Globalizing Islamic Philanthropy with Fintech – I

Islamic philanthropy has customarily lacked a global character. Traditional Islamic scholarship discourages inter-country or inter-regional flow of zakat funds. From a Shariah point of view, the following well-known hadith forms the basis of such priority:

‏ “‏ ادْعُهُمْ إِلَى شَهَادَةِ أَنْ لاَ إِلَهَ إِلاَّ اللَّهُ، وَأَنِّي رَسُولُ اللَّهِ، فَإِنْ هُمْ أَطَاعُوا لِذَلِكَ فَأَعْلِمْهُمْ أَنَّ اللَّهَ قَدِ افْتَرَضَ عَلَيْهِمْ خَمْسَ صَلَوَاتٍ فِي كُلِّ يَوْمٍ وَلَيْلَةٍ، فَإِنْ هُمْ أَطَاعُوا لِذَلِكَ فَأَعْلِمْهُمْ أَنَّ اللَّهَ افْتَرَضَ عَلَيْهِمْ صَدَقَةً فِي أَمْوَالِهِمْ، تُؤْخَذُ مِنْ أَغْنِيَائِهِمْ وَتُرَدُّ عَلَى فُقَرَائِهِمْ ‏”

‏Book 24, Hadith 1, Sahih al-Bukhari 1395

The Prophet pbuh sent Mu`adh to Yemen and said, “Invite the people to testify that none has the right to be worshipped but Allah and I am Allah’s Messenger (ï·º), and if they obey you to do so, then teach them that Allah has enjoined on them five prayers in every day and night (in twenty-four hours), and if they obey you to do so, then teach them that Allah has made it obligatory for them to pay the Zakat from their property and it is to be taken from the wealthy among them and given to the poor among them.”

The last component of the hadith (underlined above) is interpreted to imply a localized zakat mobilization and distribution strategy. It is also often interpreted to connote a strategy of exclusion of non-believers, suggesting that zakat is to be mobilized from the Muslims and allocated only among them.

A review of various viewpoints[1] on the issue of localized approach to zakat management indicates the following:

Zakat is distinct from “tax” collected by an Islamic state. It is not meant to flow into a centralized pool and allocated based on macro-priorities of the government. On the contrary, zakat should target and address the needs of the poor, the needy and other eligible beneficiaries. A strategy of localized management makes more sense in this context. Possible reasons that are socio-economic in nature may include the following:

Costs related to logistics brings down the net zakat available for distribution. It can be very inefficient to transport zakat to far-off regions in the context of non-monetary zakat, e.g. agricultural produce and livestock.

Shariah emphasizes establishing identity of beneficiaries (whether they qualify as asnaf) as also of donors (zakatable wealth must be from halal and undisputed source). The latter is also a major concern of contemporary governments seeking to curb money-laundering and financing of terrorism. Traditionally, this implied a localized approach to management with lower levels of information asymmetry. A global approach is perceived to make due diligence and monitoring costlier and more difficult.

It may be noted that the localized approach to management has been a matter of preference on grounds of efficiency. Both the classical and contemporary scholars permitted the flow of zakat to “other” regions on the basis of intensity and desirability of the need (and certainly if the originating region is zakat-surplus), such as, humanitarian crises triggered by natural calamities, wars and conflicts leading to displacement and subjugation of communities. There is also a general agreement on permissibility, if the intended beneficiaries are students or scholars or from the kith-and-kin of the zakat payer.

Do the arguments in favor of localized management continue to be tenable in the context of management of zakat backed by fintech? Several recent fintech-based initiatives seem to contradict this contention. Indeed, fintech is seen as a game changer for several reasons.

Application of fintech can potentially raise efficiency to a level where logistics related costs can be minimized to a negligible level. With traditional mechanisms of zakat management in place, the operational costs deducted from zakat by the collecting bodies continue to be too high. In regulated regimes like Malaysia and Indonesia the cap is placed at one-eighth or 12.5 percent of zakat collected. In Sudan with large proportion of non-monetary zakat (agricultural produce and livestock) a higher cap at one fifth or 20 percent is admissible. In unregulated regimes like India, costs can be as high as over 40 percent. On the contrary, Islamic charity crowdfunds (e.g. Ethis, Launchgood) are able to bring the donor and beneficiary together at a modest cost of 7-8 percent or even less.

Application of fintech can drastically reduce informational asymmetry between donor and beneficiaries; and ensure due diligence and monitoring with complete transparency. That the person-to-person (P2P) model enhanced by institutional due diligence of beneficiaries (individuals and projects) can ensure this, needs no elaboration. This has a huge positive impact in mitigating the trust-deficit between donors and zakat management institutions.

Two widely quoted studies – by the World Bank and the Islamic Research and Training Institute – estimate the potential of zakat globally in the range of USD 550-600 billion. Against this, what is the quantum of actual mobilization of zakat across the globe? If we add up the numbers as reported in various issues of the Islamic Social Finance Reports, a conservative global estimate is around 10-15 billion USD[2]. Thus, only about 2-3 percent of the potential is being realized currently. What is the key contributor to this yawning gap between the realized and potential quantum of zakat mobilization? For astute observers of the scene, the most significant factor is perhaps the trust-deficit between the zakat paying community and the existing mechanism for zakat management. Needless to say, fintech can play a very significant role in bridging the gap by addressing the most critical constraint.

Fintech can provide solutions to apparently intractable issues that have acted as major stumbling blocks in the past. It has tools that can be employed to easily establish the identity of the donors as well as the beneficiaries. Setting up a database of beneficiaries can address long-standing issues, such as, avoiding a “dependency” culture among beneficiaries and making possible time-bound mustahiq-to-muzakki transformation programs. Similarly, a database of donors can enhance the efficiency and effectiveness of mobilization drives. Instant verification of identity of donors can avoid potential money-laundering and financing of terrorism issues. More than establishing or verification of identities, fintech can provide new digital identities to the internally displaced persons and make zakat disbursement possible. A case in point is AidTech that uses blockchain technology to provide unique, secure and enduring digital identities, and thus, equip the undocumented and unbanked with access to welfare, aid, remittances, healthcare and donations. Beginning with Syrian refugees in Tripoli, Lebanon in 2015 it has moved on to forge a partnership with the International Federation of Red Cross and Red Crescent (IFRC) for mobilization and distribution of sadaqa and zakat. Another new kid on the block is GlobalSadaqa.Com sponsored by the Kuala Lumpur-based Ethis Ventures. Soon to be launched, it is expected to break new ground in the application of fintech to Islamic philanthropy, in-sha-Allah.

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[1] See Al-Qaradhawi’s treatise Fiqh Al-Zakat (Volume 2, Chapter 4)

[2] Top zakat collecting countries include Saudi Arabia at about USD 4 billion; Malaysia at about USD 600 million, Indonesia at USD 270 million, Sudan at USD 225 million, India and at Pakistan 100-150 million each, Islamic Relief Worldwide (collected from 1st world Muslims) at USD 100 million, Singapore at USD 20 million, Brunei at USD 15 million, South Africa at USD 10 million – add up to USD 5.5 – 6 billion, according to various issues of the IRTI Reports and stand about 1 percent of the potential.

Photography Sultan Salahuddin Mosque, Shah Alam, Malaysia by Mohammed Alim 

By Mohammed Obaidullah, Lead Research Economist, at the Jeddah-based Islamic Research and Training Institute (IRTI), a member of the Islamic Development Bank Group. Opinions expressed herein are author’s own and do not reflect the official position of his employer, IRTI-IsDB.