Empowering Lives With Zakat: Why We Need More Transparency And Innovation

Nizwa, Oman - Nov 10, 2017: Omani men participating in a goat auction on Nizwa market lighted by the early morning light.

By Namira Samir and Imad el Fadili

A recent study by Sumner (2012) suggested that approximately 960 million people from 1.3 billion poor people in the world live in Middle-Income countries1. This evidence is being referred to as the “new bottom billion”. Somehow startling that the extreme poor no longer live in the world’s poorest countries, it is even more alarming to realise that roughly one-fourth of the world’s Muslims live in these less-developed countries. Muslims are often backed by its obligatory tax required of Muslims which is also known as zakat. However, the rising criticism over the negligence of zakat on resolving poverty is seemingly becoming more intense than ever. This article argues that improving transparency and promoting innovation can help effectuate the enormous potential of zakat for poverty alleviation.

 

Ending poverty and inequality is one of the greatest challenges of the current decade until the next. Various charities and non-governmental organisations (NGOs) are encountering these challenges in our society. These organisations depend on either philanthropy or public financing to do their work. Although, the amount of charitable giving increases over the last years there is still a gap between need and funding2.  Moreover, this gap might become bigger since the distrust of people on charitable organisations are increasing3.  So, how to fill this growing gap?

The branch of Islamic finance, Islamic Social Finance, incorporates a number of tools, both mandatory and voluntary, that can be used to reduce inequality and achieve socio-economic justice.

The Sustainable Development Goals (SDGs) encourage humanity to cooperate in order to achieve the 17 SDGs. The UN World Investment Report shows that this cooperation is paramount since there is an average investment gap of $2.5 trillion for developing countries4.  This gap can only be filled when more funds are attracted from current givers and by untapping new areas of social finance.

Perhaps countries with low Muslim population are less familiar with “Islamic finance”, a new approach on how to conduct the economy with ethical and social considerations. The branch of Islamic finance, Islamic Social Finance, incorporates a number of tools, both mandatory and voluntary, that can be used to reduce inequality and achieve socio-economic justice. While it is never mandatory to help the poor, in Islam, it is required to give a portion of wealth to the needy. As a mandatory Islamic financial instrument, zakat can be viewed as a wealth tax on Muslims who have wealth that exceed a certain threshold (nisab).

Zakat should be distributed to eight types of recipients (asnaf). The most relevant types of recipients for the SDGs are the poor (fuqara) and the needy (masakin). The main purposes of zakat are poverty relief, economic empowerment, and community development. A number of researches elaborated the potential impact of zakat to several SDGs objectives, which include: no poverty (SDG1), zero hunger (SDG2), good health and well-being (SDG3), quality education (SDG4), clean water and sanitation for all (SDG6), and reduced inequalities (SDG10)5.

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According to IRTI, the potential of zakat can reach $1 trillion annually.6  While the potential contribution of zakat might be perpetual, it has not yet reached its highest capacity. For instance, in Indonesia the zakat has the potential to contribute 217 trillion rupiah ($15 billion) per year7. The state zakat authority in Indonesia, BAZNAS, attracts only USD 261.178 million, which is only 1.28 percent of its potential zakat collection of USD 20,263 million8.

Zakat should be distributed to eight types of recipients (asnaf). The most relevant types of recipients for the SDGs are the poor (fuqara) and the needy (masakin). The main purposes of zakat are poverty relief, economic empowerment, and community development.

Reasons that are often put forward for failing to achieve the potential is the lack of awareness or education and the informal channeling of zakat. Even though the channel to which a Muslim decides to use to fulfill his or her obligation is entirely unrestricted, paying zakat directly to individuals has its cons. An analogy with a membership of a gymnasium should be made for clarification. Suppose that you have a gymnasium membership and the owner of the gymnasium tells you that you do not need to pay the monthly contribution yet instead you are required to buy sports equipment for the gymnasium. If everyone does that on their own, we might end up with a gymnasium with too many of the same instruments or too less.

Hence, it is important to have more zakat payers who contribute to centralised zakat institutions. These zakat institutions can pool the money and invest in a sustainable way in a group of recipients and ensure that those recipients become economically empowered. But before being able to do that, it is important to find out why some people prefer to give money directly to eligible recipients. A reason for this is that some zakat payers attain an individual satisfaction when interacting directly with the counterparty which they do not think to perceive when paying directly to a centralised institution. When giving the zakat directly to an individual, the payer directly views the impact and in case of a zakat institution mostly the payers only get an annual report to assess how the money has been used. Another reason must be the distrust that more and more people have towards charitable organisations9.  There is no specific trust barometer on zakat funds but a recent research showed that the trust towards charities decreases over time. Due to inefficient use of funds and different scandals this trust has been deteriorated.

A solution to stabilise more people to pay zakat and pay the zakat to an institution is twofold. Firstly, governments (in countries with Muslim majority) and institutions should embark on awareness programs. Potential zakat payers should be effectively targeted in universities, mosques, business associations, and others. Those awareness programs should emphasise the impact of zakat on a society and the added value of paying zakat to a zakat institution which can pool the money and allocate it in a sustainable way. Secondly, zakat institutions should make significant steps forward regarding transparency and trust by engaging in new technologies. To maintain the aforementioned satisfaction of a payer, zakat institutions can provide zakat payers with a certain traceability of funds. Hereby, the payer can trace the impact that he made on the society with the paid zakat.

After stabilising people to pay to centralised zakat institutions, another challenge awaits us with regards to utilising funds in a sustainable way to achieve the real goal of zakat; transform the zakat recipients into zakat payers.

Recently, a new zakat app has been introduced through a cooperation between International Federation of Red Cross and Red Crescent (IFRC), AidTech, and INCEIF. This app endeavours to resolve the issue of transparency and inefficiency. It allows payers to choose certain zakat-eligible projects and they get a notification once the funds are utilised. Although, these are good steps forward, much more which still needs to be done. After stabilising people to pay to centralised zakat institutions, another challenge awaits us with regards to utilising funds in a sustainable way to achieve the real goal of zakat; transform the zakat recipients into zakat payers.

The current impasse directed to zakat is its inability to go beyond resolving income poverty. Having the necessary material needs does not guarantee the person or household free of deprivation. To this day, zakat has not been able to combat other layers of poverty. To name a few, a lack of quality education, proper sanitation, and malnutrition are some of the issues that are most often faced by the bottom billion. These different dimensions of poverty can now be measured by the Multidimensional Poverty Index10  developed in the year of 2010 by Oxford Poverty and Human Development Initiative (OPHI) in collaboration with UNDP. The measurement follows the Alkire-Foster Methodology (AF)11 which can determine the multidimensional poverty rate and its intensity.

The ongoing critique toward zakat is the inabilities to contribute to the abovementioned dimensions of poverty. Aside from the lack of transparency, we believe that zakat needs to utilise some innovative approaches. It needs to be integrated with other forms of technology which can extend the impact of zakat on poverty.

In concluding this article, we therefore argue that the ability of zakat to tackle social issues such as poverty is being prevented by the lack of transparency and innovation. Collaborative action between different actors can improve the situation and help zakat achieve its desired impacts.

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About the Authors  

Namira Samir is a researcher and consultant with main interests in multidimensional poverty alleviation, regional inequality and Islamic social finance. She holds a Master’s Degree in Islamic Finance and Management from Durham University, UK.

Imad el Fadili is a consultant with main interests in Islamic social finance, sustainability and poverty alleviation. Imad is also founder of FinEthical which innovates with zakat and technology to enhance transparency and sustainability. He holds a Master’s Degree in Finance from Vrije Universiteit, Amsterdam and is currently pursuing a Master’s Degree in Islamic Finance from INCEIF, Malaysia.

References

1) Sumner, A. (2012). Global Poverty and the “New Bottom Billion” Revisited: Exploring The Paradox That Most Of The World’s Extreme Poor No Longer Live In The World’s Poorest Countries. (2012). IDS Working Paper.

2) Stirk, C. (2015). An Act of Faith: Humanitarian financing and Zakat. Global Humanitarian Assistance.

3) Trust in Charities, July 2018 (Charity Commission for England and Wales)

4) UNCTAD. (2014). World Investment Report 2014 – Investing in the SDGs: An Action Plan. United Nations Conference on Trade and Development, 2014.

5) Nurzaman et al. (2018). The Role of Zakat in Sustainable Development Goals for Achieving Maqashid Shari’ah. Centre for Strategic Studies, BAZNAS Indonesia

6) Obaidullah, M., & Shirazi, N. S. (2015). Islamic Social Finance Report 1436H.

7) Firdaus, M., Beik, I. S., Irawan, T., & Juanda, B. (2012). Economic estimation and determinations of Zakat potential in Indonesia. Jeddah: Islamic Research and Training Institute

8) BAZNAS (2011-2016), Country Economy (2011-2016), Indonesian Statistics (2011-2016), the Indonesian Ministry of Religion (2011-2016) and World Bank (2011-2016). The data is calculated by Authors.

9) Trust in Charities, July 2018 (Charity Commission for England and Wales)

10) UNDP (2015). Multidimensional Poverty Index. http://hdr.undp.org/en/content/multidimensional-poverty-index-mpi

11) Alkire et al. (2015). Multidimensional Poverty Measurement and Analysis: Chapter 5- The Alkire-Foster Counting Methodology. OPHI Working Paper, 86(1), pp. 1-53.