PRO-WELFARE FINANCIAL INTERMEDIATION THROUGH INSTITUTIONALISATION OF ZAKAT AND WAQF

Salman Ahmed Shaikh

doi:10.33102/z62fh490

Authors

Salman Ahmed Shaikh International Islaimic University Malaysia Author

DOI:

https://doi.org/10.33102/z62fh490

Keywords:

Social Welfare Function, Pareto Efficiency, Inequality, Zakat, Waqf, Microfinance JEL Codes: D63, I30, O43

Abstract

Social welfare in Islamic framework is not handicapped by notions of consumer sovereignty, Pareto efficiency and Kaldor-Hicks and Scitovsky compensation criteria which do not violate Pareto efficiency. Social welfare in Islamic framework is also not myopic to not address issues of inequality. Economic teachings in Islam urge individuals to care for others and thus recognize externalities. Islam prohibits welfare-worsening institutions explicitly, such as Riba (interest), Qimar (gambling), Ghaban (theft) and Gharar (uncertainty). It allows price intervention and redistribution of resources. Redistribution is achieved in most part through Zakat (obligatory levy on wealth and produce) which compulsorily distributes wealth periodically from the haves to the have-nots. Beyond the compulsory transfer of a portion of wealth and produce through Zakat-ul-mal (compulsory levy on wealth) and Zakat-ul-ard (compulsory levy on produce of land), the institution of Waqf (perpetual endowment) encourages setting aside private wealth for community needs. This can check the private concentration of wealth and enhance the scale of social safety nets for the poor and thereby enable an increase in their welfare. The paper discusses practical and prospective models of microfinance by embedding Zakat and Waqf in integrated microfinance.

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