A Response to Proposed Core Principles for Zakat Management

A quick review of the document prepared by Working Group led by Bank Indonesia on proposed core principles for zakat management raises certain important questions that should be addressed before setting out the principles.

  1. Uniqueness of a Zakat Institution (ZI)

A zakat institution is NOT a bank though it may be seen to engaged in a unique type of financial intermediation. It does not buy money. Nor does it sell money. It does not owe money. Nor does it lend money (there could be exceptions, e.g. zakat-funded credit pool in case of Akhuwat).

  1. Overstating Interdependence between ZIs

Unlike a bank that operates in an environment of interdependence, a zakat institution can stand on its own. (e.g. Edhi Foundation Pakistan collecting over one-third of total zakat in an environment of acute trust-deficit with government zakat body and other zakat institutions). The issue of “contagion effect” is of minimial significance unlike a bank.

  1. Unique Risk Factors with ZIs

Unlike a bank, a ZI has unique risk factors. Even if some factors appear to be common between a ZI and a bank, there significance may vary greatly. For example, “country and transfer risk” and “disbursement risk” are of far less significance for a ZI as compared to a bank. Given that most ZIs operate on a local or at best national basis, the nature of the risks need to be better appreciated.

The above highlight the fact that there is little merit in mimicking Basle core principles for developing zakat core principles. A few other observations that merit serious consideration are as follows:

  1. Variations in Zakat Systems

The suggested framework is unduly biased towards a system where zakat payment is voluntary and private institutional zakat management is allowed. As rightly pointed out in the background paper there are major zakat systems (Saudi Arabia, Sudan, Pakistan etc.) where zakat payment is compulsory. The rules of the game become completely different for obvious reasons.

Where zakat is compulsory, it is a kind of alternative tax on wealth and income. Compliance is a major issue. In such a scenario, the difference between zakat institution and a bank is stark in terms of raising funds. The former “imposes” zakat and the latter “attracts” deposits and other forms of profit-seeking capital. However, when zakat is voluntary, a ZI will also “attract” contributions.

Further, whether zakat is compulsory or voluntary is not just one of the many features of a zakat system. Rather the features of a zakat system are dependent on this key principle. (I therefore, recommend a hierarchy of principles rather than a mere description of them in the Basle style presentation). Indeed, the framework for core principles for zakat simply cannot be developed from “common minimum” Basle norms for banks.

In countries like India and South Africa, zakat is voluntary, but so is the unbridled freedom to individual and institutional players to manage zakat unlike Indonesia. The latter may require self-regulation (in line with core principles) and not left to secular charity laws as suggested in the document.

  1. Absence of a Zero-Base

Unlike Islamic banking and insurance (for which AAOIFI and IFSB norms were developed assuming a zero base), zakat and awqaf system development cannot assume a zero base. Zakat laws already exist in various forms. Where laws are non-existent, zakat flows take place nevertheless, given that zakat is seen as a religious duty. One can assume that the system exists in diverse forms.

Any suggested framework therefore, must be mapped unto existing systems to assess the practicality of its implementation. (Example: wide divergence between zakat and awqaf systems in Malaysia as compared to Indonesia) One needs to examine “in how many countries out of 56 OIC countries, the framework can be implemented?” In the face of wide diversity, the suggested framework must contain features that ensure required flexibility and adaptibility. This requires serious and systematic research into components of alternative zakat systems.

  1. Dealing with Variations

Zakat systems may vary with respect to:

  • compulsory or voluntary nature of zakat
  • role of state agencies (Ministry of Finance/ Religious Affairs etc.)
  • fiscal incentives
  • cost recovery
  • transformation of mustahiq into muzakki

The core principles may refrain from making specific recommendations. For example, the Disbursement-Collection Ratio presented in the document appears to be a very useful tool for avoiding “zakat holding”. But this may make little sense in the context of the Nigerain zakat system where zakat is mostly collected as food grains and are distributed at the point of collection itself. Principles should not and need not specify the tools and be expressed in terms of the tools, howsoever elegant they may appear to be. A broader statement of the “core principle” – avoid zakat holding – would be simple and clear.

Indeed if certain country-specific norms/principles/features are identified and suggested as the recommended ones, the background document needs to clearly specify this (e.g. a vote for voluntary and against compulsory zakat).

It may specify clearly which norms/ principles/ features are present in a flexible format allowing multiple outcomes (e.g. both centralized and decentralized system of management)

There are other specific observations regarding individual Zakat Core Principles to which I will revert later. However, these would be trivial as compared to the above issues that are more fundamental in nature.

Mohammed Obaidullah | August 30, 2014

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