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BMB Islamic is establishing a fund management firm for the World Zakat Fund in Kuala Lumpur. However, the fund will be domiciled in Bahrain, “because I believe that initially, a large proportion of the funds will be coming from the Gulf Cooperation Council countries,” says Dr Humayon Dar, CEO of BMB Islamic.

The fund had received soft commitments from governments and corporations in the Muslim world as of June, two months before the planned launch of the fund, on the first day of Ramadhan in August. Its primary objective is to serve the zakat needs of the 58 countries in the Organization of Islamic Conference. Zakat is a Muslim tithe, and the World Zakat Fund is the largest collection of zakat worldwide.

However, if non-Muslim entities want to participate in the fund, their funds may be managed separately under a “general charitable funds” component, and will have a separate deployment and accounting treatment, says Dar, who is trained in both conventional and Islamic economics.

“This fund is entirely socially responsible. In fact, our investors are not called ‘investors’. We call them ‘contributors’ because they do not expect a financial return. The fund has a trust structure. It is like investing into a social enterprise, where the investors do not receive financial gains,” Dar explains.

Above all, the ‘contributors’ will expect a social return. This places an onus on Dar’s team to account for and report on an area that has no universally accepted accounting and reporting system, unlike financial accounting.

Investing for multiple gains — financial, social and other returns — usually requires additional steps in due diligence, asset selection and performance measurement. In this respect, few socially conscious institutions can surpass the World Zakat Fund for its layers of compliance and ‘profit’ requirements.

The Fund must comply with Shariah guidelines set and monitored by its principal, the International Zakat Organization (IZO) based in KL; invest in assets that deliver both reasonable financial returns and positive socio-economic change in selected communities; attend to major investors’ special requests on the use of funds; in addition to the usual scrutiny on corporate governance, accounting integrity, management quality, business strength, country risk and so on.

Traditionally, Muslims deliver zakat contributions directly to impecunious members of their communities or to local organizations that distribute the funds to deserving people in the area.

In 2006, Malaysia’s former Prime Minister Abdullah Ahmad Badawi suggested that Muslims worldwide should pool their zakat contributions, and take a global approach to alleviating poverty by creating sustainable socioeconomic development. In other words, teach them how to fish instead of giving them fish. Badawi observed that a substantial number of the world’s poorest nations are Muslim and a more coordinated socioeconomic development effort is needed.

To fulfill this vision, Badawi initiated IZO to coordinate zakat funds from the 58 members of the Organization of Islamic Conference. IZO will invest the funds and distribute them to areas of greatest need worldwide.

The funds will be managed under the World Zakat Fund, and IZO has appointed BMB Islamic, which is part of the BMB Group, as asset manager.

The US-dollar-denominated fund hopes to raise US$750 million during the first year and to subsequently increase the size to US$3 billion.

Although the concept of triple bottom-line — people, planet and profit —  has been around since the 1980s, researchers argue that it has no robustly reasoned methodology for ‘calculating’ social or environmental profit. Therefore, it is not commensurate with financial accounting standards. The crux of the problem is, social progress cannot be represented by dollars or any other simplified, numerically based equivalent that is universally accepted. Currently, social accounting presents numerous models that are pretty much open to interpretation and dispute.

If Watsons’ sells a hat for a $5 profit today and $7 next month, that’s a universal indication of financial progress. But how does one measure ‘progress’ in a community? Does one measure the number of children gaining a university education, the infant mortality rate, or some other variable? Will everyone agree that it is a measure of social return? And what ‘value’ to assign it?

Humayon Dar’s team is working through these conundrums. “Quantifying social returns is tricky, and there can be lots of subjectivity involved, depending on the assumptions underlying the variables in the input. We would like a model that is less subjective, and it is possible to produce one. We are working on a composite return index, which tracks both financial and social returns,” he says.

However, the composite index will not be ready until the fund has been deployed for at least one quarter and details have been gathered from the ground for further testing and validation, Dar says.

To meet the IZO’s mandate, Dar estimates that 20% to 30% of the World Zakat Fund will be disbursed to develop communities selected by the contributors; 20% will be invested in global equities for liquidity in case it is needed; and the remaining portion will be invested into micro private equity and micro-finance to grow social enterprises, in the areas of social housing and healthcare for example.

Dar prefers to let the contributors guide geographical allocations, especially where the development and micro private equity and microfinance portions are concerned. “A large Saudi contributor, for example, might set conditions for the funds to be used to develop their local communities. Our geographical allocations will be driven by our major contributors,” Dar surmises.

He is well aware of the issues surrounding socially responsible investments. “In the West, the social responsibility movement has a spectrum of approaches, ranging from primarily a marketing message to businesses that really deliver social impact. There is also the perception that socially responsible investments are penalized by lower financial returns,” he says.

But finding assets that have both financial and social returns is possible. A prime example is micro private equity and microfinance, which give poor people access to capital to start or expand businesses. Dar says the World Zakat Fund will invest in micro private equity through the Emerging Markets Partnership. The firm, which BMB has a majority stake in, was established in the early 1990s by former World Bank and IFC executives to make equity investments into infrastructure projects with average investments of US$10 million each. The internal rate of return is 10% to 15% a year.

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  • QN-2546

    Asset class: Real Estate Equity Fund (non listed).
    Asset region: Europe.
    Size: Total CHF 600m, approx. CHF 100-300m per fund investment.
    Closing date: 2019-06-28.

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