The potential of zakat is not being maximised in the fight against poverty.
Tokyo: The lack of a common international Islamic financial regulatory system is hindering the development of Islamic social finance instruments, causing a dearth of good practice solutions that could effectively fight poverty, say experts.
In the February 2021 issue of the International Sharia Research Academy (ISRA) International Journal of Islamic Finance, Abdulsalam Ahmed Sawmar and his co-authors say the key element of Muslim charity, zakat (obligatory charity), has historically “been an integral part of the Islamic economic system because of its sizable impact in achieving social harmony and preserving decent living standard for the needy segments of Muslim communities”.
However, the potential of zakat is not being maximised and its management faces challenges including various regulatory frameworks in different Muslim countries, the paper warned.
One impact was “a significant gap” between the estimated potential of zakat proceeds and its collection through formal institutions.
UK-based international aid agency Islamic Relief is one group trying to create a common good practice in Islamic social finance. It offers a definition for Islamic social finance, saying the sector aims to improve social justice through wealth distribution and fair financial dealings.
It bans problematic practices such as gharar (uncertainty, deception and risk), while promoting philanthropy that includes zakat, sadaqah (voluntary charity) and waqf (endowment).
The UK’s National Zakat Foundation, another body laying down advice on Islamic social finance, stressed how zakat, one of the five pillars of Islam, requires Muslims to give 2.5% of their qualifying wealth (money and property) annually.
The Zakat Foundation of America has been offering guidance in the USA, outlining eight categories of people eligible to receive zakat-based assistance based on the Quran. The non-profit organisation includes the poor, debt-ridden and the displaced among its recipients.
It also promotes waqf or hubous, noting how it typically involves donating a building, plot of land or other asset for Muslim or charitable purposes to a religious, educational or charitable cause.
The Islamic Development Bank states the annual global zakat contributions amounts to $500 billion, but in 2019 only one third of the then-33-strong membership of global advocacy platform World Zakat and Waqf Forum (WZWF) (formerly World Zakat Forum) had laws on zakat, potentially hindering its development according to the WZWF.
National governments and international organisations are trying to establish the extent of the problem and offer solutions to increase zakat collections.
In Indonesia, the world’s largest national Muslim population, the zakat collected is just 0.03% of gross domestic product (GDP) against a potential 1.59%, according to the 2019 International Sharia Scholars Forum’s Regulatory Framework of Islamic Social Finance.
Taking into account the latest World Bank economic statistics on Indonesia, these sums are large – $3.57 billion collected against the $186 billion potential. However, the framework also states Indonesia’s zakat collective collection has increased more than 31 times in the past decade.
Greget Kalla Buana, Islamic finance specialist of the United Nations Development Programme (UNDP), told Salaam Gateway Indonesia offers “the most recent example of regulatory reforms in zakat management,” including the government’s creation of a Badan Amis Zakat Nasional, a public agency whose sole objective is zakat management.
In Malaysia, Singapore and Brunei, state-created majlis (entities) are solely responsible for the collection and distribution of zakat, while Pakistan operates a dual system whereby zakat is paid to the state for some wealth and income types and to the state and private zakat bodies for others, said Buana.
Meanwhile, despite being home to more than 200 million Muslims, India does not have a formal institutional or regulatory framework for zakat management. Buana says the government does not seek to intervene as zakat is entirely voluntary and collected by religious schools and institutions.
With such disparity of frameworks, Buana said the Zakat Core Principles, launched in 2016 by Bank Indonesia, Badan Amil Zakat Indonesia (Indonesia’s National Zakat Agency), the Islamic Research and Training Institute of Islamic Development Bank and countries participating in an international working group, was a positive step.
He said they “help in effective operation and supervision” of zakat, but added there was an additional need for “detailed technical guidance that aligns with each country’s local jurisdiction, rules and regulations”.
Globally, WZWF works “to address the lack of a standard international system for cross-border services and financial transactions in Islamic Social Finance,” said Buana, adding it carries out awareness-raising of instruments, such as zakat and waqf.
It also responds to the need for international consolidation in the practice of zakat and waqf, including the possibility of any cross-country collaboration, south-south cooperation and business-to-business partnerships.
A three-year memorandum of understanding signed by the WZWF and the UNDP, in November 2019, intends to help national and international partners “leverage and align” Muslim philanthropy, particularly the zakat, with the UN’s sustainable development goals (SDGs). Under the pact, both bodies promised to promote zakat’s potential to tackle goals one, two and 10, namely poverty, hunger and inequality.
A 2021 Global Islamic Finance Report by Cambridge Institute of Islamic Finance and Ajman University Centre for Excellence in Islamic Finance also noted a link between Islamic social finance and “the SDGs, climate remediation and circular economy,” pointing out zakat could help fund important environmental initiatives and progress.
Still, with such traditional Islamic social finance practices already established as a pillar of Islam, the 2019 International Sharia Scholars Forum suggested compliance incentives for zakat (such as tax incentives). A proper enforcement of penalties for non-compliance in jurisdictions where Zakat is compulsory could be another solution to improving regulatory systems.
Other operational improvements, including better zakat institution governance, have been advised.
“Greater public trust, transparent and effective governance and openness towards the formal zakat institution’s performance are critical for zakat to achieve its full potential,” said Buana in a 2020 Global Islamic Finance Report from Cambridge International Finance Advisory with its Cambridge Institute of Islamic Finance.
While significant work is required to develop a global Islamic social finance model, the fact serious experienced minds are debating the issue may yet yield fruit.
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