Tags: waqf, endowment, islamic, finance, muslim

It's no secret that low-income households, especially in rural communities, face the "triple whammy" of low incomes, irregular and unpredictable incomes, and lack of financial tools that can help them smooth their income and consumption while coping with diverse financial risks. This makes them particularly vulnerable to adverse income shocks. Therefore, they require practical solutions to build their financial resilience.

As a result, low income households employ a wide range of formal and informal financial tools and mechanisms to manage their financial lives. Of these, shopkeeper credit is arguably the most prevalent yet least researched tool, which is very surprising given the critical role it plays in maintaining the resilience of low income households. For example, households may use shopkeeper credit to purchase ingredients for micro businesses that sell street food or even homemade soap, thereby supplementing their irregular agricultural incomes with more regular incomes. Similarly, they may use shopkeeper credit to purchase groceries when funds are low, or to access interest-free cash loans during emergencies.

Shopkeeper credit usually works as an interest-free revolving line of credit, although various variations exist based on the shopkeeper and the credit buyer. It provides convenience for both the buyer and seller if properly managed and utilized, and can help strengthen community solidarity and resilience. Unfortunately, there are several challenges to shopkeeper credit, especially when the buyers' incomes are irregular and unpredictable. Delinquencies and defaults are rarely the result of shopkeepers availing credit to non-creditworthy households, especially in rural communities, since they have a lot of information about the households, and they usually advance credit incrementally, thereby reducing their risk exposure while building a reliable credit history.

The main problem for shopkeepers is usually how to manage cash flows in light of their customers’ irregular and unpredictable incomes. Fortunately, the recent innovation of Community Commitment Pools in Sarafu.Network by the Grassroots Economics team has enabled the design and deployment of the Resilient Community Endowments Model, which is currently being prototyped with the Lola Rako Self Help Group (chama), at Mafisini in Kilifi County.

Above is the Lolarako community who have created the LOLA Voucher to improve the livelihoods in Mafisini village - worth 10ksh of products: coconut oil production, making brooms, coconut products and planting coconut seedlings

The Resilient Community Endowment Model has the following critical components:

1. The Endower: Endowers may be self-help groups (chamas), local shops (dukas), wholesalers or distributors, individual donors, non-governmental organizations, or governmental institutions. They establish endowment funds by committing cash or commodities to the relevant commitment pools.

2. The Channel: Primary channels are chamas and dukas that sell goods or provide interest free cash loans to the credit buyers, who are their members or customers, respectively. Secondary channels are the community commitment pools where the primary channels can swap vouchers for cash or other vouchers.

3. The Credit Buyers: The credit buyers are members of chamas who have been approved by their chama and have demonstrated solidarity with their chama members by actively participating in their local Rotating Labor Associations (ROLAs) using their pre-existing chama vouchers. Alternatively, dukas may decide to onboard their own existing credit customers to facilitate the management of their shop credit disbursements.

4. The Commitment Pool Manager (Curator): The Curator is any individual or entity that is sufficiently qualified to establish a commitment pool and to mobilize endowers, endowments, channels and credit buyers. The Curators’ core responsibility is to ensure the sustainability and growth of the pool in order to maximize the financial resilience of its participants.

This is the step by step outline of how the Model works:

1. The Curator establishes the Commitment Pool: The Curator creates the commitment pool and any in-house vouchers that are necessary for the operation of the pool. These should ideally include a voucher for commodity sales, a voucher for cash loans, and a voucher for the channels, which will be used to access the stable coins (cKES or cUSD) from the pool. Then he recruits endowers and tags their vouchers to the pool, making sure to define the swap ratios and limits for all the participating vouchers.
2. Endowers Establish Endowment Funds: Endowments may be made in cash or kind (in which cash they should be valued in cash). Endowers funds include a 10% administration fee, an 18% risk fund allocation, a 48% commodity credit allocation limit and a 24% interest-free loan allocation limit for the credit buyers. This means that 72% of the founder package is allocated directly to the credit buyers as commodities or cash vouchers. The endowments may be permanent/perpetual, or temporary (for a minimum of one year). In line with ethical and Islamic finance principles, the commodity vouchers generate profit-based returns for the endowers' beneficiaries, while the cash vouchers are interest-free and do not generate any returns.
3. The Curator Facilitates Allocation of Revolving Line of Credit Packages to Credit Buyers: The Curator uses in-house criteria to select credit buyers or allows the endowers to directly select credit buyers creating a common pool resource. He uses membership levels that allow credit buyers to gradually access higher credit limits after demonstrating responsible borrowing behavior and undergoing the experiential financial literacy program. He defines the durations, total limits in KES and USD, duka credit limits in KES and USD, cash loan limits in KES and USD, and the membership level fees for each membership level.
4. Credit Buyers Access Credit Over the Credit Duration: Credit buyers can use the allocated credit during the duration of the membership level. They can draw down the credit limit as needed, and repay the accessed credit in cash. When they pay back any amount of cash to the chama shop or local duka, they receive an equal amount of voucher, which allows them to access the more commodities or cash from the chama shop or duka, similar to how normal credit cards work. While it is understandable that at lower limits the credit buyers will have higher credit utilization rates and probably max out their limits, as the credit limit increases, using the experiential financial literacy training, the Curator should aim to encourage credit buyers to maintain low utilization rates in order to increase their financial resilience by having ready access to credit during emergencies. In addition, the Curator should encourage the individual credit buyers and their chamas to produce marketable commodities that they can trade amongst themselves. The pool manager should aim to develop this productive capacity by supplying endowable skills training and production inputs, and marketing the produced commodities both within and outside the communities. In this way, the resilience of the individual credit buyers, their chamas and dukas will be enhanced by ensuring that the communities can smooth their income and consumption while maintaining access to risk coping revolving lines of credit.
5. Profit is Shared Between Endowers, Channels and the Curator: The difference between the wholesale and retail price is shared using the following formula: 40% Endower, 30% Channel, 20% Self-sustaining fund and 10% the Curator. This formula allows the endower to obtain a return on the endowment's investment, the channel to earn revenues profits to continue supporting the program, the endowment fund to grow, and the Curator to manage the platform and ensure continued sustainability. Note that all the Channels are able to interact and get credit with eachother through the endowment system in a commitment pool (as a common pooled resource of all their guarentees).

Above is the current network of Channels utilizing QARD

Current Uptake The Resilient Community Endowments Model has shown promising results with the recent introduction of the QARD voucher. The total supply of QARD vouchers stands at 20,000, with a volume of 52,920 and an impressive 26,982 increase. There have been 154 transactions to date, indicating growing acceptance and utilization within the community. This uptake demonstrates the system's potential to enhance financial resilience among low-income households by providing accessible credit solutions.

We invite you to support our mission of building financial resilience in low-income communities. By contributing via:

1. Purchasing Guarentees: you can exchange national currency for guarentees like QARD.
2. Fund the Endowment: you can help expand the Resilient Community Endowments by providing essential financial tools and resources to those who need them most. Join us in fostering sustainable economic growth and community solidarity.

To purchase guarentees or fund endowments goto: Resilient Community Waqfs and connect your wallet (such as Valora ) From there you can purchase cUSD and exchange or swap it for other assets or endow it.

For more information on Qard al-Hasan and the Resilient Community Waqfs, Interest-free merchant credit or creating your own Endowments contact:

والسلام عليكم ورحمة الله وبركاته

And peace be upon you, and the mercy of Allah, and His blessings.

AbdulHakim Maina

[email protected]
B8, Kilifi, KEN