How Zakat, Waqf and Social Sukuk Differ for Investors.

Islamic social finance is the set of Shariah-based tools that move money from people who have it to people who need it without charging interest: zakat, sadaqah, waqf endowments, interest-free qard hasan loans, Islamic microfinance and social sukuk. Its weak point is collection. Formal institutions gather a small fraction of what Muslims are estimated to owe.

The size of that gap is the business story. A study by the World Bank and the Islamic Development Bank’s Islamic Research and Training Institute put annual zakat potential at $550 billion to $600 billion, while official zakat bodies handled only $10 billion to $15 billion a year, Anadolu Agency reported in November 2019. That estimate is now seven years old, and no multilateral body has published a newer global figure, but every national number since points the same way: most giving still happens person to person, outside any institution that can measure or audit it.

For investors, regulators and charities, the question is less whether these instruments work than whether they can be run at scale with the governance of a bank. That is where the most interesting experiments of the past five years sit, from Indonesia’s waqf-linked government bonds to a United Nations refugee endowment that holds $120 million. They sit alongside, but apart from, the wider Islamic finance industry, which is commercial and profit-seeking.

What counts as Islamic social finance

The term covers money given or lent for social purposes under Islamic law. Some of it is compulsory, some voluntary, and some is designed to last forever.

Zakat

Zakat is the obligatory annual payment of 2.5 percent on savings, gold, trade goods and some other assets that stay above a minimum threshold, called the nisab, for a full lunar year. A Muslim in Pakistan with 200,000 rupees in a savings account at the start of Ramadan in 2025 would have been above the government’s nisab of 179,689 rupees for that year, as announced by the country’s Administrator General Zakat in February 2025.

The Quran limits who may receive zakat. Surah At-Tawbah (9), Verse 60 names eight categories, among them the poor, the needy, the people who collect zakat, debtors and travelers in need:

۞ إِنَّمَا ٱلصَّدَقَـٰتُ لِلْفُقَرَآءِ وَٱلْمَسَـٰكِينِ وَٱلْعَـٰمِلِينَ عَلَيْهَا وَٱلْمُؤَلَّفَةِ قُلُوبُهُمْ وَفِى ٱلرِّقَابِ وَٱلْغَـٰرِمِينَ وَفِى سَبِيلِ ٱللَّهِ وَٱبْنِ ٱلسَّبِيلِ ۖ فَرِيضَةً مِّنَ ٱللَّهِ ۗ وَٱللَّهُ عَلِيمٌ حَكِيمٌ

“Zakāh expenditures are only for the poor and for the needy and for those employed for it and for bringing hearts together [for Islām] and for freeing captives [or slaves] and for those in debt and for the cause of Allāh and for the [stranded] traveler – an obligation [imposed] by Allāh. And Allāh is Knowing and Wise.” (Surah At-Tawbah (9), Verse 60)

Scholars disagree on how strictly the list applies. The Shafi’i school, one of the four Sunni schools of Islamic jurisprudence, generally holds that zakat should be spread across all categories that exist locally, while Hanafi and Maliki scholars allow a payer to give it all to a single category. That difference matters to institutions, because it decides whether a zakat fund can concentrate on one goal, such as refugees, or must spread its money thin.

Sadaqah

Sadaqah is voluntary charity with no fixed amount, recipient list or timing, which makes it the most flexible money in the system. Abu Hurairah reported that the Prophet Muhammad (peace be upon him) said:

مَا نَقَصَتْ صَدَقَةٌ مِنْ مَالٍ وَمَا زَادَ اللَّهُ عَبْدًا بِعَفْوٍ إِلاَّ عِزًّا وَمَا تَوَاضَعَ أَحَدٌ لِلَّهِ إِلاَّ رَفَعَهُ اللَّهُ

“Charity does not decrease wealth, no one forgives another except that Allah increases his honor, and no one humbles himself for the sake of Allah except that Allah raises his status.”

Reference: Sahih Muslim, The Book of Virtue, Enjoining Good Manners, and Joining of the Ties of Kinship (Kitab al-Birr wa as-Silah wa al-Adab), Hadith 2588 (in-book reference: Book 45, Hadith 90). sunnah.com/muslim:2588

The narration appears in Sahih Muslim, Book of Virtue, Enjoining Good Manners and Joining of the Ties of Kinship, Hadith 2588. Hadith numbers follow the Sunnah.com numbering, so anyone can look up each hadith there; printed editions sometimes number them differently. Because sadaqah carries none of zakat’s restrictions, charities often use it to pay for things zakat cannot, such as staff and overhead.

Waqf

A waqf is an asset given up permanently, whose income is spent on a stated purpose: a building whose rent pays for a clinic, or a farm whose harvest feeds students. Readers who want the legal mechanics can see our explainer on how a waqf works. Classical jurists argued over whether cash, which is spent when used, could be endowed at all; Ottoman-era Hanafi courts accepted it, while many other jurists did not. The International Islamic Fiqh Academy of the Organization of Islamic Cooperation (OIC) settled the question for most modern institutions in Resolution 140, adopted in Muscat, Oman, in March 2004, which said that creating a cash waqf is permissible.

Qard hasan and Islamic microfinance

Qard hasan is a loan repaid at face value, with no interest and no profit to the lender. Pakistan’s Akhuwat Foundation runs one of the largest programs: its chairman, Amjad Saqib, said in March 2024 that it had lent 250 billion rupees (about $900 million at that month’s exchange rate) to about four million families and recovered nearly all of it.

Islamic microfinance is broader. It includes profit-sharing contracts and cost-plus sales as well as interest-free loans, so a microfinance bank can charge for its services while avoiding interest. Our guide to Islamic microfinance models covers the main contracts and their costs to borrowers.

Social sukuk and takaful

Sukuk, or Islamic bonds, become “social” when the money raised pays for schools, hospitals, housing or climate projects, or when part of the return goes to charity. Microtakaful, a low-premium version of takaful, the cooperative alternative to insurance, is sometimes counted in the same family because it protects low-income households from shocks that would otherwise wipe out their savings.

How big is Islamic social finance

No one publishes a reliable global total, because most zakat and sadaqah is paid directly to relatives, mosques and neighbors. The figures below are the latest published by the institutions themselves. They are not comparable with one another, but together they show where the measurable money is.

Indonesia shows the collection gap most clearly. The country’s national zakat agency, Badan Amil Zakat Nasional (BAZNAS), reported in its national zakat management report for 2025 that the formal network collected Rp44.7 trillion that year, from 28.7 million payers, and reached 43.7 million recipients. Waryono Abdul Ghafur, the Ministry of Religious Affairs director in charge of zakat and waqf, said in August 2023 that Indonesia’s zakat potential was Rp327 trillion a year. On those numbers, the formal system captures about 14 percent of the potential, and that share is flattering, since the BAZNAS total includes voluntary giving as well as zakat.

The same report holds a less-noticed warning. BAZNAS said the number of registered zakat payers fell in 2025 even as the money rose, which suggests that growth now depends on larger payers giving more, not on more people entering the system.

Who runs it: the main institutions

Countries split into two models. In some, the state collects zakat; in others, it only regulates the bodies that do.

Indonesia uses a hybrid. BAZNAS coordinates provincial and district zakat agencies and licenses private collectors known as LAZ (lembaga amil zakat), many of them linked to mass organizations such as Muhammadiyah and Nahdlatul Ulama. Payment is voluntary, though zakat paid through an official body can be deducted from taxable income. BAZNAS Chairman Noor Achmad set a collection target of Rp50 trillion for 2025, and the network fell short of it.

Malaysia leaves zakat to its 14 state Islamic religious councils, each with its own collection agency, rules and fitrah rates. Lembaga Zakat Selangor, the largest, said its 2024 collection of RM1.22 billion was the highest since it was set up in 1994, and its chief executive, Mohd Khaidzir Shahari, said 5,081 families left poverty with zakat aid that year. Bank Negara Malaysia Governor Abdul Rasheed Ghaffour said in a speech in Kuala Lumpur on May 4, 2026, that social finance had reached many people but that its results did not always last, and he suggested the country explore cash waqf-linked sukuk.

Pakistan is the main example of compulsory collection through banks. Under rules in place since 1980, banks deduct 2.5 percent from savings and profit-and-loss sharing accounts holding at least the nisab on the first day of Ramadan, unless the account holder has filed an exemption declaration. Saudi Arabia’s Zakat, Tax and Customs Authority (ZATCA) collects zakat from companies as part of the tax system and runs the Zakaty app for individuals, which routes payments to families registered with the Ministry of Human Resources and Social Development.

The cross-border players are newer. The Islamic Development Bank (IsDB) created the Awqaf Properties Investment Fund in 2001 to lend against waqf land, so that endowments can build income-producing offices or apartments and repay the loan from the rent; it requires the waqf to put up at least 25 percent of the project cost. The U.N. refugee agency, UNHCR, launched its Refugee Zakat Fund in 2017 and says it passes on 100 percent of zakat to eligible refugees, paying overhead from other funds, a policy it says rests on 18 fatwas and scholarly endorsements. Donors in the United States who give through such channels should check the rules on zakat-eligible U.S. charities, since tax treatment differs from religious eligibility.

The Global Islamic Fund for Refugees, launched in 2022 by UNHCR, the IsDB and the Islamic Solidarity Fund for Development, is the most ambitious attempt to turn charity into a permanent endowment. According to UNHCR’s Islamic Philanthropy Annual Report 2025, the fund became operational in 2025, holding $120 million in endowed capital from partners including the King Salman Humanitarian Aid and Relief Center and Islamic Relief USA. Only the investment returns are spent; the capital is kept.

Instruments that bring in market money

The newest tools borrow the structure of the bond market so that charitable money can earn a return before it is spent.

Indonesia’s cash waqf-linked sukuk is the clearest case. Donors endow cash with a licensed waqf manager, which invests it in a government sukuk; the coupon pays for social programs, and the principal goes back to the waqf at maturity. If you want the underlying mechanics, our explainer on how sukuk pay investors without interest covers the asset-backed structure. The first retail series, SWR001, raised Rp14.91 billion from 1,041 donors in late 2020. The sixth, SWR006, raised Rp306.28 billion from 799 donors in October 2025, with a two-year tenor and a floating return with a floor of 5.70 percent a year, the Finance Ministry said. Named uses include a boarding-school dormitory in Sukabumi and ambulances for remote areas.

Those numbers cut both ways. The money grew about twentyfold in five years, but it came from fewer donors, so the product is drawing in large givers rather than building a mass base. And at about $18 million, SWR006 is a rounding error next to the billions Indonesia raises each year through ordinary sovereign sukuk.

Green and sustainability sukuk sit at the edge of the category. Indonesia sold the first sovereign green sukuk in 2018 and has returned to the market regularly since. These are commercial instruments priced for investors, and we would not count them as social finance unless part of the return or principal is given away, as in the waqf-linked model.

Evidence of impact and the main criticisms

The evidence of reach is strong; the evidence of lasting impact is thin. UNHCR said its Islamic philanthropy reached more than one million people in 25 countries in 2025, and Lembaga Zakat Selangor counts families leaving poverty each year. But few zakat bodies publish baselines, follow-up surveys or independent evaluations, so donors usually see how much money went out, not what changed for recipients.

Fragmentation is the second problem. Malaysia has 14 sets of state zakat rules. Indonesia’s official network competes with mosques and private collectors for the same donors. Across the OIC, there is no shared standard for reporting zakat, which is why a 2019 estimate remains the most-cited global figure.

Governance is the third. Islamic finance has detailed standards for banks from bodies such as the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) and the Islamic Financial Services Board, but most zakat and waqf bodies are religious agencies or charities outside that framework. Many waqf assets, especially land, sit idle or are poorly recorded, which is the problem the IsDB fund was set up to address.

Our view is that the instruments are not the constraint. Zakat, waqf and qard hasan already work at local scale. What holds the sector back is trust and measurement: payers who give directly because they cannot see where institutional money goes, and institutions that cannot show results in the terms an investor or development bank would accept. The bodies that publish audited accounts and outcome data, as Lembaga Zakat Selangor and UNHCR do, are the ones whose collections are growing.

The next test is the Global Islamic Fund for Refugees. In October 2025, its steering committee endorsed about $5 million in allocations for 2026 projects in Bangladesh, Sudan, Mali, Nigeria and the Central African Republic, its first full year of spending from a $120 million endowment that is still $380 million short of its target.