Thursday, July 26, 2007

Zakah and Waqf -- Form & Substance Revisited

Dr. Fahim Khan recently made an argument on IBFnet that we put the cart before the horse by jumping to Islamic banking and finance, which put the industry in bankers' hands, and therefore turned to satisfying historical forms of Shari`a, without any interest in substance. His prescribed cure is to turn to religious and historical Islamic institutions, Zakah and Waqf, focusing on Islamic economics, rather than merely finance -- which will take care of itself if we define proper economic objectives. I think that there is merit to this argument, but I fear that it is not sufficient.

First, and very briefly, financial considerations have been at the forefront of most economic activities nowadays. If we look at the real estate boom in Saudi Arabia, where Dr. Fahim lives, we will see that it is merely a mortar-and-steel manifestation of a financial bubble (that showed up first in the Saudi and neighboring stock markets, and in commodities, and then ultimately in the ridiculous waste of petrodollars in the building of vacant tall buildings in Dubai, Bahrain, Qatar, etc.). In the U.S., where I live, finance has also taken over much of what we do, with hedge funds and private equity firms buying and selling companies to turn a quick profit, rather than to restructure them and make them more productive.

Second, and more importantly, I fear that focusing on the historical institution of Waqf can be as detrimental to Islamic economics as focusing on sales and leases has been detrimental to Islamic finance. Moreover, the focus on Zakah is also misplaced given the narrow religious frame that real Islamic scholars (most notably, Dr. Al-Qaradawi) have imposed, despite the attempts of economists such as the late Dr. Mahmoud Abou El Saoud. Let me elaborate.

Problems with Awqaf

There is nothing distinctively Islamic about Waqf. At the advent of Islam in Arabia, there were two models of charitable trusts that the Muslims could have borrowed: the Roman and the Persian. The first texts in Sunna tell us that the first waqf in Madina was formed by one of the Medinese wealthy Jews, and then the second was by `Umar ibn Al-Khattab (r). In the second Hadith, the Prophet (p) simply told him "make it a waqf," clearly establishing that this was already a known practice. In fact, the Islamic Waqf, as the rules were later established by scholars, mimicked the Persian system. As historians have shown, this system of waqf then evolved with different rules, as scholars were very liberal in awqaf, since their essence
was charitable. In fact, however, awqaf quickly became means of circumventing inheritance rules -- to avoid division of property -- while ostensibly remaining charitable due to clauses that they became so once the waqif's genetic line ended.

Timur Kuran has written extensively on the inefficiencies of awqaf in Turkey and elsewhere in the Ottoman empire. The Iranian Bonyads continue to be a major source of monopoly power and inefficiency in the economy.

Of course, that does not mean that the trust/waqf model is inherently inferior to corporations, as Timur has argued. Indeed, one of the most powerful monopolies in the previous round of globalization around the turn of the 20th century was Standard Oil, which was a trust -- hence the U.S. has "anti-trust" rather than "anti-monopoly" laws, even when applied to corporations such as Microsoft.

Historians have traced the roots of the Anglo-American trust system to Awqaf, which King Roger II knew during his youth in Sicily. However, that model evolved in different directions, giving us much more effective trusts in the west today than the awqaf that have survived governments' attacks in the Islamic world. The evolution of the trust as an "un-corporation" might have given us a superior institution, as some legal scholars have argued recently, see Robert Sitkoff's papers on the topic. However, the Islamic world has in fact failed to make awqaf even play their own traditional role, let alone to become an engine for economic growth and development.

Thus, I fear that our focus on awqaf as a historical institution will put us in the same trap of looking at it as some kind of sacred institution, ignoring that there are no set rules for awqaf that are written in stone, and adhering again to form rather than substance.

Problems with Contemporary Zakah

Zakah is fundamentally a poverty-alleviation mechanism (the poor and destitute being the first two categories of recipients listed in the Qur'an), and therefore its role is by necessity quite restricted. In a country with limited poverty, it might turn into more general public finance, but even then restricted by scholars' categories of spending "in the way of Allah" (they include education, infrastructure building, etc.).

Those problems of spending Zakah funds notwithstanding, the biggest problem today with Zakah has to do with the collection of funds. The biggest source of Zakah funds if we were to apply the classical rules would be a percentage of oil and gas wealth (zakat al-ma`adin w al-rikaz). However, since those resources are generally nationalized, there is no point in going there!

For private individuals, there are numerous Zakah shelters. The rules of Zakah as a wealth tax was appropriate for the categories of merchants, shepherds, and farmers who possessed wealth during the Prophet's (p) time. Those rules are grossly inadequate today. Dr. Al-Qaradawi himself commented that when he visited Malaysia, he found that small farmers who produced grains and fruits paid the Zakah (zakat al-zuru` w al-thimar), but that the richer landowners who grew trees for the production of rubber paid no Zakah, since the classical rules do not include a tax on trees that did not bear fruit!

Worse, yet, today's capital for the average well-to-do Muslim may be in large part human capital (lawyers, doctors, etc.). Those can earn huge incomes, but then live in equally huge homes (Zakah exempt) and drive equally expensive cars (Zakah exempt), etc. In the end of the day, they have no gold or silver, no merchandise, no livestock, etc., and therefore pay no Zakah. The late Dr. Mohammad Al-Ghazali, and the late Dr. Abou El Saoud, tried to argue for an income Zakah, but Dr. Al-Qaradawi argued that Zakah contains a major ta`abbud (ritual worship) element, as the third pillar of Islam, and therefore did not want to apply analogical reasoning with much liberty. Needless to say, wealthy Muslims were more than happy to adopt this conservative view that allowed them to pay less!

Again, we have a problem with religious substance giving way to pietist adherence to forms. This is the general malaise of Muslims today. It is not restricted to finance.

10 Comments:

Blogger Humairah Irfan said...

Excellent read, professor.
Thank you

6:44 AM  
Blogger HijabIsOverrated said...

Thanks... i continue to learn so much from your articles. DO you have any "islamic" mortgage companies you wouldn't mind recommending?

11:14 PM  
Blogger Nazir said...

Do you think that the FED should reduce interest rates to stimulate the economy in light of the housing crises. A stimulated economy may help ease the crisis.

2:36 PM  
Blogger Mahmoud El-Gamal said...

No. Dr. Bernanke believes in inflation targeting, which has been growing as the dominant paradigm in monetary policy. He is correct in reiterating that the primary function of the Fed, the one it should focus on today, is combating inflation. The housing crisis was precipitated by irresponsible lending practices, including by so-called Islamic mortgage providers. Bailing out irresponsible borrowers and lenders would only contribute to the housing bubble that irresponsible lending practices have helped fuel. A soft landing may be difficult to negotiate, but further inflationary practices would make it impossible.

7:23 AM  
Blogger Nazir said...

http://www.cbe.org.eg/contactus.htm
The Central Bank of Egypt is accepting CV's.

You should consider applying.
:)

5:00 PM  
Blogger Mahmoud El-Gamal said...

I am not sure how to react. This could be insulting in a number of different ways, and it can be just a joke. Thanks in all cases.

6:13 PM  
Blogger Nazir said...

This was definitely not meant to be insulting. I do think you are qualified from a technical perspective being an economist and what not. However under the current circumstances it may not be attractive as you would't have the autonomy that you would like probably.

9:53 AM  
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2:00 AM  
Blogger kucau said...

mahmoud, i think there is some misunderstanding regarding the practice of zakah in malaysia.

"Dr. Al-Qaradawi himself commented that when he visited Malaysia, he found that small farmers who produced grains and fruits paid the Zakah (zakat al-zuru` w al-thimar), but that the richer landowners who grew trees for the production of rubber paid no Zakah, since the classical rules do not include a tax on trees that did not bear fruit!"

Worse, yet, today's capital for the average well-to-do Muslim may be in large part human capital (lawyers, doctors, etc.). Those can earn huge incomes, but then live in equally huge homes (Zakah exempt) and drive equally expensive cars (Zakah exempt), etc. In the end of the day, they have no gold or silver, no merchandise, no livestock, etc., and therefore pay no Zakah"

Im a medical doctor in malaysia , but yet we still pay zakah ( Zakat on Income )

have a look here :
http://www.zakat.com.my/enginfozakat/types.html
http://www.zakat.com.my/indexenglish.cfm

those rich landowners do paid zakah as well. I hope this would clear your misunderstanding.

9:18 PM  
Blogger Borhan said...

Al sallamu alaikum, jazak Allah khair, good read. I do not believe there is a problem with the richer brothers paying less, the real problem is getting them to pay zakah in the first place.. Consider masha'Allah our oil producing nations, forget oil producing.. just our nations, the zakah on the treasury and the zakah on the ruling families, be they monarchies or republics or democracies.. these guys, the leaders of the muslim world, im not sure if they do pay their due zakah, but im sure if done correctly - even with the restrictions on how zakah is administered in the way of Allah, poverty should be significantly reduced all across the ummah. I'm not too concerned about financial wealth of the ummah yet, lets just solve the poverty problem first, when there are no more poor to administer zakah to, then we can start thinking about other ways to spend it, its no good thinking about how to spend it when its not there in the first place. May Allah guide us all to the right path.. fe aman Allah

12:59 PM  

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