June 4, 2022 islamic finance

Responding to inequality: The role of OIC nations and Islamic finance


Inequality across and within countries has grown. According to the UN’s World Social Report 2020, over 70% of the world’s population lives in countries with an increasing wealth gap.

In fact, global income inequality has risen to such dramatic proportions that in 2020, the world’s 2,153 billionaires had more wealth than 4.6 billion people, who account for 60% of the world’s population. Also, according to the Credit Suisse Global Wealth Report 2020, the world’s richest 1% defined as those with over $1 million own 43.4% of global wealth.

Wealth and income inequality

Collectively, these facts and figures on global wealth and income inequality point to this megatrend increasing in magnitude. The situation has been exacerbated by the ongoing Covid-19 pandemic.

Moreover, wealth and income inequality are at the heart of global inequality, and create conditions for other inequalities to play out, such as in health and education outcomes, as measured by key indicators such as mortality rates, life expectancy, and average and expected years of schooling.

As the Julius Baer Foundation notes: “Wealth inequality is one of the most significant challenges of modern times. It can lead to unequal societies, social instability, violence and unrest, and further societal problems that affect the world at large.” Consequently, rising wealth and income inequality is an issue needing both imminent solutions and more long-term solutions to tackle their root causes.

OIC region’s wealth inequality is better than global levels, but regional variances exist

The latest data from the World Inequality Database (2021 data) suggests that wealth inequality, as measured by wealth distribution for the Muslim-majority countries is lower on average than the global average.

Nonetheless, regional variances exist, for example in the GCC countries, wealth inequality is more pronounced than the global average, while in Southeast Asian OIC countries (Malaysia, Indonesia and Brunei collectively) it is lower than the global average. Given these datapoints, it is safe to assume that over time, growing wealth and income inequality will lead to wider wealth disparities.

Funding, awareness needed for redistributive mechanisms

In Islamic finance, there is the prohibition of hoarding of wealth (kanz), and money is supposed to be a medium of exchange that is regularly circulated across the economy, rather than a commodity to be stored excessively.

To that end, redistributive mechanisms in Islamic social finance are an increasingly prominent part of the quest for a more equitable distribution of wealth across all strata of society:

  • Awqaf (Islamic endowments) can help reduce structural inequalities in society by improving access to core services, such as healthcare and education, for those who may otherwise not afford them.
  • Zakat (mandatory faith-based giving) can also help reduce income and wealth inequality indirectly, by providing the means to the poorest members of society to improve their opportunities and circumstances, such as refugees, who are one of the most vulnerable groups of people and key beneficiaries of Zakat.
  • Sadaqah is typically a short-term focused type of voluntary giving to alleviate the immediate effects of poverty, whilst Zakat is a mandatory wealth tax in Islam (set at 2.5% of annual assets and wealth) that seeks to redistribute wealth and reduce wealth inequality directly.

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