In comparation to other countries, especially high and middle income countries, Muslim countries still has a longer path from fulfilling its developmental targets, including in the economic, education, or health sectors1. In order to combat this, it is not enough that we rely only on the profit-based contracts of the Islamic Economic system. Instead, the Islamic economic system has multiple social instruments, usually known as Islamic Social Finance, that can help improve the developmental indicators of societies.

This writing focuses on several prominent forms of Islamic Social Finance. The most prominent form of Islamic Social Finance is Zakat, which is a charity functioning as a wealth tax, and is the only part of the economy which is considered a pillar of Islam. Another important instrument to be highlighted is waqf, an endowment which had a historical significance in providing public goods for the society. This writing also puts a special focus on Indonesia, as the largest Muslim country, which is also the most generous country in the world and have several notable social innovations.

1. Islamic Social Finance

2 jenis instrumen yang penting dalam mendukung kesejahteraan masyarakat adalah keuangan dan jaminan sosial. Menurut Rizzi (2018)2 keuangan sosial itu sendiri adalah modal dan etos yang masuk kedalam proyek, inisiatif, dan organisasi dengan tujuan untuk membuat dampak sosial dan/atau lingkungan yang positif. Lembaga dan mekanisme keuangan sosial mencakup keuangan mikro, crowdfunding, dan obligasi dampak sosial3. Sedangkan, menurut ILO, jaminan sosial adalah hak asasi manusia yang didefinisikan sebagai kebijakan dan program yang dirancang untuk mengurangi dan mencegah kemiskinan dan kerentanan sepanjang siklus hidup34. Jaminan sosial termasuk tunjangan keluarga, pengangguran, hari tua, dan perlindungan kesehatan. Jaminan sosial dapat menggunakan skema iuran ataupun dibiayai pajak.

2 types of instruments which promote the development of society are social finance and social security. According to Rizzi(2018)2 Social Finance itself is both the capital and the ethos that goes into projects, initiatives, and organization with a focus to achieve positive social and/or environmental impact. Social finance institutions and mechanisms include microfinance, crowdfunding, and social impact bonds3. On the other hand, according to ILO, social security is a basic human right defined as policies and programs designed to reduce and prevent poverty and vulnerability throughout the life cycle4. These include family benefit, unemployment, old age, and health protection, which can use a contributory scheme, or a tax-financed benefit.

Islam has its own social finance and social security concept, which follows sharia rules and principles, including microfinance and various types of charity5. Charity, or infaq in Islam, is one of the main pillars of the Islamic economic system6. Kahf (2007) defines infaq as ”giving away for the betterment of the society and its members including the giver and his family”. The word infaq, as well as its synonyms and derivatives are mentioned in the Quran 167 times, which highlights its importance.

Kahf (2007)6 further divides infaq into 4 categories. The first one is an absolute obligation regardless of social or community needs, such as zakah. Second is obligation that is based on certain circumstance or relation, such as family needs. Third is a community-based obligation which has to be fulfilled by at least some member of the community, such as building infrastructure. Last is voluntary spending, whether it is one-shot, such as giving food or long term spending like waqf.

2. Zakat

Zakat is the third of the five pillar of Islam, a form of worship in the form of obligatory charity. Zakat is defined as ”a rightful obligation on a special property of a particular group of people to be paid at a particular time”7. Zakat is compulsory on wealth which can provide sustenance, can multiply, and incurs profit, mainly gold and silver, cash, inventory, lifestock, and agriculture8. The rate of zakat differs depending on the category of wealth, ranging from 2,5% (cash) to 20% (treasure) depending on the effort exerted in managing the property.

Zakat is obligatory for every muslim that possess wealth above a certain threshold7. Zakat for most types of wealth is paid after it had been in its owner’s possession for 1 lunar year, with the exception of agricultural products, which is paid on each harvest. The recipient of zakat is limited to eight categories that is specified in the Quran, which are the poor, the needy, zakat employees, for influencing towards Islam, freeing captives, people in debt, the cause of Allah, and stranded travelers. Among the 8 categories, the first priority of zakat is to alleviate poverty by giving assistance to the poor and the needy9.

Historically, zakat is a social welfare tax that is organized by the state, as a part of the Islamic fiscal system. Currently countries have had differing approaches to zakah, some countries rule it as compulsory, some as voluntary through formal organisations, and some put no governmental system10. However, zakat is typically given between individuals, and in 2017, it is estimated that only a quarter of total zakat contributions are channeled through formal zakat organizations.

2.1. Impact Of Zakat

According to the World Bank and IDBG, potential annual zakat collection is estimated to reach US$200 million to US$1 trillion, which is a substantial value to create economic impact11. In a macro sense, zakat acts as a redistribution mechanism which directly reduces inequality, as it is a direct wealth transfer from the wealthy to the poor12. For the poor, zakat would act as a form of social security, assuring a continuous transfer of resources to support and uplift them9.

Zakat would also create an economic boost, as demand would rise as the poor receive more cash to spend, while the wealthy would receive incentive to invest and work to counteract the worldly cost of zakat. Zakat would also improve social cohesion as the poor feel they are supported by the rich. With good management of zakat, economic burden on the state for poverty alleviation would decrease, reducing taxes13. Furthermore, compared to other Islamic social funds, zakat is more sustainable as it is compulsory for every Muslim yearly14.

Zakat is also highly correlated with the SDGs, as the SDGs are highly aligned with Islamic values and maqasid sharia15. Therefore, the distribution of zakat would help push the realization of SDGs. This is especially important as many Muslim country needs considerably large effort to fulfilling SDGs, especially compared to middle and high income countries1. Zakat would help to fulfill many goals, including eliminating poverty (1), decrease hunger (2), health and well being (3), quality education (4), decent work and economic growth (8) and reducing inequality (10), among others10.

3. Waqf

Waqf literally means detention or holding still. Within the sharia context, waqf means the release of ownership of a certain property from the person giving waqf, making the products and income generated from the property only available for religious and humanity purposes5. Therefore, generally once a waqf is established, it cannot be sold or otherwise dispensed. Theoretically, as waqf cannot be sold and are forbidden to be neglected, they should be a cumulative and continuously increasing investment16. Waqf is a part of infaq that functions as sadaqah jariyah(ongoing), which continues giving benefits even after the donor’s death, such as revenue or infrastructure for social welfare activities.

The founder of the waqf determines the use of the property and how to distribute its services and returns, and its management12. The stipulation of the founder, such as the waqf use or its beneficiaries, is permanent as long as they do not contradict sharia rulings17. Waqf is usually managed by an institution called nazir or mutawalli, which aims to fulfill the best interest of the beneficiaries by preserving the waqf and maximizing its revenues. Waqf property can both be managed to derive income, and/or directly generate services to the public5. All kinds of wealth can be used as waqf property, including cash. Cash waqf is actually an important funding channel as it enables every individual to give waqf12.

Historically, waqf had been very successful in serving the poor and generally enhancing social welfare. The permanence of waqf creates continuous accumulation and its flexibility supports various religious and philantrophic activities, including education, social, health services, and even animal care17. Therefore waqf goes beyond need fulfillment, instead it helps provide long term empowerment. The size of waqf property had also been historically large, where waqf in many cities such as Istanbul and Cairo cover a considerable amount of the total cultivated area17.

However, currently waqf institutions had degenerated in many societies. Many of the new independent Muslim countries took control of existing waqf, prompted by the large number of lost deeds and centuries of corruption by the nazhir17, 12. There are also critics that waqf are inflexible to new demands due to the strict limitation in switching the property or the beneficiary18. The current understanding of waqf became limited to religious charity, and global knowledge and practice of waqf became lacking5. Many waqf property still exist in the Muslim world, but with most of their original deed lost and their objective unknown.

On the other hand, the development of technology and financial institutions creates many avenues for innovative waqf applications. For example, an Investment waqf could be created by investing cash waqf to a portofolio of assets similar to endowments19. While a corporate waqf can takes the form of share waqf of a company, with its dividends given for a charitable cause. Regarding technology, Blockchain can also be used to potentially improve the transparency, accountability, and efficiency of waqf management20.

3.1. Impact Of Waqf

The role of waqf in a society is as a provider of various public services which is currently produced by the state. As the utilization of waqf fund are flexible, it can give various public services to a wide range of beneficiaries, creating societal development and poverty alleviation. Furthermore, these services can also be adjusted according to the developmental needs of the society. Historically, waqf services vary and can be very specific, where there had been specific waqf for battered wives, home furnishing, river bank repair, and frontier fortification16. This flexibility makes waqf able to fulfill any of the SDGs directly, as SDGs highly aligns with the values of Islam15.

The poor would benefit from waqf not only through need fulfillment, but also by getting empowerment and enrichment through earning income tools, education, and healthcare, among others12. Economic burden in the society would also lessen as waqf would take care of the elderly and handicapped. To the state, waqf would reduce its financial burden in providing public goods, and in turn, this would create jobs and reduce tax burden9. In an economic sense, the waqf assets would be prevented from being consumed, and therefore would increase capital accumulation and future output of service and income16.

4. Developments Of Islamic Social Finance In Indonesia


Indonesia is notable as the largest muslim country in the world, as well as the most generous country in the world, according to the a href="">World Giving Index21, making it notable in terms of infaq. 8 in 10 Indonesians donated money this year, and the rate of volunteering is more than thrice the global average. In 2020, registered zakat collection in Indonesia has reached more than 12 trillion, and is projected to rise to 17 trillion in 202122. Waqf is also numerous as there are around 550 square kilometer of land waqf, according to the ministry of religious affairs, most of which are mosques or schools23.

In several jurisdictions including Indonesia, zakat and awqaf has been channeled to mitigate the impact of covid-1924. Zakat is especially relevant in the pandemic as the global pandemic increases the number of the poor and the needy. During the pandemic, 108 Indonesian Islamic social institutions had collaborated in a crisis center to prevent the spread of covid-19 through different programs25. The pandemic also created innovations in distributions, such as ambulance service applications, and using social funds to hire recently unemployed people for pandemic-related work.

Digitalisasi zakat dan wakaf adalah salah satu fokus utama Kementerian Agama RI23. Zakat pengumpulan melalui Badan Zakat Nasional (BAZNAS) meningkat 30% YoY selama tahun pandemi 2020, meskipun banyak orang Indonesia menghadapi penurunan pendapatan24. Ini sebagian disebabkan oleh peningkatan saluran pengumpulan digital, seperti kolaborasi dengan platform digital seperti e-commerce. Perkembangan infrastruktur pembayaran digital di Indonesia, seperti QRIS, ditambah dengan pembatasan sosial, membantu untuk mendukung lebih lanjut pergeseran pembayaran zakat ke pembayaran digital25. Selain itu, ini sejalan dengan tren bahwa krisis akan meningkatkan perilaku memberi karena psikologis masyarakat untuk menyumbang terpengaruh22.

Digitalization of zakat and waqf is one of the main focuses of the Indonesian Ministry of religious affairs26. Zakat collection through its National Zakat Agency (BAZNAS) increased 30% YoY during the 2020 pandemic year, even though many Indonesians face declining income27. This is partly caused by the increase of funding digital channels, such as collaboration with digital platforms such as e-commerce. The development of digital payment infrastructure in Indonesia, such as QRIS, coupled with health concerns, helps to further the shift of zakat payment towards digital payment28. Also, this goes with the historical trend that crises improve giving behavior as people’s psychology to donate is impacted25.

Salah satu inovasi yang menarik di Indonesia mengenai wakaf adalah Sukuk Wakaf Tunai (Cash Wakaf Linked Sukuk/CWLS). Ini adalah sukuk pemerintah dibiayai dengan wakaf tunai, artinya keuntungannya akan disalurkan untuk program sosial dan pemberdayaan, sedangkan pokok dana akan dikembalikan sepenuhnya kepada pendonor setelah sukuk jatuh tempo26. CWLS telah memiliki 2 penawaran sejak penawaran pertamanya pada tahun 2020, dengan total investasi 39 miliar rupiah27, 28. Program ini adalah hubungan langsung antara Sukuk dan Wakaf, membuat program yang mendukung keuangan dan pembangunan negara, sekaligus juga memperbaiki masyarakat melalui filantropi.

One interesting innovation in Indonesia regarding waqf is Cash Waqf Linked Sukuk (CWLS). It is a government sukuk financed using cash waqf, meaning that its returns are channeled for social and empowerment programs, while the funds will be returned fully to the donor after the sukuk maturity29. CWLS has had 2 offerings since its first offering in 2020, with a total investment of 39 billion rupiah30, 31. This program is a direct linkage between Sukuk and Waqf, creating a program that supports state finance and development, while also improving the society through philanthropy.


Zakat functions as a wealth tax that has a significant potential as a redistribution mechanism and social security. Zakat would also improve the economy through demand and incentives, and improve social cohesion. Waqf on the other hand, had been very successful in providing public services in the past. The inherent flexibility of waqf makes it able to fulfill any services that are needed by the society, and provide many economic impacts such as reducing state and economic burden. Both instruments would also be able to support SDGs, as both have highly correlating functions with it.

Indonesia telah menjadi contoh yang baik dalam hal sedekah. Orang Indonesia adalah pendonor paling dermawan di dunia, lembaga sosialnya telah berkolaborasi dan berinovasi dalam rangka untuk mendukung masyarakat secara optimal di masa pandemi, sementara pemerintah telah memperkenalkan inovasi baru seperti CWLS. Melihat kedepan, masih ada beberapa aspek yang dapat ditingkatkan dari Keuangan Sosial Islam Indonesia, seperti mencapai potensi zakat total29, optimalisasi aset wakaf yang ada30, dan meningkatkan sertifikasi dan database tentang zakat dan wakaf31, 29.

Indonesia has been a good example in regards to charities. Indonesians are the most generous donors in the world, its social institutions have been collaborating and innovating in order to optimally support people in the pandemic, while the government has introduced new innovations such as CWLS. Going forward, there are still some aspects that can be improved, such as reaching its total zakat potential32, the optimization of existing waqf assets33, and improving certification and database regarding zakat and waqf34, 32.