Islamic social finance (IsSF) has gained prominence in recent years due to its immense potential in, supposedly, realizing greater economic inclusion. As we have stated in this report throughout, IsSF broadly comprises traditional Islamic institutions based on philanthropy such as zakat, sadaqa and waqf as well as contemporary Islamic not-for-profit microfinance institutions. It has huge potential to serve clients that are not ‘bankable.’ Its operationalization is subject to a set of Shari’a principles that must be adhered to at all times. On the financial sustainability aspect, the management of Islamic social finance institutions (IsSFIs) must ensure that the benefits and impact of such institutions could run across the next generation.
As such, fostering the IsSF sector has become an inevitability. In light of this; and given the variations of practices, unique circumstances and priorities that each jurisdiction may have; harmonization of regulations has become an important objective as a result. Such harmonization allows for expanded activities that will unleash the potential of the IsSF sector, resulting in a greater impact on society. In articulating how zakat can be deployed for the socio-economic objectives, this chapter is structured as follows: Section 2 discusses the pertinent issues in IsSF, while Section 3 elucidates some strategic initiatives to address the issues pointed out in section 2. Section 4 is divided into two: first, it sheds some lights on how the Indonesian national zakat authority, namely BAZNAS, adopts Zakat Core Principles (ZCP); and second, it presents the role of BAZNAS in socio-economic empowerment. Section 5 is the conclusion.
Pertinent Issues in IsSF
Although IsSF has grown and attracted a range of new key stakeholders, it remains engulfed with a number of challenges at the macro, meso and micro-levels of organization. These include:
- How much regulation is right for the IsSF sector?
- Do stringent laws and overregulation stifle the sector?
- How should the key stakeholder’s harmonies different regulatory frameworks governing institutions that include religious and secular philanthropy, cooperation, and not-for-profit and for-profit finance?
- How should they develop a unified and integrated framework for the IsSF sector?
More specifically, as articulated in the IRTI Islamic Social Finance Report 2015, questions relevant to sub-sectors that may have major policy implications are:
- How do we ensure standardization in defining assets subject to zakat and estimating zakat liability in the presence of diversity in legal opinions?
- Is zakat a dependable source of funds for institutions?
- Does the state perform better than private institutions in the domain of zakat management?
- Should zakat payment to state authorities be made compulsory?
- Should a zakat payer (muzakki) be allowed to choose between public and private zakat collectors?
- Should zakat payments be allowed as a deduction to income tax payable or to taxable income?
- Is corporatization good for zakat management?
- Should zakat be allocated for other types of beneficiaries only after the needs of the ultra-poor are addressed?
- Does the requirement of ownership (tamleek ) imply unconditional cash transfer?
- Should zakat be used for giving loans (qard)? Will the answer be different if zakat funds are used to create a revolving fund (credit pool) to leverage the relatively scarce zakat funds for meeting the needs of a much larger number of the poor? Will the answer be different if the revolving fund is owned by the poor?
Moreover, the IRTI Islamic Social Finance Report 2015 identified the following issues related to waqf that have become the source of continued debate:
- What should be the coverage of an ideal legal framework for awqaf?
- How should the regulator strike a balance between concerns of preservation and development?
- Must an endower (waaqif) always be a Muslim?
- Should waqf be restricted only to immovable properties like land and buildings?
- How should family waqf be dealt with in legal framework?
- Should the state have absolute power to terminate a trustee (mutawalli) nominated by the waaqif and to take waqf assets under its own management?
- How should existing awqaf be preserved and protected?
- How effective are the penalties imposed by law against erring and dishonest private mutawalli?
- How should the corpus of waqf be invested?
Strategic Initiatives to Address the Issues
Answers to the above questions surely require careful analysis and careful observation, backed up by robust data and sensitivity to the uniqueness of each jurisdiction. In an attempt to establish a unified framework, IRTI, Bank Indonesia and BAZNAS formed a partnership in 2014 with the main objective to provide a general framework for facilitating collaboration and cooperation towards the development of Islamic social finance. The partnership has yielded a positive result in the form of Zakat Core Principles which was ultimately launched at the United Nation’s inaugural World Humanitarian Summit on May 23-24, 2016 in Istanbul, Turkey.
The main idea behind the core principles of zakat management was to help the existing regulatory bodies in different jurisdictions to improve governance. For the countries that do not have a zakat system in operation, it would also provide the basis for making zakat laws and regulations.
In essence, the main objective of zakat core principles was to strengthen a sound supervisory zakat by establishing a set of minimum standards and principles to be adopted by relevant zakat authorities. The zakat core principles are comprised of eighteen principles, divided into two main categories, a) essential criteria and b) additional criteria. The essential criteria set out in zakat core principles is any key components that should be in place in zakat management, by which any zakat authority cannot have without in order to function both efficiently and effectively. To name a few, the presence of legal foundations and robust governance are the examples. Whereas the additional criteria signifies the ‘add-on’ elements, such as risk management, that may be more relevant to any zakat authorities that are more advance and sophisticated in managing their zakat collection and distribution.
Role of Zakat in Socio-Economic Empowerment: Lessons from BAZNAS
This part sheds some lights on how BAZNAS enhances the sound regulatory framework triggered by ZCP to subsequently have several measurement indexes that pave the way for the effective management of zakat institution. This part also introduces BAZNAS’s strategic approach to alleviating poverty; through addressing three primary problems, namely i) access, ii) growth, and iii) social justice. Some examples are also presented to show BAZNAS’s initiatives to address poverty.
Developing a Sound Regulatory Framework for Zakat Institutions
As exemplified in the earlier section, the synergy between IRTI IsDB, Bank Indonesia and BAZNAS culminates in the launch of core principles for effective zakat operation and supervision, also known as ZCP which contains a set of principles to guide the relevant authorities to have robust and effective zakat management. On deliberating the zakat collection, ZCP spells out four main aspects: 1) zakatable wealth and its calculation method, 2) the collection method, 3) the promotion, and 4) safe keeping.
On the disbursement side, ZCP deliberates upon three primary aspects; a) the beneficiary’s criteria and the method of zakat allocation; b) the criteria for zakat disbursement; zakat should be disbursed in the area within which it is collected. However, zakat can be transported to other areas on the condition that the need of the mustahik within the area of zakat collection has been adequately met; and c) the quantitative criteria for consumptive and productive zakat disbursement programme to help assess the effectiveness of zakat administration. Furthermore, ZCP also covers a number of important aspects concerning legal foundation, zakat supervision, amil governance, intermediary function, risk management, and Shari’a governance.
Following the launch of ZCP in 2016, BAZNAS has issued several indexes, such as National Zakat Index; a composite index that measures the development of zakat nationally by scrutinizing its macro and micro dimensions (Puskasbaznas, National Zakat Index, 2016). The macro dimensions capture the development of indicators such as regulation, government budget allocation to support zakat, and the database of official zakat institution, the total number of zakat payers and zakat beneficiaries; whilst micro dimensions gauge the performance of zakat institution in terms of collection, management, distribution, and its reporting mechanism.
In addition, BAZNAS also has launched the zakat village index which is a composite index of economic, health, education, social and religious aspects that are utilized to measure the extent to which particular village needs zakat assistance programmes (Puskasbaznas, 2018). In regards of accounting, BAZNAS published the financial ratio of zakat management organizations in 2019 which measures five main ratios that represent the financial soundness of zakat institutions, such as activity ratio, efficiency ratio, amil balance ratio, liquidity ratio, and growth ratio (Puskasbaznas, 2019). BAZNAS also introduced other various groundbreaking studies, such as a study about the role of zakat in achieving the SDGs and Maqasid al-Shari’a (Puskasbaznas, 2017), zakat risk management (Puskasbaznas, 2018), transparency index for zakat institution (Puskasbaznas, 2019b), and zakat literacy index (Puskasbaznas, 2019c).
At the micro-level, BAZNAS has developed several tools to support socio-economic empowerment intervention on the field. First, had kifayah which is a threshold for a family to have a decent life and fulfill their basic needs (Puskasbaznas, 2018). This tool is used to assess the eligibility of a person or family is in receiving zakat disbursement programme. Second, apostasy vulnerability index that measures the vulnerability of apostasy in 34 provinces in Indonesia (Puskasbaznas, 2018). Third, zakat utilization index that measures the impact of zakat utilization programme on the beneficiaries’ prosperity on five dimensions: social, cultural, economic, da’wa, and environmental (Puskasbaznas, 2019). Fourth, index for sustainable water and sanitation to measure water, sanitation, and hygiene condition in a village (Puskasbaznas, 2019).
Poverty Alleviation Approach and its Socio-economic Intervention
Zakat is an embodiment of Islamic values that recognize the welfare of individuals being as important as the public interest. Zakat should therefore be managed and structured in such a way to effectively address a) access problem, b) growth problem, and c) social justice problem.
Access problem refers to a circumstance whereby the poor cannot access the sources of prosperity. They have difficulties, if not zero access, to three types of accesses, namely basic access, growth access, and emergency access. Basic access is fundamental access for human being to sustain their livelihood such as access to clean water, food, housing, clothing, and health services. In this sense, zakat should be provided to allow them having a decent life. Growth access refers to education that will give the mustahik an opportunity to grow if they have a proper access to quality education. Lastly, emergency access, which relates to an emergency evacuation, shelter for the survivors, and other emergency aids that are urgently needed during the disaster.
Growth problem is a type of challenges which relates to several aspects that need to be uplifted so that the beneficiaries can gain economic growth and have the opportunity to be distant from poverty trap. In this regard, three core aspects are crucial, i.e. capital, production, and market. In our view, capital deficiency is one of the reasons why small business owned by mustahik is difficult to grow. The inability to attain a sufficient economic scale has prevented them from producing goods or services that are adequate to sustain their business enterprise. In this respect, zakat needs to be channeled as the capital stimulation so that they can grow and nurture their business. The second growth problem is production which relates to the challenges that prevent mustahik from reaching the level of their production which allows them to produce a decent quality of products. The third problem is market limitation; zakat fund can be utilized as a catalyst to open a market for them. Several ways can be made for this, such as: creating a bazaar, placing their product in a restaurant, hotels or marketplace. It is worth noting that poverty is also caused by social justice problem. Zakat can be disbursed under various programmes that provide advocacy for the unheard or marginalized segment of the society.
BAZNAS Socio-economic Programmes for Poverty Alleviation
This section sheds some lights on a variety of socio-economic empowerment programmes in the field that BAZNAS has designed to address the poverty.
Under social intervention, there are five BAZNAS Programme Agencies cater for fulfilling basic, growth and emergency access. In order to fulfill basic access, BAZNAS established BAZNAS Active Service Institution; it comprises a specialized team trained to give immediate helps for those who need food, clothing, tickets and supports for wayfarer, access to ambulance, helps for disabilities and many more. BAZNAS also formed BAZNAS Healthy House Institution which provides free medical services for the poor in six different provinces. On top of it, this institution also leads the water, sanitation, and hygiene (WASH) programme implementation throughout the country. Recently, BAZNAS has signed an agreement with UNICEF for doing active collaboration in this programme. Moreover, to provide prompt assistance for emergency access in a disaster situation, BAZNAS established BAZNAS Disaster Response Agency that has two main tasks; 1) to provide first response to the emergency situation in the disaster area and, to create a resilient community which has a better awareness to disaster.
Other two novel agencies worth mentioning are BAZNAS Scholarship Agency and BAZNAS Cendekia School Institution. The former is designed to provide a various scholarship programmes for students and equipping them with relevant training so that they will become empowered and ready for their future careers. The latter is designed to become a model of Islamic boarding school that gives quality access for junior high school student from underprivileged family.
Under economic intervention fronts, BAZNAS has established four different organ units, namely Zakat Community Development, BAZNAS Microfinance, BAZNAS Institute of Mustahik Economic Empowerment, and BAZNAS Institute of Mustahik Breeder Empowerment. These units provide supports to various beneficiaries, such as farmers, breeders, traditional stalls, woman groups, disabilities groups, traditional food vendors, craftsmen, batik artists, indigenous weaver, and many more. In doing so, they provide capital support for mustahik to obtain necessary working tools and raw material for them to initiate their business. BAZNAS also give relevant trainings and assistance such as relevant production enhancement training, technology support, financial management, organizations and business training. Various relevant assistances are also given to the beneficiaries to sustain their existence while at the same time create markets where they can sell their product. For instance, BAZNAS uncharacteristically, create a fashion show in Jakarta to promote the production of the indigenous weaver in East Nusa Tenggara so that they can meet a potential buyer (Swandaru, 2019). BAZNAS also provides technological support to enhance beneficiaries’ business by developing Zmart application for traditional store to record their transaction and stocks. There is also an apps for breeder to support them in getting the access to record the development of their livestock in terms of incremental population, weight growth, livestock healthiness and educational video that exploring best practices in breeding.
Lastly, under advocacy intervention, BAZNAS has established two organ units, Mualaf Center BAZNAS (MCB) and BAZNAS Center of Strategic Studies. MCB is designed to support mu’alaf, vulnerable or marginalized groups. It also has a mandate to provide da’wa and public support to Islamic teaching.
Job creation, inclusive economy, social and environmentally friendly economy have recently been the most-cited policy goals around the world. Climate change, poverty reduction, and access to finance have also been considered as no less important than the goals aforementioned. And in the spirit of attaining such novel goals, Islamic social finance is becoming increasingly important given its immense and yet untapped potential.
In the case of Indonesia, given its economic and more importantly being one of the largest economies in the world, the enormous potential of its social and development finance cannot surely be taken lightly. In this regard, therefore, BAZNAS plays a very strategic role since it sits between the state and the market.
In the synergy between the commercial and non-commercial sector, three key components shall not be overlooked; a) sustainability path: which aims to meet the developmental needs of the community, through the launch of a number of products and the creation of sustainable financial resources; b) empowerment path: aims to enable the social finance sector to achieve a deeper impact by developing the capabilities of non-profit entities and their personnel in various fields; and c) integration path: aims at strengthening partnerships with relevant authorities in order to guide efforts towards development needs and priorities.