Archive for September 2018

This article was first published in Islamic Finance News Volume 15 Issue 34, dated 22 August 2018.

Too big to ignore: The potential size of the annual Zakat pool is estimated between US$200 billion and US$1 trillion.

Zakat is a form of philanthropy found around the world. All Muslims eligible to pay it must donate at least 2.5 percent of their accumulated wealth. As such, it is one of the largest forms of wealth transfer to the poor and needy in existence. Inspired by the Muslim faith, Zakat is now a global phenomenon of relevance and not only in Muslim majority countries.

In this article, we offer four tips when considering engaging with Zakat for the UN Sustainable Development Goals (SDGs):

Zakat is a philanthropic pool too large to ignore;

Zakat is highly aligned with the SDGs;

UNDP has already begun harnessing Zakat for SDG projects; and

Engaging with Zakat is an opportunity for a wide range of stakeholders.

Too large to ignore

The potential size of the annual Zakat pool has been estimated between US$200 billion and US$1 trillion, according to Obaidullah and Shirazi in 2015 and the World Bank and IDBG in 2016.

The precise amount paid is difficult to ascertain, as much of Zakat-giving is done informally direct from the donor to the recipient (according to the UNDP and BAZNAS) and often in goods rather than cash. Zakat is much more prevalent than commercial Islamic finance: 98 percent of Muslims in Indonesia report observing Zakat according to the Pew Research Center, while the market share of Islamic banking is around 6 percent, according to the IFSB. The pattern is similar across many countries. Considering the estimated US$2.5 trillion annual gap in SDG financing, as reported by the World Economic Forum, a funding source that may be as large as US$1 trillion per year cannot be ignored.

Alignment with the SDGs

Alleviating hunger, poverty and inequality, promoting peace and protecting the environment are central to the core Islamic principles known as the Maqasid Shariah. The Quran identifies eight categories of eligible use for Zakat, including helping the poor and needy, refugees and displaced people and liberating those in bondage. Zakat thus aligns strongly with numerous SDGs, including no poverty (SDG 1), zero hunger (SDG 2), reduced inequalities (SDG 10) and others. Collaborating with Zakat donors and administrators reflects the spirit of partnership for the goals (SDG 17). It is about much more than mobilizing finance. Zakat and Islamic finance have an underlying philosophy that embodies socially responsible development and is associated with a wide network of organizations crucial for promoting peace, development and tolerance.

How UNDP has engaged

Through an innovative partnership, UNDP Indonesia has partnered with BAZNAS – the national Zakat collection body – to harness Zakat funding for SDG-related projects. Here’s how the partnership works:

BAZNAS collects funds as per its organizational mandate

BAZNAS makes grants to the UNDP to implement projects, and

The UNDP implements projects in accordance with the UN Charter and the UNDP’s global policies.

Also, the UNDP, in keeping with its principles and policies, makes no representations about religious law and will never discriminate on the basis of religion. It only accepts grants on terms consistent with its global principles. The first major collaboration between BAZNAS and the UNDP was the installation of micro hydropower plants, which bring electricity to more than 4,500 people in four remote communities. This is part of a larger renewable energy project supported by the Global Environment Facility. Future planned projects using Zakat funds include support to livelihoods in those communities with newfound access to electricity and the protection of biodiversity. Through such projects, it is possible to see Zakat’s potential for supporting productive capacities of individuals and communities and not just consumptive or humanitarian activities such as the payment of hospital bills and disaster relief. In addition to implementing project funding by Zakat, the UNDP can also provide much-valued technical assistance to Zakat organizations and governments on enhancing the effectiveness of Zakat collection and administration, and linking Zakat with the overall SDG strategies.

What you can do

Even if you are not currently engaged with this source of philanthropic funding, Zakat can have significant relevance for you:

Muslims who pay Zakat are encouraged to do so through formal organizations rather than directly. Further, you can raise awareness about the link between Zakat and the SDGs by talking to the Zakat organization to which you contribute and asking them if they are aware of the SDGs and how their contributions support the goals. Thirdly, encourage Zakat organizations to explore using funds collected to support productive development activities that enhance people’s livelihoods. Zakat-collecting bodies can partner with development institutions as implementation partners and sources of overall technical assistance

Development partners can engage with Zakat collectors and contributors as a new and alternative source of funding and partnership to reach communities that need it most

Governments can integrate Zakat into their SDG financing plans, and Donor institutions can seek out Zakat agencies as new co-fi nuancing partners.

In a fast-developing, middle income G20 country such as Indonesia, the UNDP is focused on how to unlock the abundant resources available and channel them to where they are needed most. A new report guides Islamic organizations, development professionals and governments on how to harness the power of Zakat and other Islamic funding and finance to achieve the SDGs.

At a recent training event in Jakarta, a colleague confessed it was his first time hearing the word ‘Zakat’ in a UNDP office. If we are to succeed in financing the SDGs, it should not be the last.

Aamir A Rehman

Senior Advisor on Islamic Finance, UNDP

Francine Pickup

Deputy Country Director, UNDP Indonesia

This article was first published in Islamic Finance News Volume 15 Issue 34, dated 22 August 2018.

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This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on August 27, 2018 – September 02, 2018.

The collection of zakat has been institutionalised in many Muslim countries. The promotion, collection and distribution of zakat are undertaken by the respective religious authorities according to shariah requirements.
However, there are several challenges, according to research papers. They include inefficiency, a lack of transparency in terms of how the funds are collected, managed and distributed, the differing views of Islamic scholars on how these should be dealt with and extensive bureaucracy.
To address these challenges, Dr Ziyaad Mahomed, associate dean of executive education and e-learning at the International Centre for Education in Islamic Finance (INCEIF), and his team have come up with an Islamic social financing app that leverages blockchain technology. The app — which won first prize in a competition organised by the Islamic Development Bank Group and the IE Business School in Madrid in February — was developed in partnership with Dublin-based financial technology (fintech) company AidTech and the International Federation of Red Cross and Red Crescent Societies.

“How the app works is very simple. When users turn it on, they are presented with two options: sedekah (charity) or zakat. If they choose zakat, the app prompts them to select the school of thought they follow — Shafie, Maliki, Hambali or Hanafi — as there are differences of opinion,” says Ziyaad.
“Then, the app asks a few questions such as where they would like to see their money go. We provide them with a choice of projects such as water irrigation, sanitation, poverty eradication and education. After choosing the project, they complete their payment using a secure gateway.”
He acknowledges that the main concern of zakat contributors is whether the money goes to the right party. His team is currently working on a scorecard for the social enterprises and social development organisations that wish to promote their projects via the app. This will help the app developers to assess the credibility of the projects. Users of the app will also be able to view the scorecard.
“Specific projects are listed. And once the zakat payment has been made, it is registered on a node in the blockchain. Payers will receive confirmation of acceptance. Now, the project has their money,” says Ziyaad.
“When the money has been fully utilised, the payers will be notified via the app. Thanks to the transparency provided by the blockchain, there is more confidence among payers that their zakat has reached the intended recipients.”
The app may be launched before the end of the year, but not in this region yet. Instead, the team has chosen the UK as the base for the app’s proof of concept. There, it has access to many non-governmental organisations it could partner. Also, there are many Muslim expatriates who wish to have their zakat utilised in their home country.
There are also challenges in developing the app, such as ensuring an optimal content management system, he adds. Poverty eradication projects, for example, may involve tens of thousands of individual recipients. This makes it hard for the developer to ensure that the zakat does not go to the same group of recipients the following year.
“We have to create a solid system that does not promote dependence on zakat. The practice of giving handouts to the same individuals is a serious problem — we are not helping them to enhance their standard of living if we keep on giving them handouts. There is a category of people living in extreme poverty who will always need zakat, but we have to be careful not to contribute to a culture of dependence,” says Ziyaad.
“I am not worried about the demand for the app. I am sure that millennials, especially, would use it to pay zakat because of the transparency and convenience it offers. It is not a perfect solution, but it is a step in the right direction.”
He hopes that after the proof of concept, the app can be launched in other parts of the world, especially in Muslim-majority countries such as Malaysia and Indonesia.
“In a country like Malaysia, where zakat is managed by a particular state, introducing something like an app would be expected to improve efficiency,” he adds.
Ziyaad says there are other promising enhancements that blockchain technology could bring to Islamic finance such as the use of smart contracts in takaful. Implemented together with technologies such as telematics and the Internet of Things, smart contracts could improve the underwriting process and hasten the claims process.
“We also see that smart contracts could play a role in Islamic banking activities that rely on sequential transactions for permissibility. Banks spend significantly on arranging, monitoring and auditing these sequences. If transactions have strayed from the sequence, they may not be compliant and incur additional expenses later on,” he says.
“If there is a smart contract managing the transactions, then banks can potentially reduce costs, making the product much cheaper. Due to blockchain’s transparency, shariah compliance may be enhanced. There are companies trying to introduce this and we are helping them to figure this out. But things are still very much in their infancy at this time.” — By Khairani Afifi Noordin



This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on August 27, 2018 – September 02, 2018.


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