Endowments, Islamic Finance and Stable Coins
Multilateral Obligation Set-off for Healthy Communities
I was inspired last week after a visit to Doctor AbdulHakim Maina Ph.D. (on the left) along with the Grassroots Economics’ CTO Mohammed Sohail (Middle) and Lukas Bucher (taking the photo) who is working on economic modeling.
AbdulHakim explained to us that an Islamic endowment (aka Wafq) can be a seed of money or valuable assets that are meant to help a community and be maintained over time. AbdulHakim has been using Commitment Pooling Protocol on Sarafu.Network to build his Resilient Community Waqfs I had to understand more. After giving us tea and the proper attire to attend prayers at his Mosque he explained his system as follows.
Here how it works: An endowment of national currency in the form of a stable coin assets (like cUSD) is placed (endowed) in the pool (a blockchain based AMM) and AbdulHakim extends access to the endowment to trusted shop keepers via zero interest loans. The shop keepers can exchange their own vouchers (ERC20 tokens on Celo Blockchain) to pull out funds in the endowment with a commitment to buy back their vouchers (fulfill their commitments) over a time period.
AbdulHakim explained that he believes in patient capital where the borrower can pass their time limit without harassment – while also encouraging repayment by awarding them a higher credit limit in the pool and a boost to their reputation.
These shop keepers (who are the main community lenders in Kenya) then use the funds to stock their shops and give out the same kind of loans to their clients (cascading pools). This means people have resources when they need them – and solves a serious problem in cash starved communities through consumption smoothing.
A Wafq or seed endowment is meant to be reciprocal instrument and help the community. The Wafq together with zero interest lending seems like an Islamic formalization of ancient reciprocal practices like the Mweria tradition of the Mijikenda. Simply put, a community can use the endowment for their collective good and must replenish what they use to maintain it over time - very much like how someone reviving communal support in a Mweria must return that support to others over time.
In learning more about Islamic finance, endowments and zero interest loans, I see this as a way we can utilize scarce but needed national currencies in a way that is more sustainable while also building the resilience of rural, urban and refugee communities. This resilience building aspect - may be the most important part of the commitment pooling structure since, once created with an endowment and the community is using it for zero interest lending, they also have the ability to exchange directly among themselves.
i.e. If Katana’s Shop has credit in a pool and Amina’s Shop has debt in the same pool. Katana can use his credits directly with Amina (exchanging his credit for her debt) and purchase goods with Amina – completely bypassing the need for national currency. i.e. Amina can pay back her debt by simply selling to Katana in exchange for his credit in the pool.
In this way the value of the endowment doesn't diminish (since something must come in, as something goes out) and continues to help the community. This creates a dynamic equilibrium where the tension between credit and debts enables those community members with credit in the pool to clear each other's debts (Obligation Clearing or Offsetting - See the great work of Mutual Credit Services for more on how this is being done in UK).
With an endowment we are creating a clear expecting that the total value of the pool must be maintained over time and supporting a community of service providers - instead of treating seeded funds into a pool as a gift or donation. This expectation sends a clear signal toward sustainability that is simply not there in many charitable models. (Check out this article on Seeding)
To summarize:
Endowment: Seeding money or assets into a common pool – that must maintain their value and support a community.
Zero Interest Lending as Reciprocal Drawing Rights: Allow usage of the endowment by accepting an equal amount of the borrowers commitments (vouchers).
Incentives for repayment: Increase credit levels based on repayment.
Maintenance: Grow and maintain the endowment by charging fees on exchanges.
Note that on Sarafu.Network you can start your own endowment as a Commitment Pool (I’ll post some video tutorials shortly). For more information please read AbdulHakim’s article on https://grassecon.org/wafq
This is great, Will. We have long seen mutual credit approaches - however structured and labeled - pooling credit or commitments is perhaps a better labelling as it gives clues as to the active process, while mutual credit is a static noun - as being probably halal in Islamic terms, and have had a few preliminary conversations which have encouraged us.
So this is good to read.