Ramadan, the month of Islamic fasting, presents abundant possibilities for generosity and charitable spending on the good things of life (Hayath at-Taiyabah). Two of these charitable outlets are known as Zakat and Sadaqah.
Much of this charity is made as hand-out payments to the poor and needy in Muslim countries. But could Zakat and Sadaqah be more effective in grassroots social development by transformation into development finance instruments? How can a composite socioeconomic index of social development be constructed that will be utilized by both the public and private sectors as an effective Islamic development finance measure?
The answer would be developing a finance instrument (index) revolving around the four principal categories of instruments embodied in the Qur'an. These are Zakat (and charity, Sadaqah), spending on the good things of life (Anfaq), trade (Tijara) and phasing out interest (Riba) by means of participatory financing instruments such as Mudarabah (profit-loss sharing), ngMusharakah (equity participation), Murabaha (cost-plus pricing) and secondary finance instruments revolving around these primary ones. The resulting development finance instrument ought to mobilize resources for achieving productive change at the social grassroots level. Such social outlets could eventually be financed within the national development planning of the Ummah for Islamic socioeconomic integration.
Fiscal Cornerstone
Zakat is a specific percentage (2.5 percent) of the total Muslim wealth in private ownership that can be liquidated and that is not held in productive circulation. These assets include accumulated wealth at the valuation date of the Zakat payment, savings and income at that time, net of the permissible exemptions, called Nisab, on extended yearly and very short-term debt and basic needs expenses. Assets held by enterprises, stocks, shares and bonds are also included in Zakatable assets. Physical assets such as livestock, factory capital stock and personal effects not in productive circulation come into consideration at differentiated rates of Zakat. Once set, the Zakat rates cannot be varied, but the amount payable is not only variable but can be paid to different types of recipients according to social priorities at a given point in time.
As a mandatory deduction from wealth, Zakat moves away from being mere voluntary charity and expenditure in non-developmental directions, such as handouts to the poor and needy, the sick and debtors. Instead, it is organized into a social security fund for helping households within a social development planning framework. Zakat is the social fund of the Islamic community and acts as spiritual capital for development purposes. Hence it forms the cornerstone of fiscal policy of the Islamic world nation. The needy individual is a social entity who has the privilege to receive Zakat for social assistance rather than supplicating for it.
Eight categories of Zakat recipients are mentioned in the Qur'an. But according to the Qur'anic principle of discourse (Shura) and research based on fundamental sources (Ijtihad) on any matter, consensus on any prevalent social problem can be reached. This can set the priorities for distribution and for broadening the eight categories within themselves.
Taking a New Tack
In general, social development planning aims at organizing social and economic sectors so that the benefits of economic growth and development are felt in improving the economic efficiency and distributive equity of the nation. Development planning sets out to estimate the total resource capability of the nation for attaining the goals of economic growth and development with distributive equity.
On the social side of national development are factors such as poverty alleviation, employment creation, environmental conservation, human resource development, health care, security and so forth. On the economic side are factors such as optimal economic growth, price stability, economic efficiency, factor productivity, sustainable debt and deficits and fiscal discipline. Fiscal, monetary, inflationary, trade and income policies and human resource development programs are used to attain sustainable development with non-inflationary economic growth and full employment.
Yet, with all these noble goals, what has gone wrong with social development planning? At present we find Muslim countries to be deeply in foreign debt caused by a feverish drive towards economic growth, while poverty remains rampant. National self-reliance has withered away. Sustainable development is a far cry. Yet the Muslim countries record high real rates of economic growth. Socioeconomic development cannot realize the noble objective of social well-being, which ought to be based on synergy between economic growth and distributive equity. There is no grassroots development.
However, Islamic social development presents a holistic worldview. The principle of synergy in the Islamic worldview replaces the mainstream development view of competition and conflict between the economic and social elements. The principle of synergy reflects a unity of knowledge between everything, as derived from the core of Islamic belief on the unity of the divine laws.
In mainstream growth and development theory, there is no methodology to achieve such a complementary worldview that desires the integrated well-being of all sides, except by means of externally imposed policies that cannot be sustained in the face of the capitalist market-driven processes of self-interest, efficiency, profitability and maximization of output as the end goals. The World Bank pursues the capitalist objective relentlessly. Only recently has it come to realize the need for synergy at the grassroots for the participatory transformation of the poor and their empowerment and entitlement.
The Power of Participation
In the framework of Islamic social development, human preference is premised on moral consciousness. This requires human resource training along lines that combine moral consciousness with sustainability in social participation (Tarbiah). There is a continual reinforcement of Tarbiah in Islamic social development. Social and private sector outputs are formed out of participation, ultimately leading to the formation of a participatory economy.
An example would be flood control through co-operation between village farmers and developers to come up with cost-effective possibilities. Bamboo barrages, forestation and agricultural planning around river tributaries could be part of multisector joint ventures. Such ventures could be further extended to co-financing partners as well as labor and owners of physical capital in the village domain. These could be further linked with on-the-job training and in-house training programs with self-help cooperatives and the participatory sharing of cost, risk and production.
Public and private sector policies and relevant institutional changes can help in mobilizing resources towards a participatory development process. Such learning through co-operation and participation is the end-all and be-all of the social and economic experience.
Going in Circles
The link between Zakat and developing a participatory Islamic transformation at the grassroots is circular feedback between the elements involved, called circular causation. This is the true representation of sustainability and synergy in a systemic sense. Such synergies are intrinsic in reality but are not automatically realized in experience, given the human frailty for self-interest, conflict and competition. This circular relationship is a unique and universal way of reorganizing the social development process at the grassroots. It is the sought-after goal of every participatory and learning type of social model. This is a principle that arises from the core unity of the divine laws (Tawhid).
This idea is nonexistent for mainstream socioeconomic development theory because of the nature of individualism that cultivates the human ego and promotes it through all social, scientific and economic spectrums.
Figure 1 depicts the circular causation between the selected elements; a systemic learning process that forms sustainability in social development planning is part of such causation. The principle of synergy is also part of this sustainability.
Figure 1: Circular causation between Zakat, spending, trade and Riba-free relationships
With circular causation, every element is shown to interact, integrate and co-evolve together along the development path, carrying the sustainability of the evolving participatory processes. Circular causation reinforces the principle of pervasive synergies.
Taking Action
The private and public sectors of the Ummah ought to examine the Islamic synergy between critical elements, such as Zakat, spending on Hayath at-Taiyabah, trade and abolition of interest, to generate sustainable grassroots social well-being. The resulting social development mobilizes national resources towards participatory economic and social orders, led by the Islamic precept of unity of the divine laws (Qur'anic pairing). Today, the Islamic economic and financial industry, as catalyst of socioeconomic development, ought to pay serious attention to planning its programs, financial portfolios and policies along the direction of holistic social development at the grassroots.
Professor Masudul Alam Choudhury is a professor of economics and finance at Sultan Qaboos University, Oman. Professor Choudhury earned his M.A. and Ph.D. in political economy from the University of Toronto. He is the contemporary pioneer in the area of the epistemology of unity of knowledge and its bearing on socio-scientific theory and applications. His fields of research and international deliberations cover areas of political economy, world-system, philosophy of science and applied perspectives in these. Professor Choudhury is also the international chair of the Postgraduate Program in Islamic Economics and Finance at Trisakti University Jakarta, Indonesia. He supervises five doctoral students in this program. He is the author of Reforming the Muslim World and many other books and academic papers on the Islamic worldview. Lavli Esya and Bayu Silvia are lecturers and Ph.D. students in the Faculty of Economics, Trisakti University.
By Masudul Alam Choudhury, Lavli Esya and Bayu Silvia
Business Islamica 2007
