Financial Exclusion and Saving Motives in Brunei:A Need to Re-Define Zakat & Awqaf Institutions

Ak Md Hasnol Alwee Pg Md SallehUniversiti Brunei Darussalam

9th International Conference on Islamic Economics and Finance9-10 September 2013

Introduction• Past: Zakat & awqaf had played significant roles in Islamic

societies.

• Present: Personal financial world is changing… – …with contemporary issues such as financial exclusion, – …and the importance of savings.

• Contention: A need to refine zakat & awqaf approaches in Brunei in line with contemporary, personal financial issues.

Today…• Research: Looks at financial exclusion issues and

saving motives of welfare recipients in Brunei, to ascertain how best zakat and awqaf institutions can facilitate financial inclusion and their saving needs.

– Structured interview: 431 respondents; 215 welfare recipients (net deficit households) and 216 non-welfare recipients (net surplus households).

– Semi-structured interview: 39 welfare recipients (net deficit).

FINANCIAL EXCLUSION

Financial Exclusion: Analysis on structured interviews

• To gauge financial exclusion, 16 financial products were presented to respondents, which fall under the category of:– Bank accounts– Credit facilities– Insurance/takaful products – Investment products

• Two questions related to financial exclusion were posed:– Have you ever applied for any of these financial products/services, but were not successful

in your application?– Have you ever considered applying for any of these financial products/services but

decided not to, due to the high costs or difficulty in meeting the bank’s requirements?

• Pearson’s chi-square test.

Financial Exclusion (FE): Percent of Households with FE, vis-à-vis Net Surplus/Deficit Categorisation

• Bank accounts & credit facilities: Net deficit households are more likely to be financially excluded, compared to net surplus households.

Financial Exclusion (FE): Percent of Households with FE, vis-à-vis Net Surplus/Deficit Categorisation

• Investment products: Net surplus more likely to be excluded.– Intriguing: More intuitive for net deficit households to be excluded. – Why? May be due to the pressing needs of net deficit households.

• W/ the need to have bank accounts & credit facilities to stabilize their personal finances, investment products are the least of their priorities or ‘financial needs’ = Less likely to report they face difficulties accessing investment products.

Financial Exclusion: Semi-structured interviews

• Main theme - financial exclusion on bank accounts: Affordability. • Main subtheme: Opening a bank account to receive zakat disbursements.

– To receive zakat disbursements, recipients need to open at least a basic bank account with an Islamic bank, which generally requires a minimum opening deposit of BND50.

SAVING MOTIVES

Saving Motives• ‘What are your household’s most important reasons for saving?’

• If they provided more than 1 saving motive, their top three reasons for saving were also identified, coded and grouped into several categories:– Saving for daily/living expenses– Saving for emergency/risk mitigation– Saving for purchase of goods/services– Saving for purchase of assets– Saving for children/grandchildren’s education– Saving for retirement– Saving for charity/religious donation

Pre-Coding: Weighted Scores of Ranked Saving Motives

< Highlights importance of saving for emergencies and children’s/grandchildren’s education for both groups of respondents, though the emphasis on saving for children/grandchildren’s education is distinctly higher for net deficit respondents.

Saving Motives (SM): Percent of Households with Ranked SM, vis-à-vis Net Surplus/Deficit Categorisation

< Net surplus households are more likely to save for retirement, emergencies and purchase of assets…

< …while net deficit households are more likely to report saving for purchase of goods/services, saving for their children/grandchildren’s education and daily expenses.

Implications of Findings: Role of zakat & awqaf institutions on financial inclusion and

savingsNote: Only 2 main implications are presented

(See paper for full discussion)

(1) Facilitate creation of bank accounts & credit facilities

• Understanding financial needs of net deficit households are important, to effectively improve their financial situation.

• When financial exclusion is taken as a proxy of financial needs, there are 2 types of financial products, from which net deficit households are more likely to be excluded: bank accounts and credit facilities.

• Another proxy of financial need is saving motives. Here, two analyses related to saving motives are highlighted:i. The pre-coded results showed that for

net deficit households, the top 3 reasons for saving are to deal with:1. Children’s/grandchildren’s education2. Emergencies/unexpected needs 3. Ordinary living expenses/bills

ii. When the saving motives were re-coded, 3 categories where net deficit respondents are more likely to save, compared to net surplus respondents are:- Saving for children’s/grandchildren’s education- Saving for purchase of goods and service- Saving for daily/living expensesFrom the two analyses, there are two

saving motives that appear in both analysis: Saving for children or grandchildren’s education, and Saving for daily/living expenses.

(1) Facilitate creation of bank accounts & credit facilities

• Taking both proxies of financial needs = One may contend zakat and awqaf institutions can assist welfare recipients to fulfil their needs, by the provision of bank accounts and credit facilities that assist to meet living expenses and children’s/grandchildren’s education needs.

• In other words, zakat/awqaf institutions should consider facilitating the creation of the following:1. Bank accounts, for the purpose of saving for daily/living expenses.2. Bank accounts, for the purpose of saving for children’s/grandchildren’s education.3. Credit facilities, which assist consumers to meet their daily/living expenses.4. Credit facilities, which assist consumers to meet their children’s/grandchildren’s

education costs.

• Aside from the above, two additional types of product are:5. Bank accounts, for the purpose of saving for emergencies.6. Credit facilities, which assist consumers to meet their emergency needs.

These latter two types should be included, as the earlier pre-coded showed that saving for emergencies is ranked as the second most important reason for saving, by net deficit respondents.

(2) Need for ‘Financial Inclusion Compliance Test’ • Analysis on financial exclusion of bank accounts = Described a situation where zakat recipients

are required to open a bank a/c with an Islamic bank before receiving zakat disbursements.

• And this posed a problem for some respondents who did not possess an existing Islamic bank a/c or had insufficient funds available to open the a/c.

• This instance highlights the need for zakat/awqaf institutions to establish a ‘financial inclusion compliance test’ when designing financial solutions or products for welfare recipients.

• ‘Financial inclusion compliance test’: A holistic review of the process, whereby during the product design stage or creation of welfare-related solutions, aspects that may contribute to exclusion are mitigated.

Conclusion

• Financial situations and challenges changes from era to era, and there is a need for welfare institutions to continuously adapt and innovate their approaches.

• This paper attempts to provide one particular

approach, that is through understanding the contemporary financial needs of welfare recipients.– Other aspects/approaches to consider: Inclusive Islamic

financial planning, financial literacy etc.