18-20 february 2014 management of zakah for poverty alleviation by dr. mohammed obaidullah senior...
TRANSCRIPT
18-20 February 2014
Management of Zakah for Poverty Alleviation
By
Dr. Mohammed ObaidullahSenior Training Specialist
والتدريب للبحوث اإلسالمي المعهدIslamic Research and Training Institute
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DAY ONE
1. Who are the poor & What do they need?
2. Islamic approach to poverty alleviation3. How to estimate Zakah liability?
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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
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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.
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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 facilitiesHealth (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.
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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
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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.
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POVERTY LEVELS INMUSLIM 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*
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* Human Development Index (HDI) is a composite statistic of life expectancy, education, and income indices used to rank countries
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Ranking of Countries using HDI
VERY HIGH – HIGH – MEDIUM - LOW
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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
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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?
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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
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ISLAMIC APPROACH TO POVERTY ALLEVIATION
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POVERTY IN ISLAM
• "Poverty is almost like disbelief in God."
• In conflict with “enrichment of self (nafs)” - one of the primary objectives (maqasid) of Shariah.
• Collective obligation (Fard Kifāyah) of a society to take care of the basic needs of the poor.
• Raison d’etre of society itself – Al-Shatibi
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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)
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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)
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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.
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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)
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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
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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
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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
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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 “Allah, 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)
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MUTUAL COOPERATION
Zakah as a tool of solidarity and cooperation, mutual takaful
• Assist one another in the doing of good and righteousness. Assist not one another in sin and transgression, but keep your duty to Allah (5:2)
• Believers are to other believers like parts of a strong structure that tighten and reinforce each other. (Al-Bukhari and Muslim)
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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 well-being of the family.
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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 zakah, sadaqah and other forms of charity
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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?
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Case Study: AkhuwatIndicators 2008-
092009-10
2010-11
Dec. 2011
Dec. 2012
No. of loans 44577 65650 99844 125,646
230,000
Loan disbursed (Rs. million)
488 739 1157 1500 3200
Percentage of recovery
99.50 99.86 99.85 99.82 99.83
Cities 15 20 34 45 105
No. of branches 21 33 53 62 153
No. of employees 90 181 358 419 785Year Donation Received Amount (in Rs.
million)
Zakat Received Amount (in Rs. million)
2008 23.2 2009 36.1 2010 108 2011 127 1.8 2012 95 7.1 2013
*54 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
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Case Study: Akhuwat
• Donations by Borrowers (Progress out of Poverty)
Islamic Research and Training InstituteMember of the Islamic Development Bank Group
Year Donation from borrowers (Rs Million)
Growth Rate
Operating Expenses (Rs Million)
Donations from borrowers as %age of OE
2008 0.021 8.3 0.252009 0.010 (50) 10.4 0.102010 6.1 59078 17.83 34.3
2011 12.3 200 36.7 33.4
2012 23.9 195 68.2 35
2013* 29.8 125 *Till Feb 2013
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Case Study: Akhuwat
• Minimize operational cost through creative strategies:– Volunteers in staff (one-third)– Use of masjids and churches
Islamic Research and Training InstituteMember of the Islamic Development Bank Group
Year No. of Loans Disbursed
Amount of Loan Disbursed(Rs. Million)
Operating Expenses (Rs. Million)
OE as %age of Loan
2008 11,388 122.45 8.29 6.752009 13,821 164.23 10.38 6.322010 21,073 251.81 17.82 7.082011 34,194 418.21 36.67 8.772012 67,683 1,137.68 68.16 5.99
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HOW TO ESTIMATE ZAKĀH LIABILITY
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ZAKĀH ESTIMATION BASICS
A compulsory annual levy provided:
• On wealth owned for one Hijri calendar year (Hawl)
• Must be equal to a minimum threshold (nisāb) or more.
• Not on income used for consumption
• On savings added to wealth of an individual during the year, and on agricultural output.
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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
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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 zakah 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
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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 (nisāb).
• Passage of a year (Hawl) applicable on livestock, money, and business assets.
• For output, revenues and earnings to be zakatable, passage of a year, is not required.
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MONETARY ASSETS
Nisab • Gold: 85 grams; Silver: 595 grams
• Money: gold or silver equivalent
• Saving and investment accounts are subject to Zakah
Zakah on stock of money held for speculative purpose
Debt and receivables included unless are of highly doubtful nature
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TRADE AND BUSINESSES ASSETS
• Inventory (Urud tijārah) for the purpose of trade for profit; Nisab: 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
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COMPUTING CORPORATE ZAKĀH
Zakah = (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 zakah. Also when ownership is split between government and private, only the private Muslim is subject to zakah.
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LIVESTOCK
• Nisab: 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.
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AGRICULTURE
• Passage of year not required; payable at the time of harvest
• Nisab 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
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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
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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
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WAGES AND SALARIES Divergent views
• Income is subject to zakāh if it reaches nisāb over one year period.
• Part used (or estimated) for personal and family expenses is deductible from the amount of yearly income
• Zakah to be paid by the earner as and when wages and salaries are received.
Need to avoid double counting
