Estimation of potential Zakat in OIC

Salman Ahmed Shaikh and Qazi Masood Ahmad

As per the World Bank, an estimated 767 million people were living below the
international poverty line of $1.90 per person per day in 2013.
There has been an unprecedented change in income inequality between the poor and
the rich people during the last half century.
The 62 richest billionaires own as much wealth as the poorer half of the world’s
population (Oxfam).
One in every four people in Africa goes to bed hungry every night (Food and
Agriculture Organization).
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Famine was not caused by a lack of resources (Sen, 1983). The world has enough
resources to feed everyone, but the resources are not equally distributed.
The world agriculture produces 17% more calories per person today than it did
30 years ago, despite a 70% increase in the population (Pingali, 2002).
Inequality in wealth distribution is often a result of income differences arising due to
differences in risk tolerance, work effort, productivity and human capital to name a
few factors.
The level of inequality has increased tremendously in post-WWII period (Piketty, 2014)
The developed world needs to find answers for egalitarian distribution of income.
The developing world has to achieve both a decline in poverty as well as
egalitarian distribution of income.

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Most of the Organization of Islamic Cooperation (OIC) countries are generally poorer
than the other countries on average.
Most of the poverty resides in Africa and Asia and the bulk of the OIC countries
are located in these continents.
Half of the global poverty resides in the Muslim world while the Muslim
population is 24% of the total global population.
Due to widespread poverty and weak governments, most of the OIC countries are
behind in spending on schooling and health services.
Hence, the level of human capital, productivity and national income remain at
lower levels.

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It was estimated the resources required for poverty elimination 1% of GDP for poverty
elimination under $1.25 a day and needs 6.77% of the GDP for poverty elimination
under $2 a day in Pakistan (Shirazi and Amin, 2009).
Zakat distribution has a positive, but small impact on aggregate consumption in
Malaysia (Suprayitno et al., 2013). Hence, Zakat distribution should not be limited to
the consumption needs, but should also cover other forms of monetary aid that can
generate a continuous flow of income for Zakat recipients.
Zakat along with educational attainment significantly reduced poverty in Sudan
(Abdelmawla, 2014).
Most OIC countries where official the Zakat collection is very low does not make a
convincing case for poverty alleviation.

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About 73% of the estimated potential the Zakat collection will be needed annually to
change the status of households to the status of non-poor households in Malaysia
(Sadeq, 1996).

To achieve such diverse contemporary needs, the institution of Zakat is dynamic and
flexible. Policymaker in a modern economy can use this institution flexibly to maximize
the welfare benefits of the Zakat system.
During the Umer (rta) and Abu Bakar (rta) period of government, Zakat was
collected by the government. But, in the Usman (rta) period, people were allowed
to pay Zakat privately (Kuran, 2003).
Horses were exempted from Zakat in the Prophet’s time, but, Umer (rta) rought
them in the Zakat net in his period.
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 Umer (rta) levied Zakat on horses and skins and at the time when Arabian
Peninsula was hit with a drought and famine, he exempted the poor from
Zakat and suspended Zakat from the rich.
Usman (rta) also levied Zakat on the production in forests which was not the
case in the earlier period
Two main factors contributing to dissatisfaction of the distribution of Zakat funds:
i) The ineffectiveness of Zakat distribution and the lack of transparency on
information about the distribution of Zakat.
It is due to the perceived lack of efficiency and effectiveness may directly
undermine the Zakat institutions in attaining their desired socioeconomic
objectives.

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 Zakat governance measures, i.e. the promulgation of Islamic accounting
standard, and structural and policy reform towards more effective Zakat
distribution.
ii) The mainstream Islamic scholarship allows taxes to be levied other than Zakat
for mobilizing public finance, mainly because Zakat is a religious obligation and
is not a substitute for tax.
Taxes other than Zakat can be imposed in an Islamic economy if these taxes are levied
by the legislative council and used for public welfare (Siddiqui, 1978; Shaik, 1979). He
The taxes discouraged in Ahadith are those which were imposed by the autocratic
kings for their own lavish consumption and this kind of usurpation of public property
was discouraged in Islam.
The general directives of the Qur’an do not restrict the application of Zakat to certain
types of wealth to the exclusion of others (Haneef and Mahmud, 2012).
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 Wealth or assets subject to Zakat should include cash in hand or at bank, gold and
silver, held-for trade inventory, real estate purchased for the purpose of resale
and all types of financial investments in stocks, bonds, debentures, national
saving schemes and mutual funds.
Production is not limited to agriculture nowadays. The major part of production
comes from industries as well as the services sector.
Any types of investment with some means of earning income should pay Zakat.
Investment in a stock is a means of earning dividend income or capital gains.
Just like means of production/income are exempted from Zakat,
investment in stocks should be exempted from wealth Zakat.
Any income arising from investment in stocks must be subject to
income Zakat.
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 A real estate if it is leased, the real estate becomes the means of earning
rent for the owner. Hence, income Zakat could also be introduced on rental
income.

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“ZGDP” : Zakat to GDP ratio.
“PGI” : Poverty Gap Index value (the average measure of the expenditure gap of
each poor population against the poverty line).
The decrease in the value of the PGI) indicates that the average expenditure of
the poor tends to be closer to the poverty line and the expenditure inequality of
the poor is also narrowing.
“PHCR” : Poverty Head Count Ratio (the percentage of the population living below
the national poverty lines.)
“yp” : income at poverty line in current $.
“N” : total number of people in the country.
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From table 10.3, if the potential Zakat collection is collected and disbursed effectively,
the poverty gap can be funded even in the first round. Furthermore, it targets the poor
and ultra-poor specifically and achieves the redistribution directly.
Poor are people who earn below than USD 1.9 per capita per day
Ultra poor are a group of people who eat below 80% of their energy requirements
despite spending at least 80% of income on food.
From table 10.4, the institution of Zakat can provide a stable source of public revenue
that can be spent on public welfare directly by a transfer of monetary and
nonmonetary assets along with provision of health and educational services through
establishing welfare institutions from the Zakat fund.
This ensures socioeconomic mobility and contributes towards egalitarian income
distribution.
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Table 10.7 presents the number of people that can be lifted out of poverty with
realization of potential collectible Zakat.
In most countries, the value is greater than 1 and which suggests that if the potential
Zakat collectible is indeed collected by the government and disbursed through direct
transfers, these poor people can be adequately helped.
It is necessary that the poor people are provided with this transfer payment for a
necessary number of periods so that they can survive as well as permanently move to
the status of non-poor.
The public sector educational and health institutions need to provide effective and
affordable services so that the income earning capacity of these poor people can be
enhanced along with ensuring their survival and meeting the basic physiological needs
of life.
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Table 10.8, in most counts of poverty, the aggregate resources pooled together from
the potential Zakat collection will be enough to fund resources for poverty alleviation.
Hence, there is an important role to be played by OIC to collaborate with member
countries and transfer necessary resources from the Zakat surplus regions to the Zakat
deficit regions.

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Conclusion and recommendations
The aggregate resources pooled together from the potential Zakat collection in 17 OIC
countries will be enough to fund resources for poverty alleviation.
OIC can collaborate with member countries to transfer necessary resources from the
Zakat surplus regions to the Zakat deficit regions.
• It is necessary that the poor people are provided with Zakat as a transfer payment
for a necessary number of periods so that they can survive as well as permanently
move to the status of non-poor.
• It is highly important that the scale and efficiency of public sector institutions in
health and education are improved and poor people are provided with education,
vocational training and basic health facilities at an affordable cost.

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 o The institution of Waqf (charitable trust) can also be very effective in helping
the government to increase its scale of welfare programs and outreach.
o Social mobility rests on effective income and capacity enhancing support
programs rather than just on direct cash transfers.
• The close interaction between the Zakat disbursement agency and the Islamic
microfinance institutions is also vital. Microfinance institutions can help in
identifying targets that require immediate help in meeting consumption
expenditure requirements.
• For effective organization and with the objective of maximizing the benefits of
Zakat, it is appropriate to disburse Zakat at the federal level. This way the regional
disparities can be reduced more effectively.

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 • To gain the trust and confidence of people, it is vital to improve the governance
and transparency. Collection and disbursement details shall be reported in a
standard way periodically.
• Creating synergies between Zakat and other welfare programs. Sufficient
collection of Zakat for filling poverty gap is not enough to end poverty. It is
important that Zakat funds be disbursed to the right people and through right
channels. It is also important to utilize the existing welfare programs for Zakat
disbursement so that the right targets can be reached more efficiently.
• It is important to modify the accounting standards to achieve transparent
computation, assessment and collection.
• It is vital to improve the capacity of the public sector officials to scrutinize
accounts for transparent and efficient Zakat assessment.

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 • Pooling resources by transferring surplus Zakat funds from the rich countries to
the poor countries with lower wealth bases will help in alleviating poverty quickly
(Shirazi & Amin, 2009).
• Timing for wealth Zakat is especially important. It is better to have equal number
of people paying Zakat every quarter rather than all paying at a single time of the
year. This will help in reducing any possible arbitrage and enable the government
to have Zakat funds available at all times of the year.
• In direct transfers, it is vital to give enough Zakat per person so that the person
can come out of poverty and the objective of social mobility can be achieved
(Haneef & Mahmud, 2012).
• While there is Zakat on assets in personal use, the government in consultation
with Islamic scholars has to legislate what comprises regular and ordinary cost of
living per person for different income groups.
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 • While the government shall not intervene in restraining consumption; at the
same time, it shall also not allow people to avoid Zakat by maintaining an extra
ordinary living standard.

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