FIN 6620 – AS-SHARI’AH, ECONOMICS AND SOCIETY Br Mustafa Omar
Article Review Financing Socio-EconomicDevelopment with Zakat Funds ( Mohammad Anwar)
Group members: Ella Ermayasari Nur Aisyah Yacob Siti Azrai Binti Ahmad Akil Abdul Muqeet Khan
Agenda: Introduction Summary Significance of study Analysis Comparison of AZIF Mechanism with Other Zakat Financing Mechanisms Anwar (1995) proposed AZIF model Shihata (1985) proposed model Hassan (2010) proposed model The Practical Model: The Practice of Kuwait Zakat House Zakat Funds Contribution towards Socio-Economic Development Challenges Conclusion
Brief Introduction: Underdevelopment of Muslim countries Need for proper institution of Zakat Establishment of Awqaf-Zakat Investment Fund (AZIF)
Summary:A proposed mechanism for utilizing the Zakat funds into long term investment for the sake of socio- economic development.The Shariah compatibility, Modus operandi, potential problems and Socio-economic advantages are discussed.
Proposed mechanism: First- Collection of Zakat funds Second- Establishment as: Awqaf-Zakat Investment Fund Registration as Waqf institution and Operation as profit seeking corporate venture Third- Zakat funds used for purchasing the shares Fourth- distribution to various beneficiaries for money Fifth- Exchange of shares for commodities and cash
Shariah compatibility: Is it permissible to channel zakat funds into investment projects? Can the proposed institution be formed as a waqf but managed as a corporation? Is distribution of shares compatible with the Shari’ah, and does it upheld the principle of tamlik? Is it possible to follow the Shari’ah preference for distributing zakat locally? Is it possible to use AZIF shares in lieu of cash for buying commodities? Is it feasible to redeem AZIF shares at or above their face value?
Modus operandi & organizationalstrategy Investment fund taken as a autonomous body governed by High level trustee council, Shariah scholars and professionals Rules regarding funding, investment, administrative expenses, inspections and accounting and auditing controls In case of solvency, losses guaranteed by government callable bonds No interest bearing investments Investments in agriculture, low cost housing, food, clothing, medical facilities and education. Financing public ventures on the basis of Mudarabah, musharakah, istisna, sharikah mutaniqisah, murabahah.
Significance of study: Anwar (1995) An innovative financial institution like AZIF entails empowerment, productivity and socioeconomic development; The proposed AZIF to rightfully utilize or invest zakat funds in productive ventures for contribution towards socioeconomic development; To function through integration of collaborative efforts of fund donors, collection and distribution agencies, retail outlets, government and other involving parties in gathering scattered endowments to create a common institutional fund to maximize its utilization; To function in increased credibility ensuring mass participation and productive resource building of millions of poor or average Muslims in the spirit of Islamic charity and socioeconomic development; Also proposed as a trusted establishment of financial institution , Waqf and corporation, in compatibility with Shari’ah Law, mechanism of which fulfils condition of tamlik
Analysis (1): Zakat, Zakat funds and poverty Alleviation:Zakat as stipulated by a Qur’anic injunction is a determined portiontaken from wealth including assets and allocated to those deservingit. “Of their goods (wealth), take alms, that so thou mightest purify and sanctify them; and pray on their behalf. Verily thy prayers are a source of security for them: And Allah is One Who heareth and knoweth.” (Surah Al-Taubah, Chapter 9, Verse: 103)Zakat as obligatory charity tax , an act of Ibadah, a form of socialinvestmentZakat funds can replace government budgetary expenditures and beutilized for developmental and social expenditures.
Analysis (2): Need for an innovative approaches tofinance developments: various wealth re-distribution and poverty eradication efforts have been made but they lack implementation (Ahmed, 2004; Supardi, 2005; Laila, 2010) institution of microfinance developed to create access to funds for the poor have yet to prove its credit for poverty alleviation Laila (2010) Hassan & Khan (2007) proposed zakat funds to be used in the government’s Poverty Reduction Strategy Papers (PRSPs) Anwar (1995) urged the need to develop the zakat institution
Analysis (3): Shari’ah compatibility of investing zakat Funds: Anwar (1995) - AZIF Shari’ah compatibility:(i) Satisfies tamlik (personal ownership of zakat fund) by the poor and needy as shareholders of commercial products by virtue of their shares;(ii) Guarantees against loss, or cover from built-up loss reserve account;(iii) Allows zakah disbursement immediacy to satisfy pressing consumption needs of the poor and needy through arrangement with retail outlets to accept the certificates and cash at a price not less than face value
Analysis (4): Financing Developments with(Investing) Zakat funds: Anwar (1995); Khan, (1990) for Pakistan and Hassan and Khan (2007) for Bangladesh: “Zakat funds should not remain idle in depositories / bank accounts, but if collected and managed properly, could be used to create a pull of funds for development financing and replace government expenditures “ Khan (1990): June 30, 1989, an idle bank balance of Rs 4.387 billion were found idle in the current account with State Bank of Pakistan without any earnings Hassan and Khan (2007): In developing country as Bangladesh, foreign aid from donors contributes a significant portion of the development budget - Zakat as ready effective substitute so to reduce debt burden
Comparison of AZIF with otherZakat Financing Mechanism Anwar (1995) proposed AZIF model Shihata (1985) proposed model Hassan (2010) proposed model The practical model : Kuwait Zakat House
Shihata (1985) proposed model Model for contemporary use of Zakat funds such as education, vocational training, rehabilitation facilities, low cost housing Zakat revenues can be used in specific lawful mudarabah projects, with the zakat foundation acting as the owner of the capital, zakat beneficiaries acting as partners by contributing their skills. The profits generated be distributed between them on the basis of a pre-agreed upon ratio prior to commencement of the work. Loans provided to able bodied who can pay back and generate new source of income Low cost houses on the basis of rent financing to the poor Benevolent loans
Hassan (2010) proposed model New model in consistent with the model proposed by Anwar (1995) Integration of Zakat and Waqf with collaboration of micro finance institutions. Model viable in long run resulting from lower default rates Poverty alleviation by positive, preventive and corrective measures. Anti poverty programmes: indirect and direct strategies.
The practical model : The practice of Kuwait Zakat House Zakat funds kept in two types of accounts with the bank, current and saving accounts. Its earning on saving accounts increases the original fund deposited with the bank. It provides free interest loan to people in need of money and secure its repayment by way of installments. It finances the vocational training for capacity building of people capable of becoming productive citizens (under a scheme called productive rehabilitation scheme). It sponsors poor students’ education by offering them interest-free loans.
Zakat Funds Contribution towardsSocio-Economic Development Zakat funds by AZIF fulfils condition of tamlik: Zakat funds transformed into long-term investment AZIF shares allow recipients to obtain full control of their shares ownership. Dividends declared by AZIF give flexibility in cashing shares and entitlement to periodic income Some society members i.e. mustahaqqin (eligible) for receiving zakat can conveniently meet basic human needs Advantage for those handicapped in receiving shares, instead of cash, to manage their investments even if physically disabled Income of those unable to work and earn, be supplemented by transfers in cash and kind and provided with sufficient resources to relieve hardships Wider public participation in the stock market, especially for those keen in zakat related projects – a catalytic force for development of primary and secondary markets in Muslim countries.
Challenges: AZIF; if implemented on the basis of mudarabah or musharakah, must observe the serious consequences resulting from the risk of profit and loss sharing (PLS) nature of the contracts Absence of financier’s intervention in entrepreneur’s activities, dishonesty, “trick or trade” of entrepreneurs, moral hazards, inadequate record keeping Misinterpretations and misconduct against observing Islamic provisions, and lack of suitable primary and secondary markets Many awqaf properties poorly managed by incompetent mutawallis (managers)
Challenges: AZIF participatory or collaborative aim, restricted to Muslims as direct participants Setting up of a new FI – challenging, complex, costly Lack of institutional control – societal concern as to how their funds are utilized and the extent to which it benefits society Challenging participants’ buy-in
Conclusion: Anwar (1995) believed that the proposed AZIF model allowsfor a viable proposition that may well accelerate the pace ofdevelopment in the Muslim countries. Nevertheless, a keen initiativeto set up a suitable financial institution that is well supported by everymember of the stakeholders within the societies calls for an early andserious attention to make effect such a model. With the keenfaith, trust and collaboration of all those interested in thesocioeconomic development of Muslim countries, a model such asAZIF will surely be ideal to eradicate the world’s most seriousproblem of poverty. It is proposed that a model such as AZIF is developedin a collaborative basis as it clearly and meticulously lay out a policyframework and agenda for poverty reduction, social progress andsocioeconomic development.The literature gaps in Anwar (1995) provide space for academicexplorations and mechanism innovations on the area of utilizingzakat funds for socioeconomic developments.
References: Ahmed, Habib. (2004). Role of Zakah and Awqaf in Poverty Alleviation. Jeddah, Saudi Arabia: Islamic Development Bank, Islamic Research and Training Institute Al-Haitmi. Majma’ al-zawa’id, Vol. 3 Al-Labban, Ibrahim. (n.d.). Ibn Hazms (died 1064 C.E.) theory of the States Duty towards the Poor. Finance in Islam. Retrieved from http://www.financeinislam.com/article/1_41/2/423 Badawi, Zaki. (1996). A New Source of Development Finance Islamic Banker: News and Analysis of Islamic Banking. Finance and Insurance, 4, 18-19 Bayhaqi. Sunan al-kubra, Vol. 4 Hassan, M. K., & Khan, Juanyed M. (2007). Zakat, External Debt and Poverty Reduction Strategy in Bangladesh. Journal of Economic Cooperation, 28 (4), 1-38 Hassan, M. K. (2010). “An Integrated Poverty Alleviation Model Combining Zakat, Awqaf and Micro-finance.” Paper presented in the Seventh International Conference on the Tawhidi Epistemology: Zakat and Waqf Economy. Bangi, 2010 Khan, Muhammad Akram. (1990) “A Comparative Study on Zakat Systems – its Shari’ah Administrative and Financial Controls.” Paper presented in the Third International Zakat Conference. Kuala Lumpur, May 17, 1990 Khan, Foyasal. (2010). Waqf: An Islamic Instrument of Poverty Alleviation – Bangladesh Perspective. Paper presented in the Seventh International Conference on the Tawhidi Epistemology: Zakat and Waqf Economy. Bangi, 2010 Laila, Tanim. (n.d.). Innovations in Islamic Philanthropy and Monetization of Philanthropic Instruments: Micro- Funding of Micro-Finance. Laila, Tanim. (2010). “Islamic Microfinance for Alleviating Poverty and Sustaining Peace.” Paper presented in the World Universities Congress. Canakkale, Turkey, 20-24 October, 2010 Mahmud, Mek Wok D. & Shah, Sikandar S. (2009). The Use of Zakat Revenue in Islamic Financing: Jurisprudential Debate and Practical Feasibility. Journal of Studies in Islam and the Middle East, 6 (1), Article 2 Shihata, Ismail S. (1989). "Limitations on the Use of Zakat Funds in Financing the Socioeconomic Infrastructure of Society." In Management of Zakat in Modern: Muslim Society. Jeddah: Islamic Research and Training Institute, 57- 73. Supardi. (2005). Zakat Organization and Poverty Alleviation. School of Graduate Studies, State Islamic University Sunan Kalijaga, Yogyakarta, Indonesia.