The obligation of Zakat comprises one of the five pillars of Islam. It is an act of worship and like any other act of worship it is solely for Allah. It ranks in importance immediately after the prescribed prayer. It is levied on defined properties and its scope is quite extensive. It covers almost all forms of wealth and some forms of income as well as savings.
Zakat occupies a central role in Islamic fiscal policy and operations. At the same time it does not preclude the use of modern techniques in raising revenues for the state. In fact Islam provides its own comprehensive approach apart from Zakat as to how the state can raise its revenue in line with its pattern of expenditure. Islam requires Zakat to be collected from qualified contributers payers regardless of whether there are Zakat recipients or not. It is an obligation. At the same time it is compulsory for it to disbursed according to Islamic principles. Other sources of revenue namely taxes, borrowings etc. will depend on a country’s requirements.
The collection and disbursement of Zakat have some economic implications. They may be discussed as follows:
i. Savings and Investment
Through the imposition and collection of Zakat, idle private savings above an individual’s level of nisab (the minimum exemption level) will be reduced, if not completely eliminated. The Zakat levied will eat away their net savings unless they channel them into productive investments which earn income. This punitive nature of Zakat, although at a low rate of 2.5% of one’s wealth, would encourage one to invest. Thus, by imposing a penalty for keeping resources idle, the zakat helps push resources into productive sectors which earn income for individuals and his community.
According to a study, by virtue of the fact that the amount of nisab is small, one who does not utilize his wealth in production and keeps it idle will lose one-fourth of his wealth in less than twelve years. The Prophet realized this consequence and had urged those responsible for the management of wealth belonging to orphans to invest that money so that it would not suffer gradual erosion. This request of the Prophet teaches the Muslims to make Zakat payments form the earnings generated form one’s wealth rather than from idle wealth itself.In the absence of usury-yielding assets in an Islamic system, the effect of Zakat could be lower than the expectation of returns compared to investment. The reduced profit expectations are likely to induce the deployment of private capital in areas where currently only the public sector is obliged to venture. This will result in the expansion of private participation into the economic activities monopolized by the public sector; thereby promoting greater public-private sector cooperation in the development of the country.
ii. Equitable Distribution of Income and Wealth, and Employment
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.
iii. Consumption Level
The consumption level of a community will be enhanced with the equitable distribution of income and wealth among members of the community since the marginal propensity to consume among the lower income level is higher than the upper income level. The positive change in status from Zakat recipients to that of Zakat contributors would boost domestic aggregate demand.
If the obligation of Zakat is implemented in its comprehensive form, it will not only result in the spiritual upliftment of the members of the community but will also be able to contribute positively to the economic development of that community. As we have seen, the impact on the economy is far-reaching since the Zakat base is broad. The inducement to mobilize idle savings and invest in productive activities could be widespread and encompassing, so that the economy of a country would move and accelerate on its own accord. The benefit to that society and country would be enormous.
This impact could also positively affect a multi religious society like Malaysia, though only the Muslims would have to participate in the Zakat scheme. Unfortunately Muslim societies throughout the world, including Malaysia, currently do not have the legal and institutional framework upon which a comprehensive Islamic fiscal policy based on the institution of Zakat could operate.