In any under-developed country the only successful long term development must come from below. It must start at the grass roots with the smallest unit of society, and must be indigenous, not imposed from the top through a foreign agency. An Egyptian experiment in Islamic banking provides a model of how such a scheme might work. El nagger examines its method of operation and evaluates its contribution to the social and economic development of the community. INTRODUCTION Most Islamic countries are currently engaged in instituting economic and social development programmes. Such development activities require the establishment of dynamic institutions that will lead the drive towards socio-economic change. But institutions alone are not sufficient to achieve the desired objectives. Other vital factors must be taken into account. The quality of leadership is all important, since it is the leaders of any such institution who are responsible for communicating to the people its fundamental role and purpose. If the people are to play their part fully in what must be a truly national development effort, they must be made aware of what it is they will be involved in. Moreover, the development institutions must be closely connected with the social and cultural environment in which they operate. The instrument of change must reflect the needs and aspirations of the people concerned; must be consistent with the beliefs and spiritual values of the society in which it operates. Failure to take this into account will result in the failure of the institution to achieve its objectives. We can summarise the problem of development whether social or economic in the Islamic countries in contrast to Western more developed countries, by the nature and state of capital formation and the process of the continuity and volume of its accumulation. If we analyse the problems facing the desired capital formation process, we shall come up against multiple interacting factors, namely social, economic, psychological, political, etc. This paper illustrates a model of an Islamic bank that could be considered a practical model for assuming the responsibility of effective socio-economic development in Islamic countries by making use of the concept of development from below. As such it is distinct from any other known financial or social institutions. The developing countries of Islam are asked to study and analyse this experimental model with a view to adopting it as part of their own development planning. The experiment was begun in Egypt in 1963 in Mit Ghamr, a city in the Nile Delta. Its purpose was to explore the possibilities of mobilizing local savings and credits as an essential requirement for socio-economic development in the area. The experiment deserves careful attention not only on account of its valuable insights into the field of savings education and local credit, but also for its unique approach to community development. The goal was to begin industrialization of the Egyptian villages without state interference, and this in the land of the oldest agricultural peasantry and the oldest state bureaucracy in the world. The model was designed to pay particular attention to the fundamental attitudes of the villagers towards saving and investment, their need to achieve, their trust - or lack of it - in formal economic institutions, and their skills for collaborative efforts in' establishing small industries for the development of their community. It was with these considerations in view that the bank established the close contacts that led to mutual trust between die villagers and the Bank personnel. CONSIDERATIONS UNDERLYING THE EXPERIMENT: The basis of dynamic economic growth is an increased volume of saving. The essential role of private savings, education in saving, and of credit expansion in the process of socio-economic development is fully recognized. Individual saving is primarily a personal matter and reflects a certain way of life. The promotion of thrift must therefore begin by changing current attitudes. There is considerable evidence from successful economic development models to indicate that the effective contribution of the masses in the development process cannot be overlooked. It need hardly be stressed that the economy of developing countries cannot be strongly and organically built up solely from the top. The integration of the masses in the process of capital formation is therefore essential. It was obvious from the beginning that it would be somewhat impractical to establish savings banks similar to banks prevailing in any other country, owing to wide differences of economic, social and political climate, and to the nature of change in our country in contrast to others. Lack of private initiative, lack of entrepreneurs, ignorance in dealing with financial institutions, deterioration of the capital market, and lack of experience are instances of such factors. To be most effective, development institutions must not be separated from the environment in which they operate. Their leaders should consider the cultural context in which they operate, so that the institutions reflect the people's needs and aspirations, and are consistent with their beliefs and spiritual virtues.
ACCOUNTS OPERATED BY THE BANK To enable the Bank to achieve its principles and objectives, the management of the Bank considered it important to provide the simplest possible facilities in the operation of its dealings with the depositors. Accordingly, they initiated three types of accounts: The Savings and Loan Fund The Investment Fund The Social Service Fund THE SAVINGS AND LOAN FUND The fund guarantees care for the small saver in particular, helping him to accumulate sufficient funds to safeguard his and his family's future. The minimum deposit in this fund is five piasters (5 pence). Such a small deposit ensures that the vast majority of the population have the opportunity to co-operate with the bank and become accustomed to free and regular savings. Freedom of deposit withdrawals at any time is guaranteed in order to provide complete flexibility for savers. No maximum, limit is imposed. Regular savers are entitled to short-term loans to assist them in the exercise of productive activities which would bring prosperity to them and their local districts. These loans are without a fixed rate of interest and are small loans. The Bank stipulates that scientific studies should prove the technical and economic soundness of any project for which a loan is made. The Bank provides the client with all necessary technical consultations free of charge. It co-operates with him in studying the project and its nature in order to safeguard both the Bank and the borrower by ensuring the soundness of the investment of the loan, and the possibility of repaying it easily. As the Bank looks upon the saver as the good citizen who does his best to establish himself and who is therefore the person most entitled to assistance when exposed to sudden or unexpected disaster, it has guaranteed that savers in this fund shall benefit from the resources of the Social Service Fund without any obligations to repay what is necessary, in order to prevent him from falling into the clutches of usurers. THE INVESTMENT FUND This fund accepts the deposits of individuals who wish to increase their savings by capital investment in profitable enterprises. These deposits are channelled either directly to investment projects, or indirectly through entrepreneurs to finance local projects. The yield of these investments is distributed among depositors in this fund in proportion to the amount and duration of their deposits. The Bank aims to encourage the initiation of small projects and local industries so that it may create new spheres of work, and additional sources of income to raise the citizens' standard of living in the local areas;, and widen the local market. Freedom to draw from the sum deposited in this fund is restricted in accordance with the nature of investment operations and liquidity requirements. THE SOCIAL SERVICE FUND : The resources of this fund are amassed from the money provided by Zakat, and the subscriptions of individual and public bodies. They are distributed in the form of financial assistance to savers who are in financial difficulty as a result of sudden misfortune. THE OPERATING PRINCIPLES OF THE BANK The project was based on many principles which were studied, analysed and carefully applied by the Bank. Of these the three most important are: Participation Decentralization Consistency and integrity of the Bank accounts PARTICIPATION Islam has strong opposition to banking systems based on the payment of interest. Its alternative is the system of participation. This means that the bank participates with the borrowers of investment loans in their losses as well as their profits. It could be said that the participation system opens new perspectives for economic thinking on credit and investment policies and activities all over the world. The participation principle enables the Bank to mobilize and motivate the people to borrow money for investment since it is; not opposed by Islam. On the other hand, when the Bank participates with the borrowers in their productive enterprises, it necessitates the mobilization of the Bank's technical expertise in the quest for fields of investment, and rational methods to invest in such fields. As a result the Bank helps to conserve the wealth of the local society which might otherwise be dissipated as a result of lack of experience on the part of the borrowers. DECENTRALIZATION The Bank proved that effective socio-economic development is ;to a great extent dependent on the decentralized management of those institutions which form part of the development plan. This principle constitutes an essential ingredient of success. In clarifying the importance of this principle, certain considerations should be taken into account: Differences in circumstances from lone area to another could lead to differences in behavioural patterns and motivation. In a process such, as saving, the considerations that motivate the people to save in one community might well be inappropriate elsewhere. For this reason decentralization was considered to be important to the project. The stages of thrift education, credit enlightenment and the inculcation of new social values necessitated direct and sympathetic contacts and relationships between the leaders and employees of the Bank and the population of the local areas. It is unlikely that such contacts and relationships would be effective or successful if managed and organised from the centre. Constant follow-up of the invested loans, the guarantee of their re-payment, the effective use of the money and other factors, required decentralized management of the different activities of the Bank. The development of banks of this type constitutes a form of persuasion for the people of these areas to remain in the locality instead of migrating to the capital and to the major cities. This principle helps in achieving a balanced social and economic development for Egyptian communities. This was one of the main objectives in all countries which adopted a local administration system in the attempt to bridge the gap between the capital and the provinces. The disparity in local conditions, local needs, local resources, local problems, local aspirations and hence local priorities, highlights the importance of establishing means to participate in the social and economic development of the local community which are relevant to its particular needs. In consideration of such disparities the Bank adopted decentralization as one of its main principles.
The local areas are rich in unexploited reserves of human energy and the only hope of mobilizing such energy is to have local institutions which, through direct contacts with the locality, can harness this resource.
CONSISTENCY AND INTEGRITY OF THE BANK ACCOUNTS The Bank's operations through its accounts reflects the activities encompassed by its objectives. The Bank endeavours to further the socio-r-economic development of the community in a way which will mobilize its existing resources and lead: it to a more advanced stage of development. That is why the different types of account were designed in a way that was both consistent with, and integrated into, the achievement of this aim. The accounts are diversified to cover a wide spectrum of saving and investment types. The integrity of the Bank accounts guarantees to provide the community with banking services which are not offered by the existing traditional banking system. SOCIAL AND ECONOMIC EVALUATION The results of the experiment were examined by the National Institute for Management Development (NIMD). Of the sample interviewed 64 per cent had a strongly favourable attitude towards saving, and 60 per cent of them favoured the local Savings Bank project. Ninety-nine per cent of the sample indicated that the city of Mit Ghamr had in recent years changed for the better. Asked about the sources which had influenced this change, 87 per cent mentioned the local administration, and 47 per cent considered that the Bank had had an impact in forcing that change in the area. Accordingly, in evaluating the Bank's influence we should note the impact of such banks not only in a traditional economic sense, but also socially. SOCIAL EVALUATION The influence of the Bank in promoting social change is even more significant than its achievements in other areas. It has mobilized the village inhabitants and changed their attitudes from passive fatalism to positive concern for their community. There is no doubt that the formation of capital cannot be considered as the only factor necessary for far-reaching development. It must be accompanied by social change for the masses. Thrift education provides an opportunity to influence the behaviour of individuals relatively quickly and cheaply. This concept provides the individual with many of the positive characteristics and virtues needed for the development of the community. In achieving this, one of its major objectives, the Bank can claim notable success. has prevented the deleterious political and social effects resulting from the migration of villagers to the industrial areas and big cities. The bank has created a healthy atmosphere for interaction between the Egyptian intellectuals and the masses in the furtherance of national development, thus disproving the stated need to import external ideologies. EONOMIC EVALUATION There is no question that by all standard criteria such as increase in average size of deposits, increase in number of banks, increase in bank assets and profits, increase in requests for more banks and other like measures, the project's record looks impressive. In 1967 four more branches and eight new banks were added to the Mit Ghamr Bank, and eight new banks were opened in eight other provinces. Within the three years following the establishment of the first branch, the number of savings banks reached nine, and many local governments were asking for the establishment of such banks in their cities and villages. Handling the increasing number of requests for the establishment of new branches was one of the problems that faced the founders of the Bank. The increased number of requests indicated the strong belief in and appreciation of the Bank project as an effective tool for the socio-economic development of our communities. The Bank has clearly had dramatic success in enlisting savings from a class of very small savers in that section of society not previously touched by other financial institutions. The number of savings depositors in all banks increased from none in 1963 to 357,637 in 1967. Total deposits in all the accounts increased from none in 1963 to £956,538 (Egyptian) in 1967. In spite of tae short period during which the Bank has been in operation, it has rendered vital services to the economic development of the local community, especially in the development and establishment of small industries, and in providing new opportunities of work for unemployed workers in Mit Ghamr and its 53 affiliated villages. A factory for bricks and building materials maintains a leading role in the field of finance investment and saving in the life of the masses.
POTENTIAL PROBLEMS AND THEIR SOLUTION Paradoxically yet not surprisingly, it has been its success, rather than the reverse, which has created problems for the Bank. In each case the management of the Bank was forced to seek solutions to these if its operations were to continue unthreatened. SOCIAL AND COMMERCIAL OPPOSITION In the long run, the spread of Islamic banks represents a major threat to the existence of traditional banking systems. They are introducing a new concept of banking more expressive of Islamic belief and practice, and. firmly rooted in a popular Muslim base. This led to a number of problems to which the Bank was forced to find solutions. Though existing social authorities see the Islamic Bank as an institution conforming to the narrow traditional concept of banking, when the Bank starts to operate and to develop its social role, ':hey see it as interfering in their own area of authority and regard it simply as re-duplicating their own efforts 'Unnecessarily. Should this reaction result in conflict and consequent political intervention, the social: role of the Bank might well be jeopardized by the intervention of Vested interests concerned to control or restrict its operations. By analysing the experience of the Bank: in Egypt, it was evident that a process of change is taking place in many sections of society. In furthering such changes, the functions and role of the Bank could, from a narrow viewpoint, be regarded as conflicting with existing institutions such as the social authorities, the commercial banks and some of the central holding organisations - industrial or commercial - which are mainly under government control. The solution to this problem lay in securing the full understanding and support of the government, and this came through appreciation of the perspectives lying behind the Bank's operations and objectives. Lack of such co-operation would constitute a real hindrance to the Bank's functioning and existence. It was with this consideration in mind that the Bank started its operations by stressing the savings objective. However, as soon as the social role of the Bank began to make itself evident in the successful development of the local area, conflict with the social authorities started. In the meantime, the size of savings and number of savers was increasing rapidly either by the addition of new savers, or by savers who transferred their money from the commercial banks to the Islamic ones. Inevitably this aroused the traditional banks against their new popular-based and progressive competitor. GOVERNMENT IDEOLOGY The management of the Bank must recognize the realities of the context in which they operate. It is pointless to ignore the influence of the prevailing political system. Most of the Islamic countries have been affected by the conflict between differing international ideologies. The ideological changes taking place in most of the Islamic countries reflect deep structural changes in their societies with a tendency toward centralizing power in the hand of government. The impact of the conflict is felt mainly in those countries where the government will not tolerate any autonomous economic or social institutions. Since they have the ultimate power, such governments take over the economic and social institutions and remake them in their own images and ideology. Such action means the politicization of the economic and social processes to the detriment of their functioning. There-is no doubt that the existence of Islamic development banks in such political contexts may suffer considerably. Being an agent of fundamental social and economic change, with Islamic Shari’ah as its base, Islamic banks may arouse political leaders to force their control on the Bank's operations and functions. This could well happen at any Stage of the Bank's development and could cause serious setbacks. That is why the prevailing ideology, the political system, and the attitudes of government leaders deserve more than passing attention by the Bank's leaders if the other banks are to continue to develop and function. It is important that so vital a project avoid any setback which might endanger its existence and progress. CENTRAL COMPREHENSIVE PLANNING Some Islamic countries have adopted central comprehensive planning to guide the different sectors of their country towards the most effective solution to the problem of development. Such planning is imposed from the top by the central authority of the country concerned. The reverse is true for the operation of local Islamic banks in local areas. To satisfy the needs and fulfil the aspirations of the citizen, and to secure a balanced socio-economic change in these areas, the Islamic Bank must interact with the environment around it. Working from the lowest level of the poor citizens, its effects are felt all over the country with the extension of its branches. If in doing this the banks fail to take into account central government planning, they may well fall foul of the central authorities, who will lose no time in opposing them, by placing restrictions and limitations on the scope of their operation and the role they play. It is essential therefore that without compromising their own position, the banks recognize the importance of co-ordination with the central planning authorities on the one hand, and with the; holding industrial commercial organisations and social institutions on the other. LEADERSHIP An important ingredient of the project's success was that the local Islamic Bank was based on intimate contact and mutual trust and confidence between the villagers and the inspired and qualified leaders and personnel of the Bank. The Bank gave the right opportunity to a group of devoted Egyptian, intellectuals to participate effectively in the socio-economic development of local communities in their own country. It was not simply a question of meeting the challenge of establishing the bank and extending it, it was also essential to create the right type of leaders, and to build the resources from which further leaders might come. There is an urgent need for men whose personal qualities reflect the ideals of the Islamic Bank; men who are self-aware, sensitive to social conditions, flexible in practice and yet of the highest moral integrity. The development process must be led by individuals who are themselves inspired by the ideals of the Islamic Bank; only they can inspire others. Only they by their continuing action and vision, can further the long term development of the Bank's work. It is these qualities that must be inculcated and fostered by any programme to train future leaders. In a community development organisation such as the Islamic Bank the main task will be to attract individuals already committed to public service, and then training and retraining them in an atmosphere from which they themselves derive the satisfaction of inspiring others. Skilfully designed recruitment policies aimed at securing candidates with maximum qualifications should be instituted, and training officers should be selected from among those who possess, in addition to: technical competence, a capacity to inspire the trainees. Leaders should also be good Muslims. Developing leaders with the right qualities is not an easy task, but if the Islamic Banks are to continue to expand along the lines which have to date proved so successful, they must secure the right leadership. Only this will guarantee their continuing expansion. And only then can. they effectively further their valuable contribution to the social and economic development of the community.
|
