Finance & Banking

PAUSE FOR THOUGHT LIFE-CYCLE OF ZAKAT OBLIGATIONS AND ACCELERATION OF ZAKAT PAYMENT FOR VALUE CREATION: A NEW PROPOSAL FOR ZAKAT MANAGEMENT PROF. HUMAYON DAR

Collection of payments through technology-based vehicles like crowdfunding platforms have
now allowed product developers to structure innovative financial solutions that were not possible before the
current era of FinancialTechnology (FinTech). Processing of micropayments (even smaller payments called nanopayments) with affordable transaction costs offers an opportunity to achieve economies of scale by aggregating
small/micro payments for a large number of contributors. This has relevance to applying some innovative ideas
to the collection and disbursement of Zakat and even more to the management of Zakat funds.

THE IDEA
Every individual Zakat payer has to pay an annual
amount as Zakat to fulfil their religious duty.
These are small amounts for a vast majority of
Zakat payers but may in fact be prohibitively large
obligations for the mass affluent and the high
and ultra-high net worth individuals (HNWIs and
UHNWIs). For example, an individual with the
lifecycle income of US$1 million, and the lifecycle
savings of US$200,000, may be obliged to annually
pay US$140 as Zakat. This is with the assumption
that the individual consumes 80% of their lifecycle
income and that the lifecycle is 35 years of
productive economic life.

For a billionaire, on the other hand, the minimum
annual Zakat obligation could be US$25 million.
True that Zakat is a religious obligation and the
rightly-motivated wealthy people will only be
pleased to contribute large sums of money in this
respect. However, they must appreciate any help
in discharging a religious duty of such importance.
Let us not focus on the HNWIs and UHNWIs for
the time being. After introducing the principle of
acceleration of Zakat, we shall revert to it.

ACCELERATION OF ZAKAT PAYMENTS

Zakat is an annual contribution by the Muslims
who possess the minimum threshold of assets1.
The question arises if it is permissible to pay Zakat
ahead of the time when it becomes due. The juristic
opinions vary. Although it is permissible to pay
Zakat in advance, it is preferred to pay it when it
becomes due.

The principle of acceleration suggests that it
is permissible to pay Zakat in advance if it can
be established that there are certain benefits
associated with the acceleration, which cannot
otherwise be realised. Thus the principle behind
acceleration of Zakat demands a compelling need
like meeting financial requirements in the wake of
famine, war or any other catastrophe. I believe that
there should be no serious objection to accelerating
Zakat for any number of years, if the following
conditions are met:

  1. The Zakat obligor must pay Zakat in advance
    with an acknowledgement and commitment
    that any discrepancies (surplus or deficit)
    will be taken care of when the exact annual
    Zakat obligation is determined;
  2. The accelerated amount of Zakat will be
    considered on account, payable only when it
    becomes due with certainty of its amount;
  3. In case of investment of the accelerated amount
    of Zakat, the Zakat obligor must be aware of
    risk of loss of the invested amount and that
    they commit to pay their Zakat in subsequent
    years, with an additional contribution in case
    of partial or total loss; and
  4. The acceleration of Zakat results in some
    material benefits that were otherwise not
    possible.

ECONOMIES OF SCALE
If there are one million Zakat payers with minimum
annual Zakat obligation of US$100, the aggregated
annual amount of Zakat will be US$100 million.
Assuming no change in income and wealth of
this generation over a lifecycle of 35 years, their
lifecycle Zakat obligation will be US$3.5 billion.

How can this amount be accelerated such that the
individual Zakat payers are willing to contribute
US$3,500 now rather than spread over 35 years?
More importantly, why is there a need to do so?

Applying the above formula, US$3.5 billion collected
today will generate a future value of nearly US$27
billion, a mammoth total, which can not only be used
for the welfare of the beneficiaries of Zakat but also
be returned to the contributors or their nominated
beneficiaries (children, relatives, etc.).
Now returning to the first question. There will be
only a few who would like to pay US$3,500 in a
lump-sum now rather than enjoying the facility of paying it annually over a period of 35 years. This
is keeping aside the Shari’a complications. For
someone to agree to accelerate Zakat payments
the amount paid at present should be sufficiently
less than the lifecycle Zakat obligations. Obviously,
there are further Shari’a complications associated
with assertion. Ignoring the Shari’a side for the
time being, it is important that the Zakat payers
are sufficiently incentivised to accelerate.

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