An Unexpected Opportunity for Islamic Finance: Filling the Void Created by USAID’s Dismantlement

A new role and opportunity for Islamic finance in global development has emerged, which is good for both.

Faith-consistent investing (FCI) is gaining traction across global capital markets, with various religious traditions—including Christianity, Judaism, and Islam—aligning investment strategies with their ethical teachings. While all share common values such as justice, stewardship, and compassion, Islamic finance has emerged as the largest and most rapidly expanding faith-based financial system. Today, it’s a $4.5 trillion industry—and growing fast, edging 6 trillion by 2026. It’s based on strong values: fairness, risk-sharing, ethical investing, and making sure money doesn’t go into harmful sectors like alcohol, gambling, or weapons. And of course, zakat, the obligatory charity, is at its core. Every year, Muslims around the world give billions—between $200 billion and $1 trillion, depending on which report you read (UNDP, 2017). That’s substantial, growing and is given every single year.  To put this in perspective, USAID’s annual budget was around $50 billion.

At the same time, the world is witnessing a major shift in the global development ecosystem. USAID, one of the largest aid organizations is now effectively out of the picture. European governments are increasingly diverting funds from international aid to domestic defense and security priorities as the geopolitical system also experiences major shifts. They have publicly stated that they cannot fill in the gap created by USAID’s dismantling,.  All of this has created a significant void in development finance—particularly in areas like health, education, and poverty alleviation. Islamic finance, especially charitable giving through zakat and sadaqah, has a unique opportunity to step in—not just as a values-based alternative, but as a necessary part of keeping global development on track to meet its most urgent goals. 

But to do so, Islamic finance needs to shift from a compliance-first approach to a purpose-driven one. A lot of Islamic finance today still revolves around negative screening: are we avoiding interest? Are we staying away from haram sectors? That’s important, no doubt. But the purpose of Islamic finance is broader than that. The Qur’an and Hadith remind us repeatedly that wealth is a trust—something to be used for the benefit of others, especially the poor and vulnerable (Qur’an 3:92; 24:56; Hadith in Daraqutni).

So what if we could do more than just avoid the bad stuff? What if Islamic finance, and especially zakat and sadaqah, could proactively build a more just and sustainable world?

Enter Impact Investing: A Missing Link?

Impact investing and Islamic finance share a great deal in common. Both emphasize ethical principles and societal benefit. However, while Islamic finance often focuses on what not to do (negative screening), impact investing is centered on what can be done to create positive outcomes. That’s a mindset shift that Islamic charitable giving could benefit from.

The UNDP’s “I for Impact” report (2017) put it plainly: Islamic finance has the potential to be a major driver of the UN Sustainable Development Goals, but only if it becomes more proactive and focused on outcomes.

The Zakat Opportunity: More Than Just Relief

Currently, most zakat and sadaqah contributions go to short-term needs: food, clothing, sometimes medical assistance. It is estimated that 50% of zakat is given by individuals to individuals. These are essential, especially during crises. But what if some of that giving also supported longer-term development?

Zakat could help fund skills training, social housing, or micro-enterprises. That’s where tools from the impact investing world come in—like Impact Measurement and Management (IMM), outcomes-driven thinking, and widely used impact frameworks such as the UN SDG Impact Standards. These tools can help Islamic charities and individual givers track not just how much they give, but what difference it makes. It shifts the focus from inputs to outcomes.

Zakat can also be used in innovative ways:

- Cash transfer programs for ultra-poor families, tied to impact indicators like child nutrition or school attendance.

- Microenterprise grants to support youth and women entrepreneurs.

- Debt relief for ethical, short-term burdens that prevent long-term stability.

- Mental health and trauma services for displaced and underserved communities.

These models ensure zakat is more than just a feel-good transaction—it becomes a tool for sustainable transformation.

Crucially, these opportunities can also be extended through collaboration with institutional investors—such as Islamic foundations, pension funds, and sovereign wealth funds. These actors typically work with long-term capital and are well-positioned to complement the short-term nature of zakat through blended finance, outcomes-based partnerships, and scalable investment platforms. Together, they can offer individual zakat donors and institutional zakat platforms the ability to achieve greater impact, transparency, and alignment with developmental objectives.

Why Blended Finance is a Big(er) Deal, and Where Zakat Fits In

Blended finance has become an even more important tool for development in an ecosystem where concessional finance has become more scarce. It involves combining concessional funding—like zakat or sadaqah—with commercial investment to support projects that might otherwise be seen as too risky. The charitable portion takes on more risk, which gives private investors the confidence to come in.

Zakat, because it must be disbursed within the lunar year, is ideal for use as first-loss or catalytic capital in these structures. Institutional investors—who often manage patient, long-term capital—can co-invest where zakat has de-risked the initiative. Examples include:

- Pooled zakat funds providing junior capital in education or health-focused impact funds.

- Institutions like Islamic Development Bank, sovereign funds, or pension funds providing the senior tranches.

- Foundations offering guarantees or co-investment to scale.

Moreover, capital layering by mandate can be applied: zakat funds support immediate services; waqf (endowments) finance long-term assets; and institutional investors back innovations and systems change. This strategy ensures that all contributors—donors, charities, and institutional investors—act within their legal and ethical constraints, while achieving shared impact.

Outcomes-Based Contracts: Unlocking New Potential for Zakat

Outcomes-based contracts—previously referred to as social impact bonds—fund service providers through private capital, with payments made only when outcomes are achieved. These arrangements bring together investors, service providers, and outcome funders (those who pay for results) to deliver measurable social impact.

So what is outcomes funding exactly? It refers to the portion of capital that is paid to implementing organizations after the successful delivery of agreed-upon results. This could mean increased school attendance, improved health outcomes, or reduced recidivism rates. It shifts the focus from activities to results.

Zakat and sadaqah are excellent candidates to serve as this outcomes funding. Because they are not expecting financial returns, they provide flexible, mission-aligned capital that can incentivize innovation and ensure resources are spent only when results are achieved. For zakat providers—whether institutions or individuals—this model ensures:

- Greater accountability: Funds are only disbursed when results are verified.

- Deeper impact: With expert oversight and outcome metrics, initiatives are designed to create real, sustainable change.

- Efficiency: Experienced investors and contract coordinators (like social investment funds or public-private partnership units) ensure better coordination and risk management.

Institutional investors play a pivotal role here. They can serve as upfront funders—pre-financing education, healthcare, or employment programs, with zakat funds repaying them upon verified success. Outcomes based contracts provide a viable model for scaling up results-based programming while maintaining compliance with zakat requirements.

Examples from the field

- In the UK, outcomes-based contracts were used to reduce homelessness, where private investors funded programs upfront and were repaid only when people were stably housed.

- In India, an outcomes contract funded girls' education, leading to a 52% improvement in learning outcomes for marginalized students.

- In Uganda, an outcomes contract improved early childhood education for over 12,000 children, with verified learning gains tied to payments.

Zakat institutions and individual givers can both benefit by participating in such mechanisms—ensuring that their generosity delivers real, lasting change, while leveraging the rigor and reach of institutional partnerships.  Revenue-Based Finance: An Islamic-Friendly Alternative to VC

Revenue-Based Finance (RBF) is different. Investors get repaid from a small percentage of business revenue until a pre-agreed return is met. It’s flexible, founder-friendly, and deeply aligned with Islamic principles.

RBF shares a lot in common with Islamic contracts like mudarabah and musharakah, where returns are based on profit-sharing. There’s no interest, no forced exits, and no dilution of ownership. It is not an extractive form of financing. For impact-focused entrepreneurs—and investors who want to support them—it’s a win-win.

If Islamic finance institutions embraced RBF more broadly, they could help scale ventures that aim to do good—while still earning ethical, risk-adjusted returns. They can capture promising early stage impact companies that are moving to the US or EU with the illusion that they can find better funding terms.  But as most of them do not fit the Silicon Valley expectations, they either give up or return home empty handed.  Countries with strong Islamic finance institutions have an opportunity to offer equity alternatives with structured exits to these companies and become leading destinations for innovation and impact. 

Some Real-World Wins to Learn From

- UNHCR’s Refugee Zakat Fund raised over $192 million and supported more than 6 million people. Transparent reporting made a big difference.

- Islamic microfinance projects in countries like Sudan and Bangladesh have empowered small entrepreneurs through Mudarabah and Qard Hasan structures, with repayment rates above 90%.

What Needs to Happen Next?

1. Develop systems to measure and manage the impact of zakat and sadaqah—not just count how much was distributed.

2. Enable legal and policy reforms that allow Islamic charitable funds to be used in blended finance and outcomes-based models.

3. Educate institutions, donors, and scholars on how modern tools can support Islamic values.

4. Create platforms for collaboration between Islamic finance professionals, impact investors, and development experts.

5. Empower individual zakat and sadaqah givers with tech tools and platforms that offer real-time transparency, impact data, and personalized giving options.

Final Thoughts: A Call to Action for a New Era of Islamic Impact

The convergence of modern impact investing practices with Islamic charitable giving is more than just an opportunity—it is a pressing necessity. As traditional pillars of global development finance such as USAID and European aid programs scale back or shift priorities, the world risks losing vital momentum on poverty reduction, health, education, and environmental sustainability. This creates a clear void—one that Islamic finance and philanthropy are well positioned to help fill.

Zakat and sadaqah, guided by religious principles and driven by the collective commitment of the Muslim community, can become transformative vehicles for real-world change. But to do so, they must evolve from reactive, short-term relief tools into proactive instruments of sustainable development.

By integrating proven strategies from the impact investing field—like outcomes-based contracts, blended finance models, and rigorous impact measurement frameworks—Islamic giving can be deployed with greater focus, transparency, and efficiency. These tools will not only strengthen accountability but will also ensure that every dinar and dollar given in the name of faith achieves its highest possible benefit.

This is the moment to reimagine how we use Islamic finance—not just as an ethical alternative to conventional systems, but as a driving force for global good. By leading with purpose and embracing innovation, Islamic charities, financial institutions, and individual givers can help secure a more just, sustainable, and equitable future for all.

The Islamic world has a chance to seize this opportunity—not just to protect the legacy of Islamic philanthropy, but to elevate it to meet the challenges of our time and position itself at the center of international development as an indispensable partner.