Microfinance is defined as giving small loans to the poor people without any security collateral, people who have been denied loans in a conventional system. The loan amount depends on the nature of the purpose for which a loan is taken out, for example, farming, fishing, poultry, cattle raising, small trade, etc. The main purpose of the microfinance project was to reduce poverty among the rural poor. Later, the establishment of Grameen Bank officially started its microfinance business and earned reputation nationally and internationally, which eventually led its founder Dr Yunus and his organisation to win the Nobel Peace Prize. A number of banks, NGOs, and public and private organisations followed suit and achieved commercial success. Some studies, however, have found that the income and assets of the borrowers have increased to some extent but microfinance has largely failed to eradicate poverty. Generally, it comes through a high interest rate against any loan amount that the borrowers take. Often, they have trouble paying off the loan because the majority of the recipients are not educated enough to understand the complex math that is involved.
On the other hand, the Islamic Zakat system has the same purpose: to assist the poor and alleviate poverty in a country. The Zakat amount doesn’t come with any interest attached and the recipients are not required to pay it back either. Zakat is not limited to providing subsistence living for the poor but it rather aims at enriching them. It works as a social charitable giving tool, and if managed properly, the recipients can establish for themselves small businesses to produce things and to meet their subsistence needs.
The success of Zakat in reducing poverty depends on the methods used for distributing funds in a particular society. In countries like Malaysia, Indonesia, Egypt, and many other Middle Eastern countries, distribution of Zakat funds has been institutionalised through government and non-government organisations. Recipients of Zakat funds have been benefitting from the institutionalised system. Besides individual and household poverty alleviation, Zakat funds can be used to promote infrastructural development, agriculture, and farming which are the main sources of income for many in our country. It may help to create employment opportunities by establishing small cottage industries for the less fortunate people, and create opportunities for common people to sell their goods at the local market. It may also ensure good governance and social justice in a particular society.
Zakat is one of the five pillars in Islam and an important instrument for establishing social justice. However, in Bangladesh, the majority of wealthy Muslims are not well aware of this issue and reluctant to pay Zakat in an appropriate way. It is limited to giving cheap clothes to the poor in the form of sari and lungi, and a few bucks without any proper measure of business revenues and assets, liquid funds or savings, and gold or silver reserve at the basic rate of 2.5 percent. The collection and distribution of Zakat funds are yet to be effective, thanks to the lack of proper Islamic knowledge among the Muslim population and also because the system hasn’t been institutionalised publicly and privately. Zakat plays an important role in reducing poverty and promotes equitable sharing of wealth.
An active role by the wealthy Muslims can be vital in alleviating poverty besides the conventional microfinance, tax collection, and other mechanisms. Also, the accountability issue should be taken into consideration during the processes of fund collection, distribution and promotion by individuals, mosques, government and non-government organisations. If we simply take the example of a few major cities in Bangladesh, there are a large number of wealthy Muslims there, and if they pay their due proportion of Zakat to the less fortunate in a meaningful way, poverty can be significantly reduced over time. And with the help of Zakat apps, one can easily calculate their due proportion of Zakat. Islamic scholars should devise a mechanism about how the Zakat system can be more effective for the particular case of Bangladesh.
Syed Kamrul Islam is a faculty member, School of Business and Economics, North South University. Email: firstname.lastname@example.org
The views expressed in this article are the author’s own and do not necessarily reflect Saray Consultancy’s editorial stance.