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Making Zakat And Aid Work In Poor Economics

Namira Samir
By Namira Samir
3 weeks ago
I discuss the effectiveness of almsgiving on resolving poverty in Muslim countries by providing a comprehensive analysis of findings and key texts from scholars such as Jeffrey Sachs, William Easterly, Esther Duflo and Abhijit Banerjee on the effect of aid on poverty.


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  1. SPECIAL REPORT Making Zakat and aid work in poor economics NAMIRA SAMIR discusses the e ffectiveness of almsgiving on resolving poverty in Muslim countries by providing a comprehensive analysis of findings and key texts from scholars such as Jeffrey Sachs, William Easterly, Esther Duflo and Abhijit Banerjee on the effect of aid on poverty. Namira Samir is a researcher and consultant based in Indonesia with main interests in multidimensional poverty alleviation, women empowerment and Islamic social finance. She holds a Master’s degree in Islamic finance and management from Durham University in the UK. She can be contacted at namiraalhasni@outlook. com. Zakat and aid possess some similarities in a way where both instruments give no assurance on the improvement of the recipients’ well-being. The contribution of Zakat and aid must go beyond the consumption function and they must be distributed to those who are willing to improve their livelihoods. The meeting point of almsgiving and the productive poor is through microfinance institutions, which can ensure that the fund is given to people who desire to improve their lives through financing and entrepreneurship. The world needs to get smarter. Solving the big problem of poverty is not as simple as giving the poor money and food. This has been the underlying argument of William Easterly, a professor of economics at New York University in his book titled ‘The White Man’s Burden: Why the West’s efforts to aid the rest have done so much ill and so little good’. The accuracy of this notion can be easily seen in today’s world, where despite the large amount of charities made for the destitute, poverty remains persistent. Over 50% of the worldwide poor reside in Muslim countries and they make up 24% of the global population (Mughal, 2018). In the quest to end deprivation, we acknowledge the importance of money as the primary instrument to win the battle. In a semi-ideal world where everybody is kind and have a strong willingness to help each other, there might no longer be poor people. At least that is what Jeffrey Sachs concludes in his book titled ‘The End of Poverty’. He argues that the poor are trapped in either nutritionbased or health-based poverty traps, © and if the poor cannot afford to escape impoverishment, we must help them out with our excess wealth. Since Muslim countries have distinguished characteristics, perhaps the way to alleviate extreme poverty in the Muslim world is by employing instruments that are in accordance to the values they hold. In Islam, Zakat is a form of almsgiving which is obligatory for Muslims whose income and financial belongings exceed a certain financial threshold. There are two types of Zakat: Zakat of wealth (Al Maal) and the Zakat of body (Al Fitr). Both types of Zakat aim to balance the uneven distribution of wealth and end different dimensions of poverty. There is no need to question the correlation of Zakat and hunger reduction, since food is being transferred from the wealthy to the needy, hence to some extent it contributes to a more equalized distribution of basic needs. However, with the astonishing discovery of high poverty in Muslim-majority countries despite the existence of Zakat as religious almsgiving, we must examine to what extent both types of 23 Zakat contribute to poverty reduction and what can be done to improve it. There is the same impression toward Zakat and aid, ie by giving the poor money or providing them with basic necessities, they would have the same capacity and autonomy as the non-poor on improving their well-being. But there is bewilderment at the relationship between money/income and food expenditures. Abhijit Banerjee and Esther Duflo in their 2011 book titled ‘Poor Economics’ reveal that when the poor have more money, they spend it on something that is more expensive. From this phenomenon, we become aware of what it is like to live below the line. Money is seen as the chance to experience a completely different life. But are they to blame for possessing such a desire? Another limitation of almsgiving is its inability to boost anyone’s income permanently. We must be reminded that a one-time gift can only help people to move up to a higher level in a certain period of time, without guaranteeing the continuity of the upward trend of the livelihood condition. 30th January 2019
  2. SPECIAL REPORT Continued McGillivray (2004) argues that poverty would be higher without aid flows. However, aid will not go as far as ending poverty and improvement on how aid is channeled needs to be made. Moreover, as Easterly points out in his book, aid does not respect people’s freedom. He maintains that there is no need to supply the poor with something when they do not have the willingness to accept such an endowment for improving their wellbeing. The imperfect depiction of poverty is due to our lack of understanding of the solution to end deprivation. The key to escaping poverty is ‘willingness’, and when the poor are provided with almsgiving such as aid or Zakat, they are not required to have the will to upgrade their livelihoods. The poor live a fundamentally different life and in order to make an exit from the trap, money is insufficient. When we receive gifts, we are not required to use the gifts for certain objectives. The same thing happens when the poor is being given money or food as aid. They can use them as they wish and they make the choices based on what makes sense to them, and we cannot control their rationality. As argued in this article, aside from providing them with the tool to escape poverty, there needs to be some supervision of the usage of money provided to them. It is implausible to control the way the poor spend the money they acquire from Zakat or aid, since both instruments are given voluntarily. However, that does not mean that nothing can be done to prevent the improper use of the aid given. With regards to Zakat, knowledge-sharing on how the money should be spent is also applicable. The administrators of Zakat can play a role in this by ensuring the poor are aware of the importance of spending Zakat money for productive causes. Furthermore, the way in which Zakat and aid are provided must be designed such that it can ensure the improvement of the well-being of the poor. This seeks the utilization of a mechanism that can connect Zakat and aid with people who are willing to improve their lives. Among the means to do so is microfinance. Microfinance © borrowers are those whose livelihoods are hindered from development due to the inability to access credit from formal financial institutions. They are the ones who decide to apply for small loans because they wish to improve their well-being through entrepreneurship. By running small businesses, they will be able to generate income that might suffice to fulfill and later improve their household’s wellbeing. Zakat and aid need to be productive and the poor must have the willingness to escape poverty Yunus (1999), the pioneer of the microcredit concept, maintains that microfinance would correct market failure through providing credit access to the poor. The social power generated from economic power created by loans given to borrowers will lift them out of impoverishment. There are many examples of Zakat distributed to the poor through microfinance institutions. The number of clients of microfinance institutions as per 2017 reached 139 million with loans estimated at US$114 billion. While Zakat helps to fulfill the basic necessities of recipients, microfinance boosts the economic capacity of borrowers, which can escalate the reduction of other dimensions of poverty (education, health, living standards). In 2018, the National Zakat Board of Indonesia (BAZNAS) initiated a Zakat microfinance program via a microfinance institution where the funds are acquired from Zakat funds and qualified borrowers are the ones entitled to receive Zakat. Zaenal (2018) examined the Zakat microfinance program initiated by BAZNAS in 2018 and its role in poverty reduction in selected regions 24 of Indonesia. The funds used for microfinance are Zakat funds, hence, the recipients are Zakat beneficiaries who urgently need to escape from poverty. The findings show that the program is effective in alleviating poverty and increasing the material welfare level among beneficiaries. Similarly for aid, instead of channeling it directly to the poor, it could be channeled to microfinance institutions that can ensure that it is given to people who desire to improve their lives through loans and entrepreneurship. The role of Zakat and aid in poverty alleviation cannot be overemphasized since it merely solves a tiny element of material poverty, which is the fulfillment of basic necessities. Contrary to a prior expectation that Zakat and aid are capable of alleviating poverty, this article argues that Zakat and aid can actually tackle multidimensional poverty if they are linked with other alternative tools which have the capability of improving the level of education, health and living standards of the poor. There is the psychology of the sunk cost effect, which maintains that people are more likely to maximize their use of something that they have spent money on. As such, people who receive aid will have the tendency to take it for granted and not use it to improve their well-being. Meanwhile, borrowers at microfinance institutions realize that this is their chance to improve their well-being and they will maximize their efforts with the loan provided by the microfinance institutions. Suffice to say, Zakat and aid are underutilized miracles. The most critical challenge is to focus on Zakat and aid effectiveness, because although they might contribute to the improvement of people’s well-being, the impact will not be sustainable. Such a notion is not raised due to skepticism, but rather because optimism needs some rationality and we need to work our way to maximize the chance of realizing the ideal outcome of Zakat and aid for empowerment. Zakat and aid need to be productive and the poor must have the willingness to escape poverty. Only with such conditions can we actually make almsgiving contribute significantly to poverty reduction. 30th January 2019