Using zakat, sadaqa and awqaf for sustainable development

I don't usually use the blog for long quotes with little commentary, but there was an article that I linked to from my twitter account (@sharingrisk) yesterday that that I think is very well written and raises a lot of interesting ideas, so I want to put up the first few paragraphs and suggest you read the rest:

Islam requires Muslims to give 2.5 percent of their wealth to the poor every year. This represents a big potential in aid funding, but much of the money is mismanaged. In search for sustainable forms of aid, some organizations are trying to promote a broader perspective in Muslim giving rather than narrow conceptions of charity.

Every year, somewhere between US$200 billion and $1 trillion are spent in "mandatory" alms and voluntary charity across the Muslim world, Islamic financial analysts estimate.

At the low end of the estimate, this is 15 times more than global humanitarian aid contributions* in 2011.

With aid from traditional Western donors decreasing in the wake of a global recession, and with about a quarter of the Muslim world living on less than $1.25 a day**, this represents a huge pool of potential in the world of aid funding.

But Islamic finance experts, researchers and development workers say much of the money spent in 'zakat' (mandatory alms) and 'sadaqa' (charity) is mismanaged, wasted or ineffective.

"Wealth is growing in the Muslim world. So is the poverty. Where have we gone wrong?" asks Tariq Cheema, president of the World Congress of Muslim Philanthropists (WCMP), an organization which advises Muslim donors - including some of the thousands of millionaires living in the Gulf - on how to increase sustainability and accountability in their donations.

Islam requires Muslims to give 2.5 percent of their wealth and assets to the poor every year. Much more is given in voluntary 'sadaqa'. But that money is usually donated in small amounts at local levels to feed the poor, help orphans, or build mosques. Muslims say many of them give, almost without thinking, to fulfil a religious obligation. "Our rituals are there, but often they lack the spirit," Cheema told IRIN. "We just give the money and forget."

Very little of the money goes towards sustainable development.

"Billions of dollars worth of giving in 'zakat' and 'sadaqa' are unfortunately ineffective by and large," he said. "Our giving shouldn't be driven by our desire to prove that we are good people... Our giving should be smart and effective."

"We are here to bring that shift in the culture: the paradigm shift from conventional and generous giving to strategic giving... There is a lot of money around that needs to be channelled towards development."

Forbes Special Report, etc.

Forbes released a Special Report on Islamic finance. Although the U.S. has not shown much interest in changing regulations to put Islamic finance on a level playing field with conventional finance, other countries like the U.K., Malaysia, Singapore, Japan, Dubai and Bahrain are vying to be the largest hubs of Islamic finance. The growth in Islamic investing is one area in which ethical investing has begun to grow out of being a niche market within the global financial system, although it is still small compared with the system as a whole. The growth, however, has come with challenges. One of the greatest is the shortage of Shari'ah scholars who know both the Shari'ah, financial services and with enough knowledge of English "to wade through hundreds of pages of a prospectus or legal documents".

Forbes also provides a historical analogy to the development of Islamic finance in the conventional finance market. This was the gradual move away from prohibitions of interest (usuria) in Catholicism. Although there is nothing that suggests that the prohibition of interest in Islamic finance will be circumvented, the historical analogy provides a warning against focusing on the form, rather than the spirit, of the prohibition of riba. The tension between the letter and spirit of Islamic law is the subject of a piece by Haider Ala Hamoudi, a professor at the University of Pittsburgh.

One of the areas in which the U.S. has seen significant growth in Islamic finance is in equity mutual funds, the subject of one article in Forbes.

Islamic banks in Pakistan report the need of short-term liquidity instruments, a need filled using short-term government bonds by conventional banks. The increased cost of products used by Islamic banks in the absence of liquidity management products may slow growth in demand because, as the CEO of Meezan Bank Irfan Siddiqui noted, people's demand for Islamic banking depends on the service and price, in addition to its Shari'ah-compliance. The government of Pakistan announced on April 25th that it has appointed manager of the first rupee-denominated government sukuk, expected to be Rs. 20 billion ($309 million).

The fifth Islamic bank in the U.K., Gatehouse Bank, is now open. The takaful industry, now at $3.5 billion, is expected to grow to $10 billion by 2012. Despite unsolved regulatory and tax issues, Indonesia plans to issue up to $2 billion in sovereign sukuk this year to finance the country's large budget deficit. Islamic finance, while still at an early stage, is growing in Canada. The Kuwaiti exchange will allow the selling of Islamic options on stocks using the controversial arboun structure. Although very little has been done in Islamic finance in France, the government is setting up two round tables to assess the feasibility of Islamic finance in France, in part to attract funds from the Middle East caused by the significant increase in the price of oil.

The requirement of compulsory zakat recently enacted in the UAE has attracted criticism from a notable Shari'ah scholar, Sheikh Hussein Hamed Hassan, who says it is an individual, not institutional requirement.