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The Institution of

Zakat and Its


Impacts on Society

By: Najeeba Ali

International Islamic University


Islamabad

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Contents:

Introduction
Zakat
Importance of Zakat
Objectives of Zakat
Sources of Zakat
Obligatory Zakat
Disbursement of Zakat
Impacts of Zakat on Society
Economic Justice
Economic impact of Zakat
Zakat and Income Distribution
Zakat and Development
Zakat and Poverty Eradication
Zakat and Investment
Zakat and Social Security System
Ethical and Spirtual Impacts
Conclusion
Bibliography

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Introduction:
Islam is the religion and way of life that was revealed to humanity by our creator, Allah (swt)
. Since Allah (SWT) is the one who created the heavens and the earth, and out of His
unlimited mercy to mankind, He also revealed to us a way of life and a religion, Islam, that
give us peace and happiness in our lives here on earth and in the afterlife. Islam was revealed
as a practical religion that covers all aspects of our lives, and it is intended to be implemented
in our lives.
As such, when implemented honestly and correctly, Islam provides solutions to all problems
that are faced by humanity. One of the most widespread and dangerous problems faced by
humanity is that of poverty, hunger and starvation. There is nothing more horrifying than the
realization that as we live our happy lives here, millions of our fellow human beings live in
hunger and face starvation. The majority of the world population today lives in poverty. It is
clear that the world system we have set up today is unjust and inhumane.
Remedy given by Islam i.e. zakat for all these problems is perfect, multidimensional,
practical and unlike other economic solutions has immediate effect on society.
The main purpose of choosing this topic is to highlight the multidimensional impacts of zakat
institution i.e. the solution of the existing problems of Muslim Ummah.almost the whole
muslim Ummah is facing issues like poverty,economic instability etc.
The aim is to promote the establishment of zakat institution as suggested by Islam in its real
means.The procedure from collection till disbursement should be fair and efficient,in this lies
the true Economic success.
This term paper gives introduction of zakat institution and its impacts on society.it gives a
sight of economic impact,social impact,ethical impact and role of zakat in
development,investment,fair distribution,poverty eradication.
We are thankful to Allah SWT for making us successful in our attempt.
At the last but not the least, we are indeed grateful to our honorable teacher Dr.Naseem
Shirazi for providing us the great opportunity to work on this topic.

JazakAllah-u-Khairan!

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Zakat:
Zakah is “that portion of a man’s wealth which is designated for the poor”.

The Arabic word Zakat, with its root Z -K -W means growth and development.
It is also defined as: “a compulsory levy imposed on the Muslims so as to take surplus money
or wealth from the comparatively well-to-do members of the Muslim Society and give it to
the destitute and needy”
Economically, zakah results in economic prosperity as zakah is paid from
Those who have surplus, to the poor. This will improve the poor’s purchasing power, which
may lead to a higher demand on goods. ‘Purification’ is also among the objectives and
purposes of zakah. This includes purifying the wealth of the contributor because in the wealth
of the relatively well-to-do, some portions of it are the right (due) of the others.

Importance of Zakat:

Zakat is one of the most important aspects of the Islamic Economic System. Unfortunately
for all of us ‘Zakat’ which is one of the Five Pillars of Islam, has been reduced to just a ritual
which we perform once a year.

The institution of Zakat is the cornerstone of the Islamic Economic system. The Quran
emphasises ‘Zakat’ as a critical component of socio economic justice. The institution
works to ensure an equitable distribution of wealth and establishes a safety net for needy
members of society. Both the sources and disbursement categories of Zakat are specified
in Islamic doctrine. The Quran identifies eight categories of disbursement, each of which
carries clear social benefit.
One positive economic effect of Zakat is an increase in the money supply and a
consequent increase in the demand for goods and services.
It also provides debt relief and enhances price stability. If accumulated in times of
prosperity, Zakat funds can aid society through times of depression. Though Zakat has
widely fallen out of use in modern times (except a ritual) it can have great economic
impact if properly re established.
Like freedom from interest, Zakat is also an integral part of Islamic economic systems
since Zakat is derived from the Shari’ah. Here are some brief features of the
economic impact of Zakat on society within the framework of the Quranic perspective of
economic justice.

Objectives of Zakat:
The objectives of zakat are as follows:

1) The right of Allah:


In islam to acknowledge the legitimate right of Allah on humans and on their wealth is a
matter of belief and a test of faith.This acknowledgement must be confessed and translated
into deeds and material transactions.Zakat is expression of that gratitude. It is given by the
zakat payer from the bounty of Allah in his possession .Allah ordained where the dues are to
be distributed.

2) Purifying self and wealth:

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Zakat is a ritual,and when performed ,the muslim feels that he is worshipping the lord,seeking
his own salvation and God’s mercy and blessing.Allah says,
“And whoever purifies himself (by paying zakat) does so for the benefit of his own
soul”(35:18)
Humans naturally love wealth and try their best to accumulate as they can.Quran says,
“say!if ye have control of the treasure of the mercy of my lord,behold,you would withhold
them for fear of spending them,for man is ever niggardly”(17:100)

3) Social Solidarity:
Islam ordains solidarity among the individuals of its ummah.This solidarity has two aspects.
a) It considers the individuals as an integral part of his community. He has as much right
towards it as it has towards him. Prophet(p.b.u.h) said that he who has any surplus of
wealth should give to those who have not enough.(Imam Muslim)

b) Allah related the right of the poor to his own right on the wealth of the rich.

4) Promotion of stable economic growth:


The promotion of stable economic growth through investments, employment and balance
consumption is also one of objectives of Zakat.

5) Income equality:
The achievement of greater income equality through an equitable distribution of wealth, thereby
eliminating poverty and extreme disparities of wealth between the rich and the poor.

Sources of Zakat:
God commands Muslims to pay a certain percentage of their net worth
above nisab (the poverty line) as well as a certain percentage of the net output of
Agricultural and mineral production.
This payment is not a favor, but rather an appropriate use of their wealth which god has
given them as a trust (Quran 57:7), which is 2.5% of the net wealth. Nisab, the dividing
line that separates the basic necessities of life from luxuries, differs from society to society
and changes over time. It sets an acceptable standard of living, which covers all necessities
of life compatible to a particular community at a particular economic period. As a general
rule, it includes food, clothing, household effects, a house for personal use, medical care,
education, means of transportation, and tradesman’s tools and equipment.
By its very definition, nisab is a dynamic, not a static concept. While an automobile today
may be a necessity in USA, it may be a luxury in a country like Sudan or
India. Similarly, a horse used as a means of transportation, and therefore a necessity in a
country like Afghanistan, could be considered a luxury in the upscale suburbs of San
Francisco. Simply stated, as ordained in the Quran,
“Those who have more than nisab, no matter how modest it may be, must understand and
accept that poor members of the society have aright to a portion of all of their wealth”
(Quran 57:7).
Nowhere do we see the term manafi’a (net profit) used in Quran in the context of zakat. Since
Quran uses the term amwa’al (wealth), the basis for calculating zakat is clearly one’s total net
worth and not just on their annual income or net profits.

The Obligatory Zakat:


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Islam makes it obligatory on every Muslim to pay a certain "tax", called Zakat, on their
accumulated wealth. The money collected from this Zakat is to be distributed among the poor
and needy.

The Arabic word "Zakat" means both 'purification' and 'growth'. One of the most important
principles of Islam is that all things belong to Allah (swt), and that wealth is therefore held by
human beings in trust. Our wealth is purified by setting aside a proportion for those in need,
and, like the pruning of plants, this cutting back balances and encourages new growth in our
wealth.

Zakat is due on accumulated wealth that has been in the possession of a person for at least
one year. There are rules on how to pay Zakat on each type of possessions, such as gold,
animals, crops, shares and so on. A certain percentage of each type of these possessions is to
be paid as Zakat. Note that the Zakat is taken from excess wealth that a person is
accumulating and has had in their possession for over a year. It is not paid on income.
Therefore, people whose save nothing after covering their expenses with their income do not
pay Zakat, and in fact may be eligible to receive Zakat money from others if their income
does not cover all their needs.

Disbursement of Zakat:
Just as Quran outlines the source of zakat, the Quran also defines its disbursement
categories in the following verse:
“The offerings (zakat) given for the sake of God are (meant) only for fuqara (poor)
and the masakeen (needy), and ameleen-a-alaiha (those who are in charge thereof),
and muallafat-ulquloob (those whose hearts are to be won over), and for fir-riqaab
(the freeing of human beings from bondage), and (for al-gharimun those (who are
overburdened with debts), and fee-sabeelillah (for every struggle) in God’s cause, and
ibn as-sabil (for) the wayfarer: (this is) an ordinance from God- and God is allknowing, wise.”
(Quran 9:60).
The eight categories mentioned in this verse clearly defines the disbursement of zakat
as an economic safety net to assure fulfilment of those who, for no fault of their own,
cannot afford the basic necessities of life.

a)The first two categories, namely fuqura (the indigent/the poor) and masakeen (the
needy) includes those people who, being underemployed or unemployed, have no
means of support or insufficient income to meet their basic necessities of life and
therefore are indigent or live below the poverty level. This may be because they are
incapacitated, disabled, orphans, sick, homeless, or of similar status.
To maintain the integrity and the independence of collection and disbursement of
Zakat.

b)The third category ameleen-a-alaiha refers to those expenses that are necessary
to administer the zakat fund, including personnel salaries.

c) Muallafat-ul-quloob:the fourth category, includes those people whose hearts are to


be won over.According to some scholars this apparently means such non-Muslims who are to
close to understanding and perhaps accepting Islam, and for whose conversion every effort
should be made, either directly or indirectly (i.e., by means of the widest possible
teaching of Islam).
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d)The fifth category fir-riqaab relates to both ransoming prisoners of
war and freeing slaves.

e)The sixth category, al-gharimun, includes those people who


are overburdened with debts contracted in good faith, which – through no fault of
their own – they subsequently are unable to redeem.

f)The seventh category feesabeelillah embraces every kind of struggle for a righteous cause, both
in war and in peace, including expenditures for the propagation and defence of Islam and
for all charitable purposes. This may include education, medical care, and social welfare
work.

g) the eight category ibn as-sabil (son of the road) denotes any person who
is far from his/her home who, because of circumstances beyond his/her control, does
not have sufficient means of a livelihood at his/her disposal. In its wider sense it
describes a person who, for any reason whatsoever, is unable to return home either
temporarily or permanently: for example, a political exile or refugee.

IMPACTS OF ZAKAT ON SOCIETY:

Economic Justice:

The Quran itself sheds light on the economic importance of Zakat. The commandment to
establish Zakat is mentioned more than 100 times, usually in conjunction with
Salah (prayer), as two means of purification. God commands Muslims to pay Zakat on their
total wealth in excess of nisab (minimum wealth), to the poor for benefit of the society’s
social and economic welfare. The following Quranic verses, among others, emphasize
that all resources belong to God and that these resources are thus a trust (Quran 57:7) that
must be used to satisfy the basic needs of all those who, for no fault of their own, cannot
afford the basic necessities of life in a humane and dignified manner.

“(so that) wealth does not circulate only among your rich” (Quran 59:7)
“And(would assign) in all their wealth and possessions a due share (zakat)
unto such as might ask (for help) and such as might suffer privation” (Al Quran 51:19)

Likewise we find from the sayings of the Prophet Muhammad, who once said,

“He is not a man of faith who eats his fill when his neighbour is hungry”
“A locality where a person has to sleep hungry deprives itself of God’s protection”

Ali, the fourth Caliph, expanded on this idea in saying that:


“God has made it obligatory upon the rich to pay out of their wealth whatever is sufficient
for the poor. If the poor starve, or go unclad, or suffer difficulties, it is because the rich
have deprived them. Hence it is proper for God, the Almighty and the Exalted, to bring
them to account and to punish them”

Because the known economic resources at a given point in time are relatively limited,
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establishing the Quranic perspective of economic justice and providing general well being
for all members of the society requires a focus on three critical economic factors:
1. Earning Halal (permissible) income;
2. ensuring an equitable distribution of wealth; and
3. creating an economic safety net to assure need fulfillment of those who, for no fault
of their own, cannot afford the basic necessities of life.

Zakat is a cornerstone of the values that govern Islamic economics. Being directional and
normative, zakat defines the norms of economic activity and, through its effects on
economic variables, determines the direction along which the economy should move. On
the revenue side, it specifies the manner in which revenue (zakat) is to be raised and who
pays it, and on the expenditure side, it sets forth the uses (recipients) of the revenue. Like
any modern budget, it describes the economic order that it attempts to establish and
express the ideals and aspirations of society.

Finally, as a fiscal mechanism, zakat performs some of the major functions of modern
public finance, which deals with social security entitlements, social assistance grants for
childcare, food subsidy, education, health care, housing, and public transportation in a
welfare state. It separates public welfare expenditures from other budgetary items and puts
the burden of meeting the economic welfare needs of the society where it belongs. Unlike
tax levied by the government for the services provided to tax payers on a quid pro quo
basis, the Quran and Sunna, irrespective of the economic conditions of the society,
determine zakat and its heads of expenditure. That zakat is distinct from taxes can be seen
from a saying of the Prophet Muhammad that “in your wealth there is also obligations
beyond zakat”. By paying zakat, a zakat-payer fulfils his/her fard, (religious obligation),
whereas a taxpayer by paying his/her taxes only enables the state to perform its functions
effectively.
.

Economic Impact of Zakat:

When a certain percentage of one’s wealth is spent annually over the foregoing eight
categories as prescribed in the Quran, zakat has a significant economic impact on
society. Income support provided to the poor and needy would result in a measured
increase of the money supply in the economy causing upward shift in demand for
goods and services. To support this upward shift in the demand for basic necessities
of life such as food, clothing, shelter etc., the production facilities would gradually
expand and begin to absorb the idle capital. To support the increased production, the
economy would generate more jobs and new employment opportunities. This added
employment in turn would generate more demand for goods and services, more room
for additional investments, and finally, the growth cycle based on balance
consumption would contribute to a balance economic growth.

As explained above, fir-riqaab, the fifth category of zakat expenditures, (in addition to
ransoming prisoners of war), relates to the freeing of slaves. Today, obviously, human
beings are no longer bought and sold as property. But by extrapolating the intent of
this category, it can be safely stated that one of the basic purposes of zakat is to free
human beings from economic slavery as well. The majority of people living in poor
countries suffer from abject economic slavery at the hands of many local landlords,
loan sharks, rich industrialists, and multinational corporations that exploit natural
resources. One of the best ways to free people from economic slavery is to first give
these oppressed people temporary relief and then, for economic rehabilitation through
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essential financial resources to acquire training, equipment, and material. For
example, small businesses or privately owned “co operatives” could be created. A
regular flow of income of these entities would accrue to the recipients. Depending
upon the rate of profit and retained earnings, the value of these enterprises would
progressively grow. The income multiplier effect not only would benefit the economy
several times the original investment in these enterprises, it would enable the poor to
eventually become self-sufficient and free themselves from economic slavery while
contributing to the economic stability of the society.

Expenditure on the sixth category, al-gharimun, is designed to assist those people


who, being overburdened with debts, are unable to fulfil their obligations. A closer
understanding of this category would reveal that Islam does not allow bankruptcy
where creditors, whether individuals or financial institutions, eventually pass on their
bad debts to the consumers in the form of increased prices. Such increases, if not
offset by other elements of consumer price index, eventually contribute to inflation.
To provide for such contingencies where debtors who contracted debts in good faith
but due to conditions beyond their control, such as sudden sickness, natural or
economic catastrophes, cannot redeem them, expenditure of zakat for redeeming the
debts of al-gharimun not only help maintain price stability, it eliminates one of the
important factors which contributes to inflationary cycle.

To satisfy the seventh category, fee-sabeelillah (in the cause of God), zakat funds
when spent for education, medical care, and social welfare of those who otherwise
cannot afford them or are oppressed, provide moral stability and human dignity to the
recipients, essential elements in maintaining economic harmony. Likewise, by
providing financial assistance to ibn-as-sabil who may be refugees or political exiles,
the expenditure of zakat, while maintaining the human dignity and general well being
of the recipients, contributes toward their economic self-sufficiency. Over a period of
time they no longer will be a burden on the society.

That zakat is universal in its scope can be seen in the manner in which it is collected
and distributed. After providing for the needs of eligible kin, the zakat fund is
designed to cover the needs of those who live in the community where zakat is
collected and then to those eligible recipients living in the county, state, country, and
finally the world at large.

Through accumulation of surplus in zakat funds during prosperous years, the


institution of zakat provides necessary contingency funds during depressed economic
conditions when zakat revenues may not be sufficient to meet the required needs of
the society. The levy of zakat, particularly on the idle portion of an individual’s
wealth, induces the zakat payer to seek a return on his wealth at a rate at least as high
as the rate of zakat, so as to be able to pay zakat without reducing his/her wealth.

Zakat and Income Distribution:

One of the most intricate problems in modern times is the unfair distribution of income.In an
Islamic state,this question would hardly be raised ,and for the following good reasons.

1)If all savings are immediately directed to consumption or investment,the society would
reach the state of “full employment” in a very short period.
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2)When nobody withholds money from circulation or in other words when every sale is
immediately followed by a purchase,demand reaches its highest peaks,requiring a steady flow
of supply.this leads to a steady increase of demand on labor,gradually raising wages and
salaries

3)The Islamic economic system makes capital for investment readily available and without
fixed charge (interest),as savings are immediately directed to investments against a share in
profits.This availability of capital allows competition to function at an optimum
scale,bringing down the rate of profits to a level quite near to the average professional
earning.

In other words while wages and salaries tend to gradually increase as a result of the persistant
increase in demand,profits in different trades tend to equalize at a lower level owing to the
availability of free capital and open competition.Moreover,unearned income gradually but
quickly disappear since interest on money turns to be negative under the transactional zakat
system.Only those who work and those who produce have a right in the national product,each
according to his contribution to that product.

From the above, one can adduce that by establishing the institution of zakat in a modern
state,the pattern of the economy would be basically different from the usual modern liberal
and socialist economic patterns.by imposing the “ritualistic” prescribed zakat,we are
activating the “normative” aspect of human economic behavior and by applying the
“transactional”zakat ,we are utilizing the empirical method in administering the human
activities while totally eliminating the fictitious and misleading assumption of the “homo-
economo” together with the premise that man’s aim in life is mainly his material welfare.by
paying zakat,by productive work and by being assured of future security and a decent
standard of living,the indivisual acquires the feeling of security and peace of mind.

The institution of Zakat provides a mechanism by which resources belonging to a community


are distributed among the needy so that each and every individual can be assured of a
minimum standard of living. This does not imply that the unfortunate members of the society
must always rely on the Zakat fund indefinitely. Islam imposes upon every able Muslim to
work for his livelihood. Zakat transfers are only to supplement the incomes of the poor in
order to satisfy the minimum requirements for a decent life.

For a deeper understanding with regard to the objectives of Zakat, in light of the present
economic situation, part of the Zakat transfers could be earmarked for recipients to participate
directly and actively in productive economic activities relevant to their capacities. This helps
create self-employment and independence. This strategy will not only help transform present
Zakat recipients into Zakat contributors over time but also will have a positive multiplier
effect on the economy.

Zakat and Development:

The term “giving Zakat ” means

a) making available to all human beings the provisions of growth and development by
providing equal opportunity within its jurisdiction and

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b) purifying a corrupt economic system. This is in contrast to the present situation where the
governments “ take away (a ritual) Zakat ” instead of “giving (the Quranic) Zakat ” to the
people as instructed by Allah.

In the first place, the duty imposed by Allah for “giving Zakat ,” i.e. making available the
provisions of growth and development, cannot be fulfilled unless the Quranic government has
the capability to discharge this responsibility. The needs of the people determines how much
Zakat is taken. Zakat is not a special religious tax or levy that is different from the
government tax. In a Quranic state it is not possible for some people to hoard material
possessions beyond their needs and indulge in excesses, while the rest are deprived of the
basic means and provisions of life. The Quran explains the justification for this.

i. The Earth is the source of all the provisions of life. Like water, air and light, the Earth has
been created by Allah for the benefit of all . Therefore, no one has the right to own it except
Allah. We humans, are only the trustees and beneficiaries. We are not owners., the claim of
ownership of any part of the Earth by human beings is shirk in the sight of Allah.

ii. In this system, individuals cannot hold onto surplus wealth.

Quran says,

“ O Rasool! your companions ask you about the use of those things which benumb the human
intellect e.g. wine etc. and about easily acquired money. These things are beneficial to some
degree but the damage they do is far in excess of the benefit. They also ask you as to how
much they should spare for the help of others. Say: all that is surplus to your needs” (7/199).

iii. Surplus wealth should go to the treasury ( Baitul Maal ) of the Islamic government, as was
the case during the time of the rightly-guided Khalifas. Therefore, in this system, there is no
question of individual, or group investment.

iv. This system will provide all the basic needs of life like housing, hospitalization, and
education. No one will need to borrow money with interest for the above; no one will have
surplus money to invest with interest.

v. The question of individual business for profit also does not arise in this system. Shops will
be cooperative distribution centers, not sources of individual profit. Those who run the
centers will receive compensation for their efforts.

Paying Zakat to the poor and the needy increase their ability to produce .Infact ,zakat is
meant to help the poor and have-nots stand on their own feet and sustain themselves.When a
destitute receives an amount of money ,enough to sustain him and his dependents for one
whole year;he is infact getting a small capital which,if well utilized,would contribute to the
productive system and even add to it.The views of imam nawawi cited in his book Al-
Majmou

“it is reported that if a person eligible to zakat has a profession,he should be given an amount
enough to enable him to resume practicing his profession and to buy the necessary machinery
and accessories, irrespective whether this amount is relatively small or big.it should be
enough to yield a profit that suffices to sustain him.this amount naturally differs according to
the different professions and vocations,countries,times and persons….some jurists in course
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of assessing this amount ,designated to each profession what it may require of capital
goods.they classified the grocers,the jewelers,the general merchants,the bakers,the money-
changers etc.and assigned an approximate amount to be given to each of them.If the zakat
receiver is a farmer ,he should be given an amount enough to buy him a farm that would
suffice to sustain him on a permanent basis”

Zakat paid to the bona fide insolvent businessman to meet his debts is a boost to productivity
and a direct contribution to the productive system.It is obvious that to pay the debts of the
insolvent from zakat means helping the creditors to continue their productive process without
the disturbance and agony usually accompanying the uncertainty of reimbursing their debts.In
practice,the receiver of zakat would be getting a gratification or a free capital to help him
overcome his critical business financial crisis and stay in the market.Zakat here plays the role
of “insurance” that hedges against unapprehended risks and unexpected losses.Such a system
would be a great stabilizer to the productive process in any economy.

Zakat and Poverty Eradication:

Poverty:

Poverty is relative and differs according to the conditions in societies.However there are
different levels of poor persons,those who have a little and those who have nothing.

Muslim scholars include in the “need” of poor person items like clothing,lodging and
domestic animal to carry him and his belongings ,a servant if his status justifies that.

Poverty and Islam:

Concern for poor and the destitute is the hallmark of Islamic economic agenda.In this respect
zakah constitutes the most prominent and basic institution that addresses the needs of all
those who are poor and needy, in this form the permanently working social and economic
system.

The Islamic approach is unique is that it defines the targets as well as provides the modest
operandi for these goals.For instance,quran lays down very clearly that wealth should not
circulate only among the rich of the society.This statement is then followed not merely by
persuading indivisual but by concrete actions that ensure wider distribution of wealth and
assets.

Another important aspect of Islam’s vision of poverty is that it just an economic state which
does not at all decide the social status and previleges of a person.Poverty does not constitute
the basis of social stratification.In Islam ,the social recognition of indivisual has nothing to do
with ones wealth ;it is rather linked with his or her moral behavior stemming from Allah-
conciousness and as manifested in ones practice of tenets of Islam and the contribution one
makes for the welfare of society.

Role of zakat in combating Poverty:

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Zakat stands on a clear Islamic philosophy that the real owner of wealth is god ,and that
human beings are not only interested to make use of that wealth which they earned.

The Quran says “And spend(in charity)out of the (substance)whereof He has made your
heirs[57:7]

Islam ordains certain regulations for expending ones wealth considering the welfare of the
whole society.All humans are Allah’s creation and He is their sustainer ,and this is why He
instructs the believers to takecare of needy and beggers.Within this general outlook zakah has
been made mandatory to eliminate poverty.

Since the major expenditure of zakat is on the indigent ,it realizes the policy recommended in
contemporary studies that for the elliviation of poverty”every country needs an adequate
social safety net to catch those whom markets exclude”because of its fixed and recurrent
nature zakat allows the government to make a long term strategy in combating poverty.In
spending zakat priority should be given to the poor in same region from which it has been
collected.This creates a healthy feeling of solidarity between the rich and the poor of that
region.

Zakat and Investment:

Zakat levies may have two opposite effects on private savings and investment. An annual
Zakat levy on net savings (or net wealth) above the Nisab limit is likely to strengthen the
propensity to consume. An individual saver may derive greater satisfaction from avoid the
yearly Zakat levy which threatens to eat away his net savings. Thus the consumption function
has an upward shift. But it may produce an entirely different reaction in him. In order to
protect his wealth from gradual erosion, he may turn his idle wealth into active real or
financial resources. His willingness to invest may be intensified. Both these tendencies
would, in the ultimate analysis, cause an upward shift in the demand for goods and services
produced in the economy. Hoarded wealth would be turned into an active agent of demand,
while investment would increase in response to, and almost in proportionate measure to, the
power of Zakat to erode idle resources. Increased demand for consumer and capital goods
would contribute to greater production.

Considered from another angle, the power of Zakat to erode idle wealth, and its punitive
imposition on hoarded precious metals, would tend to increase the supply of savings (in an
economic sense) in comparison to its demand.

Investment of Zakat Funds:

The most important aspect of the matter is the mode of disbursement of Zakat funds. The
simplest method is to expend these funds through transfer payments to those entitled to
receive them. But a deeper understanding of the objectives of Zakat, in the light of modern
economic analysis, makes its utilization possible in such a manner as to produce a cumulative
effect on poverty and as an instrument of active fiscal policy designed to promote the welfare
function of public expenditure. These funds or a part thereof may be earmarked for
productive investment intended for the benefit of eligible recipients in firms or industries
owned by them. Such investments may be dovetailed with overall investment priorities of the
economy. Thus these funds would serve two purposes at the same time. on the one hand, they
would minimize the non-investment or consumption expenditure arising out of substantial
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and regular transfer payments of Zakat in an economy. Since the marginal propensity to
consume at low levels of income is not usually more than unity, and since in a developing
economy it is fairly high all round, the two would together further depress the ratio of savings
to GNP. While at high levels of employment the upward shift of the consumption function
may be desirable in certain conditions, the developing economies are confronted with an
unusually low ratio of savings to current incomes and would very much like to restrict
consumption. If Zakat funds flow into investment channels, it would reduce its negative
effects on savings and add to gross national product. On the other hand, investment-oriented
disbursement of these funds would have a cumulative effect on poverty.

A certain amount of Zakat funds, invested according to the overall production priorities of an
economy, would benefit the poor, in particular, and the economy, in general, through its
multiplier effect on employment and incomes. Let us for the sake of illustration; assume that
Rs.100 is spent as transfer payments in one year. If the marginal propensity to consume is 1,
which is most likely to be the case for people below the poverty line, all amounts would be
expended on the purchase of consumer goods. To resources would thus be lost forever in so
far as the recipients are concerned, with the exception of such cases, and such parts thereof,
as spent on the improvement of the productive efficiency of the spender, economy may
benefit in so far as the additional demand for consumer goods increases production and
employment. The resultant multiplier effect however is likely to be low on account of the
strong probability to such funds would, for the most part, be spent on non-durable consumer
goods. If however, the same amount was invested in productive active a regular flow of
income would accrue to the recipients, while the say amount would not only remain intact but
may progressively increase depending upon the rate of profit and the immediate expenditure
needs the recipients. At the same time assuming income multiplier equal to which is the value
usually assigned to it in the developing economies, said amount would benefit the economy
three times its original value.

Zakat and Social security system:


Zakat is the cornerstone of Islam’s social security system. The bulk of the financing needed
for assuring at least a basic minimum standard of living for all citizens which is the objective
of the system, is expected to come from zakah proceeds. However, in case proceeds from
zakah do not suffice for the purpose, these have to be supplemented from the general
budgetary resources to the extent considered necessary. A basic principle of public finance in
Islam is that where as the proceeds from zakah cannot be spent for the purposes other than
those specified in the Quran. There is no restriction on the transfer of resources from the
general budget to the welfare budget for the augmentation of the social security fund.

Islam social security system is meant to be a highly personalized system in which individual
needs are addressed in accordance with the nature and intensity of these needs. The poor who
are eligible to receive Zakat are either incapacitated so that they cannot earn their living or
unemployed and do not find work. In the first case zakat functions as a “social security”
organization, where the poor are provided with the means of living and shielded by zakat
against deprivation and lack of necessities of life.

By giving such unproductive handicapped persons enough money to spend and to live
decently, zakat is not only raising their standard of living, but we are also activating the
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economy by such spending. To spend more, means to buy more, to sell more, and to increase
profits, production and employment.

On the other hand the unemployed needy person is eligible to receive zakat in the absence of
any other source of income, such as social security and poverty subsidies. In an Islamic
system every individual has the right to work, and it is the duty of state to secure for him the
opportunity to work. If the unemployed person refuses to work; he or she would then forfeit
his or her right in zakat.

Zakat is supposed to maintain the person and his dependants for one year. It is recommended
that it would be paid in full and in advance. The reason behind this recommendation is to give
the person a chance to start his own private business if he so prefers. The criterion here is that
the unemployed must be provided with the “original or basic needs”, Necessary for the
modest decent life.

Whether the unemployed who receive zakat would use it in starting a new business or in
meeting the expenses of their everyday life, consumption would always be increased by the
counter value of zakat. The value would go to obtain either capital goods for further
production or mere consumable goods. The impact of such spending is of special importance
as it keeps the trend of supply almost ineffective by the magnitude of unemployment. It is
common knowledge that one of the most aggravating factors in economic recessions is the
curtailed purchasing power caused by unemployment.

Ethical and Spiritual Impacts:


The spiritual aspect is referred to in the holy Quran in the verse:

"Take (O Prophet) from the wealth Sadaqat (Zakat) to cleanse and to elevate them (the
Muslims)."

This spiritual element is emphasized in many other verses where it is represented as a loan
given to Allah to be repaid many times over.

Al-Ghazali ,in his treatise Ihya ‘ Ulum al-Din has outlined eight inward attitudes and duties
that are incumbent on those who seek, through payment of their alms ,the way that leads to
the Hereafter. These include

(1) Understand the purpose and significance of zakah,


(2) Payment at proper time.
(3) Give in secret.
(4) Give openly.
(5) Avoid taunting and hurting.
(6) Adopt humility.
(7) Give the best and the dearest.
(8) Seek the worthy and deserving.

Zakah, according to al-Ghazali, is a measure to test our degree of love to Allah. Al-
Quran considers possession of wealth a trying test, and not a token of virtuous

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Excellence or privileged nobility or a means of exploitation

Al-Ghazali argued that:

“ Our property which is very dear to us, is God’s trust deposited with us.
Therefore, it is necessary that they should be sacrificed in His cause, and
they should be utilized for seeking His pleasure. If you suffer a loss in
them, you should not start crying and wailing and you should not
consider that it was your personal property that has been taken away
from you, because compared to you Allah is the more rightful owner and
He has the right to use it in any way He likes. If you are tested by an
increase in them, then you should not hesitate to undertake jihad when
called upon to do so, and you should not turn away from obedience to
Allah on account of them”

In Islam, the real owner of wealth is God alone and the proprietor is simply an
appointed agent and a mere trustee In explaining the concept of
trust, al-Ghazali mentioned that in the eyes of Shariah, trust has a very
broad sense. This word contains an ocean of meaning, but underneath it is the sense of
responsibility, the sense of having to appear before Allah and to account for one’s
actions. The details regarding the concept of amanah (trust and responsibility) in Islam
as provided by the hadith:

“ Everyone of you is a guardian and everyone will be asked about his


subjects. The Imam is a guardian. He will be asked about his subjects. A
man is the guardian of the persons in his household. He is answerable
about them. A woman is the guardian of her husband’s house. She will be
asked about her responsibility. The servant is the guardian of the articles of
his master. He is answerable about this responsibility of his” (al-Bukhari)

Zakah is also considered as an expression of gratitude to God’s bounties. Zakah


payment should be done once it becomes due and should not be procrastinated. The best
is that we perform the duty secretly, unless we want others to follow suit our good
deeds. Most importantly, we should not feel arrogant and we should not hurt the
feelings of the recipient. In terms of giving the best and the dearest, we can apply this in
the context of how we perceived wealth and money.

Proprietors are constantly reminded of the fact that they are in reality mere agents
appointed by God to administer their holdings. However, Islam did not prevent the
Muslims from attaining wealth and endeavoring for material improvements through
lawful means.
In terms of distributing zakah, we must ensure that the most worthy and deserving
in the society will benefit from our duty fulfillment. Accordingly, Abdalati
emphasized that the proprietor must always be ready to spend in the way of God
and to contribute to worthy causes. It makes him responsive to the needs of the society
and gives him an important role to play, a sacred mission to fulfill.
In the case of taxation, the element of reluctance and rancor is underlying. This is
so because tax payer is not moved by the conviction that the levy is from Allah, who
will then recompensate him for it.Even in the so-called advanced
societies where the role of taxation in the modern-day state is very well understood,
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there is a perennial conflict of interests between the tax giver and the recipient. The
question ‘Why should I support social programs?’ continues popping up in different
forms and debates”

To pay Zakat is a cleansing process for the wealth and its owner. Allah not only promises
reward in the hereafter but also to bless an enterprise so that it becomes more profitable; The
terms itself indicates both purity and growth. The material element is manifest in its role as an
important factor in social justice and peace. Because the poor and needy are guaranteed a
share in the wealth of the wealthy, It helps to harmonise the relationship between the haves
and the have not thus reducing the chances of social disorder and the loss to the community
of any proper participation by the poorer section.

Conclusion:

The concept of tawhid implies that the ultimate ownership of everything belongs to allah and
people hold these things in trust.When man is not absolute owner but a trustee then he must
spend his wealth (under the trust) according to the commands of Allah,the real owner and he
is compensated accordingly,this makes muslim to spend more and more in the name of
Allah.this inturn leads to improvements in economic and social conditions of a society as
explained above.

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As discussed above,zakat causes redistribution of income and wealth,which results in increase in
purchasing power of poor and eradication of poverty.This increases the demand for good and
services which inturn leads to increase in investment and production creating employment and
balance in society.

In short,although zakat is significant at each of this level yet this cycle ultimately leads to welfare
of society solving the major issues of poverty,hunger,starvation and injustice.

The term paper emphasized on need for a pure and efficient zakat institution which can ensure
proper collection and distribution.In the end the discussion of ethical and spirtual impact of zakat
is made to throw light on the fact that zakat is not only the solution to economic problems, but it
also leads to ethical and spiritual development.Thus,the institution of zakat when fully operational
would become a fountain of economic harmony and contentment.

BIBLIOGRAPHY:

1 ) Zakat and its economic impact ,by:Zafar Sareshwala

2) A Comparative Study of Zakah and Modern Taxation


by:Nur Barizah Abu Bakar and Abdul Rahim Abdul Rahman

3)Zakat Organization and poverty Alliviation ,By Supardi2


4) Zakat - A New Source of Development Finance,by Dr. Zaki Badawi
5)Contemporary zakat by mahmoud Abu-Saud

6)Poverty Alleviation in Pakistan by Mohibul Haq Sahibzada

7)Islam ,poverty and income distribution by Ziauddin Ahmed


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8)Islam and economic Development by M.umer chapra

9)Public Finance In Islam by S.A.Siddiqui

E-sources:

10)islam.com

11)al-islami.com

12)jstor.org

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