The COVID-19 pandemic has been challenging for everyone. The multifaceted crisis seems almost unstoppable and has created devastating adversities. It has been claimed that Islamic finance has been more resilient during the financial panic in 2008. Accordingly, it is expected, to bring in its moral foundation (be it commercial or social), to deal with these current uncertainties. Islamic social finance (ISF) alone must not be seen competitively with other sectors, but rather as a complement to overcome the recession. ISF is thus supposed to be working with governments, private sectors, and philanthropists to support relief and recovery phases. This age is the momentum for ISF rediscovery with a forward-looking perspective and inherent strengths.
Review of 2020
Over 1,400 years, ISF has been instrumental as a safety net, contributing to addressing marginalization and vulnerability. The Islamic Social Finance Report by Islamic Research and Training Institute classifies ISF into philanthropy-based (Zakat, Sadaqah, Waqf), cooperation (Qard, Kafalah), and microfinance institutions. ISF produces a positive impact by mobilizing funds to close the financing gap for poverty alleviation, inclusive economic growth, and equality. A few Islamic commercial finance instruments, such as Takaful and Sukuk, apply the social investment model by including ISF. Such a mix of financial mechanisms leads to broader participation and hardship removal. To these ends, ISF has stepped into the limelight amid the pandemic. Historical findings and current trends are then explored to capture the prospects of ISF.
Zakat — a mandatory 2.5% levy charged on Muslim’s wealth above a certain threshold — is an equitable redistribution mechanism. It transforms Mustahik (Zakat recipient) into Muzakki (Zakat payer). In a positive measure, it is supposed to prevent poverty by unlocking access and giving people options to survive. A median of 77% of Muslims in 39 countries reported paying Zakat regularly, with nine in 10 found in Indonesia, Malaysia, Thailand, Morocco, and Afghanistan as per Pew Research Institute. However, the actual collection has never reached its estimated annual worldwide value, US$550-600 billion, as discussed at the World Zakat Forum. Therefore, a revolutionary plan is required in Zakat disbursement, from consumptive spending (eg basic needs, cash transfer, medical expenditure) to expanding the beneficiaries’ rights through a productive model (eg cash-for-work for those who lost their jobs due to the pandemic).
Waqf — an endowment with no reclaiming intention — is a more flexible charity. Under the principles of voluntary, perpetuity, inalienability, and irrevocability, it admits a longer spending horizon and income generation. Besides donating a plot of land, assets, or properties, Waqf substance has evolved in modern days. It can be in the form of cash, either permanent or temporary. Worldwide Waqf asset is predicted at between US$100 billion to US$1 trillion as stated in a report by World Bank, International Centre for Education in Islamic Finance, and International Shari’ah Research Academy for Islamic Finance. Convincing people through transparent governance, other than increasing literacy on Zakat, Waqf, and Shariah rulings, is crucial to boost ISF contribution. In 2020, disruptive technologies such as fintech and blockchain have been involved. For example, blockchain promotes accountability, efficiency, and traceability at once through immutable data distribution. It helps in the governing, recording, servicing, and managing of Zakat, Sadaqah, and Waqf database with a decentralized system.
Preview of 2021
There is an innovative practice of blended financing where Zakat is harnessed along with other resources. Zakat is channeled through a micro hydro power plant project to provide electricity for residents in the deprived villages of Jambi, Indonesia. The electricity leads to savings in energy costs. In turn, it enables the community to acquire better education, receive quality healthcare, and run businesses. That is just one example of how Zakat delivers the multiplier effect. This approach demands the government’s intervention since a lack of public trust may be a challenge. The government may also facilitate the Zakat collection, given it is not a mere personal obligation but rather a common interest. In light of this, tax-deductible and tax-credit regulations on Zakat have been issued in Indonesia and Malaysia, respectively. The way ISF, in particular Zakat, assists universal social protection raises an interesting question. Social protection is mostly tax-financed, which likely imposes exclusion to those employed in the informal sector who cannot make taxation. Islamic history revealed, a guaranteed minimum standard of income, introduced by the first Muslim Caliph Abu Bakr (632-634): 10 dirhams is granted annually to each man, woman, and child, which was later increased to 20. In his successor’s reign, Umar ibn Al-Khattab, unemployment insurance was included to extend equality. The nature of ISF allows Zakat to take part in this social protection, which expresses solidarity. The pandemic has been the impetus for the concept of basic income to return in some countries. Notwithstanding, a fair share needs to be concisely articulated on how Zakat fits compatibly into the scheme, rather than just who benefits.
Another innovation in ISF has come into reality by merging it with commercial instruments. The government of Indonesia has pioneered a social investment instrument: cash Waqf Sukuk. Instead of handing the coupon to Sukukholders, it is allocated for social projects. In its first issuance, the coupon was utilized for purchasing medical equipment to support the Retina Center at Achmad Wardi Waqf Hospital in Banten. Furthermore, this type of investment can help SMEs while providing a front-loading strategy for development purposes. Zamzam Tower in Saudi Arabia also demonstrates remarkable precedence through the issuance of Sukuk to finance the construction of a building on Waqf land. Thus, such Waqf combined with commercial products has proven to increase collection. ISF is of paramount importance, yet it has been long abandoned and less attractive than the commercial sector. The ethical and social values embedded in ISF portray its alignment with the UN Sustainable Development Goals (SDGs). It has gained attention from multilateral entities: the UN agencies and multilateral development banks including the IsDB, World Bank and Asian Development Bank. Apparently, innovative finance, an integration into policies, and social-commercial interaction will keep dominating the ISF mainstreaming in 2021 with digital connectivity and SDG adoption as the future enablers.
In the wake of a pandemic, any attempts to take advantage of ISF must concern health and economic aspects. Many countries have shifted from traditional to non-traditional funding since state budget and tax revenues are no longer adequate. In search of new financing, ISF has been considered as an emerging force in many forms. Nevertheless, ISF institutions’ performance and talent competence within the ecosystem are criticized for the sake of continuous improvement and adaptation. A more sustainable ISF system must start by addressing these issues. Subsequently, a clear articulation of the Zakat core principles and the Waqf core principles is significant for optimizing ISF tools and institutions’ competitive advantages, specifically at the project implementation level. Although with different rules governing their uses, ISF and commercial finance, as well as fiscal stimulus, can be mutually supportive when put holistically. This diversifying approach pushes the government and community to rethink and move beyond leveraging.