The economics of zakat

Zakat is one of the five pillars of Islam. It is a compulsory procedure for Muslims earning above a certain threshold and should not be confused with Sadaqah, the act of voluntarily giving charitable gifts out of kindness or generosity, and with Awqaf, the permanent dedication by a person professing Islam of any movable or immovable property for any purpose recognised by Muslim Law as pious, religious or charitable.

Zakat is said to purify yearly earnings that are over and above what is required to provide for the essential needs of a person or family. zakat is based on income and the value of possessions.

The common minimum amount for those who qualify is 2.5% or 1/40 of a Muslim's total savings and wealth. If personal wealth is below the nisab during one lunar year, no zakat is owed for that period.

One of the most profound aspects of Islam is that it takes human dignity very seriously. Distributing zakat is not handing out charity to the poor. Instead, it is essentially a due for the poor from the rich ( the have –nots have a rightful share of the wealth of the rich – Al Quran)

In this way, zakat is a powerful tool to help re-circulate wealth to those most vulnerable, many of whom are experiencing poverty at no fault of their own, but due to their unfortunate circumstances, such as lack of access to resources because of poverty, war and other adverse circumstances.

Accordingly, zakat may be regarded as a social security system in Islam. Further, zakat means purification and growth as it washes away the greed and the acquisitive orientation of the rich. According to the Quran:

Indeed, [prescribed] charitable offerings are only [to be given] to the poor and the indigent, and to those who work on [administering] it, and to those whose hearts are to be reconciled, and to [free] those in bondage, and to the debt-ridden, and for the cause of God, and to the wayfarer. [This is] an obligation from God. And God is all-knowing, all-wise. - Al-Tawbah, 9:60.

According to the above testament of the Quran following eight are the categories of recipients of zakat

1. The poor (al-fuqarâ'), meaning low-income or indigent.
2. The needy (al-masâkîn), meaning someone who is in difficulty.
3. zakat administrators.
4. Those whose hearts are to be reconciled, meaning new Muslims and friends of the Muslim community.
5. Those in bondage (slaves and captives).
6. The debt-ridden.
7. In the cause of God.
8. The wayfarer, meaning those who are stranded or travelling with few resources.

Abdul Mazid. Illustration: TBS

So, zakat can be an effective mechanism to achieve sustainable development by reducing social problems and boosting economic activities. Some of the social and economic benefits of zakat are as follows.

(1) It gives hope to those who may feel hopeless;

(2) It ensures redistribution of wealth;

(3) Zakat restores and establishes human dignity;

(4) Zakat reduces poverty;

(5) Zakat provides financial help by way of food, shelter and clothes;

(6) It provides assistance and support for those in severe debt;

(7) It prevents the poor from resorting to unlawful or illegal means to earn a living;

(8) It helps bridge the gap between the rich and poor;

(9) It discourages hoarding of wealth; 

(10) Eliminates social conflicts;

(11) Establishes collective ownership;

(12) Establishes social security 

With a focus on alleviating poverty, zakat can be a solution, locally, nationally and globally. It is a powerful institution for contributing to sustainable development in communities worldwide. An estimated $200 Billion to $2 Trillion of zakat is generated each year and circulates the world. In this way, zakat has the potential to alleviate hunger, thirst, and poverty.

The key takeaway from the above discussion is that wealth distribution can solve very real problems. This is precisely what zakat achieves. It's a small percentage of 2.5% that may be small to you but put together it is extremely powerful. 

The modern approach to zakat institution is a significant economic and social instrument for the poverty alleviation and stability of the Muslim ummah. In this context, the zakat institution is to serve as a pool of resources for the economic and social development of the ummah beginning with those who are most needy.

In this regard, zakat funds can be utilised for the development of resources especially concentrated in the area of human capital development for the long-term rather than short-term relief for those in need and at the same time, prevent the zakat revenues from diversion to undesired. zakat management institutions should aim at using zakat funds as a means of providing assistance that will have a long-lasting effect. zakat institutions should have long-term programmes to teach the poor and needy know how to catch fish rather than every year they merely provide them with fish to eat.

The author is a former Secretary to the Government and former Chairman of the NBR.

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions and views of The Business Standard.