Poverty’s Bane: On Zakat as a Developmental Funding Source

Zakat – the Islamic obligation of alms giving – is said to have once eradicated absolute poverty under the rule of the caliph Umar bin Abdul Aziz. Centuries later, with the swelling Muslim populace, perhaps Zakat once again offers the potential for mass poverty reduction. This article will explore the potential of Zakat as a source of development funds. This will be examined in light of bridging financing gaps in the developing world. Obstacles that curtail Zakat’s efficacy will also be


Issues in funding development

The contemporary potential of Zakat is highlighted through the emphasised principle of local usage of Zakat funds; Islamic scholarship stipulates that the worthiest use of Zakat funds is within a local area. Interestingly, a recurring theme from every single past International Conference on Financing Development has been the mobilisation of domestic savings.

The need for bridging the massive financing gap in development was first highlighted in Monterrey in the 1st International Conference on Financing Development (UN, 2000, p2). This conference stressed the need for mobilisation of domestic resources, particularly savings (UN, 2000, p3). The Doha Declaration on Financing for Development in 2008 reaffirmed Monterrey, but added that a sound and wide-reaching financing system was needed to aid domestic mobilisation, alongside an appreciation of the specificities of each country. In July 2015, the Third International Conference on Financing for Development reiterated the past two conferences, with an added emphasis on specifically allocating more resources to the poor (UN, 2015, p8). Certainly, these conferences had conventional finance systems in mind rather than Zakat, especially given the substantial body of literature detailing the relationship between finance and development.


Zakat as a potential source of development funds

Zakat seems to be a striking answer to the concerns mentioned in the conferences on financing development. As mentioned earlier, Islamic scholarship states that Zakat is to be prioritised locally, answering the recurrent theme of mobilising domestic savings in all three conferences. Recall also that according to the Hanafi School of jurisprudence, Zakat funds are given to those who have net assets below the Nisaab level, which addresses the call of prioritising resources for the poor mentioned in Monterrey. The opinion of the other three schools of thought would also be pertinent in this regard as they still give priority to whoever needs it most.

Moreover, Zakat is potentially wide reaching; its potential reach is theoretically wherever there are Muslim communities, because upon those Muslims is the obligation to pay Zakat. Given that it is not compulsory to distribute Zakat via an administrator, an individual can donate Zakat funds to any local need which they have specific and personal knowledge of. Potentially, this could overcome any gaps in distribution of Zakat that, say, a charity or distribution agency might miss. For example, an individual may have a friend who lives in a distant setting that is cut off from infrastructure, inhibiting any charities or NGOs from reaching them. By means of personal information, the individual could donate Zakat in such a circumstance, hence benefitting those who have been missed by wider authorities.

The personal knowledge that would accompany a localised distribution of Zakat is indeed a powerful thing; Friedrich Hayek, Keynes’ intellectual rival, argued in defence of decentralised pricing, that individuals are best placed to spend their own money and make their own decisions. He argues this based upon an individual having access to ‘knowledge of the particular circumstances of time and place’. Such knowledge, Hayek contends, is unquantifiable and inexpressible to other parties. It follows that the State, when compared to the individual, would therefore have far less information to make a decision with. As such, the individual is best placed to make their own decisions (Hayek, 1945, p521). Apply this logic to Zakat; an individual could potentially have superior knowledge of where best to use Zakat in a locality, as compared international charities and NGOs. Although Hayek’s argument is not without its flaws, the broad notion of localised distribution of Zakat bettering it’s poverty alleviation capabilities by virtue of local information is a salient point.

Hence theoretically Zakat is both wide-reaching and can tend to specificities of a community, two themes emerging out of the Doha Declaration.


Obstacles to overcome

Theoretically at least, Zakat has promise as a mechanism of poverty alleviation. However, there are number of obstacles that need be addressed.

Firstly, Zakat would only be effective in a localised setting if there are some affluent Muslims who would have a considerable sum of Zakat to pay. If there are people who are not eligible to pay, or are only required to pay a small amount due to their own relative poverty, then there simply would not be sufficient funds to mobilise for developmental purposes. Moreover, Durlauf (1994) states that poverty can intensify by local spillover effects, creating ghettos. In Economics, spillover effects (or externalities) is a term used to describe the impact of a transaction upon the third party i.e. those not involved in the transaction. In the case of poverty, various sociological studies document a higher prevalence of social and economic difficulties in subsequent generations in areas with higher poverty rates; poverty is propagated intergenerationally through spillover effects. Hence poverty typically occurs in clusters. In this light, within a locality, it would be unlikely for affluent Muslims to live side by side with poorer Muslims. By implication, poorer areas would not have a large pool of Zakat funds. Consequently, the advantages of localised distribution outlined above would not easily materialise.

Moreover, although scholars state that Zakat is best used locally, this is a point that is not well known among Muslim communities. To some extent, this inhibits the potential mobilisation of domestic savings. However, this is an issue of miseducation among Muslims rather than a conceptual problem with Zakat. This issue can be resolved with increased education surrounding Zakat. To this end, charities such as 1st Ethical and the National Zakat Foundation carry out education seminars on Zakat (see links below). This criticism alludes to an unfortunate theme of general mismanagement and ignorance about Zakat.




Concluding remarks

Zakat can theoretically provide a funding source for developmental purposes in poorer communities, in a manner which synergises with the International Conferences on Funding Development. However, vicious cycles of poverty constrain the potential of Zakat, as well as general miseducation around the distribution of Zakat. Perhaps then, there international Muslim communities to focus charitable funds upon capacity building in poorer communities, in order to break poverty cycles. Muslim governments could also sharpen their Zakat distribution schemes. In any case, the Muslim community certainly has a powerful tool in its hands; but with a shortage of strategic and analytical thinking around Zakat, it has yet to reach fulfil it’s potential as a poverty alleviator.

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