This document discusses Mohammad Anwar's proposed mechanism for utilizing Zakat funds for long-term investment and socioeconomic development called the Awqaf-Zakat Investment Fund (AZIF). The proposed mechanism collects Zakat funds and establishes an investment fund registered as a Waqf institution that operates as a profit-seeking corporation. Zakat funds would be used to purchase shares in the fund. The fund would then distribute shares to beneficiaries and exchange shares for commodities and cash. The document analyzes the Shariah compliance, operation, potential benefits, and challenges of the AZIF model, and compares it to other proposed Zakat financing mechanisms.

1. FIN 6620 – AS-
SHARI’AH, ECONOMICS AND
SOCIETY
Br Mustafa Omar

2. Article Review
Financing Socio-Economic
Development with Zakat Funds
( Mohammad Anwar)

3. Group members:
 Ella Ermayasari
 Nur Aisyah Yacob
 Siti Azrai Binti Ahmad Akil
 Abdul Muqeet Khan

4. Agenda:
 Introduction
 Summary
 Significance of study
 Analysis
 Comparison of AZIF Mechanism with Other Zakat
Financing Mechanisms
 Anwar (1995) proposed AZIF model
 Shihata (1985) proposed model
 Hassan (2010) proposed model
 The Practical Model: The Practice of Kuwait Zakat House
 Zakat Funds Contribution towards Socio-Economic
Development
 Challenges
 Conclusion

5. Brief Introduction:
 Underdevelopment of Muslim countries
 Need for proper institution of Zakat
 Establishment of Awqaf-Zakat Investment Fund (AZIF)

6. Summary:
A proposed mechanism for utilizing the Zakat funds
into long term investment for the sake of socio-
economic development.
The Shariah compatibility, Modus operandi, potential
problems and Socio-economic advantages are
discussed.

7. Proposed mechanism:
 First- Collection of Zakat funds
 Second-
 Establishment as: Awqaf-Zakat Investment Fund
 Registration as Waqf institution and
 Operation as profit seeking corporate venture
 Third- Zakat funds used for purchasing the shares
 Fourth- distribution to various beneficiaries for money
 Fifth- Exchange of shares for commodities and cash

8. Flow of Zakat Funds

9. Shariah compatibility:
 Is it permissible to channel zakat funds
into investment projects?
 Can the proposed institution be formed
as a waqf but managed as a
corporation?
 Is distribution of shares compatible with
the Shari’ah, and does it upheld the
principle of tamlik?
 Is it possible to follow the Shari’ah
preference for distributing zakat locally?
 Is it possible to use AZIF shares in lieu of
cash for buying commodities?
 Is it feasible to redeem AZIF shares at or
above their face value?

10. Modus operandi & organizational
strategy
 Investment fund taken as a autonomous body governed by High
level trustee council, Shariah scholars and professionals
 Rules regarding funding, investment, administrative
expenses, inspections and accounting and auditing controls
 In case of solvency, losses guaranteed by government callable
bonds
 No interest bearing investments
 Investments in agriculture, low cost housing, food, clothing, medical
facilities and education.
 Financing public ventures on the basis of
Mudarabah, musharakah, istisna, sharikah
mutaniqisah, murabahah.

11. Significance of study: Anwar (1995)
 An innovative financial institution like AZIF entails
empowerment, productivity and socioeconomic development;
 The proposed AZIF to rightfully utilize or invest zakat funds in
productive ventures for contribution towards socioeconomic
development;
 To function through integration of collaborative efforts of fund
donors, collection and distribution agencies, retail
outlets, government and other involving parties in gathering
scattered endowments to create a common institutional fund to
maximize its utilization;
 To function in increased credibility ensuring mass participation and
productive resource building of millions of poor or average Muslims
in the spirit of Islamic charity and socioeconomic development;
 Also proposed as a trusted establishment of financial institution
, Waqf and corporation, in compatibility with Shari’ah
Law, mechanism of which fulfils condition of tamlik

12. Analysis (1): Zakat, Zakat funds and poverty Alleviation:
Zakat as stipulated by a Qur’anic injunction is a determined portion
taken from wealth including assets and allocated to those deserving
it.
“Of their goods (wealth), take alms, that so thou mightest purify and
sanctify them; and pray on their behalf. Verily thy prayers are a
source of security for them: And Allah is One Who heareth and
knoweth.” (Surah Al-Taubah, Chapter 9, Verse: 103)
Zakat as obligatory charity tax , an act of Ibadah, a form of social
investment
Zakat funds can replace government budgetary expenditures and be
utilized for developmental and social expenditures.

13. Analysis (2): Need for an innovative approaches to
finance developments:
 various wealth re-distribution and poverty eradication efforts have
been made but they lack implementation (Ahmed, 2004;
Supardi, 2005; Laila, 2010)
 institution of microfinance developed to create access to funds for
the poor have yet to prove its credit for poverty alleviation Laila
(2010)
 Hassan & Khan (2007) proposed zakat funds to be used in the
government’s Poverty Reduction Strategy Papers (PRSPs)
 Anwar (1995) urged the need to develop the zakat institution

14. Analysis (3): Shari’ah compatibility of investing
zakat Funds:
 Anwar (1995) - AZIF Shari’ah compatibility:
(i) Satisfies tamlik (personal ownership of zakat
fund) by the poor and needy as shareholders of
commercial products by virtue of their shares;
(ii) Guarantees against loss, or cover from built-up
loss reserve account;
(iii) Allows zakah disbursement immediacy to satisfy
pressing consumption needs of the poor and
needy through arrangement with retail outlets to
accept the certificates and cash at a price not
less than face value

15. Analysis (4): Financing Developments with
(Investing) Zakat funds:
 Anwar (1995); Khan, (1990) for Pakistan and Hassan and
Khan (2007) for Bangladesh:
“Zakat funds should not remain idle in depositories / bank
accounts, but if collected and managed properly, could
be used to create a pull of funds for development
financing and replace government expenditures “
Khan (1990): June 30, 1989, an idle bank balance of Rs
4.387 billion were found idle in the current account with
State Bank of Pakistan without any earnings
Hassan and Khan (2007): In developing country as
Bangladesh, foreign aid from donors contributes a
significant portion of the development budget - Zakat as
ready effective substitute so to reduce debt burden

16. Comparison of AZIF with other
Zakat Financing Mechanism
 Anwar (1995) proposed
AZIF model
 Shihata (1985) proposed
model
 Hassan (2010) proposed
model
 The practical model :
Kuwait Zakat House

17. Shihata (1985) proposed model
 Model for contemporary use of Zakat funds such as
education, vocational training, rehabilitation facilities, low cost
housing
 Zakat revenues can be used in specific lawful mudarabah
projects, with the zakat foundation acting as the owner of the
capital, zakat beneficiaries acting as partners by contributing their
skills. The profits generated be distributed between them on the
basis of a pre-agreed upon ratio prior to commencement of the
work.
 Loans provided to able bodied who can pay back and generate new
source of income
 Low cost houses on the basis of rent financing to the poor
 Benevolent loans

18. Hassan (2010) proposed model
 New model in consistent
with the model proposed by
Anwar (1995)
 Integration of Zakat and
Waqf with collaboration of
micro finance institutions.
 Model viable in long run
resulting from lower default
rates
 Poverty alleviation by
positive, preventive and
corrective measures.
 Anti poverty programmes:
indirect and direct strategies.

19. The practical model : The practice
of Kuwait Zakat House
 Zakat funds kept in two types of accounts with the
bank, current and saving accounts. Its earning on
saving accounts increases the original fund deposited
with the bank.
 It provides free interest loan to people in need of
money and secure its repayment by way of
installments.
 It finances the vocational training for capacity building
of people capable of becoming productive citizens
(under a scheme called productive rehabilitation
scheme).
 It sponsors poor students’ education by offering them
interest-free loans.

20. Zakat Funds Contribution towards
Socio-Economic Development
 Zakat funds by AZIF fulfils condition of tamlik: Zakat funds
transformed into long-term investment AZIF shares allow recipients
to obtain full control of their shares ownership. Dividends declared
by AZIF give flexibility in cashing shares and entitlement to periodic
income
 Some society members i.e. mustahaqqin (eligible) for receiving
zakat can conveniently meet basic human needs
 Advantage for those handicapped in receiving shares, instead of
cash, to manage their investments even if physically disabled
 Income of those unable to work and earn, be supplemented by
transfers in cash and kind and provided with sufficient resources to
relieve hardships
 Wider public participation in the stock market, especially for those
keen in zakat related projects – a catalytic force for development of
primary and secondary markets in Muslim countries.

21. Challenges:
 AZIF; if implemented on the basis of
mudarabah or musharakah, must observe
the serious consequences resulting from the
risk of profit and loss sharing (PLS) nature of
the contracts
 Absence of financier’s intervention in
entrepreneur’s activities, dishonesty, “trick or
trade” of entrepreneurs, moral
hazards, inadequate record keeping
 Misinterpretations and misconduct against
observing Islamic provisions, and lack of
suitable primary and secondary markets
 Many awqaf properties poorly managed by
incompetent mutawallis (managers)

22. Challenges:
 AZIF participatory or collaborative
aim, restricted to Muslims as direct
participants
 Setting up of a new FI –
challenging, complex, costly
 Lack of institutional control – societal concern
as to how their funds are utilized and the
extent to which it benefits society
 Challenging participants’ buy-in

23. Conclusion:
Anwar (1995) believed that the proposed AZIF model allows
for a viable proposition that may well accelerate the pace of
development in the Muslim countries. Nevertheless, a keen initiative
to set up a suitable financial institution that is well supported by every
member of the stakeholders within the societies calls for an early and
serious attention to make effect such a model. With the keen
faith, trust and collaboration of all those interested in the
socioeconomic development of Muslim countries, a model such as
AZIF will surely be ideal to eradicate the world’s most serious
problem of poverty. It is proposed that a model such as AZIF is developed
in a collaborative basis as it clearly and meticulously lay out a policy
framework and agenda for poverty reduction, social progress and
socioeconomic development.
The literature gaps in Anwar (1995) provide space for academic
explorations and mechanism innovations on the area of utilizing
zakat funds for socioeconomic developments.

24. References:
 Ahmed, Habib. (2004). Role of Zakah and Awqaf in Poverty Alleviation. Jeddah, Saudi Arabia: Islamic Development
Bank, Islamic Research and Training Institute
 Al-Haitmi. Majma’ al-zawa’id, Vol. 3
 Al-Labban, Ibrahim. (n.d.). Ibn Hazm's (died 1064 C.E.) theory of the State's Duty towards the Poor. Finance in
Islam. Retrieved from http://www.financeinislam.com/article/1_41/2/423
 Badawi, Zaki. (1996). A New Source of Development Finance Islamic Banker: News and Analysis of Islamic
Banking. Finance and Insurance, 4, 18-19
 Bayhaqi. Sunan al-kubra, Vol. 4
 Hassan, M. K., & Khan, Juanyed M. (2007). Zakat, External Debt and Poverty Reduction Strategy in Bangladesh.
Journal of Economic Cooperation, 28 (4), 1-38
 Hassan, M. K. (2010). “An Integrated Poverty Alleviation Model Combining Zakat, Awqaf and Micro-finance.” Paper
presented in the Seventh International Conference on the Tawhidi Epistemology: Zakat and Waqf Economy.
Bangi, 2010
 Khan, Muhammad Akram. (1990) “A Comparative Study on Zakat Systems – its Shari’ah Administrative and
Financial Controls.” Paper presented in the Third International Zakat Conference. Kuala Lumpur, May 17, 1990
 Khan, Foyasal. (2010). Waqf: An Islamic Instrument of Poverty Alleviation – Bangladesh Perspective. Paper
presented in the Seventh International Conference on the Tawhidi Epistemology: Zakat and Waqf Economy.
Bangi, 2010
 Laila, Tanim. (n.d.). Innovations in Islamic Philanthropy and Monetization of Philanthropic Instruments: Micro-
Funding of Micro-Finance.
 Laila, Tanim. (2010). “Islamic Microfinance for Alleviating Poverty and Sustaining Peace.” Paper presented in the
World Universities Congress. Canakkale, Turkey, 20-24 October, 2010
 Mahmud, Mek Wok D. & Shah, Sikandar S. (2009). The Use of Zakat Revenue in Islamic Financing: Jurisprudential
Debate and Practical Feasibility. Journal of Studies in Islam and the Middle East, 6 (1), Article 2
 Shihata, Ismail S. (1989). "Limitations on the Use of Zakat Funds in Financing the Socioeconomic Infrastructure of
Society." In Management of Zakat in Modern: Muslim Society. Jeddah: Islamic Research and Training Institute, 57-
73.
 Supardi. (2005). Zakat Organization and Poverty Alleviation. School of Graduate Studies, State Islamic University
Sunan Kalijaga, Yogyakarta, Indonesia.

25. Thank you