COMMERCIAL INVESTMENT OF ZAKAT FUNDS
MUHAMMAD ANWAR
The proposal to channel Zakat funds into long-term investments in order to accelerate the pace of development in the Muslim countries breaks fresh ground in Zakat utilization strategy.
Most Muslim countries are characterised by a low per capita income; an unduly large subsistence sector; high population pressure; low agricultural productivity; a resources exploitation; a high rate of unemployment; an acute scarcity of skill-development programmes; and a rather weak institutional and physical infrastructure. Hence the need to explore new and innovative approaches to finance development is all the more urgent and crucial.
Proposed Mechanism
First, Zakat donors would continue to make their payments to their present Zakat agencies for collection and distribution. Second, a new financial institution known as the Awqaf-Zakat Investment fund (AZIF) should be established. AZIF would be registered as an Awqaf institution to give it permanency but it would nevertheless operate as a profit-seeking corporate venture. It would have branches and affiliate offices throughout any particular country, and would be the key institution for channelling Zakat into long-term investments.
Third, the Zakat collection agencies should use their accumulated funds for purchasing shares in the AZIF, thus making all Zakat funds comprise the paid-up capital of the AZIF. These shares would be negotiable and transferable, and the shares might be issued in various denominations. For the convenience of individual countries each AZIF share would be worth one standard currency unit of the country concerned, e.g., one ringgit in Malaysia, one rupee in Pakistan etc.
Fourth, the Agencies would distribute these AZIF shares to the beneficiaries of the Zakat in lieu of money, that is, the usual manner.
Fifth, in order to cater for the essential needs of the Zakat recipients, arrangements should be made for prominent retail outlets such as general stores, banks, post-offices etc. to cash these shares for the Zakat-holders at a price not less than the face value of the shares. Shares held both by the Zakat recipients and the authorised outlets would also be redeemable at AZIF centres at their face value or market value, whichever might be the greater.
For this mechanism to function properly and efficiently, both primary and secondary Markets would be necessary. For while the existence of a primary market is needed for providing financial resources to the AZIF for employing them productively for development purposes, a secondary market is essential for helping Zakat beneficiaries liquidise their investments whenever they feel the need to do so.
Basic Questions
I should now like to examine some fundamental questions arising from whether my proposed long-term investment mechanism is acceptable to the Sharia.
Is it permissible to invest Zakat? At present, accumulated Zakat funds can lie idle, in either deposit or current accounts at a bank. Keeping funds idle is in violation of the Sharia, which is against hoarding, and in favour of a wide circulation of funds. Zakat funds would not lie idle if there were a complete synchronisation between the Zakat inflow from donors and Zakat outflow to the beneficiaries of the Zakat.
In a Hadith, the Prophet urged those who were responsible for managing the wealth of orphans to invest that wealth in profitable ventures so that it would not suffer gradual erosion due to the Zakat on it. A Zakat Fund has a similar status to those orphans’ wealth, because in both cases the managers of the properties are mere trustees of the stipulated beneficiaries.
This principle is especially relevant when you consider that beneficiaries receive sufficient Zakat to cover their expenses for the whole year Although this Zakat is received once a year, expenditures carry on throughout the year, thus meaning that money can be left unnecessarily idle. The crucial principle of self-help is also present here, and we should therefore remember that the Prophet once encouraged a needy person to buy an axe to cut wood instead of just helping him to meet his immediate requirements.
Investment of Zakat proceeds in commercial ventures needs consideration. Up to now, lawmakers have hesitated to permit investment of Zakat funds, not because there is anything in the Qur’an which explicitly or implicitly militates against such investment, but because they fear that the immediate consumption needs of beneficiaries may not be such as might be deferred, and such money would be exposed to business risk.
I would answer this criticism on two counts. First, investment through AZIF would not delay distribution of Zakat to the beneficiaries, although the Zakat would be in the form of cashable shares rather than cash money. The beneficiaries would thus not have to defer their consumption needs.
Second, the AZIF would be required to invest the Zakat Funds into diversified portfolios so that the likelihood of financial loss would be minimised. In addition, insurance should be provided by the government by simply committing callable capital to covering a loss if it ever happens. Alternatively, the AZIF could build up a ‘Loss Reserve Account’ (LRA) from its earnings.
The use of Zakat funds for investment, whereby some beneficiaries as a group become financial partners in certain productive projects, was, in fact, found compatible with the Sharia at an Ulema convention held in Pakistan in 1989.
Waqf As a Corporation
Can the AZIF be established as a corporation? Waqf is defined as taking the corpus of any property from the ownership of someone and transferring it permanently to God, and dedicating its fractions to others. Therefore, by virtue of being a Waqf, the AZIF will retain permanency.
The AZIF, being a Waqf, would therefore observe the four canons of Waqf It endows; targets beneficiaries-persons as well as purposes; endowed assets; and deals with legal forms and terms of Waqf contracts. The Mutwalli (Management) of a Waqf must also be mature. Its members must have a sound mind, be honest and trustworthy with no taints of immorality, and should be capable of managing and controlling the property personally and/or through capable managers. T h e Management further has rights to recover Waqf property; appoint a successor; borrow; sell and exchange Waqf property; and incur Waqf-related expenditure.
I would also suggest that Waqf resembles a corporation because it is a Juridical Person, which, like a corporation, has existence in law; it has the same principle of separation of ownership from management as does a corporation; and both a Waqf and a corporation are permanent entities. However, a corporation may be subject to voluntary winding up or compulsory liquidation, and therefore I propose that a Waqf may not be liquidated.
Distribution in Shares
Zakat distribution can take the form of direct support to buy productive tools or establish a shop, and make periodic payments to the beneficiaries. And since stocks and shares represent ownership of production and commercial assets, such as machines and shops, it is compatible with the Sharia to distribute Zakat in the form of shares, which represent real productive assets.
Many scholars maintain that Tamlik is an important condition of disbursing Zakat funds. This means that beneficiaries of Zakat funds must become their owners. But the allocation of Zakat shares by an AZIF in the place of money would still fulfil the requirements of Tamlik.
Localised Distribution of Zakat
According to Abu Ubaid, the Prophetic sayings stress the fact that when Zakat is collected, it should be distributed in the same locality from which it was taken if it can be demonstrated that there are recipients there who need it. An AZIF could set up branches in all regions so that it could maintain a local presence wherever possible, preferably along with Islamic banks and Zakat agencies.
It could then be made mandatory that a certain proportion of shares should be shared out only to residents of the particular locality. In addition, funds might be earmarked for the development of the local infrastructure, education, industry, agriculture, and handicrafts, in which local people might be gainfully employed.
In order to improve social cohesion, there would need to be public accountability as to how this ‘General Zakat’ in the form of shares to help local amenities and employment was shared out. In that way it would be easier for the donors of the Zakat to see where their money was going.
In the USA, food stamps of varying denominations, worth one, five, ten dollars etc., are distributed to the poor. These stamps may be freely used by the beneficiaries to make purchases from authorised retail outlets. Similarly, the Zakat House in Kuwait gives coupons to Zakat recipients. The AZIF shares would also be certificates of various denominations, and could be used in the same way.
As a financial institution, AZIF would know vei7 well how to channel the funds into profitable investments and to protect the wealth from unnecessary loss. In this regard, conducting project appraisals, analysing financial statements of the entrepreneurs, and asking for some kind of collateral, are just some ways of cutting down the element of risk and possibility of loss to a minimum.
AZIF Modus Operandi
The AZIF should be an independent autonomous body commercially, economically, socially and religiously; and all shareholders, staff, project partners, and others associated with AZIF must be Muslims, as Zakat money cannot be entrusted to non-Muslims. The need for developing proper systems and procedures for accounting and financial controls for the AZIF cannot be over-emphasised. If the systems and procedures are allowed to sprout without proper planning, it will cause a great deal of trouble later, if not defeat the purpose altogether.
The staff of an AZIF should be knowledgeable, and committed in their concern regarding problems of Muslims in their communities. They must be competent and qualified to do the job, and there must be conditions of service that will guarantee the necessary means of living.
The AZIF should enact that a certain percentage of jobs be reserved for Zakat recipients. Training schemes would have to be organised to develop the capabilities and skills of the poor and of unemployed youth, and to meet the shortage of experienced and efficient personnel.
AZIF would need to be run by people of integrity, competence, piety and knowledge, factors which would certainly enhance the size of the Zakat collections, thereby contributing proportionately to the AZIF’s capital. It should seek to make use of all the mass media to acquaint people with the duty of paying Zakat, and explain its various activities and the works of the AZIF. For successful growth and continuity depends in large measure on the confidence of the donors and primary subscribers in the organisation.
The donors and primary buyers should be regularly informed of the results and operations through periodic reports, a factor which should provide motivation to those who currently shy away from giving their Zakat contributions.
Projects designed to meet essential needs of the community must be financed to the exclusion of luxury and non-essential items, and AZIF should concentrate on productive tools and consumption goods of common use by people of small means, and invest in the production of goods such as sewing machines, clothes, shoes, dwelling houses, small poultry farms etc. Even viewed from the standpoint of income distribution, let alone for the provision of food, it would be the source of income and welfare for the major part of the country’s population.
The AZIF should seek projects in the fields of livestock, agricultural estates, production, forestry, production of fruit and vegetables, fisheries, and dairy products like eggs, milk, butter, and poultry. It would also be worthwhile to seek projects in agricultural industries and the commercial development of farms and fishing areas like storing, packaging, processing, and marketing. Construction of houses and production of consumer durables deserve special consideration.
All projects undertaken should be profit-orientated, for the simple reason that it would be impossible for the AZIF to augment its funds and mobilise new resources simply through religious appeal. AZIF should finance such projects/enterprises as are technically sound, and economically and financially viable, and which demonstrate that a clear effort has been made to promote welfare and self-assistance for the Zakat recipients. Improved housing facilities, health services, training programmes, educational institutions, and a number of similar services may be initiated for this purpose.
Investment in infrastructure, as well as the maintenance and operation of the existing infrastructure in poor localities, is necessary to create an environment conducive to the health and economic development of the poor. A developed rural infrastructure will also facilitate the transition from a rural to a commercial and industrial base. Emphasis should be given to labour-intensive projects in labour-abundant countries, including Islamic hotels, and the development of tourist resorts.
Realising that the usual forms of funding are ruled out by virtue of the requirement regarding conformity with the Sharia, it is essential to explore other modes of placement such as investment in real estate markets, stock markets, investment trusts, mutual funds, and commodity markets, and the risks and difficulties involved with them.
The AZIF may finance most long-term private and public ventures on the basis of Mudaraba, Musharaka, Istisna, Sharikah Mutanaqisa, Murabaha and other Islamic modes of financing. Nevertheless, a major consideration in the selection of projects must still be their realisable profitability, as funds for the Zakat beneficiaries are not to be washed away on the pretence of their being orientated towards social goals. Social programmes may, if at all, be financed only from the realised profits and not from the capital of AZIF.
AZIF, its branches and affiliate offices should encourage reputable investors, establishments, financial, commercial, industrial, and service institutions to participate in establishing diversified projects in specified fields. AZIF may also develop the capabilities of small-scale industry investors who possess the technical and managerial know-how, but lack the necessary funds to start or widen the scope of their existing activities.
Potential Sources
Cumulative Zakat funds lying with the Zakat collection agencies make up readily available money for capitalisation of the AZIF, which are as follows:
As Zakat becomes due each year on the well-to-do Muslim, the capital subscriptions of the AZIF would increase every year and continue to expand over time. Zakat on wealth held or managed by companies, financial institutions, employers, provident funds of employees, investment trusts, share certificates, and savings or fixed deposits deducted at source may be used directly to purchase AZIF shares. Capital may be raised by up-grading the Zakat collection efforts.
The gap remains wide between the assessment of Zakat on available wealth in the Islamic countries and what is collected. Zakat has the potential of mobilising substantial resources because the Nisab is low and the base of the levy is fairly wide. In fact, the base is so wide that almost everyone except the poor has to pay something by way of Zakat. In certain country studies, Zakat has been found to have the potential to transfer 3 per cent to 4 per cent of the gross domestic product every year to poorer section of the population.
At present, Zakat is not collected against all stipulated items in any of the Muslim countries, so that much of its potential remains untapped. For example, in 1988, only about 8.3 per cent of the total Zakat was collected and paid to the religious councils of Malaysia. A balance of 91.7 per cent, or US$134.3m, remained uncollected or unpaid. In the Sudan, Zakat proceeds are insignificant relative to GDP, and Zakat collected as a percentage of agricultural output falls into the range of 0.40 per cent to 0.88 per cent only. If proper collections were made, then only Ushr from agricultural output should fall between 5-10 per cent of agricultural output in the country.
Cash Waqf may be channelled into long-term investment. Indeed, investment of Waqf cash is already in practice. For instance, in Turkey, the Turkish Awqaf Bank was established in 1954. The income from the bank is spent on management, restoration and other needs of the Waqf properties. In Uganda, Waqf properties are managed by the Muslim Supreme Council either directly, or through Industrial and Commercial Holdings (ICH), a body which was established by the Uganda Muslim Supreme Council. ICH is currently managing eight agricultural estates, one factory producing envelopes, one factory producing brushes, four cattle ranches with 500 head of cattle, and residential and commercial buildings situated in Kampala and Jinya.
Anas Zarqa has proposed placing some existing Waqf properties on Hikr and the cash invested through the AZIF. The income so obtained from these shares could be the income realised by the Waqf authority, while the shares themselves could be retained permanently and not be sold except to buy other shares of another kind. In this way, the value of investment is not decreased but increased, while the expenditures are met out of the profits generated by the investment.
Challenges
While it would be difficult to over-emphasise the benefits such a scheme could bring, it would also be fatal to gloss over the problems and difficulties that might arise.
In making investment contracts on the basis of Mudaraba and Musharaka, the AZIF must not lose sight of the serious consequences which could arise should the financier fail to intervene in entrepreneurial activities such as Mudaraba contracts, or the entrepreneur resort to ‘tricks-of-the-trade’, inadequate record-keeping or appropriate funds.
For instance, the Islamic Development Bank’s (IDB) equity operations have dropped sharply in view of the bank’s unhappy experiences with several of its equity investments. It appears that many of the projects financed by the IDB are facing difficulties of one type or another, related to project implementation, production, marketing, and other operational or financial aspects.
It is also important to realise that vast properties in most Muslim countries used to be in the nature of Waqf. For instance, in the first quarter of this century, up to 12.5 per cent of arable land in Egypt, 33 per cent in Tunisia, 50 per cent in Algeria, and 75 per cent in Turkey was Waqf land. But, despite land being a prominent factor in production, most of the Awqaf were poorly managed. Such holdings in the hands of incompetent managers (Mutawallis) proved to be a handicap to the growth and development of a healthy national economy.
Socio-Economic Development
The specific benefits of the proposed mechanism in terms of self-support for the individual Zakat beneficiaries and its potential to contribute towards the development of the agricultural sector, rural development, and the development of education, health, utilities, and service infrastructure cannot be denied. Such development would definitely reduce the incidence of poverty that is rampant in Muslim countries and among Muslims in multi-racial countries.
For instance, in Malaysia, the incidence of poverty in 1984 for Malays was 25.8 per cent. For Chinese households it was 7.8 per cent, while for Indian households it was 10.1 per cent. These figures had fallen to 23.8 per cent, 7.1 per cent, and 9.7 per cent respectively by 1987. Thus, the incidence of poverty among Malay Muslims is the highest of the ethnic groups in Malaysia.
The mechanism I am putting forward has the potential to reduce poverty and help towards making Muslims more self-supporting. Some other advantages, which could be reaped through the mechanism outlined above, are as follows:
All Zakat money would be transformed into long-term investment shares, and the shares would be for sale on the market and cashable for the purchases of the necessities of life at retail outlets. The recipients are thus able to obtain full control of their rightful ownership in the form of AZIF shares. The beneficiaries may also be able to use these shares for making transactions in amounts and in a manner which they deem fit. In addition, being shareholders, they would be entitled to dividends declared by the AZIF from time to time. The beneficiaries would enjoy the added advantage of flexibility in cashing their shares and entitlement to periodic income.
Some members of society are permanently placed in need of Zakat for meeting their basic human needs in terms of food, clothing, shelter, Medicare etc., because of some permanent disability like being an invalid, blind, chronically ill, senior citizens, or orphan children. Others may fall into this category because of involuntary unemployment.
In fact, these people are entitled to perpetual help, which is possible from a perpetual income stream in the form of dividends from the investments made by the AZIF. The poor and needy will benefit directly in the form of dividend earnings, and also indirectly from the increased supply, and the resulting fall in the prices, of goods commonly used by them.
There might be an additional advantage for the handicapped and physically disabled in receiving shares instead of cash, because they may then be able to manage their investments even if they cannot perform physical tasks. Those who are unable to work, say through physical disability, old age, or illness, should be provided with sufficient resources to relieve their hardship.
The incomes of those who are not able to earn enough to ensure a basic minimum standard of living for themselves and their dependent family members should be supplemented by transfers in both cash and kind. However, the maximum effort should be exerted to use the proceeds of Zakat in such a manner that recipients become self-supporting in course of time.
It has been emphasised that Zakat proceeds should be used in such a way that the self-respect of the recipients is not hurt. An added advantage would be that the distribution of Zakat in the form of Zakat shares would preserve privacy and enhance the dignity of the regular recipients of Zakat.
The establishment of AZIF would also almost certainly lead to wider public participation in stock markets, particularly by those who are interested in Zakat-related projects. In this way, it would become a catalytic force for the development of both primary and secondary markets in Muslim countries.
Conclusion
Thus, it may be seen that the channeling of Zakat funds into long-term investments is a viable proposition for helping the development of Muslim countries. Hence the proposal to set up a suitable financial institution such as AZIF calls for early and serious attention from all those interested in the social and economic well-being of Muslim countries.
Edited By Asma Siddiqi
Institute Of Islamic Banking And Insurance London
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