September 30, 2022

Lack of best practices hampers the development of Islamic social finance | Salaam Footbridge

The potential of zakat is not maximized in the fight against poverty.

Tokyo: The lack of a common international system of Islamic financial regulation hampers the development of Islamic social finance instruments, resulting in a dearth of best-practice solutions that could effectively tackle poverty, experts say.

In the February 2021 issue of the International Sharia Research Academy (ISRA) International Journal of Islamic Finance, Abdulsalam Ahmed Sawmar and his co-authors state that the key element of Muslim charity, zakat (compulsory charity), has historically “is an integral part of the Islamic economic system because of its far-reaching impact on achieving social harmony and preserving a decent standard of living for needy segments of Muslim communities”.

However, the potential of zakat is not maximized and its management faces challenges, including varying regulatory frameworks in different Muslim countries, the newspaper warned.

One of the impacts was “a significant gap” between the estimated potential of zakat proceeds and its collection through formal institutions.

The UK-based international aid agency Islamic Relief is one group trying to create common good practice in Islamic social finance. He offers a definition of Islamic social finance, saying that the sector aims to improve social justice through the distribution of wealth and fair financial transactions.

It prohibits problematic practices such as gharar (uncertainty, deception and risk), while promoting philanthropy which includes zakat, sadaqah (voluntary charity) and waqf (endowment).

The UK’s National Zakat Foundation, another body advising on Islamic social finance, highlighted how zakat, one of the five pillars of Islam, requires Muslims to donate 2.5% of their wealth eligible (money and goods) each year.

The Zakat Foundation of America offered guidance in the United States, outlining eight categories of people eligible to receive zakat-based and Quran-based assistance. The non-profit organization includes the poor, the indebted and the displaced among its beneficiaries.

He also promotes waqf or hubous, noting how it typically involves donating a building, land, or other property for Muslim or charitable purposes to a religious, educational, or charitable cause.

The Islamic Development Bank reports that annual global zakat contributions amount to $500 billion, but in 2019 only a third of the 33 members of the global advocacy platform World Zakat and Waqf Forum (WZWF) ( formerly World Zakat Forum) had zakat laws, which may hinder its development according to the WZWF.

National governments and international organizations are trying to establish the extent of the problem and come up with solutions to increase zakat collections.

In Indonesia, the world’s largest national Muslim population, collected zakat is only 0.03% of gross domestic product (GDP) against a potential 1.59%, according to the International Forum’s Islamic Social Finance Regulatory Framework 2019 Sharia scholars.

Given the latest World Bank economic statistics on Indonesia, these sums are significant – $3.57 billion raised against a potential $186 billion. However, the framework also indicates that collective zakat collection in Indonesia has increased more than 31 times over the past decade.

United Nations Development Program (UNDP) Islamic Finance Specialist Greget Kalla Buana said Salaam Gateway Indonesia offers “the most recent example of regulatory reforms in zakat management”, including the creation by the government of a Badan Amis Zakat Nasional, a public agency whose sole purpose is the management of zakat.

In Malaysia, Singapore and Brunei, state-created majlis (entities) are solely responsible for collecting and distributing zakat, while Pakistan operates a dual system in which zakat is paid to the state for certain types of wealth and income and to the state and the private sector. zakat bodies for others, Buana said.

Meanwhile, despite being home to over 200 million Muslims, India lacks a formal institutional or regulatory framework for managing zakat. Buana says the government is not looking to intervene because zakat is entirely voluntary and collected by schools and religious institutions.

With such a disparity of frameworks, Buana said the Fundamentals of Zakat, launched in 2016 by Bank Indonesia, Badan Amil Zakat Indonesia (the Indonesian National Zakat Agency), the Islamic Research Institute and Islamic Development Bank training course and countries participating in an international working group, was a positive step.

He said they “contribute to the effective functioning and supervision” of zakat, but added that there was an additional need for “detailed technical advice that aligns with jurisdiction, rules and regulations. of each country”.

Globally, the WZWF is working “to address the lack of a standard international system for cross-border services and financial transactions in Islamic social finance,” Buana said, adding that he was campaigning awareness 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 transnational collaboration, south-south cooperation and business-to-business partnerships.

A three-year Memorandum of Understanding signed by WZWF and UNDP in November 2019 aims to help national and international partners “harness and align” Muslim philanthropy, particularly zakat, with the Sustainable Development Goals ( SDGs) of the UN. As part of the pact, the two bodies pledged to promote the potential of zakat to achieve goals 1, 2 and 10, namely poverty, hunger and inequality.

A 2021 Global Islamic Finance Report from the Cambridge Institute of Islamic Finance and the Ajman University Center for Excellence in Islamic Finance also noted a link between Islamic social finance and “the SDGs, climate clean-up and circular economy”. , pointing out that zakat could help fund important environmental initiatives. and progress.

Yet, with such traditional Islamic social finance practices already established as a pillar of Islam, the 2019 International Shariah Scholars Forum suggested zakat compliance incentives (such as tax incentives). Appropriate enforcement of penalties for non-compliance in jurisdictions where Zakat is mandatory could be another way to improve regulatory systems.

Other operational improvements, including better governance of the institution of zakat, were advised.

“Greater public trust, transparent and effective governance, and openness to the performance of the formal institution of zakat are essential for zakat to reach its full potential,” Buana said in a global report on Islamic Finance 2020 from Cambridge International Finance Advisory with its Cambridge Institute of Islamic Finance.

Although significant work is needed to develop a global model of Islamic social finance, having experienced and serious minds debating the issue could still bear fruit.

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