The Role of Zakat and Waqf based Microfinancing in Minimising Intragroup Income Inequality: Malaysian Perspective

Transcription

1. 1st International Conference on Towards Financial Inclusion : Development in Islamic Economics, Banking and Finance, Peshawar (23-24 Jan, 2016) The Role of Zakat and Waqf based Microfinancing in Minimising Intragroup Income Inequality: Malaysian Perspective Abidullah* Institute Islam Hadhari, Universiti Kebangsaan Malaysia Email: abidullah@siswa.ukm.edu.my Mobile No. +60-1135620579 Muhammad Hakimi Mohd Shafiai Senior Lecturer, School of Economics, Faculty of Economics and Management, Universiti Kebangsaan Malaysia & Institute Islam Hadhari University Kebangsaan Malaysia Email: hakimi@ukm.edu.my
2. 1st International Conference on Towards Financial Inclusion : Development in Islamic Economics, Banking and Finance, Peshawar (23-24 Jan, 2016) Abstract Income Inequalities have severe negative effect on the economic growth of a country. On the other hand its persistence increase poverty as the rich class multiply its wealth and the poor suffers. The capitalist economic system provided a solution to channel down the income from the rich to the government so that it can be spent on poor and other development projects. However, tax system is failed to provide justice to the poor. Similarly, conventional charities are not able to decrease inequalities amongst rich and the poor class. Malaysia is not a different case in the respect where the inequalities not only amongst the ethnic groups exists but also within the group. The major ethnic group ‘Malay’ are the one who are more effected by the latter type of inequality and ultimately pushed them into poverty. Hence, the aim of this paper is to provide a solution to poverty by minimising income inequality within the Malays ethnic group through waqf and zakat based microfinancing. By means of qualitative research, a solution is provided by developing a conceptual framework. The results suggest that combine efforts of zakat and waqf institutions in providing microcredit facility would help to improve the living standard of the poor. Keywords: Income inequality, Poverty, Zakat, Waqf, Microcredit 1. Introduction Income Inequalities have severe negative affect of the economic growth of a country (Alesina & Rodrik 1994; Birdsall 2012; Birdsall 2005). The classical economist developed a hypothesis according to which economic inequality was considered beneficial for economic growth (Khalid 2011). However, neo-classical economists reject the hypothesis and proposed a hypothesis that income inequalities have no significant effect on the economic growth. Both hypothesis have been tested by the modern era economists and came to conclusion that income inequalities do have significant effect on the economic growth of a country. Moreover, the effect of income inequality is more severe on the developing nations than developed ones (Bourguignon 2004; Alesina & Rodrik 1994). Any empirical evidence showed that countries
3. 1st International Conference on Towards Financial Inclusion : Development in Islamic Economics, Banking and Finance, Peshawar (23-24 Jan, 2016) with high level of inequalities experienced by low per capita GDP growth (Ortiz & Cummins 2011). The sources for redistribution of income from top to bottom of income groups must need to be efficient enough to minimize the economic inequality. However, it is eminent that tax system is failed to be fair with the poor (McIntyre et al. 2014). The tax benefits are only given to the rich while the less wealth are the one who pay taxes. The corporate entities have taken maximum advantage of the tax system because the government is in no position to enforce strict tax regulations. Malaysia being a developing nation faces same income inequalities amongst and within the groups. Malays are those who suffers more from the inequalities as compare to the other two ethnic groups i.e. Chinese and Indians. The Malay friendly affirmative policies had a positive effect on the Malay economy but in reaction it created intra-group inequality amongst the same group (Ragayah 2008b; Shireen 1998). The failure of tax system in minimizing income inequalities confirms to step back towards Islamic philanthropy such as zakat and waqf. Zakat institutions in Malaysia are more developed as compare to waqf institutions. However, zakat is not enough to alleviate the living standard of the poor. In this respect, waqf institution in combination with the zakat institutions can play an important role in minimising the gap between rich and the poor. Hence, the objective of this paper to identify the intra and inter group inequalities in Malaysia, and to provide a solution through waqf and zakat based microfinancing. 2. Intra-group Income Inequality and the Malays Dilemma: Malaysia is a multi-racial country. There are several races that reside in Malaysia. The three major races are Bumiputera with the population of 67.4 percent, Chinese 24.6 percent and
4. 1st International Conference on Towards Financial Inclusion : Development in Islamic Economics, Banking and Finance, Peshawar (23-24 Jan, 2016) Indians 7.3 percent (Department of Statistics 2011). Bumiputera are divided into Malays – the majority group and Non-Malays – the minority group. According to Article 160 [Clause 2] of Malaysian Constitution, Malay means a person who professes the religion of Islam, habitually speaks the Malay language, conforms to Malay custom and (a) was before Merdeka Day born in the Federation or in Singapore or born of parents one of who was born in Federation or in Singapore, or was on that day domiciled in the Federation or in Singapore; or (b) is the issue of such a person. In order to avoid confusion, ‘Bumiputera’ and ‘Malays’ would be used interchangeably in this study. Being a multi-racial country, it has inherited inequality from colonial era. This inequality got even more severe after the independence from British in 1957. The bubble of this economic inequality burst in 1969 in the form of racial riots. Later on in 1973 the affirmative policy NEP or New Economic Policy was introduce to make the life of Malays better. Till 1990, this policy had achieved most of its goals as Malays got better in many sectors. The poverty was decreased amongst the Malays, also the number of Malay students were increased in the Higher Education sector as well as attained the modern and professional occupations (Ragayah 2008a; Khalid 2014). After NEP, number of policies were introduced such as National Development Policy (19912000), National Vision Policy (2001-2010) and currently New Economic Model. These policies aided to the Malay economy as well to non-Bumiputera. However, it was estimated that in year 2007, majority of households in the bottom 40 percent of the income bracket were still Bumiputera (Khalid 2011). The comparison between the ethnic groups depicts that Bumiputera are still behind that other two ethnic groups in the race of economic growth. The previous researches showed a thorough insight of income inequality amongst the ethnic groups (Anand 1983; Hashim 1998; Khalid 2009). However, the inequality within a group
5. 1st International Conference on Towards Financial Inclusion : Development in Islamic Economics, Banking and Finance, Peshawar (23-24 Jan, 2016) became a new phenomenon when Shireen 1998 tested it for the first time in Malaysia. After decomposition of Inequality by ethnic group using theil index revealed that intra-group inequality is far high than inter-group inequality (Shireen 1998). A study based on 2004 data depict that the total inequality as measured by Gini coefficient was 0.418, and of this, about 93.71 percent was caused by inequalities within the group differences while only 6.29 percent was caused by ethnic differences (Ragayah 2008b). Lately, a report showed that 95 percent of the inequalities were caused by intragroup differences and only 5 percent was caused by ethnic differences (Salih 2014). Based on Gini index, intergroup inequality is decreasing from 0.513 in 1970 to 0.401 in 2014 (figure near to 1 means more inequality and vice versa). However the intragroup inequality is decreasing with slow pace (Department of Statistics 2014). In order to minimise income inequality amongst the Malays, the bottom 40 percent group must be assisted in maximising their income. There are three reasons why the progress of minimising intragroup inequality is slow. Firstly, there is problem in identify the poor household. In order to identify the poor in the Bottom 40 percent, a criteria is necessary that indicates who is poor. Poverty Line Income or PLI is a threshold below which a household is considered as poor. The poverty Line Income in Malaysia is set at RM 930 (RM is ISO code for Malaysian Currency and stands for Ringgit Malaysia) which is considered as unrealistic by many economists in their debates. PLI is the level of household income which is considered sufficient for meeting his basic needs such as food, clothing, and shelter, as well as education, health, transportation and recreational expenses (Aun 2015). Recently, a report suggested Relative Poverty Line Income to be used as a criteria to define a Poor household. Relative Poverty Line Income, according to that method, must be RM 2293 which would put more than 40 percent of Malaysians in the poor category. Secondly, the tax system is not providing sufficient support to the poor as most of the tax benefits are availed by the rich (Chen 2012). On the other hand conventional charity and zakat
6. 1st International Conference on Towards Financial Inclusion : Development in Islamic Economics, Banking and Finance, Peshawar (23-24 Jan, 2016) is not showing a significant effect on bettering the economic standard of the poor because it is provided for the consumption purpose rather than being provided as capital (Ab Rahman et al. 2012). Last and the most important factor is the focus of charity regimes to provide short-run economic support to the poor while in long-run they would still be dependable on the them. In order to overcome these issues the role of zakat and waqf become vital in channelling the income from the rich to the poor in order alleviate poverty and intra-group inequality. 3. Islamic Philanthropy as a Tool of Minimising Inequality and Poverty amongst the Poor Islam is the religion which is not only the way of guidance for the Muslims but for all mankind. This guidance is not only limited to the religious perspective but also provide guidance in other areas of life. One of the evidence can be explained from the perspective of economy which was totally set a side after the downfall of the Islamic era. The capitalism that was introduced in 16th century and got more famous in the mid of 18th century after the introduction industrial capitalism which spread across the globe. It took centuries to explore the loopholes of capitalist economic system and got evident in 1990s. The system is immensely criticised especially in the second half of 19th century and is considered as unjust system for the poor which only promotes the rich to maximise their wealth. In order to counter wealth maximisation and equal distribution of income, Islam has already provided solution 1400 years ago. Islamic Philanthropy such as Sadaqah, Zakat, and Waqf provides better distribution of income and wealth amongst the different levels of income groups. Sadaqah has the almost similar concept as the conventional charity with difference in the expectation of reward for the charity giver. In conventional charity, the donor has the expectation to help the poor or other reasons
7. 1st International Conference on Towards Financial Inclusion : Development in Islamic Economics, Banking and Finance, Peshawar (23-24 Jan, 2016) mentioned by Loseke, 1997 whereas the Muslim who give Sadaqah not only help the poor but expects the reward from Allah SWT. Moreover, zakat and waqf are discussed vastly amongst the scholars and explained its role as in minimizing inequality and bettering the economic standards of the poor. In this section I attempted to explain the basic philosophy and economic role of zakat and waqf in providing financial inclusiveness to the poor. 3.1 The Philosophy of Zakat and its Role in Minimising Income Inequality: a. The Philosophy Zakat is the third of the five pillars of Islam. The importance of zakat can be judged with its preference among the five pillars of Islam. It is compulsory for every Muslim to pay zakat who are capable of it. It is also compulsory for all Muslims to not hoar wealth but to distribute. It has been mentioned in the Qur’an that “O you who have believed, indeed many of the scholars and the monks devour the wealth of people unjustly and avert [them] from the way of Allah. And those who hoard gold and silver and spend it not in the way of Allah - give them tidings of a painful punishment The Day when it will be heated in the fire of Hell and seared therewith will be their foreheads, their flanks, and their backs, [it will be said], "This is what you hoarded for yourselves, so taste what you used to hoard””. (Tawba 9:34-35) According to the narration of Abu Said al-Hudri, the Messenger of Allah stated that zakat is not required for silver less than 5 uqiyya’s (200 dirhams= 595 grams). During the Caliphate of Umar Farooq R.A., Anas Bin Malik, the collector of zakat asserted that he was instructed to take half of a dinar from every twenty dinars. This practice was later followed by Caliph Ali R.A. during his time. From the Hadith and the practices followed by his Companions, the
8. 1st International Conference on Towards Financial Inclusion : Development in Islamic Economics, Banking and Finance, Peshawar (23-24 Jan, 2016) scholars came to conclude the nisab for zakat should be 85 grams of god or 585 gram of silver. Those who possess the stated amount of Gold or silver or equivalent wealth should pay zakat with overall proportion of 2.5 percent (Şentürk, 2007). The recipients of zakat are derived from the following verse of Qur’an, “Alms are only for the poor and the needy, and those who collect them and for those whose hearts are to be reconciled, and for the ransom of captives and debtors and for the way of God and for wayfarers” (Tawba 9:60). Hence the beneficiaries of zakat include, the poor who are deprived of basic necessities such as food clothing, shelter, the destitute who do earn but that their earning is not enough to fulfil their basic needs, the zakat collectors who devoted themselves to collect and distribute zakat and have no other way of earnings, the Muallfaa Al-Qulub (those whose hearts are to be reconciled with Islam), freeing the slave, the debtors who are under heavy debt, Fi Sabilliah (giving in the way of Allah) and wayfarers who become needy during travel in order to serve Allah’s Way, even though they are rich back home (Şentürk, 2007). b. Zakat in Malaysia There are total 14 states in Malaysia and each state has its own zakat department that comes under the jurisdiction of State’s Islamic Religious Council (SIRC). Hence, each state has a separate zakat collection and distribution system except the federal territory which comes under federal government. SIRC comes under Sultan or Raja of each state without interference from the federal government. The era of privatization has brought another dimension to the philosophy of zakat collection and distribution. Many states in Malaysia has privatize its zakat system via a body that acts under SIRC to perform all the duties of zakat. Such as Federal Territory Kuala Lumpur privatize it zakat system in 1991, Selangor in 1994, Pahang in 1995, Negeri Sembilan in 1998 and Melaka in 2001 (Lubis et al. 2011; Othman & Mohd Noor 2012;
9. 1st International Conference on Towards Financial Inclusion : Development in Islamic Economics, Banking and Finance, Peshawar (23-24 Jan, 2016) Ab Rahman et al. 2012). Due to separate zakat system of each state, it is difficult to explore and focus on all the states zakat departments. Therefore, this study would only focus on Selangor which is the most populous and developed state of Malaysia. c. Zakat Collection and Distribution in Selangor In Selangor, zakat collection and distribution comes under Lembaga Zakat Selangor (LZS) or Zakat Institution Selangor and is directly supervised by Shariah Islamic Religious Council Selangor. LZS is now an established organisation with more than 400 employees in 25 branches. The main focus of LZS is on collection and distribution of zakat to the eight asnaf mentioned in the Quran. LZS also involve recipients of zakat in five major development programs such as social development, education, economics, human and Institutional development of Religion. The payment of zakat can be made online via LZS portal which has made it easy for the zakat payers to pay with a single click rather than waiting in queue to deposit zakat amount in banks. On the other hand distribution of zakat is made using had kifaya method. There is a specific rate set by LZS for each category of household such as for head household, couple, and schooling children, children under and above 18 years. A specific amount for each category is calculated and if the amount exceeds the household income, he would be provide assisted by the LZS. For example, a person with income of RM 1000 living with his family including his wife and three children in a rented house. Among the children two are in the age category of 7-17 years and one is 4 years old. According to the rates of Had Kifaya fixed by LZS, the total had kifaya for this household must be RM 1800 showing the household is short
10. 1st International Conference on Towards Financial Inclusion : Development in Islamic Economics, Banking and Finance, Peshawar (23-24 Jan, 2016) by RM 800. Hence the LZS would give this amount to the household in order to cover their day to day expenses1. d. The Role in Minimising Income Inequality: From the above discussion and the mentioned verse from the Qur’an, it can be clearly observed that with the help of zakat the wealth would be redistributed from the wealthy to those who don’t possess it. Zakat is one of the financial redistribution tool for an Islamic state to provide financial inclusiveness to the poor (Johari et al. 2014). Zakat can provide financial assistance to the poor who are vulnerable to financial shocks and scarce in capital and knowledge. A study conducted in Selangor (Populous and Most developed state of Malaysia) provided evidence that zakat reduces income inequality amongst the poor (Ibrahim 2006). The data was collected from the zakat recipients in Selangor with the focus on the income before and after zakat distribution. In order to see the effect of zakat on income inequality, Lorenz Curve, Gini Index and Atkinson Index were used. The indices provided a positive effect of zakat income inequality with reduction in poverty burden. However, zakat distribution would only decrease income inequality in short-run and the poor would be dependable on it for the life-time. Moreover, the study was focused on the inequality amongst the poor Malays, not on the inequality amongst the rich and the poor Malays. It is argued that if the poor is provided with loan to start an economic activity such as small business would better his living standard and alleviate poverty (Hassan 2010; Ali 2014; Yumna & Clarke 2009). . However, due to shariah restriction, zakat cannot be paid as loan and can only be provided in the form of cash. Therefore, it would be feasible to use waqf benefits to provide capital as loan which would not only solve the issue of dependency on the charity but also the intragroup inequality. 1 The procedure of calculating had kifaya is given on the official portal of LZS which can be accessed at www.zakatselangor.com.my
11. 1st International Conference on Towards Financial Inclusion : Development in Islamic Economics, Banking and Finance, Peshawar (23-24 Jan, 2016) 3.2 Waqf and its Role in Minimising Intra-group Income Inequalities: The literal meaning of waqf is to hold, to prevent or to restrain or in other terms it means to protect any asset from falling in the hand of third person. In order to elaborate waqf is an inalienable trust in which the founder of the waqf (waqif) makes the guidelines or principals for the property’s revenue and allocates the profit or usufruct or yields of the property to specific person or institutions. Such property is then given in the possession of fiduciary (wali or mutawalli) who manages the trust for the benefit of a third party. The condition for the asset to be waqf must be an immovable asset but later such requirement was relaxed to legitimize immovable assets which was then known as Cash Waqf (Kuran 2001). There are three types of waqf such as waqf khayri, waqf ahli, and the combination of family and public waqf or hybrid waqf and the fourth type that is new to this family is corporate waqf.  Waqf Khayri It is also known as charitable waqf or public waqf in which endowment is made by the founder to help the poor and needy in the society and to support the general goods of the public. There are two types of public waqf – religious waqf or specific waqf and philanthropic waqf or general waqf. The endowment of assets for the purpose of building mosques or any other religious institute falls under religious waqf category whereas philanthropic waqf includes endowment of assets for the benefit of the society and support the poor(Hassan 2010).  Waqf Ahli or Family Waqf In such type of Waqf the founder made the endowment of his property to his children, grandchildren or other relatives. In case, the beneficiaries that are defined by the founder are no longer alive, then the property will be used for the public welfare purposes.
12. 1st International Conference on Towards Financial Inclusion : Development in Islamic Economics, Banking and Finance, Peshawar (23-24 Jan, 2016)  Hybrid Waqf: In this type of waqf the endowment is made by the founder to the family and a part to the public. One third of the property would be waqf and two-third for the descendants that should be shared according to the teaching of Qur’an (Hennigan 2004). a. Waqf Benefits: There are few restrictions that are declared by the jurists in order to safeguard the waqf property. First, once the property is declared to be waqf property by the founder, then he cannot revoke it back. Secondly, the waqf property should be perpetual as this condition will help in safeguarding the property to be overtaken by the government or any other individual. Thirdly, no one can sell, mortgage or gift the waqf property (Quresh, 1990). As it is already discussed that waqf can be general or specific, moveable or immoveable. Hence, the revenue must be treated according to the type of waqf as shown in Figure 1. Waqf General Waqf Specific Waqf Immoveable goods Moveable Goods Immoveable assets Moveable assets Economic activity Invest Economic activity Invest Revenues for Public goods Revenues for specified beneficiaries Figure 1: Treatment of Waqf benefits (Abidullah et al. 2015) Revenues for specified beneficiaries
13. 1st International Conference on Towards Financial Inclusion : Development in Islamic Economics, Banking and Finance, Peshawar (23-24 Jan, 2016) Immoveable assets such as land or building etc. must be used for an economic activity. For instance, land can be used for agricultural activities or build a mall and derive the revenues while the buildings can be rent out in order to generate the revenue. Moveable assets such as cash must be invested in a halal activity and generate profits. The revenues under specific waqf must go to the specified beneficiaries while in general waqf revenues and profits would be used for public goods. b. The Importance of Waqf from Quran and Hadith Perspective The importance of establishing waqf can be realised from the following verse of the Qur’an “And establish regular Prayers; And give regular charity; And loan to Allah a Beautiful Loan”2 From the given verse of Qur’an, the emphasis is given on Prayers and Charity that includes zakat and also Sadaqah. Waqf according to Shariah scholars is type of Sadaqah with recurring rewards which is voluntary in nature whereas zakat is obligatory on all wealthy Muslims. It is also observed from the history that Awqaf were established for both religious and social purposes such as the Masjid Nabweeh and Masjid Quba in Madina were the waqf properties established by Prophet Muhammad (PBUH) (Shirazi 2014). Another instance of waqf can be observed from the era of Prophet Muhammad (PBUH) when Umar Al-Khattab (RA) got a piece of land in Khyber and endowed it for the social purpose. Narrated by Umar (RA) When 'Umar got a piece of land in Khaibar, he came to the Prophet saying, "I have got a piece of land, better than which I have never got. So what do you advise me regarding it?" The Prophet said, "If you wish you can keep it as an endowment to be used for charitable purposes." 2 Surah Al-Muzammil 73:20
14. 1st International Conference on Towards Financial Inclusion : Development in Islamic Economics, Banking and Finance, Peshawar (23-24 Jan, 2016) So, 'Umar gave the land in charity (i.e. as an endowments on the condition that the land would neither be sold nor given as a present, nor bequeathed, (and its yield) would be used for the poor, the kinsmen, the emancipation of slaves, Jihad, and for guests and travellers; and its administrator could eat in a reasonable just manner, and he also could feed his friends without intending to be wealthy by its means."3 Waqf is recurring charity as it can be observed from the mechanism that waqf assets can be either moveable or immovable and the benefit derives from it must be perpetual in nature. In this case the importance of waqf can be realised from the hadith narrated by Abu Huraira (Allah be pleased with him) “Allah's Messenger (may peace be upon him) said: When a man dies, his acts come to an end, but three, recurring charity, or knowledge (by which people) benefit, or a pious son, who prays for him (for the deceased).” 4 Hence it can be induce from the hadith that endowing the assets is a piety activity because when people waqf their assets in the name of Allah, it is their faith that it will be their support after death in hereafter. c. The Economic Role of Waqf: The economic dimension of waqf must not be neglected as it has contributed to lowering the government expenditures in the past. It is known that tax is one of the major revenue generator for the government and plays a vital role as a donor to government spending. Waqf at the time of Ottoman caliphate played a vital role in decreasing the government expenditure on essential services such as health, education, and municipal etc. with no cost whatsoever to the government. Such a massive reduction in government expenditure would help in decreasing 3 4 Bukhari Volume 4, No. 33 Sahih Muslim, The Book of Bequests (Kitab Al-Wasiyya), Hadith no. 4005
15. 1st International Conference on Towards Financial Inclusion : Development in Islamic Economics, Banking and Finance, Peshawar (23-24 Jan, 2016) government budget deficit and hence assist in lowering the need for government borrowing which would ultimately lead to the lowering of interest rate (Çizakça 1998). The major misconception in the mind of layman is to eliminate riba or interest completely under Islamic economics agenda. However it is eminent from the classical Islam that riba was still not completely eliminated. Moreover it must be bear in mind that immediate elimination of riba is not possible as no country has yet succeeded to get rid of riba. According to Çizakça 1998 waqf may contribute to gradual elimination of riba as such voluntary donations contribute to finance all sorts of social services to the society and better distribution of income in the economy. In the conventional economy, the problem of under supply of public goods is so often observed. Public goods are those which are consumed by an individual without reducing or eliminating its availability for the other individual (Bates 1997). The examples of public goods can be national radio and television services, defence services, public parks etc. The problem that is pointed out by the economist is the under supply of such goods – the rational behaviour of human wouldn’t allow him to contribute in order to get benefited. For instance, an individual would get the same public goods even he doesn’t not pay taxes by free riding on the tax payments of fellow countryman. Waqf can be a source of provide public goods to the society with any extra cost charged to the government. Another contribution of waqf system was towards minimizing unemployment. In Turkey, waqf system has contributed significantly in providing employment other than those employed directly by the state. Recent studies on the potential of waqf has revealed that the system can significantly contribute to poverty alleviation by providing them opportunities to generate their income from favourable economic activities (Ali 2014; Haneef et al. 2013; Hassan 2010; Shirazi 2014; Zarka 2007).
16. 1st International Conference on Towards Financial Inclusion : Development in Islamic Economics, Banking and Finance, Peshawar (23-24 Jan, 2016) Today, waqf can play an important role in minimising intra-group inequalities amongst the rich and the poor. The waqf benefits that are derived can be used as a loan to establish small businesses for the poor. This loan would act as capital for the poor to establish his business (Abidullah, & Muhammad Shafiai 2015; Hassan 2010). Once the poor have means to generate their income in perpetuity and get employments, the gap between the rich a poor would be minimise. 4. Zakat and Waqf based Microcredit Facility to Minimize Intra-group Inequality and Poverty amongst Malays: Earlier in section 2 we pointed out three problems that blows the inequality fire amongst Malays to the height. First, the Poverty Line Income set by the government is too low. To elaborate, the PLI set by the government is set as RM 930 which is considered as far too unrealistic. A study showed that 80 percent of Malaysians are earning below RM 3,000 and it is hard to meet the ends in this amount (Mustafa 2014). The problem the government policy is that it is focusing on those below PLI while those with RM 3000 still facing difficulties in surviving with such a less amount. However, there are some schemes that are introduced for income group of below RM 3000 but it is not too effective. This would aid to inequality as these people would go for bank loans and wouldn’t be able to save money that can provide them security in case of financial shocks or helps in maximising their wealth. Secondly, the focus of charity and zakat institutions is on providing relief to the poor in shortrun which would make them dependable forever. It would motivate the poor not to work because ‘they are getting the fish for free’. It is argued that ‘it is better to provide them a rod to catch the fish rather than provide a free fish’. Hence it is important to help them in developing skill to earn in better way rather than providing free money.
17. 1st International Conference on Towards Financial Inclusion : Development in Islamic Economics, Banking and Finance, Peshawar (23-24 Jan, 2016) Here, the income inequality is getting worst, because those below RM 3,000 income are not able to improve their living standards and secondly, the poor are dependable on charities instead of earning by themselves. In general terms it means that only 20 percent of Malaysians are able to multiply their wealth while the remaining are suffering. Hence, in order to provide support to those below RM 3,000 and the extreme poor whose income is below RM 830, waqf and zakat can play an important role. It is important to note that Islamic Microfinance Institutions (IMFIs) in Selangor, do not have established network as compare to the Zakat Institution Selangor. Therefore, IMFIs would first establish its network in the poverty effected areas which would increase the operational costs. Moreover Waqf Institution are also not established and have several mismanagements in dealing with waqf benefits. Hence, we proposed, that zakat and waqf institutions must collaborate in establishing a single microcredit facility. This would help in decreasing the operational costs which are considered high in case of Islamic Microfinance Institutions. In our study, the operational model for zakat and waqf based microcredit is inspired by Hassan (2010) operational model for NGOs. However, we have made some changes to this model to make it relevant to Zakat and Waqf based Microcredit Facility. As the focus of our study in on Selangor, hence it is important to mention that the government of Selangor has fixed its PLI at RM 1,500 which looks reasonable. In our model, we would consider those Malay Income groups whose income is below than RM 1,500. They would be eligible for the disbursement of both zakat and waqf benefits while Malay income group below RM 3000 would only be considered for disbursement of waqf benefits as loans. To make it easy, those below RM 1,500 are mentioned as IG 1 and below than RM 3,000 as IG 2 in our model.
18. 1st International Conference on Towards Financial Inclusion : Development in Islamic Economics, Banking and Finance, Peshawar (23-24 Jan, 2016) Zakat Institution Selangor has already established 25 branches within urban and rural areas of the state based on the poverty map. The selection criteria would focus on IG 1 and IG 2 income groups. IG 1 are eligible for both zakat and waqf while IG 2 will only be eligible for waqf loan facility. For capital financing, IG 1 and IG 2 would be provided with training, once pass this phase, they will be divided into a group of five members. The neediest one would get the loan first and after making his first instalment the second member would get the loan. After the payment of the first instalment by second member, the third member would get a loan and so on (Hassan 2010). The source of funds for Zakat and Waqf based Microcredit Facility (ZWMF) as mentioned in figure 2, would obviously be zakat funds from the current year and any surplus from the previous year. Awqaf fund would be the second source for the ZWMF and a separate account maintained as Awqaf retained earnings from the previous years. Zakat donations for basic consumption Zakat Fund Zakat Surplus from previous years Zakat & Waqf Microcredit Facility Zakat donation as capital for basic needs Awqaf Fund Capital Financing (Awqaf funds) Awqaf Retained Earnings Working Capital (Awqaf Funds) Instalments & Losses Non-Earning Investment Repayments Operational Costs Figure 2: Fund Management Framework for Zakat & Waqf Based Microcredit Facility
19. 1st International Conference on Towards Financial Inclusion : Development in Islamic Economics, Banking and Finance, Peshawar (23-24 Jan, 2016) Zakat would only be provided to IG 1 in the form of cash for basic consumption and as capital for buying necessary consumption goods. On the other hand, waqf funds would be provided for capital financing purposes to both IG1 and IG2. Once the business is started, working capital for the purposes of expanding business or establishing the current business. It is important to note that this fund would be provided as Qard ul Hassan where only original amount plus operational costs would be recovered from the borrower. Once the borrowers start paying their instalments, the operational cost would be recovered from it and the rest of amount would go to “waqf retained earnings” account. In case of any loss incurred, would be recovered from that same account. 5. Summary: Income inequalities are the major hindrance not only in the development of a country but it also expands the lower class income group as the middle class starts slipping to it. In Malaysia, intra-group inequalities are considered more dangerous as compare to the inter-group income inequalities (Shireen 1998; Ragayah 2008b; Khalid 2014). The setting of lower PLI by the government, inefficiency in charity distribution, and the focus on providing financial assistance in short-run are the major causes that does allow the poor to have better economic status. Not only the poor below PLI but also those who are earing below RM 30,000 are not able to meet the ends. On the other hand Selangor has almost doubled its PLI that what the federal government has set which would increase the number of poor in the state. In this study, we have focused on two income groups i.e. below RM 1,500 (poor) and below than RM 3,000 (middle class). We have provided Zakat and Waqf Based Microcredit model which would support the middle class to better their standard of life by doing side businesses and also the poor to improve their living standard by earning perpetual income.
20. 1st International Conference on Towards Financial Inclusion : Development in Islamic Economics, Banking and Finance, Peshawar (23-24 Jan, 2016) The funds would be provided based on the Grameen bank operational model. The poor class would be provided with zakat donations for basic consumption needs and capital financing from the Awqaf funds. On the other hand, middle class would be provided with capital financing from Awqaf funds. In short, this model would help in not only decreasing the intra-group income inequalities amongst Malays. However, there is need of a pilot project test based on the given model so that any loophole present the current model can be overcome and further operational adjustments are made accordingly.
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