Ak Md Hasnol Alwee Pg Md Salleh Universiti Brunei Darussalam

1. Financial Exclusion and Saving Motives in Brunei:A Need to Re-Define Zakat & Awqaf Institutions AkMd Hasnol Alwee Pg Md Salleh Universiti Brunei Darussalam 9th International Conference on Islamic Economics and Finance 9-10 September 2013

2. 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. Introduction

3. 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). Today…

4. FINANCIAL EXCLUSION

5. 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: Analysis on structured interviews

6. 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

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

8. Main theme -financial exclusion on bank accounts: Affordability. • Main subtheme: Opening a bank account to receive zakat disbursements. • To receive zakatdisbursements, recipients need to open at least a basic bank account with an Islamic bank, which generally requires a minimum opening deposit of BND50. Financial Exclusion: Semi-structured interviews

9. SAVING MOTIVES

10. ‘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 Saving Motives

11. < 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. Pre-Coding: Weighted Scores of Ranked Saving Motives

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

13. Implications of Findings: Role of zakat & awqaf institutions on financial inclusion and savingsNote: Only 2 main implications are presented (See paper for full discussion)

14. 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: • 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 expenses • 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 education • 2. Emergencies/unexpected needs • 3. Ordinary living expenses/bills (1) Facilitate creation of bank accounts & credit facilities From 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.

15. Taking both proxies of financial needs= One may contend zakatand 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: • Bank accounts, for the purpose of saving for daily/living expenses. • Bank accounts, for the purpose of saving for children’s/grandchildren’s education. • Credit facilities, which assist consumers to meet their daily/living expenses. • Credit facilities, which assist consumers to meet their children’s/grandchildren’s education costs. • Aside from the above, two additional types of product are: • Bank accounts, for the purpose of saving for emergencies. • 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. (1) Facilitate creation of bank accounts & credit facilities

16. 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. (2) Need for ‘Financial Inclusion Compliance Test’

17. 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. Conclusion