Baitulmal is seen as a charitable organization among the Muslim community in Malaysia, as it is more focused on the administration of zakat (alms) funds as well as its distribution to the needy. This article looks into its potential of acting as a catalyst in strengthening economic activities among the Muslim society.

The name Baitulmal often evokes charity for Muslims and this statement makes a lot of sense given Baitulmal’s present role of providing financial aids and as a distribution channel for zakat contributions and donations. In 2008, the Baitulmal in Malaysia’s Federal Territories alone collected and distributed some RM211 million (US$62.7 million) of zakat monies, including zakat fitrah (tithes), to the needy.

Despite its stereotype, Baitulmal should not serve as just a charitable organization but could be developed further. Baitulmal can play a more important and significant role if its dual roles of generating income and distributing monies are empowered.

Role of the Baitulmal
During the golden era of Islam, Baitulmal acted as the national treasury. One of its main functions was collecting various forms of taxes from both the Muslim and non-Muslim communities. From the Muslim communities came zakat payments that were derived from wide-ranging sources, including possession of gold, silver or other assets, business operations, agricultural produce and poultry.

The zakat monies are then distributed to eight asnaf (recipients) as clarified in the Quran. Other sources of funds for Baitulmal are inheritances that are left without a beneficiary or next of kin and unclaimed properties.

Following the Crusades which led to the conquest of Western powers over Islamic states, the function of Baitulmal and its scope were reduced drastically to an institution that merely collects and distributes zakat and Waqf, apart from its limited scope as a charitable institution. Malaysia was not an exception as it was colonized for 446 years.

Baitulmal in Malaysia
The executive power on matters relating to Islam under the Federal Constitution stipulates that the administration of Baitulmal generally falls under the jurisdiction of the respective state Islamic religious councils.

The responsibilities of these councils include promoting, facilitating and improving the economic and social development of the Muslims.

They are also allowed to form organizations to operate and manage projects, schemes or industries planned or developed by the councils for the socio-economic advancement of Muslims.

The councils are authorized to use any asset or monies that are not needed immediately to invest in securities that are allowed for trust monies as well as deposit them in conventional or Islamic banks and financial institutions.

Given that Baitulmal is authorized to manage its sources of income as well as its investment, it is also responsible in ensuring the beneficiaries’ interest in the Waqf properties.

The Islamic capital market (ICM) is an important component in Malaysia’s financial system and the country has a comprehensive Islamic financial infrastructure complete with legal framework, market players and human capital development.

From this perspective, Baitulmal has the potential to benefit from ICM instruments by value-adding its income and investments. However it is important that these functions are discharged efficiently if Baitulmal is to play a more significant role in spurring the country’s economy.

Value-add for Baitulmal
Malaysia has a comprehensive ICM which is continuously enhanced through innovation. Investors seeking to invest or raise capital are offered a wide choice of established products that include Shariah compliant securities, Islamic trust funds, Shariah index, warrants and Islamic real estate investment trusts (i-REITs) and Sukuk.Baitulmal can benefit from these instruments to maximize its investments.

For example, there can be direct investments in the stock market, as more than 80% of the stocks in Bursa Malaysia are Shariah compliant.

However, it is crucial for Baitulmal to either have its own professional investment advisory panel or obtain external expertise for market analyses and investment recommendations.

On this note, Baitulmal has the option of appointing its own experienced and skilled investment managers to advice on the investment of Baitulmal’s financial assets as well as surplus funds in Islamic financial instruments.

Extending this further, Baitulmal could also benefit from Islamic structured products, which provide alternative investment strategies.

If it has companies or subsidiaries whose business activities involve trading and mass production of palm oil, Baitulmal should consider taking hedging measures against risks and investing in products like crude palm oil futures. Similarly, Baitulmal could be involved in Sukuk, either as an investor or an issuer.

On the back of Malaysia’s expertise in Sukuk and as a forerunner in the global Sukuk market, it is imperative for Baitulmal to come up the ranks by riding on Malaysia’s leading position in Islamic finance so as to add value to its the assets and the institution.

Baitulmal could also invest in i-REITs as part of an effort towards sharing wealth with the Islamic community and also non-Muslims.

In all the developments that have been recommended for Baitulmal, what is important is to have the requisite expertise supported by an accountable system of performance measure that prioritizes performance and in so doing, strengthens Baitulmal’s position as an institution that is the driving force behind the Islamic economy.

Investments in Sukuk
Baitulmal could potentially be a major player in the capital market if it were to invest its surplus funds in these financial instruments, given that the institution has the financial capacity and is able to make investments within the scope of the law.

An effective way towards this is for Baitulmal to consolidate all its surplus funds so as to bolster the fund size to a practicable level for purchasing Sukuk.

Profits resulting from this investment can then be channeled back into the various groups of funds for distribution to beneficiaries. If the capital is derived from a general source, it could be distributed for the welfare purposes of Muslims.

Capital generation through Sukuk
Baitulmal could also act as a catalyst for the development of fixed assets. The income stream created from the growth of the fixed assets can be channeled back as a source of income for Baitulmal.

If the income is general in nature, it goes back to the general account and for Waqf properties, Baitulmal, as a trustee, will channel them back to the beneficiaries. Part of the returns goes to Baitulmal as management or administration fees and is proportionate to the level of income generated.

The creation of high-skilled job opportunities is one of the multiplier effects from this process. On the one hand, the Waqf beneficiaries will gain from the income stream and on the other, the development of the properties, which leads to its utilization for business purposes and commercial services, is rewarding for the community.

This article was translated from a paper presented in Bahasa Malaysia titled “ Memperkasa Peranan Baitulmal Menerusi Instrumen Pasaran Modal Islam” at the National Bailtulmal Convention held on the 25th June 2009 in Kuala Lumpur, Malaysia.