Zakat, the annual obligation of Muslims to give away 2.5% of their wealth to charitable causes, has been a key pillar of Islamic finance since its inception. It is also one of the most misunderstood components of Islamic finance. The reality is that it is not merely a form of charity, but rather a powerful tool for social and financial inclusion and community development.

Zakat has everything to gain from ESG investments and vice versa. First, both have common goals and values, including moral principles, compassion, fairness and equity and inclusiveness. Both require broad stakeholder engagement, including poor people and communities living on the margins of society, while mainstream investment tends to focus on profit maximization; both want to make people and society better off through business Zakat, the annual obligation of Muslims to give away 2.5% of their wealth to charitable causes, has been a key pillar of Islamic finance since its inception. However, this pillar can also be expanded beyond charity alone. Today’s ESG investing is one example of how Zakat and ESG investments go hand in hand by providing a way for investors to include social responsibility as part of their investment strategy while still maintaining profitability and growth potential over time.

 

It is also one of the most misunderstood components of Islamic finance.

Zakat, one of the five pillars of Islam and one of the most misunderstood components of Islamic finance, is often confused as a tax or charity. It’s not a tax, because it’s not imposed by the government. It’s not simply charity either—though zakat does support charitable causes—as Zakat is an obligation on Muslims to help others in need and to promote justice. It’s also not voluntary, like many people believe. Zakat becomes obligatory on wealth (as long as it’s above Nisab (threshold from which one has to pay Zakat) – when its owner owns it for one year.

 

The reality is that it is not merely a form of charity, but rather a powerful tool for social and financial inclusion and community development.

In its essence, Zakat is a form of charity. However, given its broader implications for social inclusion and community development, it is more than that. Zakat has its origins in the Quran: “Alms-tax is only for the poor and the needy, for those employed to administer it, for those whose hearts are attracted ˹to the faith˺, for ˹freeing˺ slaves, for those in debt, for Allah’s cause, and for ˹needy˺ travellers. ˹This is˺ an obligation from Allah. And Allah is All-Knowing, All-Wise.” (Surah At-Tawbah 9:60) Zakat is one of the five pillars of Islam and compulsory. According to Islamic teachings, it should be paid annually by Muslims who have reached maturity and are financially stable. Zakat literally means “purification” or “growth” – i.e., growth in wealth through lawful means in order to benefit people who are less fortunate than oneself – which makes it one of humanity’s most powerful tools for social inclusion. This isn’t merely because it provides funding for projects aimed at improving lives around the world; rather, Zakat serves as an important tool for financial inclusion as well since it helps families get back on their feet after experiencing hardship or loss.

Zakat and ESG investments have much to gain from each other. Both share a common ethos based on principles of social impact, responsible investing and long-term growth.

Zakat has everything to gain from ESG investments and vice versa.

Zakat and ESG investments have much to gain from each other. Both share a common ethos based on principles of social impact, responsible investing and long-term growth. Investing in Zakat funds and Islamic financial products is one of the most ethical ways for Muslims around the world to support their communities. By engaging with your local Zakat fund you can help people who are less fortunate than yourself get access to financing – a key foundation for helping people rise out of poverty. ESG investing also has an ethical underpinning: it focuses on companies that are making the world a better place rather than simply focusing on profit maximisation at any cost. A company may produce toxic waste but if it also funds research into renewable energy then an ESG investor would be happy to invest in it because they believe this latter goal is more important than avoiding pollution generated by its operations (even though this would still be an important consideration).

 

First, both have common goals and values, including moral principles, compassion, fairness and equity and inclusiveness.

The first common goal is the pursuit of moral principles and values. Zakat and ESG investments have much to gain from each other because both are based on moral principles, compassion, fairness and equity. Both require broad stakeholder engagement, including poor people and communities living on the margins of society.

 

Second, Zakat allocation can be used to mitigate poverty alleviation, addressing the lack of access to financial resources for those in need.

Second, Zakat allocation can be used to mitigate poverty alleviation, addressing the lack of access to financial resources for those in need. Zakat is an annual financial obligation where Muslims pay a proportion of their wealth (2.5%) every year to designated beneficiaries (e.g., poor people) as well as wider charitable causes [1]. The application of Zakat has been found to help avoid the wealth disparities within the society [2], which makes it a good candidate for supporting financial inclusion efforts. Zakat also operates as a yearly fiscal stimulus by providing an additional source of funding for social services and infrastructure development that can complement fiscal policies, reduce government expenditure, alleviate extreme hardship, and promote financial independence among vulnerable groups [3].

 

Zakat is an annual financial obligation where Muslims pay a proportion of their wealth (2.5%) every year to designated beneficiaries (e.g., poor people) as well as wider charitable causes.

Zakat is an annual financial obligation where Muslims pay a proportion of their wealth (2.5%) every year to designated beneficiaries (e.g., poor people) as well as wider charitable causes. Zakat is one of the Five Pillars of Islam, alongside Shahadah, Salah and Fast. In the context of ESG investing, Zakat provides a way to align your investments with your values. With almost 2 billion Muslims worldwide, this can be a significant market opportunity for asset managers who want to attract clients with similar beliefs or cultural backgrounds.

 

Third, there are many parallels between many aspects of ESG investment principles and those underlying Islamic Social Finance such as Islamic banking or takaful insurance products, which share much in common with ESG investing.

ESG investing is a growing trend in the Muslim world, and it’s gaining popularity among Zakat payers. While there are many benefits of investing in this way, it can be difficult for those who aren’t familiar with ESG to identify where to start. Third, there are many parallels between many aspects of ESG investment principles and those underlying Islamic Social Finance such as Islamic banking or takaful insurance products (which share much in common with ESG investing). This means that some of the objectives pursued by Zakat payers – such as protecting their money from non-halal profit – can also be achieved through suitable investments.

 

Conclusion

The Islamic social finance community is turning its focus toward developing products and services that promote socio-economic inclusion. Zakat plays a key role in this process, as it can provide a source of funding for Zakat eligible ESG initiatives that help achieve these goals. In turn, ESG investments seek to align their portfolios with human values — the same values that guide Zakat institutions and their donors on issues relating to corporate governance and responsible investment (RI).

Saâd Dhif

Executive Director,

Swiss Zakat Foundation

 

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