Can Zakat be used for Qard Hassan (non-interest) loans to poor Muslims for their businesses?

Zakat is a fundamental pillar of Islam and a divine mechanism for wealth redistribution to address social inequalities. Surah Taubah, verse 60, provided guidance on the distribution of zakat:

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Translation: The Sadaqāt (prescribed alms/zakat) are (meant) only to be given for the poor, the needy, those who administer them, those whose hearts need winning over, to free slaves and help those in debt, for Allah’s cause, and for travellers in need. This is ordained by Allah; Allah is all knowing and wise.

The discussion on the use of zakat funds for financing, specifically in the form of interest-free loans (qard hassan), reflects a nuanced debate among contemporary Shariah scholars. This debate centers around the interpretation of zakat's objectives and the mechanisms for its distribution as outlined in Islamic law.

The first group of scholars, including Sheikh Utsaimin, Sheikh Ahmad bin Humayd, Sheikh Rafiq Yunus al-Misri, Sheikh Abdullah al-Faqih, Sheikh Hisam al-Din Afanah, and former Grand Imams of al-Azhar, Sheikh Jad al-Haqq and Sheikh Muhammad Sayyid al-Tantawi, argue against the use of zakat for loans. Their stance is supported by several key points:

1. Direct Beneficiaries: They reference Surah At-Tawbah (9:60) to highlight that zakat should directly benefit specific categories of recipients, with the Shafi'i school emphasising that the 'lam' in "lil-fuqara'" indicates a transfer of ownership (tamlik), which a loan does not fulfil.
2. Immediate Needs: These scholars argue that zakat is intended to meet the immediate needs of its recipients, a principle upheld by the majority of scholars from the Maliki, Shafi'i, and Hanbali schools, as well as al-Karkhi from the Hanafi school. They contend that loans do not address these immediate needs.
3. Historical Precedent: They note that the distribution of zakat through loans was not practiced during the time of the Prophet Muhammad (?), his companions, or successors.
4. Risk of Deficit: The use of zakat as a loan facility is seen as risky because if a borrower cannot repay, it could deplete zakat funds, potentially depriving other eligible recipients.

On the other hand, a second group of scholars, including Yusuf al-Qardhawi, Sheikh Abu Zahrah, and Sheikh Muhammad Zuhaily, argue for the permissibility of using zakat funds as loans based on several considerations:

• Qiyas Awla (Superior Analogy): They argue that since gharimin (debtors) are among the zakat recipients, and zakat can be used to settle their debts, it is permissible to use zakat as loans, as the borrower will become a debtor and thus a zakat beneficiary.
• Maslahah (Public Benefit): According to the Shafi'i school, the zakat institution/state has the authority to determine the appropriate zakat distribution mechanism based on public benefit, need, and the general objectives of Shariah.
• Empowerment of Asnaf: They argue that providing zakat in a productive form, such as loans for working capital, can empower recipients by encouraging entrepreneurship and helping them avoid usury (riba).

This debate illustrates the diversity of thought within Islamic jurisprudence regarding the application of zakat in contemporary contexts. While the majority view emphasises direct aid and immediate relief, the minority opinion highlights the potential for zakat to serve broader economic empowerment objectives through loans. Both perspectives are rooted in a desire to fulfil the objectives of zakat within the framework of Islamic law, reflecting a balance between adherence to traditional interpretations and adapting to modern economic challenges.

Given the differing opinions, individuals are advised to refrain from providing Qard-Hassan (interest-free loans) for zakat payments on their own. However, at the statutory board level, there might be room for innovative approaches like Qard-Hassan, especially if such methods align with broader societal needs and can enhance the economic status of zakat recipients over time. In addition, distributing zakat as interest-free loans at the statutory board level could make zakat funds more productive and empower beneficiaries by fostering an entrepreneurial spirit while avoiding transactions based on riba (interest).

In practice, Islamic financial institutions and zakat management bodies in countries like Indonesia (Baitul Qiradh BAZNAS) and Kuwait (Kuwait Zakat House) have implemented microfinance schemes using zakat funds. These initiatives aim to empower the poor and needy by providing them with the means to improve their economic status, potentially transforming them from zakat recipients to contributors.

Ultimately, while respecting traditional guidelines, the IFSG recognises that zakat-based interest-free lending can expand assistance to underserved sectors and help alleviate poverty under statutory board administrations. If implemented in Singapore, the IFSG recommends that zakat authorities establish parameters for utilising zakat in microfinance, ensuring adherence to Maqasid al-Shariah and serving the greater public interest.

Allah knows best.