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The Financial Express

The socioeconomic dimensions of Zakat

| Updated: May 09, 2022 21:39:33


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Security of life and wealth are the basic human rights in Islam. Imam al-Gazali concluded that Islam grants mankind five basic rights. These are faith, life, shelter, posterity and wealth. That is, every man, whether Muslim or not, has the right to practise his faith with absolute security of his life and property, has the right to a habitable house, has the right to marry and have children.

Therefore, Islam, as the most comprehensively revealed religion, takes care of man's material needs with the utmost seriousness. Although al-Qur'n says that Allah made reasonable provision for all living beings on earth, acquisition and consumption of these supplies depends on various factors. The pattern of distribution of these wealth and supplies among the countries of the world and also the pattern of distribution within a country among a number of segments is most important. The second point in question is the quality, training and orientation of the people doing this work. These people are basically the product of the country's political, economic, social and cultural practices and, more fundamentally, the economic doctrines pursued by the people and the political governments. Social security, by definition, is the minimum economic security provided to a country's oppressed population who have no source of livelihood. These can be provided in various forms -- such as unemployment insurance, insurance, old-age pensions etc. There is also a need for funds for over-indebtedness and ailing health. For all of this, people need support. In the Western Secular Sense (WSS), financial security against these adversities is called social security, that is, the security provided by society or the state. Islam not only advocates meeting all these economic needs directly with financial grants as support, but also considers the social, cultural and egalitarian aspects of security.

The basic concept of Islamic social security is that a Muslim cannot be poor. The Prophet (PBUH) says "Poverty leads to infidelity…and sought refuge from hunger vis-à-vis poverty because hunger is bad companion …" (Ibn Majah).  Faith (Iman) is the first step to the religion of Islam. Since poverty leads a person to rebellion against the believer's (Mumin) core belief, poverty is contradictory statement in the Islamic framework. In the Christian dimension, "poor is always there with you". In Islam, however, there can be no long-term requirement for any benefit for a man except for a specific bad time. An unemployed person cannot remain unemployed for too long. Islam has made a permanent provision for a temporary problem through Zakat.

AN ECONOMIC ANALYSIS OF ZAKAT: In analyzing the economy of Zakat, Allah commands in al-Qur'?n can begin the discussion, which state: "And seek in that which Allah has given thee, the home of the Hereafter; and neglect not thy share in this world..." (al-Qur'n 28:77). And when praying to the Almighty, a believer seeks both the good in this world and the hereafter as enunciated in al-Qur'?n. 

Umar Chapra (1979), who describes the shortcomings of both the capitalist and socialist approaches, asserts that "The synthesis of the material and the spiritual is what is missing in the welfare concepts of the other two systems, capitalism and socialism, as they are morally neutral… Thus, satisfying the spiritual and material needs of the individual and society would, of course, require the state to play a crucial role in Islam's economic system. Muslim economists in the today have worked on the role of Zakat in the public finances of these countries' economies. Persons who pay Zakat are known as ahli-nishab and are distributed among another group (of beneficiaries) as prescribed in al-Qur'n. As quoted earlier, al-Qur'n says, "Realise Zakat from the properties of the people. Purify and sanctify them and pray for their good and welfare. Surely, your prayers will cause a sense of consolance and peace in their heart and Allah hears and understands all" (al-Qur'n 9:103). This verse clearly expresses that the Prophet (PBUH) has been asked to realise Zakat.

An economic perspective of Zakat can be understood where Zakat is a transfer of cash (originally or by conversion) from the wealthy segments of the society to the destitute. It is clear from the direction of the verse that this type of transmission will bring about purification and rectification (of environmental problems) and will also bring a holy sense of piety as well as peace in the hearts of the Muslims who give. The literal meaning of the word Zakat is: (a) purification of the soul and property of the paying class and the purification of the environment as a whole; and (b) the payment of Zakat makes the Zakat payers feel that they are obeying Allah's command and performing a compulsion (farz) imposed on them.

This gives the Zakat payers a kind of relaxation and also grows a sense of humanity and compassion. Another meaning of Zakat is that it "causes increase of wealth". This meaning seems to anticipate the common experience that when money is given or transferred, it appears to diminish. This dilemma will be deepened in the following discussions. One of the basic tenets of Islamic economics is that it does not allow wealth to be concentrated in a few hands. Al-Qur'n says, "Beware, don't allow cycling of wealth in the rich section of the community" (al-Qur'n 59:70). Hence, the general tendency of Islamic economics is to defuse and smooth out such concentration, if any, and to prevent further concentration. One of the most effective economic tools to operate in this direction is the institution of Zakat and Shadaqa.

REDISTRIBUTIVE EFFECT OF ZAKAT: Allah commands in His Book: And what Allah restored to His Messenger from the people of the towns - it is for Allah and for the Messenger and for [his] near relatives and orphans and the [stranded] traveller -- so that it will not be a perpetual distribution among the rich from among you. And whatever the Messenger has given you, take; and what he has forbidden you, refrain from. And fear Allah; indeed, Allah is severe in penalty (al-Qur'n 59:7). In this verse Allah describes how the spoils of war are distributed and the aim of the distribution is not to concentrate wealth in a few rich hands of the community. That is, resources should be distributed in a way that minimises or evens out apparent inequality among people in the community. However, this task is not so simple that an individual or an agency can do easily.

The entire Ummah believes that the government is responsible for collecting and distributing Zakat in an Islamic country. Al-Qur'n and the Sunnah of the Prophet (PBUH) have adequately covered this connotation. This process indicated the transfer of income from one group to another. Regarding the recipients of Zakat, al-Qur'n lists eight different groups of beneficiaries ranging from faakir and masakin to the cause of Allah as previously mentioned. Some Ulama insist on direct transfer of payment to recipients. This includes Mufti Mohammad Shafi from Pakistan. On the other hand, however, most thinkers consider it permissible to flow the Zakat benefits to the beneficiaries directly and indirectly through institutions or projects that provide needed services. On the other hand, according to Yusuf al-Qardawi, the beneficiaries can be divided into two groups. To the first group, which includes the needy officials of the Zakat administration and those whose hearts are to be won, the Zakat proceeds can be remitted directly. The rest can receive the benefits indirectly. But, Amin Ahsan Islahi argues that the insistence on direct payments from certain beneficiaries has no basis in the legal text. Thus, it is now generally accepted that the Zakat proceeds can be spent through institutions or projects that result in the benefit of the beneficiaries.

From an economic point of view, the most important meaning of Zakat is to effectively transfer excess income of the wealthy people to the people below the poverty line. It is also critical to prevent further accumulation of wealth in few hands and push them into the nooks and corners of the society. This task of Zakat is one of the functions of the distributive branch of fiscal goals in an Islamic economy. Islam not only condemns income inequality between different groups, but also takes positive steps to eliminate all anomalies in this regard: Islam recognises that a society endowed with economic and social justice is the natural outcome of the institution of Zakat. The political hierarchy is only there to ensure the smooth and proper implementation of this institution.

Zakat eliminates many unethical evils from the society. Many writers, especially Marxists, believe that the root of all evil is the poverty of a group of people. The Prophet (PBUH) says, "Poverty leads to infidelity" (Bukhari and Muslim). Different kinds of crimes are committed by the poor class. Their deprivations make them desperate to do and undo whatever they can. It is also historically observable that Zakat and begging did not go together indefinitely in the Muslim Ummah. In the economic plan, Zakat prevents hoarding. Because Zakat is levied on the hoarded goods. Un-invested black earnings and hoarding are positive obstacles to the implementation of the government's economic programme. Zakat is a deterrent against this hoarding and accumulation of black money. Black money is thus pushed into the investment process. These helps increase production.

Zakat transfers money and wealth from a group of people whose marginal propensity to consume (MPC) is lower than a group of beneficiaries whose MPC is extremely high. Through this transfer, the beneficiaries increase effective demand, which in turn makes investment more difficult. Thus, Zakat not only enforces but also creates an effective demand for the investment consumption of increased production. In a dynamic analytical context, this process continues until it turns out that the whole economy is saturated, increasing both production and distribution levels, increasing national income and finally reducing the likelihood of depression, leading to stability in the consumption process and production in the economy.

CREATION OF A NATURAL ENTREPRENEURIAL CLASS: The payment of Zakat implies that a certain amount of wealth is deducted, thereby reducing the existing wealth, both in cash and in kind, to the extent that is paid in the form of Zakat. If there is no alternative process for investing this wealth, the gradual process of paying Zakat each year will make the wealthy fellow poor until he falls below the minimum wealth limit (the level to be ahli-nishab).

In order to avoid this danger of becoming poor, every Ahli-Nihsab is likely to be asked to invest his wealth in such a way that it grows. Therefore, not to mention further growth, an Ahli Nihsab needs only to invest to maintain the existing level of prosperity. This implies that there is a built-in incentive system as well as investable resources and potential entrepreneurs in the institution of Zakat, On the other hand, a man who receives Zakat money may be intelligent, hardworking and sincere enough to use the Zakat money to survive and buy tools for handicrafts that will help him grow and earn an income as an entrepreneur, enabling him to get out of the path of poverty. Such intelligent individuals can be given Zakat money to buy tools, implements that enable them to earn for survival and quality of life improvement. In this way, a poor man becomes an entrepreneur living gracefully in the community.

THE DYNAMIC FUNCTION OF ZAKAT: Jurists, especially today's scholars, advocate paying Zakat in order to permanently settle a Zakat recipient in the economic sector. Doing so is to produce for the purpose of benefitting the payee and others. Such a recipient will not take Zakat in the next year. Rather, in a few years after receiving the Zakat fund, the mustahik is expected to be able to pay Zakat. In this way, each year the number of payers will increase and the number of recipients will decrease - ultimately eliminating the presence of Zakat recipients.

ZAKAT AND WORK EFFORTS: Some scholars have pointed to a likely negative effect of Zakat on labour effort as observed in the western welfare system. This appears to be a similar problem in the western social security system, where insurance is preferred to work. Ziauddin Ahmed et al. (2008) explains that Zakat payment may be conceived of in terms of what is described as a negative tax. Under Zakat transfer payments, the government may designate a poverty line based on current living standards and make payment to those individuals whose income fall below the poverty line of the so designated group. Any poverty line designated with reference to current standards of living and income will have to be adjusted in the light of the Zakat nishab, nishab to allow for a dynamic interpretation in terms of cost-of-living index and reasonably defined current income flows. Transfer payments may have to be made due to one's savings in gold, jewellery which altogether exceed nishab.

To avoid the problem of the negative impact of Zakat on work performance, a possible compromise between paying Zakat and working is advocated. Full payment of Zakat funds to lift individuals above the pre-established poverty line may need to be revised because of its likely dissuasive effect on work performance (Ziauddin Ahmed et al., 2008). Therefore, maintaining a reasonable pace of work requires a trade-off between the goal of eradicating poverty and protecting the incentive to work. Such a compromise should not be very difficult in practical policy planning.

Apart from its religious significance, Zakat has been treated in its two aspects mainly in its importance as a social security measure and as an important instrument for the productive and distributive effect in the Islamic economy. In its performance in the social and economic life of an Islamic community, Zakat has left an unimaginably high mark. Zakat as social security is unique in its kind and is unparallel as an economic instrument in its multidimensional effect in the economy.  Since Islam is a complete code of conduct for all human beings, all of its institutions are designed to be guided by the fulfilment of the pre-established socio-economic and spiritual goal. Zakat is undoubtedly an institution whose scope is the broadest in the social and economic spectrum of the Muslim community.

ROLE OF ZAKAT IN FISCAL POLICY: The goal of the fiscal policy planners is to maximise the allocative, distributive and stabilising efficiencies of the resources. Regarding the allocative function, distributive function as well as macroeconomic stabilisation function of Zakat, Muslim economists of different countries have started carrying out exhaustive theoretical and empirical studies substantiating the claims made on these issues in our brief analyses made above. As an example, Shehu U. R. Aliu carried out a detailed discussion on the role of Zakat in allocation, stabilisation and distribution branches of the economies on the basis of the contribution of the Muslim economists in these respects. His illuminating remarks in concluding his analysis are summarised as follows: The goal of fiscal policy planners is to maximise the allocation, distribution, and stabilisation efficiency of resources. Regarding the allocation function, the distribution function, as well as the macroeconomic stabilising function of Zakat, Muslim economists from different countries have started to conduct extensive theoretical and empirical studies that support the claims made on these issues from the lens of socioeconomics. As an example, Rano (2017) discusses the role of Zakat in the allocating, stabilising and distributing branches of economies based on the contribution of Muslim economists in this regard.

Rano (2017) uses conceptual, theoretical and empirical studies to analyse the socio-economic implications of Zakat, an omnibus instrument of Islamic fiscal policy based on injunctions from al-Qur'n and Sunnah. He studied the allocating, stabilising and distributing functions of Zakat on individual subsistence and society or economy as a whole. The study concludes an important consideration in both conventional and Islamic macroeconomics, primarily the strategy of how resources are efficiently allocated. The work noted that Zakat encourages consumption among those (needy and poor) with higher MPC, while additionally stimulating increased investment, all of which increase the overall productivity and well-being of the society.

Furthermore, as the economy grows and prospers, the challenge of maintaining economic stability arises. Based on broader Islamic economic principles, it could particularly serve as a powerful tool for economic stabilisation, serving both as an expansive tool for generating income for those at the lower income level and a discretionary tool for those at the higher income level. Problems such as inflation, uncertainty, business cycles, recessions, and others, which are inextricably enduring features of capitalist economies, are effectively brought under control by the automatic stabilising effect of Zakat on the economy. In this context, the case of the 2008 financial crisis may be relevant. Western economies were close to collapse due to inept banking.

In accordance with the cardinal principles of justice, fairness and justice in Islam, Rano (2017) elaborates on the strategic role of Zakat. That is, Zakat performs the main functions of modern public finance; ensures social security, combats the unequal distribution of wealth, curbs poverty, facilitates the provision of socio-economic infrastructure and public goods for the needy and the poor, promotes mutual peace and social cohesion in society. Thus, Zakat in Islamic economics is much more than a pillar of Islam or a wealth tax. It has been found that Zakat exerts a great influence on the socio-economic well-being of the society, has a positive impact on resource allocation, stimulates economic stabilisation, and is able to achieve distributive justice and social security. Its correct application through an efficient collection and distribution system is able to solve the challenges of these modern times.

EFFECTS OF ZAKAT ON POVERTY, CRIME AND CORRUPTION: Prophet Muhammad (PBUH) describes poverty as an element leading to infidelity, which is a rebellion against belief in Allah-- the highest form of human crime. Then come the follow-up crimes in infinite variety. Marxists also describe it as the core of social crimes.

In the Islamic context, Zakat and poverty cannot go hand in hand. The Marxist strategy to eradicate poverty is to socialise all factors of production to place them all in the hands of the government. The government will control the factors of production and the distribution of the products of the proletariat and the government, which means there is a double-edged knife for oppression. However, the practical failure of Marxist strategy, as demonstrated in China and the former Soviet Union, proves that its theology is inherently flawed and untenable. Again, the same conclusion applies to capitalism. Islam's Zakat strategy is, therefore, the only panacea left to eliminate poverty and all kinds of social crimes.

In the modern macro context, Zakat can help improve human capital by designing specific programmes for the poor and the vulnerable, which can include education, health and social services through proper planning based on the dictates of fiqh al-zakat. Since crime is mainly caused by lack of resources and poverty, Zakat gives resources immediately to people who need them. So, people don't have to look to the wealth of others to meet their needs. In addition, Zakat develops human qualities such as compassion, brotherhood and a sense of responsibility towards one another. Thus, crime cannot approach and thrive in their community. 

Many researches have been conducted by various university academia on the subject of poverty, corruption, Zakat and good governance. In one such study, Ridhu Al-Hamdi analysed the compatibility between Islam and good governance in addressing two key public issues, namely poverty and corruption (Mutiarin et al., 2015). To explain the compatibility between Islam and Western academics, his study examines the political agenda and strategy of each of them using available literature and came to the conclusion that Islam and the Western perspective share a similar concept, a similar policy and have a similar agenda and strategies to address poverty and corruption issues in society (Mutiarin et al., 2015). But in the case of Islam, it has two unbeaten tools, namely Zakat and spirituality. His study found that poverty and corruption are at the root of the backwardness in developing countries. Good governance aimed at eradicating both these curses will use tools used in the case of Zakat, morality, spirituality and government policies. These are superior tools suggesting that poverty and corruption can be minimised and even eliminated from the society through good governance with the compatible tools in each of the contexts.

 

M Kabir Hassan is Professor of Finance at the University of New Orleans and the 2016 Islamic Development Bank Prize Winner in Islamic Banking and Finance. [email protected]

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