Islamic philanthropy and Islamic social finance in humanitarian action

Innovation, legitimacy and risk
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While humanitarian needs are increasing, traditional humanitarian financing is decreasing. Across Asia, the Middle East and Africa Muslim populations are disproportionately affected by disasters and conflict. Muslim humanitarian actors are responding to these needs through Muslim philanthropy and humanitarian aid. In recent years, we have seen increased recognition of the potential of Muslim philanthropy. The United Nations (UN) has called for innovative methods and new partnerships to utilise Islamic financial resources. Together with UN agencies, Muslim humanitarians are developing policies and seeking new avenues to leverage the potential of Muslim philanthropy. Islamic social finance is now part of the humanitarian vocabulary.

we have seen increased recognition of the potential of Muslim philanthropy

New attention to religion

Religious humanitarian actors have a long history of assisting people in need. In recent years, a new focus on religion in humanitarian action, including Muslim humanitarians, has emerged among mainstream organisations. The UN Agenda 2030 – with 17 goals for sustainable development and a promise to leave no one behind – is also putting religion at the forefront. SDG 17 calls for new partnerships among public and private, secular and religious actors. The UN high-level panel for humanitarian financing called for the recognition and use of Islamic social finance. At the World Humanitarian Summit in Istanbul in 2016, a special session on Islamic Social Finance brought together key actors from governments, the private sector, international banks, multilaterals and non-governmental organisations to discuss the issue.

This is a recent trend. For a long time, humanitarian scholars and practitioners have generally revealed more scepticism than recognition of religious humanitarian actors. One reason for this scepticism is a concern that religious actors have particularistic and exclusionary worldviews that conflict with the core humanitarian principles of humanity, impartiality, neutrality and universality. Another critique relates to a presumed ‘charity approach’ which does not ensure sustainability and social change.

This is also debated among Muslims. Scholars of Islamic political economy, Islamic finance and social theory reveal diverging opinions on key questions. Who should be collectors and managers of alms, including the role of the state versus that of the civil society; what would be an ideal system for the collection and redistribution of zakat, is it a state or community responsibility; and who is entitled to receive zakat? Is it only Muslims or can also non-Muslims fall within the criteria? These are among the questions addressed in this blog post.

Muslim philanthropy and Islamic social finance

Islamic social finance can be defined as a common term for the various approaches that – compliant with Shariah law – aim to help people in need, alleviate poverty and contribute to socio-economic development. Drawing on Muslim religious traditions for giving and helping people in need, the most common Islamic social finance instruments include zakat (obligatory alms, commonly calculated as 2.5% of excess wealth paid annually), sadaqah (voluntary alms) and waqf (Islamic endowment). Other instruments are qard al-hassan (interest-free, goodwill loans for welfare purposes) and sukuk (Islamic bonds). These are not only instruments of charity, altruism and beneficence, but tools for redistributing wealth to contribute to social justice.

Islamic social ethics contains two main concepts: trusteeship and social justice. This is founded on the idea that prosperity and poverty are part of the same order, where the rich have the duty to help people in need and reduce poverty through the redistribution of wealth.

The potential of zakat: Challenges and opportunities

Zakat is the third pillar of Islam coming only after a declaration of faith and prayer. Paying zakat is an individual obligation, commonly given between individuals. In 2021, the Islamic Development Bank estimated zakat funds to be some US $300 billion worldwide. This reveals a huge, largely untapped, potential for zakat to meet humanitarian needs, including from Muslims living in the US, Canada and Europe.

a huge, largely untapped, potential for zakat to meet humanitarian needs

To realise the enormous potential of zakat, how these resources are collected and distributed matters. We have looked closer at the experiences of three different organisations: (1) the National Board of Zakat in Indonesia (BAZNAS); (2) the UN High Commission for Refugees (UNHCR), a non-Muslim intergovernmental organisation; and (3) Islamic Relief Worldwide, a transnational Muslim NGO. In recent years, these three organisations have established procedures for zakat management that are compliant with Islam and humanitarian principles.

Since 2002, BAZNAZ  is responsible for the national zakat management coordination in Indonesia. It reports that zakat has increased from $250 million in 2015 to $812 million in 2020, still only 3.7% of its potential. Much effort has gone into enhancing awareness of the zakat potential and methods of collecting and distribution, including the digitalisation of zakat payment that allow each zakat provider to track their contribution to the receiver.

In 2013, the UNHCR identified Islamic philanthropy as a new source of humanitarian funding. Following extensive consultation with religious scholars, in 2019 they established the Refugee Zakat Fund for distributing cash and in-kind assistance, now operating in 14 countries.

Among transnational Muslim NGOs, Islamic Relief has taken the lead in developing Islamic social finance for humanitarian relief and development. In 2016, the organisation developed a new zakat policy to ensure a consistent approach to zakat management that is in compliance with Islamic regulations and maintains accountability towards the ‘donors [of zakat], rightsholders [the recipients of zakat], and Allah (SWT) Himself’. Islamic Relief work through national implementing partners, which ensures the decentralised collection and distribution of zakat funds, adapted to the local social contexts and legal environments.

New beneficiaries

One core debate is whether non-Muslims are entitled to receive zakat. The view of many scholars is that zakat was traditionally intended for Muslims, with the needs of non-Muslims being met with other funds (such as sadaqah). Some contemporary scholars are of the view that zakat may be spent on giving aid to non-Muslims who fall within the given categories, as the Quran specifies the status of beneficiaries, not their religious identities. BAZNAS, UNHCR and Islamic Relief are all using zakat in their humanitarian relief activities for both Muslim and non-Muslim beneficiaries. As the first UN agency collecting zakat, UNHCR legitimacy has been questioned and tested. In response the UNHCR has sought legal advice from various prominent Islamic institutions, including Al-Azhar Islamic Research Academy. Both BAZNAS and Islamic Relief have sharia boards providing advice on matters of Islamic jurisprudence, including the introduction of new beneficiaries and activities.

New activities

The use of Islamic social finance in humanitarian action has raised questions about appropriate uses of zakat funds. Islamic charity, for example, has been criticised for being too ‘short-term’ oriented. Questions about sustainability, the need to bridge between humanitarian and development activities and financing to help people out of poverty have emerged among Muslim humanitarians, as well as among secular humanitarian organisations. High on the agenda are questions of how zakat can contribute to long-term solutions that can help transform recipients of zakat into donors of the same. In Indonesia, BAZNAS divides zakat into two different programs: consumptive-based programs to meet immediate humanitarian needs and productive-based programs for economic empowerment, making zakat a tool in poverty alleviation.

Managers of alms

Which institutions or organisations can be considered legitimate to administer zakat remains a key question causing considerable debate among Islamic scholars and organisations managing zakat. Some scholars are of the view that only Islamic governments have the legitimacy to administer these funds, while others uphold that in the absence of Islamic states, any Islamic organisation can perform the obligation on behalf of the Muslim community. Others are of the view that the state and/or its designated agencies are expected to merely supervise and not fully control zakat.

Trust, risk and accountability

As managers of zakat, these organisations are not only managers of aid money, but individuals’ alms. With this follows additional accountability to those required in modern financial management. As such, the introduction of Islamic social finance is not only the introduction of a new humanitarian practice area, but it also involves changes to individuals’ religious practice. Giving zakat is a personal obligation. It is private, often deeply personal, and not only about helping people here and now but considered as an investment in the afterlife. This makes accountability, trust and risk management key to the organisational legitimacy of both public and private zakat management organisations. To be seen as legitimate managers of alms – and providers of humanitarian assistance – the organisations work to increase awareness of the impact of zakat and to improve accountability and transparency of funding, activities, vis a vis donor and beneficiaries zakat.

Key questions remain

The use of Muslim philanthropy and Islamic social finance in humanitarian action is rapidly evolving. The examples of UNHCR, BAZNAS and Islamic Relief demonstrate several innovative ways for incorporating and developing the field, by both faith-based and secular organisations, private and state actors, and across the humanitarian and development fields.

The huge potential of Muslim philanthropy and Islamic social finance as a source of humanitarian financing makes it worthy of further attention and scrutiny. It has raised questions about approaches to aid and how we conceive of assistance: should it be a right or a privilege to receive assistance? What is needed for Muslims to entrust their zakat to an organisation or a state rather than to distribute their alms privately? Can Islamic social finance bridge immediate needs and poverty reduction and contribute to social justice. These questions remain important to faith-based and secular organisations, which would benefit from further discussion and collaborations across traditional divides.

This blogs follows on from the webinar “Taking stock: Muslim philanthropy and Islamic social finance in humanitarian response“, organised by Kaja Borchgrevink, Altea Pericoli and Arne Strand in June 2022 and supported with funding from the NCHS.

You can view a recording of the webinar discussion here.