Zakat may be paid out by an individual muzakki (zakat payer) directly to an individual mustahiq (zakat beneficiary). This is the practice in countries where there is no organized or institutional mobilization and disbursement of zakat. Arguably, organized zakat management has many positives. Available evidence suggests that organized zakat management may be more efficient in mobilizing zakat, in identifying and distributing zakat among eligible beneficiaries. At the same time, institutional zakat management does leave room for some individual discretion and direct distribution. Moving from individual to institutional management of zakat may bring in the first leveI of efficiency. Indeed, most Muslims societies either already have or seek to have a zakat infrastructure in place to ensure institutional zakat management.
The next important issue that needs to be addressed is: should zakat be paid out or distributed in cash or in kind? We have partially addressed this issue in an earlier blog. Arguably, unconditional cash transfer programs are observed to be more efficient than conditional ones that limit the ability of the beneficiary in deciding how to spend. Indeed, zakat distribution programs can learn from the experience of similar cash transfer programs in this regard. Giving cash rather than goods has several clear advantages that we underline below. When beneficiaries receive cash, they certainly feel more empowered with the ability to decide how best to spend the same. No matter how much experience or empathy the zakat agency may have it cannot be a better judge of what the beneficiaries need.
Many zakat agencies respond fast in times of natural calamities and bring in items of consumption and then distribute the same among beneficiaries. However, in this kind of a supply chain the agencies tend to bypass what is already in the area – the local market system. Bringing in materials from outside can impact prices, availability, access and can even cause local traders to go out of business. Giving cash or vouchers (tokens) that is used to purchase various things like food, household items, water, shelter, and medicines can boost local markets and increase trade. This creates revenue-generating opportunities in the community. Finally, from a logistics perspective, cash pay-outs are far simpler and faster compared to distribution of goods. It allows the agency to focus its efforts where it matters the most: in selecting beneficiaries and monitoring the overall process.
Moving from physical distribution of goods to cash may take us to the second and higher level of efficiency. Now, how does that zakat agency go about distribution of cash? Traditionally, this perhaps conjures up the scene of a long queue of zakat recipients waiting for their turn to receive cash or a cheque. Millennials are more likely to visualize a scenario where zakat is transferred as a credit to the e-wallets of beneficiaries. At a basic level, one may discuss what are the pros and cons of distributing zakat as handing over hard cash in contrast to other modes of doing it.
Paying in hard cash looks simple. It appears familiar. But dealing with hard cash has its pain points. It requires a surprising amount of infrastructure because it is relatively bulky. It is even bulkier if we are paying out in small denominations. It is unsafe. There is a risk of robbery by outsiders. There is also a risk of internal leakages as it is hard to trace. It is harder to account for. Immoral insiders can be hard to monitor. If it is in the pocket or hands of individual A, it belongs to him or her.
Let us dissect a zakat payment operation in cash. It goes like this: take the cash and count it; shift it from A to B and count it again; shift it from B to C and count it again; and so on. So, cash payments of zakat can be costlier to implement, especially when a natural disaster strikes and there is an immediate need for relief and rehabilitation. Cash will need to carried along with the cashiers to the affected region and substantial amounts can simply disappear due to lack of accountability and trace-ability.
It is not hard to see that paying out in digital format has strong advantages over distribution of hard cash. So, what choices are out there for implementing a digital money delivery system? What are the logistical requirements of the system? And from the point of view of the beneficiaries, how important is their familiarity with and readiness for digital payments?
Digital payments involve user authentication. This makes it possible to ensure that cash reaches the intended beneficiary. A digital environment also ensures integrity of data relating to the beneficiaries. Thus, there are built-in mechanisms that insure against theft and leakages. Every single payment can be accounted for or tracked, minimizing the possibility of corruption. Every single payment can be properly authorized.
What are the operational requirements for a successful digital zakat payment program? In terms of infrastructure, it will obviously be unwise to suggest that the program will create its own infrastructure. Essentially, the program has to use infrastructure that already exists on the ground. Required infrastructure will consist of bank servers for accounting, mobile phones for notifications, ATMs or perhaps banking agents for cash withdrawal, etc. Assuming that such an infrastructure exists, a digital zakat payment program will have distinct benefits over a physical cash disbursement program.
However, there is another factor other than infrastructure, that needs to be part of the equation. It is about the mustahiqoon or beneficiaries themselves. Are beneficiaries familiar with and ready to take up digital cash? For example, anecdotal evidence suggests that in a waqf-funded program in the Odisha province in India that pays cash every month to widows and elderly poor ladies, the program shifted from cash pay-outs to direct bank transfers in a bid to eliminate middlemen. However, it was observed after some time that the middlemen took advantage of the fact that most beneficiaries were not comfortable with PINs and ATMs. They collected the ATM cards for small groups of beneficiaries and provided them with withdrawal services from ATMs in inconvenient locations against a cut from the pay-outs.
Some of the major complaints or sources of satisfaction for the beneficiaries who are mostly illiterate, and poor relate to the following questions:
- Do the mustahiqoon or beneficiaries understand the process?
- Is there a cost/fee for withdrawing their funds?
- Is the merchant charging a fair price when they buy goods with the card?
- Do they have problems using the hardware?
- Can a beneficiary use the card/PIN by her/himself? Are there helpers around to explain the process to them?
- Are certain groups (e.g. disabled, or the elderly) particularly disadvantaged by the technology?
- Is there some guy out there whom they can turn to if they have a problem or if they are not treated fairly?
- Is there an increase or decrease of security threats to participants, staff, and/or partners with the introduction of digital zakat transfers?
- Is control and access of zakat transfers improved or made worse by the introduction of new technologies?
If the beneficiaries are not familiar with and ready to take up digital cash, the zakat body needs to factor in a very significant awareness and customer support efforts and related costs.
What if there is no appropriate digital infrastructure in the area in terms of financial service providers, ATM or agent presence in the ground, mobile phone coverage and ownership, etc.? If not, a digital zakat distribution program needs to factor in significant setup costs.
At the end of the day, the purpose of the zakat distribution program is to provide liquidity in the hands of the people in distress, so that they are able to buy the goods and services they need. They are better off. This is the ultimate objective of the program. It makes little difference if liquidity takes the form of hard cash or digital cash. Notwithstanding the hype around digitization, the ground realities – the existence of the required infrastructure and the readiness of the beneficiaries – should determine the choice. Once factors like the technology requirements, beneficiary readiness, and operational implications have received due consideration, going digital certainly enhances efficiency. It certainly makes more sense.
This is to acknowledge that insights from a learning program on Cash Transfers conducted by the Digital Frontiers Institute, South Africa have greatly helped me in developing this blog.