Finance & Banking

ZAKAT TO FIGHT AGAINST COVID-19 PANDEMIC

JAYA ADDIN LINANDO YUNICE KARINA TUMEWANG

COVID-19 pandemic has come as a bit of a bombshell for countries all over the world. No single country
has ever thought that the damage it is causing will be utterly severe. Many sudden adjustments in all
aspects were made to deal with the pandemic. The adjustments run not only on international and
national matters but also – and even more closely felt – on a personal level, from casual circumstances
such as work and social life to one of the most private aspects of human life; religious activities. The
governments have instructed people to diminish public gatherings, which means that the congregational prayers
and all communal-based religious activities should be halted. Last month was Ramadhan, the holy fasting month for
all Muslims worldwide. This month is strongly associated with many social lessons and it was fascinating to see how
the social messages were delivered during a time when social activities are limited. Yet, Ramadhan goes on, and even
better the scholars utilised communalities value in Islamic society as the instrument to help fight COVID-19 impacts.

Particularly through Zakat optimisation.
Muslim scholars from various countries
urged the Muslim society to make the
best use of Zakat to help those severely
impacted by COVID-19.

The main and the most elementary idea
from Muslim scholars (i.e. from Indonesia,
Pakistan and the UAE) regarding Zakat
is the release of the fatwa that Zakat
may be used for COVID-19 related
treatments. Furthermore, looking at
the list of Asnaf (beneficiaries of Zakat)
based on Al-Qur’an surah At-Tawbah
verse 60, these beneficiaries are even
more relevant following the COVID-19
pandemic. The list of eight Asnaf are: fakir
(the poor); miskin (the needy); amil (zakat
administrator); muallaf (newly convert
to Islam); riqab (slaves); gharim (those in
debt and cannot pay); fii sabilillah (those
striving in the cause of Allah); and ibnu
sabil (the traveller that has fallen short of
funds during the journey).

Relating the list to COVID-19 pandemic, in general, all of
sudden there is a significant increase in the number of people
fulfilling the criteria to be the beneficiaries of Zakat. It is all
due to the domino effect COVID-19 has caused. As people
are forced to stay at home, the production and consumption
are greatly impacted, the economy as a whole is crushed and
many people must lose their job as a consequence. This loss
of jobs has led some people to enter the ‘fakir’ and ‘miskin’
states. Those no longer having a job or facing a wage-cut may
also fall into the ‘gharim’ condition, especially when these
people having credit on house, car, or other instalments.
The lesser income and the constant instalments due in
amount and in time automatically make them fall into debts.
COVID-19 has also caused a lockdown in several areas that
makes people trapped in a place far away from their home,
for some people with this case, it is just a matter of time
until they run out of money and wealth thus making them
‘ibnu sabil’. Although the concluding decision upon criteria of
each Asnaf category lies in the hand of local Muslim scholars,
at least the initial signs indicate that the number of zakat
beneficiaries this year may be skyrocketing.

Without a doubt, zakat is among the main instruments
extremely needed by society, especially in these circumstances,
as a last resort to stay alive. Zakat not only could put meals
on their table, but also relieve the financial burdens and
emotional distress of a family struggling to survive during this
tough situation. Zakat is expected to bind the Muslim society
together more than common prayers, which turns out to be
restricted due to this pandemic. It teaches us to help those in
the need and share what we have. Zakat is thus the glue that
adds cohesiveness to any Muslim community.

Moreover, for a country like Indonesia, the largest Muslim
population, which appears to be the most generous country
of the World Giving Index in 2018, based on the worldwide
survey from the Charities Aid Foundation (CAF), many are
hoping that the society’s generosity could play its role at its
best. This kind of generosity could help save the lives of
those out of work who have no paid leave, health insurance
or financial safety net. The World Bank and IDBG (2016)
reported that the value of stand-alone zakat could reach
potentially USD200 billion to USD1 trillion annually, not
to mention the annual growth rate of ZIS, which could be
around 38.34%, while the GDP growth is only 5.42%. Thus,
it is not surprising that the government of many Muslimmajority countries is proposing to have an early collection
of Zakat in order to contribute to the fight against corona.
Considering the current conditions, the digitalisation of zakat
today seems more relevant and crucial than ever. Aside from
being a responsive effort of the digital revolution 4.0, digital
zakat management turns out to have both benefits and
conveniences that are more effective and efficient. As people
are not allowed to go anywhere, it is inevitably crucial for the
society and zakat institutions to optimise the utilisation of
cash-less transactions.

The process of cash-less zakat transactions must be supported
by the expansion of the range of collection services to the
distribution of zakat funds to mustahik (zakat recipients). Not
only could it increase the participation of the zakat payer,
but also improve the transparency and accountability, which
used to be the main issue for many zakat institutions. One
of the tools to measure the transparency and accountability
of an institution is to provide brief financial reports to
beneficiaries. The existence of technology has been able to
strengthen the governance of zakat management institutions
to carry out the processes of accountability and transparency
to stakeholders related to the government, the private sector
and the community at large. Improved accountability and
transparency is an important factor for gaining the society’s
trust that is the soul of this institution.

WILL C VID-19 REMODEL ISLAMIC FINANCE?

DR HYLMUN IZHAR

A partial recovery, however, is projected for
2021, though it can never be an affirmative
answer, at least for now. The economic fallout
nonetheless, depends on factors that interact
in ways that are hard to predict, including the
pathway of the pandemic, the intensity and
efficacy of containment efforts, the extent
of supply disruptions, and the repercussions
of the dramatic tightening in global financial
market conditions, shifts in spending patterns,
behavioural changes, confidence effects, and
volatile commodity prices. Many countries face
a multifaceted crisis comprising a health shock,
domestic economic disruptions, plummeting
external demand, capital flow reversals, and a
collapse in commodity prices.

Will the crisis be a V-Shape, U-Shape, or L-Shape? It is not yet clear.

The vital question is perhaps how much of the
world economy will endure the lockdown, and
this depends on, among others, the accessibility
of credit. Business runs on credit. The bits of
the economy that do continue to function – the
warehouses, the mobile phone providers and
internet firms – all need credit. Wage bills for
those still working are financed through credit.
Even greater is the need of those who are not
working. If they cannot get loans, bills will go
unpaid, which spreads the pain. To survive the

lockdown, millions of families and firms around
the world are relying on grants and loans from
the state. But tax revenues have collapsed, so
states need credit too. Across the world, we
are witnessing the largest surge in deficits and
government debt.

COVID-19’S IMPACT ON ISLAMIC FINANCE

The growing anticipation of a cyclical economic
downturn accelerated by the impact of
COVID-19 has worsened credit quality and
limited funding, placing greater pressure on the
liquidity of financial institutions, particularly
banks. Islamic banks are no exception since they
all operate within the same financial ecosystem
as their conventional counterparts. Prior to
the COVID-19 though, the progress of Islamic
banks has continued unabated and could now
be humbled by the coronavirus pandemic.
Although Islamic banks are not exactly in the
business of lending and borrowing money, they
are essentially deposit-taking entities, which
extend financing2 to deficit units yielding return
or margins as a result. In the current climate,
the Islamic banking sector could see declining
margins, along with slow financing growth and
more problem assets, which combined are likely
to weaken banks’ profitability. If Islamic banks
see liquidity dry up, they will struggle to support
financing as a result.

On a bigger scale, Islamic banks, Islamic financial
markets and Islamic money markets contribute
to providing the financial fuel of the economy.
Normally, credit is sustained by the optimistic
promise of growth. When that dissolves, the
market is subsequently facing a self-reinforcing
cycle of collapsing confidence, contracting credit,
unemployment and bankruptcy, which spreads a
cloud of pessimism.

In the Islamic debt capital market, following
strong sukuk activity in the first two months
of the year, the coronavirus pandemic has

seen international issuance grind to a halt3.
With an unprecedented combination of low oil
prices, economic disruption, health concerns,
lockdowns and investor uncertainty, the current
circumstances have seen sukuk at a standstill
— and although there are some hopes that
the market will eventually resume activity, the
landscape is likely to look rather different postpandemic.

On the corporate sukuk issuance, for instance,
Dubai Islamic Bank (DIB) was the first to call a
delay in its planned USD750 million sukuk4,
which could be a wise move to avoid paying a
higher profit rate due to the ongoing volatility.

Lower-rated issuers and those most directly
exposed to the travel, tourism and consumer
spending industries will suffer most. Issuers
based in Oman or Bahrain, plus some of those
in Dubai, may face obstacles in refinancing their
maturing debt or deficits. In Saudi Arabia, despite
the fiscal stimulus package of about USD32
billion,5 Saudi companies are also expected to
take a hefty economic hit, particularly following
the ban on pilgrimages to Mecca and Madinah
announced on the March 4, 2020.

IS ISLAMIC FINANCE REALLY ISLAMIC?

The answer to the question above may not be a
straight one. But it is nearly impossible to take no
notice of the public perception suggesting that
the Islamic finance industry has failed to deliver
its promises on fairness, equity and inclusion.
Furthermore, as the industry has become a real
force in the financial markets6, it creates new
financial products increasing transaction costs
and leading to financialisation.7

This could have been due to the process of Islamic
financial engineering that has been characterised
by a) a greater reliance of plugging ‘classical
Islamic financial contracts’ into an Anglo Saxon based banking model and, b) a conventional
securitisation technique in sukuk issuance has
proven to have made Islamic finance appear to
be no different than its conventional counterpart.

In my view, an Islamic financial engineering
period has been considerably exacerbated
by the introduction of; first, wa’ad technique
(especially double wa’ad) applied to Islamic
financial contracts. The white paper by Deutsche
Bank in 2007 was perhaps the first documented
articulation on the use of double wa’ad in
contemporary Islamic financial engineering.8
Second, the deployment of commodity murabaha
through the use of tawarruq for both liquidity
management and personal financing purposes.
Third, the operationalisation of the concept
of beneficial ownership9 and the extension of
the khulta (mixture) principle to the field of
commercial transactions10; which Islamic capital market through sukuk issuance has undoubtedly
been the great beneficiary of the implementation
of such concepts. These three components have
altered the profile or body of the Islamic financial
contracts resulting in the financialisation of the
entire Islamic financial services industry.

In the process, one of the unpreventable
outcomes is a ‘shift’ in the natural domain of
contract, from initially being classified as a
benevolent contract to now being a commercial
contract. One example is the kafalah contract;
upon which a fee is now permissible11. This is possible since, in contemporary practice, kafalah has essentially been moulded into ‘shirkatul wujuh’ using the principle of tab’iyyah12 or subordination13.

THE CHANGING FACE OF ISLAMIC FINANCE

Nowadays, innovations are characterised by
the use of artificial intelligence (AI), fintech,
and internet of things (IoT), or collectively
known as the Fourth Industrial Revolution;
Islamic finance is encountered with situations
where such innovations are creating substantial
displacements in industry and employment in
major economies around the globe.

It is imperative; therefore, that Islamic finance
has no other choice but to change. Furthermore,
there is also a genuine demand and opportunity to redirect innovations towards services
and products that create more economic
opportunities, jobs and financial inclusion for
those who have been on the sidelines of the
Islamic finance revolution. Coincidentally, we are
witnessing the propagation of Environmental,
Social and Governance (ESG) discourse, which
refers to the three central factors in measuring
the sustainability and ethical impact of an
investment in a company or business; combined
with the proliferation of the immense potential
of Islamic Social Finance.

A change of the look and direction in the
industry is needed. Malaysia’s recent movement
of Value-Based Intermediation in Islamic finance
can be considered as evidence of such a change.
Another one is the issuance of Khazanah
Sustainable and Responsible Investment
(SRI) sukuk. Waqf linked sukuk is another breakthrough championed by the Ministry of
Finance Indonesia in partnership with Badan
Wakaf Indonesia (BWI) and Bank Indonesia.

It is becoming apparent that the drivers of the
change now are no longer driven by an entirely
profit geared motive; rather it emphasises upon
creating social and environmental impact. In other words, it is an admission that the deviations
caused by the operation of Islamic finance in
relation to the expected or aspired paradigmatic
knowledge, theory and institutional emergence
have to be corrected14. One way to do that
is through the introduction of ESG, Impact
Investing and Islamic Social Finance.

WILL COVID-19 REMODEL ISLAMIC FINANCE?
It is perhaps rather premature to provide an
affirmative answer right now. However, five
dimensions can play a role in reshaping Islamic
finance post-COVID-19: inequality trifecta15 — inequality income, wealth,
and opportunity; needs a reality check. This
could ignite the global community to question
the relevance of the existing institutional
setup of financial intermediaries. If so, this can
also consequently challenge the existence of
institutions supporting the financial industry,

1) Social norms and values may evolve.
This can bring about an entirely different
perception about life in general, in which social,
economic and financial interactions are part
of it. The current pandemic has taught us the
novelty of compassion, shared solidarity and
shared prosperity irrespective of nations, ethnic
backgrounds and religions. A heavy reliance on
the traditional model of finance and financial
system that has resulted in what El-Erian calls
such as Basel, IOSCO, IFSB, and IIFM, amongst
others.

2) Methods of doing business may change.
As the social interaction may shift to a new
equilibrium, coupled with the pervasiveness of
digitalisation, the way of doing business, work
methods and financial dealings may drastically
change as well. Automation of processes will be unsurprisingly just a matter of a split second.
For Islamic financial transactions, this will surely
pose a new territory of challenge. Countless
traditional fiqh rulings can be challenged as a
result.

3) New Assets Classification may likely emerge.
What constitutes an asset may be revisited. To fit
the definition of ‘mutaqawwam’ or lawful under
Shari’a may alter. A different characterisation
of an asset being fungible (mithliyyat) and nonfungibles (qimiyyat), or a different method in
distinguishing ‘ayn16 from dayn17 is a sheer
possibility. If this materialises, the set of Shari’a parameters as guiding principles for
Shari’a-compliant products will shift to a new
equilibrium. Consequently, the building blocks of
contracts and the landscape of Islamic financial
transactions are expected to be different than
what we have now.

4) The birth of a new global currency is not to be
ruled out.
The recent hype of cryptocurrency and the use
of blockchain technology over the past few
years coupled with the increasing prominence
of digital economy should not go unnoticed.
In the literature of classic jurisprudence, what
modern society calls now as money was at the
time termed as nuqud or ‘umlah. While nuqud
refers to money being widely accepted by a large society, the specific meaning of ‘umlah is
a type of currency that is only valid in a certain
jurisdiction and may not be widely accepted18.
Going forward, the survival of fiat money
remains to be seen.

5) Moving from globalisation to regionalisation.
The pandemic has unravelled the world’s
precarious dependence on China as it controls
one-third share of the global supply chains19.
This can trigger a massive restructuring as
production and sourcing move closer to endusers and companies localise or regionalise their
supply chains. And in the context of Islamic finance and the halal industry, this can pave the
way for an effective realisation of South-South
cooperation among OIC member countries.

CONCLUSION
The current situation provides a golden
opportunity for all of us to have a moment of
reflection. How we respond during this time
can determine how we come out of the crisis
later on. Compassion, solidarity and selflessness
have stood out to become the novel values that
unite all humanity across the globe. Finance
and economy, logically, should be supported by
institutions that are anchored on those values.
And Islamic finance has the natural ingredients
to be at the vanguard to put those values in
place.

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