The Institution of Zakat and Its

Impacts on Society

By: Najeeba Ali

International Islamic University Islamabad

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Contents:

IntroductionZakatImportance of ZakatObjectives of ZakatSources of ZakatObligatory ZakatDisbursement of ZakatImpacts of Zakat on SocietyEconomic JusticeEconomic impact of ZakatZakat and Income DistributionZakat and DevelopmentZakat and Poverty EradicationZakat and InvestmentZakat and Social Security SystemEthical and Spirtual ImpactsConclusionBibliography

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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 fromThose 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 Quranemphasises ‘Zakat’ as a critical component of socio economic justice. The institutionworks to ensure an equitable distribution of wealth and establishes a safety net for needymembers of society. Both the sources and disbursement categories of Zakat are specifiedin Islamic doctrine. The Quran identifies eight categories of disbursement, each of whichcarries clear social benefit.One positive economic effect of Zakat is an increase in the money supply and aconsequent increase in the demand for goods and services.It also provides debt relief and enhances price stability. If accumulated in times ofprosperity, Zakat funds can aid society through times of depression. Though Zakat haswidely fallen out of use in modern times (except a ritual) it can have great economicimpact if properly re established.Like freedom from interest, Zakat is also an integral part of Islamic economic systemssince Zakat is derived from the Shari’ah. Here are some brief features of theeconomic impact of Zakat on society within the framework of the Quranic perspective ofeconomic 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

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zakat payer from the bounty of Allah in his possession .Allah ordained where the dues are to be distributed.

2) Purifying self and wealth: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 worthabove nisab (the poverty line) as well as a certain percentage of the net output ofAgricultural 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 todaymay be a necessity in USA, it may be a luxury in a country like Sudan orIndia. Similarly, a horse used as a means of transportation, and therefore a necessity in acountry like Afghanistan, could be considered a luxury in the upscale suburbs of SanFrancisco. 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).

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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:

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 disbursementcategories 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 areoverburdened with debts), and fee-sabeelillah (for every struggle) in God’s cause, andibn 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 zakatas 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 (theneedy) includes those people who, being underemployed or unemployed, have nomeans of support or insufficient income to meet their basic necessities of life andtherefore are indigent or live below the poverty level. This may be because they areincapacitated, disabled, orphans, sick, homeless, or of similar status.To maintain the integrity and the independence of collection and disbursement ofZakat.

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

c) Muallafat-ul-quloob:the fourth category, includes those people whose hearts are tobe 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 possibleteaching of Islam).

d)The fifth category fir-riqaab relates to both ransoming prisoners ofwar and freeing slaves.

e)The sixth category, al-gharimun, includes those people whoare overburdened with debts contracted in good faith, which – through no fault oftheir 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 welfarework.

g) the eight category ibn as-sabil (son of the road) denotes any person whois far from his/her home who, because of circumstances beyond his/her control, doesnot have sufficient means of a livelihood at his/her disposal. In its wider sense itdescribes a person who, for any reason whatsoever, is unable to return home eithertemporarily 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 toestablish Zakat is mentioned more than 100 times, usually in conjunction withSalah (prayer), as two means of purification. God commands Muslims to pay Zakat on theirtotal wealth in excess of nisab (minimum wealth), to the poor for benefit of the society’ssocial and economic welfare. The following Quranic verses, among others, emphasizethat all resources belong to God and that these resources are thus a trust (Quran 57:7) thatmust be used to satisfy the basic needs of all those who, for no fault of their own, cannotafford 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,

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“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 sufficientfor the poor. If the poor starve, or go unclad, or suffer difficulties, it is because the richhave deprived them. Hence it is proper for God, the Almighty and the Exalted, to bringthem to account and to punish them”

Because the known economic resources at a given point in time are relatively limited,establishing the Quranic perspective of economic justice and providing general well beingfor 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; and3. creating an economic safety net to assure need fulfillment of those who, for no faultof their own, cannot afford the basic necessities of life.

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

Finally, as a fiscal mechanism, zakat performs some of the major functions of modernpublic finance, which deals with social security entitlements, social assistance grants forchildcare, food subsidy, education, health care, housing, and public transportation in awelfare state. It separates public welfare expenditures from other budgetary items and putsthe burden of meeting the economic welfare needs of the society where it belongs. Unliketax levied by the government for the services provided to tax payers on a quid pro quobasis, 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 seenfrom a saying of the Prophet Muhammad that “in your wealth there is also obligationsbeyond 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 functionseffectively..

Economic Impact of Zakat:

When a certain percentage of one’s wealth is spent annually over the foregoing eightcategories as prescribed in the Quran, zakat has a significant economic impact onsociety. Income support provided to the poor and needy would result in a measuredincrease of the money supply in the economy causing upward shift in demand forgoods and services. To support this upward shift in the demand for basic necessitiesof life such as food, clothing, shelter etc., the production facilities would graduallyexpand and begin to absorb the idle capital. To support the increased production, theeconomy would generate more jobs and new employment opportunities. This addedemployment in turn would generate more demand for goods and services, more roomfor additional investments, and finally, the growth cycle based on balance

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consumption would contribute to a balance economic growth.

As explained above, fir-riqaab, the fifth category of zakat expenditures, (in addition toransoming prisoners of war), relates to the freeing of slaves. Today, obviously, humanbeings are no longer bought and sold as property. But by extrapolating the intent ofthis category, it can be safely stated that one of the basic purposes of zakat is to freehuman beings from economic slavery as well. The majority of people living in poorcountries suffer from abject economic slavery at the hands of many local landlords,loan sharks, rich industrialists, and multinational corporations that exploit naturalresources. One of the best ways to free people from economic slavery is to first givethese oppressed people temporary relief and then, for economic rehabilitation throughessential financial resources to acquire training, equipment, and material. Forexample, small businesses or privately owned “co operatives” could be created. Aregular flow of income of these entities would accrue to the recipients. Dependingupon the rate of profit and retained earnings, the value of these enterprises wouldprogressively grow. The income multiplier effect not only would benefit the economyseveral times the original investment in these enterprises, it would enable the poor toeventually become self-sufficient and free themselves from economic slavery whilecontributing to the economic stability of the society.

Expenditure on the sixth category, al-gharimun, is designed to assist those peoplewho, being overburdened with debts, are unable to fulfil their obligations. A closerunderstanding of this category would reveal that Islam does not allow bankruptcywhere creditors, whether individuals or financial institutions, eventually pass on theirbad debts to the consumers in the form of increased prices. Such increases, if notoffset by other elements of consumer price index, eventually contribute to inflation.To provide for such contingencies where debtors who contracted debts in good faithbut due to conditions beyond their control, such as sudden sickness, natural oreconomic catastrophes, cannot redeem them, expenditure of zakat for redeeming thedebts of al-gharimun not only help maintain price stability, it eliminates one of theimportant factors which contributes to inflationary cycle.

To satisfy the seventh category, fee-sabeelillah (in the cause of God), zakat fundswhen spent for education, medical care, and social welfare of those who otherwisecannot afford them or are oppressed, provide moral stability and human dignity to therecipients, essential elements in maintaining economic harmony. Likewise, byproviding 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 beingof the recipients, contributes toward their economic self-sufficiency. Over a period oftime 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 collectedand distributed. After providing for the needs of eligible kin, the zakat fund isdesigned to cover the needs of those who live in the community where zakat iscollected and then to those eligible recipients living in the county, state, country, andfinally the world at large.

Through accumulation of surplus in zakat funds during prosperous years, theinstitution of zakat provides necessary contingency funds during depressed economicconditions when zakat revenues may not be sufficient to meet the required needs ofthe society. The levy of zakat, particularly on the idle portion of an individual’s

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wealth, induces the zakat payer to seek a return on his wealth at a rate at least as highas 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.

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.

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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

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.

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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 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.

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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:

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.

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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 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

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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 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)."

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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 virtuousExcellence 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, andthey should be utilized for seeking His pleasure. If you suffer a loss inthem, you should not start crying and wailing and you should notconsider that it was your personal property that has been taken awayfrom you, because compared to you Allah is the more rightful owner andHe has the right to use it in any way He likes. If you are tested by anincrease in them, then you should not hesitate to undertake jihad whencalled upon to do so, and you should not turn away from obedience toAllah on account of them”

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

“ Everyone of you is a guardian and everyone will be asked about hissubjects. The Imam is a guardian. He will be asked about his subjects. Aman is the guardian of the persons in his household. He is answerableabout them. A woman is the guardian of her husband’s house. She will beasked about her responsibility. The servant is the guardian of the articles ofhis 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

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

Proprietors are constantly reminded of the fact that they are in reality mere agentsappointed by God to administer their holdings. However, Islam did not prevent theMuslims from attaining wealth and endeavoring for material improvements throughlawful means.In terms of distributing zakah, we must ensure that the most worthy and deservingin the society will benefit from our duty fulfillment. Accordingly, Abdalatiemphasized that the proprietor must always be ready to spend in the way of Godand to contribute to worthy causes. It makes him responsive to the needs of the societyand 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 isso because tax payer is not moved by the conviction that the levy is from Allah, whowill then recompensate him for it.Even in the so-called advancedsocieties where the role of taxation in the modern-day state is very well understood,there is a perennial conflict of interests between the tax giver and the recipient. Thequestion ‘Why should I support social programs?’ continues popping up in differentforms 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.

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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.

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.

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BIBLIOGRAPHY:

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

2) A Comparative Study of Zakah and Modern Taxationby: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

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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