Islamic Social Finance at World Humanitarian Summit

It was an eagerly awaited event. A day before the event, the daily Star of Malaysia published an interview titled “Taking Islamic Social Finance to the World” with HE the Sultan of Perak who would lead a special session on Islamic Social Finance at the United Nation’s inaugural World Humanitarian Summit (WHS) in Istanbul.

The motivation for the event largely rested on the following facts:

  1. The need for humanitarian funding has steadily risen over the recent years. The world today spends around US$25bil to provide life-saving assistance to 125 million people devastated by wars and natural disasters. In the face of the growing need, the supply is falling behind. Much of the need relates to Muslim societies. Therefore, not only new sources of funding need to be urgently tapped, the Muslim countries have a greater responsibility.
  2. Islamic social financing holds the promise. This is based on estimates developed in studies by researchers at the Islamic Development Bank (IDB) and the World Bank. IDB’s research on zakat in 2015 shows an estimated US$600bil (RM2.4 trillion) available to meet humanitarian needs. The logic goes further. If 1% of this is made available, it can meet the global funding deficit for 2015!

The event had a galaxy of eminent personalities as speakers that included Excellencies, the Sultan of Perak, the Secretary General of the OIC, the President of the Islamic Development Bank among others. Moderated by Yalda Hakim of the BBC, the one-hour event started with a brief presentation by the Sultan and a call by him for a Grand Bargain on finance. He called on aid organisations to stop competing for resources and to come together. He informed that the UN fell short of US$7.5bil (RM30.6bil) in funding needs last year, 30% of what it required. He proposed that Governments should use the opportunity at the WHS to sign up to the idea of a solidarity levy and create a steady revenue stream for humanitarian action.

Dr Iyad Ameen Madani was the next speaker. He explained the various mechanisms of Islamic social finance, and emphasized on the on-going work to address how waqf, zakat, sadaqah and other instruments such as sukuk bonds can be channelled effectively and efficiently. The next speaker was Mr Xavier Bettel, Prime Minister, Grand Duchy of Luxembourg, who highlighted the many firsts that the small country can boast of in the matter of introducing Islamic finance. Dr Ahmad Mohd Ali, President of IDB asserted that the aim of Islamic social finance is to ensure that no one is behind; and no one is alone. He highlighted the many programs and projects of IDB that aim to address the twin concerns of rehabilitation and development. Specifically, he highlighted the new initiatives undertaken with World Bank, which was seconded by the next speaker, Dr Mahmoud Mohieldin, Senior Vice President, World Bank Group.

Dr Hender, Deputy Governor of Bank Indonsia sought to highlight the advances made by his country in developing international standards for the Islamic social finance sector. He informed the audience that the Core Principles for Zakat Management have already been developed and the same for Awqaf are under development in active partnership with the Islamic Research and Training Institute (IRTI) of the Islamic Development Bank and BAZNAS, the Indonesian apex body for Zakat Management. He presented a copy of the Core Principles document to the President, IDB. Finally, he offered his country to host an International standard setting body dedicated to the sector.

Other speakers at the event included Dato Muzaffar Hisham, CEO, Maybank Islamic an aspiring key stakeholder in the development of sukuk as well as an awqaf crowd-funding platform for humanitarian financing. He asserted that while his organization is a for-profit one, it has a long-term outlook that is appropriate for managing Islamic social funds. Other speakers at the event included Mr.Jan Egeland, Secretary General of the Norweigian Refugee Council, Ms. Cihan Sultanoglu, Assistant Secretary General of the UN, and Ms. Ertharin Cousin, Executive Director of the World Food Programme.

Two observations are in order. First, the estimated potential zakat funds is placed at USD600 billion. If one examines the studies underlying the estimates, it becomes clear that these are crude estimates of zakat liabilities of ALL eligible payers in Muslim countries if they pay zakat according to Shariah rules. The fact of the matter is that a small percentage of such potential payers are practicing Muslims. The payment of zakat being a religious obligation becomes a voluntary act in most Muslim socieites, with the exception of Saudi Arabia and Sudan where the State laws have made it compulsory to pay zakat. Zakat payment is also compulsory in Malaysia and partially so in Pakistan. In effect however, zakat payment remains a voluntary act due to lack of enforceability. Studies at IRTI-IDB reveal that about USD5.7 billion is being collected in five countries with Saudi Arabia accounting for about USD4 billion alone. This is less than one percent of the so-called potential!! Therefore, to say that funds amounting to USD600 billion are “waiting somewhere to be tapped” is a gross overstatement.

Second, there seems to be a rush towards developing waqf platforms and sukuk. The reasons for such observed interest are not hard to see. Both have a business dimension and involve the services of fee-seeking investment bankers. The result: an understatement of the importance of zakah and sadaqa, even while these are far more relevant and impactful in the context of humanitarian financing as these can easily be adapted as emergency cash transfer programs. Waqf on the other hand, especially cash waqf, raises the need for “prudent management” of the portfolio as a precondition to generating adequate cash. Only the returns, as per Shariah rules governing awqaf, can be spent on the intended needs. This would necessarily involve placing the funds in the capital markets over long-term. What is the probability of generating “perpetual” and “sustainable” returns in the volatile markets and using the same for emergency humanitarian needs, is anybody’s guess.

Related Articles


Your email address will not be published. Required fields are marked *