Financial institution is in fact the backbone of the national development. For this purpose, financial institution receives public money in form voluntary or obligatory form and provides resources that contribute to the economic development. However, from the Islamic point of views, the economic and social developments are only a part from tangible development, whereas it should also look into wider perspectives such as spiritual and ethical development.
In general, there are three sectors that play the main roles of the developments namely the public sector, private sector and voluntary sector. The public sector plays the roles of government which responsibilities to provide facilities and infrastructures, deciding for rules and regulations, providing security and protection and many other functions. The roles of Islamic financial institutions are with the private and voluntary sectors. The diagram below shows the related financial institutions and related functions under each sector. Although zakat as shown in the diagram is obligatory, some scholars opine that it is a part of the voluntary sector, otherwise it still under the third sector.
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| Three Main Sectors contribute to Development |
The Islamic institutions can give major contributions to the development if the major parties play their own roles especially those in the voluntary sectors. The main participant in voluntary sector is actually the Muslims themselves, whereby the official operators are only act as the coordinators. The voluntary sector comes into existence on the sense of brotherhood where a Muslim has to help other Muslims who in needs.
For the private sector, the participants shall play their roles in 2 situations:
i. Obligatory function – they are obliged to pay zakat for the wealth they generated. The zakat can be paid through the voluntary sectors i.e. the zakat collection centres or it can also be paid directly to the Asnaf.
ii. Voluntary function - they are encourage to contribute to the society through Corporate Social responsibility (CSR)
These 2 functions are very crucial to help the contribution for the economic and social development as well reduce the fiscal burden of the government. However, in this context, the voluntary sector plays the major roles and will strongly give impact to the comprehensive development. The roles for the voluntary sector are:
Zakat is one of 5 pillar of Islam which obliged on every Muslims. It aims to reduce the poverty and to create wealth balance among the society. Zakat in Arabic is equivalent to cleanliness and purity, prosperity and affluence. Zakat is the name of anything that is deducted from one's money as a right for the poor as it is a purification of one's wealth so it can grow on righteous basis. Different form sadaqah and other voluntary roles, the collection of zakat should only be distributed to a specific Asnaf that are mentioned in the Quran. They are fakir, miskin, amil, muallaf, fisabilillah, gharim, ibnu sabil, and riqob.
The Zakat plays a vital role in the enhancement of the economy and the achievement of development. This is mainly due to three interlinked factors: it discourages hoarding money and encourages investment and expenditure. One of the most important goals of zakat is to stop the hoarding of money and not investing it to have a return on the owner and on the community as a whole.
This idea goes in line with the understandings of the modern economy, which points out the fact that the hoarding money without use is a serious impediment to the growth of the economy as still resources don’t go into the wheel of the economy and therefore diminish the amount of local wealth. Moreover, this results in a rate of growth much lesser than the one that can be achieved if all resources were fully utilized. In addition, the understanding of the zakat encourages the investment of the savings because if the original zakat money was not invested it will demolish throughout the years by the zakat payment. Hence, it is one of the bases that the money is invested to be able to pay the zakat from the profits made and not from the original capital.
The institution of waqaf (Islamic endowment) is one of the institutions of Islam that has contributed greatly to Islam’s past success and empowered the Muslim community since the early days of Islamic history. Apart from waqaf for such religious purposes as the endowing of mosques, cemeteries, religious schools and institutions of Islamic education, waqafs, in essence, are also generally philanthropic. They are characterized by charity and welfare including those dedicated to assisting the poor, the destitute, the oppressed and the marginalized.
Waqaf, or pious foundation, aims to provide the goods and services which either could not be provided for at all or sufficiently due to the failure of the market mechanism or the government. In addition, the system seek for providing health services, education, and food distribution etc., the use of funds accumulated in waqaf in an efficient manner is being developed through cash-waqaf system and human development projects to enhance their contribution to the economic development of the societies[1].
There are few types of waqaf:
a) The religious waqf - waqf that devoted for religious purposes, i.e. land and building for worship.
b) The philanthropic waqf - is aimed to support the poor and people in need or people at large such as education, health services, scientific research, libraries, care of environment, public facilities, business financing, etc.
c) Family waqf - is the kind of waqf that the benefit of waqf given to the own children and descendants of the waqif, and only the surplus, if any, might be given to public. However, some Muslim jurist argued that family waqf is not allowed.
From economic perspective, waqf can be seen as saving and investment altogether which will lead to return that gained in the next life, hereafter. Waqf from economic point of view could be said as diverting funds and other resources from consumption and investing them in productive assets that provide either usufruct or revenues for future consumption by individuals or groups of individuals As a saving instrument, waqf fund or property is hold or preserved that its value is not decreased. However, a person who devoted waqf (waqif) can not withdraw his/her saving deposit because the assets no longer belong to him/her but Allah. So, the waqf will become public asset. Although the ownership turns from private into public, the benefit in term of akhirat reward will flow sustainably for the waqif as long as the waqf asset exist and generate public benefit.
Together with a comprehensive and effective Islamic corporate responsibility programs (CSR), the concept of Corporate Waqaf can form the central strategic thrust in realizing the objectives and aspirations of Business Jihad. The corporate waqaf institution for Business Jihad initiative can set the momentum to re-empower the Muslims economically and reestablish the ummah’s social dynamics. Only then can the ummah aspire to fully realize Islam’s injunction to establish the religion as ad-deen and to become a positive civilization force.
Takaful
Takaful is an arabic word which derived from word Takafala which means guaranteeing each other. Section 2 of the Takaful Act 1984 describes takaful as ‘a scheme based on brotherhood, solidarity and mutual assistance which provides for mutual financial aid and assistance to the participants in case of need whereby the participants mutually agree to contribute for that purpose’[2].
Takaful system applies the Tabarru’ concept to differentiate from the conventional insurance. Tabarru' means "donation; gift; contribution." Each participant that needs protection must be present with the sincere intention to donate to other participants faced with difficulties. Therefore, Islamic insurance exists where each participant contributes a particular amount into a fund that is used to support one another. The objective of Takaful is to pay a defined loss from a defined fund.
Combining these 3 sectors namely the zakat, waqaf and takaful together with the private sector, the roles of partners in the development have become assured. If all the sectors play their respective roles effectively, the public sectors should only concern for some functions whereas the voluntary sector will take over the education, health and some of the facilities development functions. At the same time, the public should only pay less tax and contribute more to the voluntary sector.
The 3rd sector not only become a tool for the Muslims society but also attracted many other countries of different religion and background to adapt the model in the economic and social development. This has been proven by the following facts:
- In Canada and Australia, special act and standards have been established to rule the voluntary sector.
- In United States, the voluntary sector has become a responsibility of the rich society. For example, Warren Buffett and Bill Gates has transferred one third of their wealth in the foundation to help the needy.
- In Iran, each member of the society will contribute one fifth of their income for the mosque for development purposes and to help the needy.
- In London, Regent Mosque has established takaful system, whereby each member of the society will contribute to the fund to help people who need instant financial needs.
- Malaysia, the Johor Corporation (A Malaysian State-based Government-linked Corporation – GLC) has successfully developed waqaf fund for health development through the establishment of Waqaf An-Nur Corporation Berhad (previously known as Kumpulan Waqaf An-Nur Berhad). The first step was taken when Johor Corporation transferred to waqaf RM 200 million of shares (on net asset value basis) of listed companies owned by it to Waqaf An-Nur Corporation Berhad on 3rd August, 2006.
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