Islamic social finance could help deliver United Nations sustainable development goals

Potentially $1 trillion can be collected in zakat annually, boosting efforts to achieve better living conditions and alleviate poverty.

There is a growing global movement to align Islamic social finance with the United Nations’ Sustainable Development Goals (SDGs) designed to address global environmental, social and economic challenges by 2030.

These include combating poverty, inequality, climate change and environmental degradation and ensuring social justice. Islamic social finance has various tools coinciding with the 17 SDGs including zakat (obligatory almsgiving), waqf (endowments), sadaqa (voluntary charity) and qard hasan (interest-free loans).

Since 2016 the UN has explored ways to harness the power of Islamic faith-based finance to implement its projects and align funding flows with the SDGs. Many UN agencies are currently exploring new Islamic finance partnerships and tools, such as the UN High Commissioner for Refugees (UNHCR’s) Refugee Zakat Fund platform, UN Children’s Fund (UNICEF) and a UN Relief and Works Agency for Palestine Refugees in the Near East-Organisation of Islamic Cooperation (UNRWA-OIC) Waqf Fund.

Furthermore, the UN Development Programme (UNDP) is leveraging Indonesian zakat funds for broader development projects linked to carbon emission reductions, equality and fairness. Equally, in cooperation with the UNDP, the Islamic Development Bank’s Global Muslim Philanthropy Fund for Children (GMPFC) provides humanitarian aid and funding for developmental projects, such as education and health services.

Zakat is the key element of Islamic social finance to tap given it is obligatory almsgiving, whereby all Muslims must make an annual payment equal to 2.5% of their income and possessions to assist the poor.

Currently there is a significant financing gap for achieving the SDGs, equalling at least $2.5 trillion annually, said UNDP Islamic finance specialist Greget Kalla Buana, adding that if mobilised efficiently, zakat has a huge potential to help the world’s poor.

“In essence this is the largest wealth redistribution mechanism in existence,” he said.

With the world’s Muslim population nudging 1.9 billion, the World Bank and the Islamic Development Bank Group estimate the annual zakat value at $1 trillion.

Based in Jakarta, Indonesia, Buana is working on zakat-funded SDG-related projects that shift zakat disbursement from a consumption to a productive model and expand the rights of zakat recipients by stimulating the creation of business and industry. One example was the 2017 partnership between the UNDP and Indonesia’s national zakat agency BAZNAS that installed micro-hydropower plants in Jambi province, Sumatra, introducing lower-cost and CO2 emissions electricity to more than 4,000 people and over 800 households.

“As of today, five installations have been in operation and the community is now enjoying wider access to electricity, be it for schools, healthcare, business enterprises, tourism and so forth,” he said.

The local government has also paid more attention to the village receiving this power, financing the development of a 700 metre-long village road, thus highlighting the project’s multiplier effect.

Although the SDGs have not been developed on a religious basis, many of the goals are aligned with the spirit of Islamic law, said Omar Shaikh, director of the Islamic Finance Council UK (UKIFC), a specialist not-for-profit advisory and development body focused on promoting and enhancing the global Islamic and ethical finance industry.

“If you take the seven categories of zakat beneficiaries, explicitly written in the scripture and primarily focused on helping the poorest of the poor – including travellers, refugees and migrants – and look at the 17 SDGs, you can see they clearly fit the SDG framework and are workable within Islamic spirits of the law and Islamic principles of the Maqaasid As-Sharia (Sharia objectives),” he told Salaam Gateway.

According to the UNDP report Unlocking the Potential of Zakat and Other Forms of Islamic Finance to Achieve the SDGs in Indonesia, examples of zakat and SDGs that overlap include:

• faith through reducing vulnerabilities, particularly to poverty, hunger, poor health, unsafe water and inequality (relating to SDGs 1, 2, 3, 6 and 10);

• life by eradicating food insecurity, ensuring healthy lives, combating water scarcity, poor water quality and inadequate sanitation, ensuring decent work for all and making cities safe and sustainable (SDGs 2, 3, 6, 8 and 11);

• progeny by promoting peace and protecting the environment (SDGs 3, 5, 7, 11,12, 13, 14, 15 and 16);

• intellect by facilitating access to healthy nourishment and quality education to build human capital (SDGs 1, 2 and 9) and

• wealth by generating economic activity and a social safety net (SDGs 1, 3, 8 and 10).

However, there are challenges to successfully mobilising and leveraging zakat funds including the lack of a global standard for zakat collection and distribution, said Zenobia Ismail, a research fellow at the University of Birmingham’s international development department.

Some Muslim-majority countries such as Indonesia, Malaysia and Pakistan have state-run collection schemes, while elsewhere zakat is administered through local or supranational Islamic non-government organisations like the UK-based Islamic Relief Worldwide and Muslim Hands or the South African-based Gift of the Givers Foundation, as well as by UN agencies.

She said cases of mismanagement and corruption have fuelled mistrust in zakat schemes and limited growth. Organisations that lacked transparency and accountability deterred contributions and undermined the scope for using zakat as part of a national poverty alleviation strategy.

“Zakat schemes need elevated levels of accountability and solid management capacity and transparency. Furthermore, although it is an obligatory payment, zakat is not being paid by all those eligible, not even in countries where there are state-run collection and redistribution schemes,” she stressed to Salaam Gateway.

Consequently, Ismail sees more potential in using zakat for local economic development projects linked to the SDGs such as digging boreholes for clean drinking water and better sanitation systems in poverty-stricken countries.

“One has to be realistic about what can be achieved with zakat since it is charity paid by individuals according to their income. There may be more scope for Muslim billionaires to establish something like the (Bill and Melinda) Gates Foundation, which can be a bigger player in the international development arena,” she said.

Shaikh said the increased use of fintech and blockchain technologies could also boost donors’ trust.

“The SDGs provide a clear framework to measure impact and this is where zakat has suffered in recent years, due to the lack of transparency on where the money is spent and lack of reporting on (its) social impact... technology can enhance transparency and credibility as it gives more confidence to the stakeholders involved,” he said.

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