‫المعهد اإلسالمي للبحوث والتدريب‬
Islamic Research and Training Institute
Management of Zakah for
Poverty Alleviation
By
Dr. Mohammed Obaidullah
Senior Training Specialist
18-20 February 2014
DAY ONE
1. Who are the poor & What do they
need?
2. Islamic approach to poverty alleviation
3. How to estimate Zakah liability?
2
WHO ARE THE POOR
Living under one dollar a day
Much more than just lack of income
About lack of education, lack of good health, poor
opportunity (because of no credit or no connection)
to pursue your chosen calling or what you are good
at - Amartya Sen
3
WHO ARE THE POOR
Current commonly used line for extreme poverty is
$1.25 of consumption per day and per capita, in
purchasing power parity term (think of it as the
buying power of a $1.25 per day in the US). This is
what the World Bank tracks.
This is very little! Another interesting number is the
number of people who live under twice the poverty
line, which is still a very small budget.
4
WHO ARE THE POOR
Absolute poverty as the absence of any two of the following eight
basic needs:
Food (Body Mass Index must be above 16)
Safe drinking water (must not come from solely rivers and ponds)
Sanitation facilities
Health (Treatment must be received for serious illnesses)
Shelter (Homes must have fewer than four people living in each
room. Floors must not be made of dirt, mud, or clay)
Education (attend school or otherwise learn to read)
Information (access to newspapers, radios, televisions, computers,
or telephones at home)
Access to services (access to other services, such as, legal, social,
and financial services.
5
WHO ARE THE POOR
Group Exercise:
Prepare a household budget of a typical poor
Muslim family with imaginary but realistic items
and figures.
Questions to Ponder: Where should we draw the
poverty line?
Check different poverty score cards for different
countries
6
WHO ARE THE POOR
It is useful to benchmark the progress we
(the world, or a particular country) are
making against poverty and against the
problems that come with it.
For this, we can look at various indicators:
infant mortality, number of kids who can
read, etc... and of course, income or
consumption poverty.
7
POVERTY LEVELS IN
MUSLIM WORLD
• Five of the member countries account for over
half a billion (528 million) of the world’s poor
with incomes below $2 a day or national
poverty line.
• With another five countries, they account for
over 600 million of the world’s poor
• Most IsDB Member Countries rank low as per
Human Development Index*
_______________________
* Human Development Index (HDI) is a composite statistic of life expectancy, education, and income indices used
to rank countries
8
Ranking of Countries using HDI
VERY HIGH – HIGH – MEDIUM - LOW
9
APPROACHES TO POVERTY
ALLEVIATION
“I have identified the specific investments that are needed [to
end poverty]; found ways to plan and implement them; [and]
shown that they can be affordable.” - Jeffrey Sachs (Columbia
U), End of Poverty
“After $2.3 trillion over 5 decades, why are the desperate needs
of the world's poor still so tragically unmet? Isn't it finally time
for an end to the impunity of foreign aid?” - William Easterly
(NYU), The White Man’s Burden
10
APPROACHES TO POVERTY
ALLEVIATION
Esther Duflo, Abhijeet Banerjee, Dean Karlan
• Surprisingly little hard evidence on what works
• Can do more with given budget with better evidence
• If people knew money was going to programs that
worked, could help increase pot for anti-poverty
programs
• Instead of asking “do aid/development programs
work?” should be asking:
o Which work best, why and when?
o How can we scale up what works?
11
FIGHTING POVERTY WITH HARD
EVIDENCE
Financial inclusion reduces poverty. But what is
the evidence on specific forms of intervention?
• Microcredit is a valuable service for some
entrepreneurs and business owners, but is not a silver
bullet to bring millions of people out of poverty.
• Unconditional cash transfers have a greater impact
than conditional cash transfers
12
ISLAMIC APPROACH TO POVERTY
ALLEVIATION
13
POVERTY IN ISLAM
• "Poverty is almost like disbelief in God."
• In conflict with “enrichment of self (nafs)”
- one of the primary objectives (maqasid)
of Sharīah.
• Collective obligation (Farḍ Kifāyah) of a
society to take care of the basic needs of
the poor.
• Raison d’etre of society itself – Al-Shatibi
14
ECONOMIC EMPOWERMENT
• A man of the Ansar community came to the
Prophet (peace be upon him) and begged from
him. (#1)
• He (the Prophet) asked: Have you nothing in
your house? He (the man) replied: Yes, a piece
of cloth, which we wear, or which we spread
(on the ground), and a wooden bowl from
which we drink water. (#2)
15
ECONOMIC EMPOWERMENT
• The Prophet said: Bring them to me. He (the
man) then brought these articles to him and he
(the Prophet) took them in his hands and asked
to the assembly of people: Who will buy these?
A man said: I shall buy them for one dirham.
• The Prophet asked twice or thrice: Who will
offer more than one dirham? Another man
said: I shall buy them for two dirhams. (#3)
16
ECONOMIC EMPOWERMENT
• The Prophet gave these to him and took the two
dirhams and, giving them to the man of the
Ansar, he said: Buy food with one of them and
take it to your family, and buy an axe and bring it
to me. (#4)
• He then brought it to him. The Prophet (peace be
upon him) fixed a small branch of wood (as a
handle on it) with his own hands (#5)
• And said: Go, cut and collect firewood and sell it,
and do not let me see you for a fortnight.
17
ECONOMIC EMPOWERMENT
• The man went away and cut and collected
firewood and sold it. When he had earned ten
dirhams, he came to him and bought a garment
with some of them and food with the others. (#7)
• The Prophet (pbuh) then said: This is better for
you than begging which should come as a spot on
your face on the Day of Judgment. (#8)
18
ECONOMIC EMPOWERMENT
•
#1. Access of the poorest of the poor to the
program
• #2. Careful assessment of the financial health of
the poor; enquiry blended with empathy;
insistence on contribution and beneficiary stake
• #3. Transformation of unproductive assets of the
beneficiary into income-generating ones through
rigorous valuation (auction method); involvement
of the larger community in the process
19
ECONOMIC EMPOWERMENT
#4. Meeting of basic needs on a priority basis
and investment of the surplus in a productive
asset
#5. Direct involvement of the program in
capacity building in the run-up to income
generation; commitment of top management
of the program
20
ECONOMIC EMPOWERMENT
• #6. Technical assistance in the form of imparting
requisite training to the beneficiary for carrying
out the business plan/ income-generating project;
monitoring through a time-bound schedule and
impact assessment through a feed-back
mechanism
• #7. Transparent accounting of operational results
and liberty to use part of income to meet higher
needs
• #8. Strong discouragement to seeking charity
21
DEBT AVOIDANCE
• Debt only as a last resort and not as a means
to finance one's growing lifestyle needs.
• Prophet Muhammad (peace be upon him) used
to regularly supplicate “Allāh, I seek refuge
with You from sin and heavy debt”
• Muslims are exhorted to repay their debt in
time and avoid deliberate delays.
• The best among you are those who are best in
paying off debt (Muslim)
22
MUTUAL COOPERATION
Zakāh as a tool of solidarity and cooperation,
mutual takāful
• Assist one another in the doing of good and
righteousness. Assist not one another in sin
and transgression, but keep your duty to
Allāh (5:2)
• Believers are to other believers like parts of a
strong structure that tighten and reinforce
each other. (Al-Bukhari and Muslim)
23
FAMILY COHESIVENESS
• “Women Only” approach alien to Islamic
culture.
• “And everything have We created in pairs
that you may reflect".(51:49)
• Balanced role for men and women in
ensuring the economic and social wellbeing of the family.
24
MORE INCLUSIVE APPROACH
Islamic approach to poverty alleviation
• blends wealth creation with empathy for the
poorest of the poor
• favors equity-based and cooperation-based
models in contrast to mechanisms that
create and perpetuate debt
• with a central role to zakāh, sadaqah and
other forms of charity
25
Case Study: Akhuwat
Questions
• What is unique about Akhuwat’s lending
method and credit risk management?
• What are the main components of Akhuwat’s
strategy?
• How does Akhuwat reduce its cost of loans to
zero?
• What could be threats to Akhuwat’s sustained
operations?
26
Case Study: Akhuwat
Indicators
2008-09
2009-10
2010-11
No. of loans
44577
65650
Loan disbursed (Rs. million)
488
Percentage of recovery
Cities
No. of branches
No. of employees
99.50
15
21
90
Year
2008
2009
2010
2011
2012
2013*
Donation Received
Amount (in Rs. million)
23.2
36.1
108
127
95
54
99844
Dec.
2011
125,646
Dec.
2012
230,000
739
1157
1500
3200
99.86
20
33
181
99.85
34
53
358
99.82
45
62
419
99.83
105
153
785
Zakat Received
Amount (in Rs. million)
1.8
7.1
8.1
* Up to February, 2013
**Loans in 2011-12 include those funded by PKR 2 billion zakat placed by Dept of Zakat, Government
of Pakistan
27
Case Study: Akhuwat
• Donations by Borrowers (Progress out of Poverty)
Year
Donation from Growth Rate
borrowers
(Rs Million)
Operating
Expenses
(Rs Million)
8.3
10.4
17.83
Donations from
borrowers as
%age of OE
0.25
0.10
34.3
2008
2009
2010
0.021
0.010
6.1
(50)
59078
2011
12.3
200
36.7
33.4
2012
23.9
195
68.2
35
2013*
29.8
125
*Till Feb 2013
28
Islamic Research and Training Institute
Member of the Islamic Development Bank Group
Case Study: Akhuwat
• Minimize operational cost through creative
strategies:
– Volunteers in staff (one-third)
– Use of masjids and churches
Year
2008
2009
2010
2011
2012
No. of Loans
Disbursed
11,388
13,821
21,073
34,194
67,683
Amount of Loan
Disbursed
Operating
Expenses
(Rs. Million)
(Rs. Million)
122.45
164.23
251.81
418.21
1,137.68
8.29
10.38
17.82
36.67
68.16
OE as %age
of Loan
6.75
6.32
7.08
8.77
5.99
29
Islamic Research and Training Institute
Member of the Islamic Development Bank Group
HOW TO ESTIMATE ZAKĀH LIABILITY
30
ZAKĀH ESTIMATION BASICS
A compulsory annual levy provided:
• On wealth owned for one Hijrī calendar year
(Ḥawl)
• Must be equal to a minimum threshold
(niṣāb) or more.
• Not on income used for consumption
• On savings added to wealth of an individual
during the year, and on agricultural output.
31
ZAKĀH ESTIMATION BASICS
Exempt from it items of personal and
family use such as residence, furniture,
personal and family transportation.
Also exempt items used as means of
production, such as, tools and
equipments, machinery etc.
Elaborate rules of zakāh base and rates
32
ZAKĀH ESTIMATION BASICS
• Zakatable asset (a stock concept) and
Zakatable output (a flow concept)
• With most forms of assets, the rate is two
and half percent
• For output, rate of zakāh is higher at ten or
five percent depending upon whether the
output or revenue earned is expressed as
net of related costs or in gross terms.
• Need to avoid double counting
33
CONDITIONS OF ZAKATABILITY
• Absolute right of ownership of wealth with
exclusive right of disposition
• Growth or potential of growth in wealth
• Wealth above the minimum threshold (niṣāb).
• Passage of a year (Ḥawl) applicable on
livestock, money, and business assets.
• For output, revenues and earnings to be
zakatable, passage of a year, is not required.
34
MONETARY ASSETS
Niṣāb
• Gold: 85 grams; Silver: 595 grams
• Money: gold or silver equivalent
• Saving and investment accounts are
subject to Zakah
Zakāh on stock of money held for speculative
purpose
Debt and receivables included unless are of
highly doubtful nature
35
TRADE AND BUSINESSES ASSETS
• Inventory (Urūḍ tijārah) for the purpose of trade for
profit; Niṣāb: same as money
• For manufacturing concerns, all inventories – of
raw materials, work-in-progress and finished
goods are zakatable at market value
• Current liabilities (provided are payable from
present Zakatable stock) are exempt; Fixed assets
are exempt
• Thus: zakatable value is equivalent to net working
capital
36
COMPUTING CORPORATE ZAKĀH
Zakāh = (Net Current Assets (+/-) Adjustments –
Conventional Bank interest) x Percentage of
Muslim Ownership x 2.5%
In a business where ownership is split between a
Muslim & non-Muslim, only the Muslim’s share of
the business is subjected to zakāh. Also when
ownership is split between government and
private, only the private Muslim is subject to
zakāh.
37
LIVESTOCK
• Niṣāb: 30 cows or 40 sheep or 5 camels
• Rates slab depending on numbers of livestock
• If in the nature of merchandize for resale, 2.5%
of market value
• If acquired for by-products e.g. milk (in a
dairy), then similar to agricultural output: ten
or five percent depending upon whether the
output is expressed in net or gross terms.
38
AGRICULTURE
• Passage of year not required; payable at the
time of harvest
• Niṣāb is five wasq (652.8 kg of wheat)
• Value of land is not zakatable
• Rate is ten percent of output if land does not
need irrigation and five percent if land needs
irrigation
39
ASSETS ON LEASE
• Buildings and non-arable land on rent
• Comparable to agriculture where output/
revenues and not value is zakatable;
• Market value zakatable, if acquired and held
for trade and resale.
• Divergent views on rates (2.5/ 5/ 10) percent
40
STOCKS
• If for short-term trading, then on market
value
• If for long-term investment, then
 on value adjusted for the percentage of
zakatable assets if financial info can be
accessed and analyzed
 on earnings (similar to agriculture) if
otherwise
 Divergent views on rates (2.5/ 5/ 10)
percent
41
WAGES AND SALARIES
Divergent views
• Income is subject to zakāh if it reaches niṣāb
over one year period.
• Part used (or estimated) for personal and
family expenses is deductible from the
amount of yearly income
• Zakāh to be paid by the earner as and when
wages and salaries are received.
Need to avoid double counting
42
THANK YOU
Instructor’s Contact Information
Email: mobaidullah@isdb.org
Tel : 012-646 6232
Fax: 012-637 8927