empathy and reduce or cancel rent during the period as a form of corporate or individual social responsibility as this will help the affected businesses to reduce their costs and ensure their survival in the absence of revenue generation.

Acknowledging this and the notion that we should, as much as possible, reduce rent-seeking behaviour, it would perhaps be appropriate to consider waqf as a mechanism to fund the fixed assets of businesses, especially MSMEs. The provision of waqf buildings for MSMEs to operate without paying rent, but ensuring they maintain the property would greatly reduce their fixed cost. This would greatly help MSMEs by providing financial relief to them as this mechanism would decrease their operational cost. Furthermore, this mechanism would also allow MSMEs to share resources between each other with the spirit of brotherhood where coworking space concepts can be practiced.

Therefore, this could solve the problems of MSMEs unable to pay rent, should there be another pandemic, such as the situation faced during COVID-19, or any other uncertainties that could happen in the future. This would also be appropriate in the provision of online-based businesses where most MSMEs do not have the capacity or capability of developing and maintaining an online platform. Similarly, as observed during the pandemic, the government, and other entities such as the Islamic banks, provided online platforms where MSMEs could market their product while at the same time providing an online payment mechanism. Waqf can be used in the provision of such a platform with the maintenance costs collectively borne by the MSMEs, which will greatly reduce the cost if it was to be taken up by a single business. Such a platform not only reduces the cost for the MSMEs but benefits the consumers in the form of reduced competitive price of goods and services, a win-win situation for all parties. A similar practice has been observed previously in open-source coding, as a platform for professionals to build up their programs or software by collectively contributing to the development of the code, which is also available for others to use. Such activity can be achieved through waqf contribution for the betterment of society at large and, in this context, MSMEs.

Aside from the above, waqf assets could also be used in a commercial setting, which can generate income for the waqf, ensuring its sustainability. If the waqf assets consist of funds, it can be invested in an income-generating investment or financial instruments where the returns can be used by the public or MSMEs. Any proceeds of the waqf properties, for instance, business profit-sharing through the mudarabah concept, should be invested in order to maintain the operation of physical waqf assets such as buildings. The potential of waqf in promoting MSMEs should not be overlooked. PE««/-based business is seen as a form of entrepreneurship that may be regarded as the disposal of wealth by a philanthropist or nazir for the purpose of creating wealth preferably for those in need or those with low incomes (Iman & Mohammad, 2017), which can replace the rentseeking ideology. Hence, the business manager of waqf or nazir must be creative in managing waqf properties.

Although as prescribed by the act, MUIB is the sole custodian for waqf assets, and the authority can set up subsidiaries that can be entrusted with specific development and management of properties or assets benefiting MSMEs and ensuring the assets are productive. These subsidiaries are expected to report on the performance of the respective assets and its development to the authority for proper monitoring. The major challenge for w^/in funding MSMEs in Brunei is the interpretation of waqf assets so that it is not limited to physical properties, land, or buildings but to encompass other assets including software, financial instruments, and others.

12.4.3 Zakat

Zakat is more restricted in terms of its use. Should it be utilized in providing capital to MSMEs, only those who fall under the definition of the ^»«/(beneficiaries of zakat found in the Quran) can benefit from it. Some may claim that this restriction may not be beneficial for MSMEs as it only caters for those with low incomes and those in need. This perception is not accurate as the poor and needy are one group defined as asnaf, there are other categories that can claim from the zakat fund. In addition, it also gives specific outlets for those in dire need, who under normal circumstances would be excluded from formal financial institutions. As such, zakat can cater to them directly without stringent financial assessment prior to the disbursement of funds. This is the beauty of zakat-, in having restrictions on its distribution, it actually caters specifically for those who need funding and will never be granted from other institutions.

Prior to the COVID-19 pandemic, the MUIB has been proactive in providing capital, training, and providing business opportunities for the asnaf to help them be self-sufficient and later become contributors of zakat rather than receivers. Several successful projects were highlighted, such as the duck farm run by a single mother who used to be the receiver of zakat. Her success has turned her life around from being a receiver to being an employer of several workers who assist her in managing the farm. Such projects and awarding of capital however, do not turn all receivers into success stories. For instance, in the research conducted by Bashir et al. (2012), the authorities granted the recipient boats and other tools for fishing intended to sustain their livelihood. Unfortunately, the recipient had a more urgent need to pay off his debt, forcing him to sell the boat and equipment to get cash. There is also a case where the recipients of the tools cannot afford to maintain the assets given, which rendered them unusable.

During the COVID-19 pandemic, the zakat fund was extended to other micro-businesses, self-employed individuals, and other businesses affected by the closure of their business operations due to the pandemic. This mostly includes MSMEs in different lines of business from small traders in the public market to water taxi drivers. This is a fresh outlook from the previous recipients of zakat who are mostly evaluated on their individual capacity and household income rather than the business they operate. Indirectly it shows that although zakat is managed and distributed according to certain restrictions, it is not restrictive in nature but enables a wider inclusion of the asnaf in pursuing economic benefit. Hence the opportunity to fund MSMEs through the zakat fund is there, especially for the asnaf.

The main challenges that can be seen in the utilization of the zakat fund for MSME funding is in the interpretation of asnaf and how the fund can be distributed to the respective MSMEs. Basically, there is no requirement for the capital to be intact, which can be seen in waqf, and there is no condition attached to the disbursement of the fund to control the utilization of the fund for a specific purpose. The asnaf are also not required to provide financial reports or progress on the capital extended, neither on the performance of the MSMEs or whether they are making a profit or loss. It would, however, be unfair if the extension of funding to MSMEs is considered as a one-off, and they are expected to fall out of the categories by receiving financial assistance. Hence, an update of their progress may be needed to ensure that they receive the assistance they need, which may not be wholly financial in nature.

12.4.4 Combination o/sadaqah, waqf, and zakat

The decision to choose which is better depends entirely on the needs of the respective business. For example, for a business in need of financial assistance only, it may opt for either zakat or sadaqah. However, if a business requires a new office, capital and financial assistance may be granted in a combination of waqf and sadaqah or waqf and zakat. It is more a contextual consideration for the MSMEs. As highlighted above, the pre-COVID-19 environment showed the rigid use of these social financial contracts, whereas during the pandemic itself, it has been used dynamically to sustain and assist MSMEs in ensuring their survival. In the long term, it is envisioned that funding MSMEs should not be restricted to one form of social financial contract but can be utilized in combination or in accordance with their needs.

For instance, zakat or sadaqah can be used in the initial setting-up of working capital for MSMEs. But ensuring their funds are not tied down to purchases of fixed assets, waqf can be used to provide the basic infrastructure and tools needed to produce goods and the provision of services. As the business grows, it may need further funding, depending on its needs; working capital, for example, can be raised through sadaqah as a voluntary contribution to assist MSMEs to grow. This may also influence MSMEs to operate differently as a social enterprise rather than a profit-seeking enterprise, which is mostly judged by the generation and growth of their bottom line and balance sheet size. Although this is a conceptual proposition that stems from the observation of the country’s utilization of these social financial contracts during the CO VID-19 period, it does show promise if properly implemented.

In efforts to combine the Islamic social finance contract to help MSMEs, there are several factors that need to be taken into consideration. For example, a combination of sadaqah and w^fin the Brunei context may give rise to operational challenges as these two may be under separate agencies. As mentioned earlier, waqf, under the current law, is solely under the custody of the MUIB, whereas sadaqah may be managed or entrusted to informal trustees whether individuals or entities. Regulating sadaqah may also defeat its purpose as donors mostly expect to retain their anonymity in donating their funds to their preferred cause.

Taking stock of the above, providing needed funding to MSMEs does not hamper efforts or the notion of utilizing social financial contracts in an integrated manner.

12.5 Conclusion and the way forward

The emergence of the pandemic has shown that the modern economic and financial system has its flaws and was unable to protect the local economy from an unprecedented crisis that forced the world to look for alternative financing that could help stimulate the economy by supporting MSMEs. This chapter aims to find ways to support and empower MSMEs during this pandemic, or other uncertainties, through the application of Islamic social finance. With Islamic social finance, profit maximization is not the prime motive. In fact, the contribution is a form of sadaqah jariah (a continuous and ongoing charity) whose benefit continues to flow until the akhirat (Judgement Day), and this more important for the donor and contributor of sadaqah, waqf, or zakat. It is also proposed that a combination of contracts would meet the needs of different MSMEs holistically rather than just focusing on one, and this should be further empirically explored in future studies. In the future, Islamic social finance may also be considered for the different lifecycles or the expansion and development of MSMEs. In addition,

Unlocking Islamic social finance 197 observing the potential of the social finance contract from what has been done during the pandemic, the proposition of this study can also be used as a guide and expanded to prepare for any future uncertainties faced by businesses, which might be in the form of a pandemic, economic crisis, or any other challenges. COVID-19 was unexpected and has affected the global economy. In the crisis, the utilization of the Islamic social financing contract seems to positively contribute to the sustainability and empowerment of MSMEs.


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