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Alternative Way To Reducing Poverty and Inequality in Nigeria From Islamic Perspective
Alternative Way To Reducing Poverty and Inequality in Nigeria From Islamic Perspective
Authors: Ibraheem Alani Abdul Kareem is a PhD student of Islamic Finance and
Banking, Faculty of Business and Management. Corresponding author:
ibraheemalani1@yahoo.com
Mohd Sadad bin Mahmud PhD, Senior lecturer in Faculty of Business and Management.
Ahmad Shukri Yazid PhD, Senior lecturer in Faculty of Business and Management, all are
affiliated with Universiti Sultan Zainal Abidin (UNISZA), 23100, Gong Badak,
Terengganu, Malaysia.
AbdulFattah Abdul Ganiyy PhD, Department of Accountancy, Federal Polytechnic, Kaura
Namoda, Zamfara State, Nigeria.
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1. Introduction
Throughout the world, poverty and inequality have been on the increase in relative
terms in the last few years. Poverty is a key limitation of economic improvement and the
shortage of economic opportunity is seen to increase the indigence level of a household
and individual. This lack of opportunities has increased inequality. Experts have explored
that to solve the problems of poverty and inequality, there is need for suitable strategies
that ensure the poor population can benefit from them (Ogbeide, & Agu, 2015). Around
1.4 billion of the world’s population have less than UDS 1 per day. From a broader point
of view, approximately 1.75 billion people in the 104 nations covered by UNDP (United
Nations Development Programs) MPI (Multidimension Poverty List) representing 1/3 of
their population live in multidimension poverty which demonstrate critical lack in
education, health and standard of living (World Bank, 2017). Poverty contains
deprivation in nutrition, education, security, health, dignity and empowerment.
As per World Bank (WB) research, a one percent decrease in developing nations’
development rates traps an addition twenty million people in poverty. It follows that
when economic development slows down it may cause adverse implications on poverty
level (Hasan, Magsombol & Cain, 2009; Ibrahim, 2010). During the previous 70 years
ago, Bilateral Donor and United Nations (BDUN) and the Multilateral Development
Banks (MDB) agencies have poured in billions of dollars to encourage growth in
developing nations. World Bank (WB) alone had distributed more than USD500 billion
to fund projects in developing nations. These struggles have no doubt produced
substantial outcome in terms of expanding access to health services, education, building
infrastructures, building capacities and enhancing access to sanitations, electricity and
water. However, the results of this “development” have barely filtered down to the poor
as the increment in world income was accompanied by steady rising of world inequalities
(Bashir, 2018).
In Nigeria, this circumstance is contradictory given the enormous resources
(physical and human) that the Nigeria is blessed with. The country has rising rate of
poverty both at federal and state level, high rate of income inequality, unemployment,
migration out of the country, low quality human capital and high rate of population
(World Bank, 2016). For more than fifty eight years of political freedom, country has
been affected with abject poverty amidst abundant manpower and natural resources.
Poverty has manifested itself in poor health, communication, environmental,
transportation, education, and other economic, and social facilities to handle issues of
inequality and poverty in the country (Olayiwola, 2015).
Nigeria has the biggest economy in Africa, however there are three in every five
Nigerians living in poverty. The inequality has reached such extraordinary levels that the
country’s five richest men -worth USD29.9 billion- might lift eight six Nigerians people
out of poverty per year. Report on poverty still suggest that the country has the poorest
people worldwide by 2018 (Stears Business, 2017). Also, Nigerian governments have
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been implementing many programs and policies particularly in the area of poverty
alleviation, but the outcome is still poor due to inconsistency in government policy.
Policies and strategies on poverty alleviation have been executed and formulated by
various governments at all levels over the years but with little or no fruitful solution
(Olayiwola, 2015). For instance, after 1960 independence, poverty eradication effort in
Nigeria was centred on education. Similarly, Operation Feed the Nation (OFN), Green
Revolution, War Against Indiscipline (WAI), Community Banks, Directorate of Food,
Roads and Rural Infrastructure (DFFRI), Family Economic Advancement Program
(FEAP), Family Support Program (FSPL) and National Poverty Alleviation and
Eradication Program (NAPEP) existed during the period to make reference to a few
(Dauda, 2017). Development of human capital (DHC) is significant to any effort to
alleviate poverty in the country but the data indicates it is an area where succeeding
governments have not done well. The number of Nigerians living in extreme poverty rose
by 35 million between1990 to 2013 alone.
In order to address this anomaly, the government under President Muhammed
Buhari launched social intercession programs, including money transfer to the poorest
people. This is an offer to tackle the extreme poverty problem in the country. The
government’s effort at reducing poverty is not yet yielding result. The country is set to
turn into the world third biggest poverty center by 2050. Also, Nigeria is home of the
highest numbers of children out of school (Kazeem, 2018). According to OXFAM (2018)
many countries worldwide have taken strong steps to reduce inequality but it is very sad
Nigeria has done very little in this regard. Nigeria still has the largest population of
extreme poverty.
Report says Nigeria ranks 157 in term of social spending, 104 in taxation policies
and Nigeria scores 133 on labour rights. This is shamefully low. The social spending
(education, health and social protection) ranks index reflect extremely poor social results
for the citizens. More than 10 million kids in the country do not go to school and 60% of
these kids are girls (UNICEF, 2017). Under 1% of these poorest girls complete secondary
school education, compared with 27% for boys. Similarly, one in 10 children dies before
reaching their fifth birthday (OXFAM, 2018). The condition of poverty is also terrible at
global level. It was reported that some 57million children were out of school, hence
Ahmad and Hassan (2015) posit that half of this number was in SSA. Nigeria as the
largest nation in Africa which makes it have the highest figure of these out of school
children. Poverty will occur when household income is far below its expected
expenditure. Therefore, as many projects have been abandoned across the country and
these are the projects that should provide work for many families to send their children to
school. Furthermore, Oladejo and Bolukale (2014) postulated that, poverty in Nigeria is
high because of unemployment or low income that cover only a fraction of the cost of
living. Those that propose to start business can not because of dearth of capital and those
that want to borrow money from the banks can not because of lack of collateral. Going to
microfinance banks for loan have caused a lot of problems because of their payment
terms and conditions.
According to American Economic Development Council (AEDC,1984) “Economic
development is the process of creating wealth through the mobilization of human and
financial capital, physical and natural resources to generate marketable goods and
services”. Also, “The large number of economic ills, including poverty, social and
economic injustice, inequalities of income and wealth, economic instability and inflation
of monetary assets are all in conflict with the value system of Islam” (El-Ghattis, 2011).
Therefore, this study presents Islam as offering a rich set of instruments to reduce
poverty and inequality. Nigeria is overwhelmed by huge poverty and inequality in
distribution of wealth. The approach adopted by Islam includes Waqf, Sadaqat, Qard Al-
Hassan and Zakat. It also include profit and loss sharing financing instrument such as
Mudarabah, Musharakah, Ijarah, Murabaha, Sukuk to target the poor people in society.
These offer a comprehensive approach to reducing poverty and inequality among the
under privileged.
2. Methodology
To accomplish the objective of this study, the following methods based on survey
of the previous study, content analysis, data collection from numerous secondary sources
such as journal, newspaper, textbook and internet sources were used.
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3. Literature
3.1 Islamic perspective to reduce poverty and inequality
Poverty and inequality can be reduced by using Islamic profit and loss sharing
financing instrument such as Mudarabah, Musharakah, Ijarah, Murabaha, Sukuk etc. and
distributive approach such as Waqf, Sadaqat, Qard Al-Hassan and Zakat to complement
risk sharing instrument. The target is the poor people in society (Shaikh, & Mohanty,
2017). According to Muazir and Musari (2016) Islamic financial system is a new
approach in which the responsibility is to carry out the distributive justice through
distribution of wealth. This would lead to poverty alleviation and reduce problem of
inequality in society. Ackerman and Frank (1998) urged that, welfare inequality must be
addressed by the circulation of wealth. Furthermore, the primary objective of Islamic
finance is to accomplish a moral economic system which should have lasting effect on
wealth while unemployment, inequality and poverty are reduced (Oshodi, 2012). More
so, Musari (2016) claim that the minimization of distributive inequality can be
accomplished by educational system and guarantee to get same opportunity among
citizens. Waqf, sadaqat and zakat can be utilized to provide microfinancing for the poor
in the society. Hassan (2010) affirms that Islamic financial institutions can solve problem
of poverty and inequality in the society through zakat and waqf. Since Islamic financing
promotes equity, social justice and prohibits interest, it will probably yield better benefit
if they are appropriately structured.
2.1.1 Mudarabah:
This is a form of Islamic equity-based partnership contract known as profit and loss
sharing contract. The equity partnership financing includes mutual sharing of loss and
profits among the partners, depending on the performance of the project. In the case of
mudarabah the contract involves capital provider who provides financial capital and an
entrepreneur. The profit from investment will be shared according to a predetermined
ratio such as 30/70 or 40/60 by the parties. In the event investment fails, all loses would
be borne by capital provider while entrepreneur would lose his effort and time (BNM,
2015; Sapuan, 2016). This agreement of mudarabah occurs between two parties. One of
the two parties will provide the capital (rabul mal), while the other entrepreneur
(mudarib) works with the condition that, the benefit ought to be shared between the two
parties based on a predetermined ratio (Sapuan, 2016). The parties involved in this
contract would share profit among them. However, the loss would be borne by the capital
provider unless it occurs due to negligence, miscount or breach of contract terms and
conditions by the entrepreneur. Bacha (1997) stated that mudarabah has lower expected
returns and higher risks. This inequality in the distribution of return and risk has caused
full-fledged and window Islamic banks to reduce the use of mudarabah financing in their
ventures.
2.1.2 Musharakah:
Musharakah is a partnership contract between at least two people in an investment
structure where profit and loss would be shared among the parties. The capital
contributed can be same or different. Profit would be shared based on the pre-agreed ratio
78 Journal of Islamic Banking and Finance April – June 2020
which must be agreed upon at the beginning. In the event of loss, it would be shared
based on the capital ratio not based of profit sharing ratio. All partners can participate in
the musharakah partnership management whereby everybody is responsible to the
business or by appointing one of them as agent (Mia, Hasnat & Mahjabeen, 2016).
Musharakah inspires partnership. Moreover, it creates jobs for many people in the
society, promotes enterprise and partnership businesses, creating employment in the
nation, promotes business venture culture in the public and develops people talents.
Musharakah partnership has a powerful impact on controlling inflation and spread of
baseless credit, encourages joint projects without powerful investigations and research
guarantees business successes not speculations (El-Ghattis, 2011).
2.1.3 Ijarah:
Ijarah (leasing) is one of the contracts in Islamic financing that is used by Islamic
banks, whereby assets are purchased by the banks. Consequently, the bank makes it
available to customers as rent at a price agreed by both parties together with profit for a
specific period (Shinkafi & Ali, 2018). According to Sa’ad, (2019), ijarah involving the
rights over the utilization of asset under which the financial institution buys the asset
from the market then leases it to the customer over a fixed period in return for pre-agreed
monthly payment. Also, the arrangement can be made for the customer to repurchase the
asset at the end of the contract. This can happen in house rent to assist many who do not
have a house to live in or do not have ability to buy a house. It can also be used to rent a
car. This would assist many drivers who do not have ability to buy vehicle from their
daily commercial business. The standard requires Shariah compliant leasable and
tangible asset, such as machines and property. In project financing, ijarah is among the
most commonly used principles because of its mechanism that is deployable for project
financing structure. Ijarah is selling the benefit to exchange the usufruct of a specific
property to someone in exchange for a wage or fixed price from the lessee. The standard
of the contract of ijarah is similar to the principles of sales because the two contracts
include the transfer of properties to another (Lahsasna, Hassan & Ahmad, 2018).
According to El-Ghattis (2011) leasing contract has no immediate impact on
poverty alleviation and has little on unemployment reduction. However, it has enormous
potential for protecting against inflationary damages to middle class people and
businesspersons by permitting the utilization of assets without unexpected cash outflows.
It empowers them to modify or replace even after certain years or months their machinery
or equipment without much cash flow. Ijarah like normal lease, sometimes can lead to
inflation by itself if the economy is working at full employment level. This will then
enhance request of goods which would further raise prices in the market.
2.1.3 Murabaha:
The Accounting and Auditing Organisation for Islamic Financial Institutions
(AAOIFI) stated that “Murabaha is selling a commodity as per the purchasing price with
a defined and agreed profit mark-up. This mark-up may be a percentage of the selling
price or a lump sum. This transaction may be concluded either without a prior promise to
buy, in which case it is called an ordinary Murabaha, or with a prior promise to buy
submitted by a person interested in acquiring goods through the institution, in which case
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2.1.4 Sukuk:
Sukuk is one of the fast growing products in Islamic finance industry. It has
achieved a compound yearly growth rate of 5.8% for the period of 2012 to 2016. Sukuk
represented 19.5% of worldwide Islamic finance assets in 2017 (IFSB, 2018). Sukuk have
played important role in infrastructure development for the public and private sectors
(IIFM, 2018). It is estimated that USD73.1 billion worth of infrastructure sukuk was
issued by more than ten countries between the second and last quarter of 2015. Bond in
conventional market is debt based. This is different from sukuk which is based on
partnership contract (mudarabah and musharakah). The risk sharing feature among
investors in these instruments can possibly upgrade the stability of the financial markets.
Also, sukuk could encourage environmentally friendly activities and enhance livelihoods.
It also helps Islamic finance to accomplish its ethical objectives (Asutay, Mohieldin &
80 Journal of Islamic Banking and Finance April – June 2020
Nwokike, 2018). According to Bin Syed Azman and Ali (2016) sukuk are financial
models that can be utilized to help reduce the society’s problem of poverty and helps to
provide economic security for the country. Muazir and Musari (2016) postulated that
lesson from Indonesia demonstrates that sukuk can be used as financing instrument to
fund the farmers and at same time do profit and loss sharing investment. Sukuk has been
practised in Indonesia as alternative financing for working capital of the farmers. This
demonstrates that sukuk has capacity to be an instrument for managing the lack of access
to liquidity. According to Soeleman and Lestari (2014) sukuk is one of the current
instruments to fairly treat the people in which profit and loss would be shared in
accordance with a pre-decided ratio among the investors.
Using sukuk as a means to poverty reduction and inequality in Nigeria would help people
in rural area to touch their live and it would leave them out of extreme poverty and would
reduce level of inequality in the country (Oshodi, 2012; Dusuki, 2010).
Practical Implication
Profit and Loss Sharing (PLS) which comprises of Musharakah and Mudarabah
are powerful instruments that can promote entrepreneurship and thus enhance economic
development (Sadeq, 1997). Government can encourage Public Private Partnership (PPP)
by using Musharakah financing. Sukuk can also be used to generate and distribute
electricity which the government has not been able do in spite of huge resources sunk
into it. Sukuk can also be used to finance Mass Housing Scheme.
Agriculture remains the mainstay of the Nigerian population. Government at all
levels can encourage farmers by engaging them in Salam mode of financing. The
government can provide seeds, fertilizer and other planting tools. The farmers pay back
with their farming products. Apart from improving productivity, this will also assure
them ready market for their products at reasonable prices.
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