Inflation is rising and growth is slowing. Like much of the rest of the world, UK faces the prospect of stagflation and a deep squeeze on living standards. The numbers are harrowing; one in five people are predicted to fall into a debt trap this year, and there is expected to be a surge in debt advice. One in three people already seeking help from StepChange have fallen into arrears on utility bills, that is up from one in seven before the pandemic. To add to all that, 11 million households are facing £25 billion covid-related debt. Four million people are using credit to pay for essentials because they simply can’t make ends meet otherwise. For these households, rises in energy bills and the increasing cost of essentials are not things that make the difference between being able to afford luxuries or not; they’re the things that genuinely make the difference between heating and eating. A recurring theme for people in problem debt is the impact on mental health.
All of the above is being grasped in what is called the ‘cost of living crisis’. This refers to the fall in ‘real’ incomes (that is, adjusted for inflation and tax) that the UK has experienced since late 2021. It is being caused by a combination of high inflation outstripping wage increases and upcoming tax increases that have squeezed incomes for many households
Whilst the government flexes all its muscles it has to deal with the cost of living crisis, there are several divinely-guided instruments that can be used to remedy the situation. Islam has a suite of social finance instruments including Zakat, Sadaqa, Waqf, Udhiyya, Fidyah, Fitr, Kaffara and more. The most interesting of these is Zakat. Zakat can play a huge role in assisting people in the cost-of-living crisis by bridging the gap and making ends meet for those eligible.
Zakat can be paid to Muslims who have dipped below the poverty line in Shariah, known as Nisab. Similarly, those Muslims who are overwhelmed in debt can also benefit from Zakat when their net wealth is below the poverty line. Zakat can play a reviving role in the cost-of-living crisis by cushioning those who fall below the threshold. Zakat can provide the following benefits in this crisis:
1. Essentials grant – In the midst of the current crisis as we crawl out of the covid pandemic, Zakat can be used to provide and underwrite basic necessities and essentials for those struggling with purchasing such essentials. Nobody in society should be left without their essentials and needs. Zakat is the safety net to ensure that this does not happen.
2. Energy grant – Zakat can be used to unleash a package of energy grants or advance payments for those who would otherwise struggle paying their bills. Zakat can be paid on behalf of the beneficiaries to energy providers as an advance to cover the forthcoming months, ensuring that people do not have to choose between warmth and a meal, or hot water and food.
3. Debt bridging – Zakat can be used as debt relief and bridge the gap between solvency and insolvency. Debt is a weight and burden on the shoulders of the debtor. Zakat plays a role in emancipating people from constraints that are overwhelming.
4. Rent – Another area where Zakat can be productive in the cost of living crisis is the payment of rent. Whilst people are struggling with managing their budgets, Zakat can be used to pay rent on behalf of Zakat eligible beneficiaries, giving them breathing space and relief in their budgets.
5. Unlocking more income – Another potential role of Zakat in the cost of living crisis is that it can support eligible individuals by paying for courses, skills and training to unlock more income and create further income streams.
6. Investments – A more optimistic and more long-term solution is creating investments for the Zakat eligible beneficiaries. Zakat can be invested on behalf of the needy and poor, and the return on investment can be distributed to the poor and needy. Of course, this would mean that the equity or investment is also owned by the Zakat eligible beneficiaries.
In crises, it is faith that pulls us through.
By Mufti Faraz Adam