banner ad

Zakat – A New Source of Development Finance

December 20, 2010 | 2

By Badawi, Zaki
Islamic Banker: News and Analysis of Islamic Banking, Finance and Insurance, Issue: 4, March 1996, 18-19

Contrary to popular perception, Zakat, the annual levy payable on the wealth of Muslims, is not merely a charitable donation to the poor and needy. But as f0r Zaki Badawi, Shariah Consultant to Islamic Banker, stresses, the institution of Zakat should be used to finance development projects to alleviate poverty – an aim which demands greater transparency in the collection and disbursement of Zakat

Zakat is one of the five pillars of Islam. It has two essential aspects, one spiritual and the other material. The spiritual aspect is referred to in the Holy Quran in the verse “Take (O Prophet) from the wealth Sadakat (Zakat) to cleanse and to elevate them (the Muslims).” This spiritual element is emphasised in many other verses where it is represented as a loan given to Allah to be repaid many times over.

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 term 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-nots, thus reducing the chances of social disorder and the loss to the community of any proper participation by the poorer sec­tion. If a social system is measured by its care of the weak and the needy, then Islam passes the test with honours.

Now, the question is how should Zakat be paid? To whom? In what way, and is it the only legitimate tax? The literature has several contradictory views influenced by the direct experiences of the scholars. Some, bearing in mind the conduct of their rulers, suggest that the individual should be entrusted with its distribution, unless the ruler demands it, in which case he should only be paid Zakat of the visible assets, Zakat of the invisible assets should he entrusted to the individual.

As to whom it is to be paid, the answer is in Sura 9, Verse 60 of the Quran, which specifies the recipients as “the poor, the needy, the Zakat collector, the slaves to buy their freedom, those whose hearts you seek to win, those who have crippling debts or loss of property, the warriors and the needy traveler.” The category of war­rior is a restricted translation of the term “Fi sabilillahi”. Some understand the term to include any outlet that serves the com­munity and the Faith.

As for the way it is paid, schol­ars regarded it as funding the consumer needs of the recipient, such as food, clothing, hous­ing and even means of trans­port. Since it is levied annually, the treasurer is supposed to dispose of it shortly after collection. The use of Zakat funds for long term projects was seldom discussed by the scholars due to the nature of economic activities of their time. Some of them allowed utilisation of Zakat for building schools and mosques while others considered such projects to be outside Quranic categories.

Finally, is Zakat the only legitimate tax? Some scholars decreed that taxes addi­tional to Zakat cannot be levied on the Muslims under normal circumstances. In abnormal situations such as war, drought and shortage of supplies, the rich might be asked to pay taxes to meet the crisis. This vision is clearly based on the prevailing system of non-interventionist administra­tion.

Governments in the past undertook no systematic part in general education, agri­cultural and industrial planning or health. These and other responsibilities forced modern governments to create a large bureaucracy to manage the state and this in turn led to the imposition of taxes to fund a standing army, police force, medical services, social welfare, justice, schools and universities, subsidised industries etc. No scholar has disputed the right of con­temporary governments to collect enough taxes to meet these commitments. The question to be asked is whether these taxes absolve the Muslim from paying Zakat. There are those who suggest that it would not be fair to subject the Muslims to further payments if they extend the tax to Zakat. In the last century, some groups held this view and launched a revolution against rulers who imposed taxes along­side Zakat.

Zakat Disclosures of Islamic Financial Institutions (US$)
Bank 1994 Zakat Figures Disclose Zakat


Disclose Zakat


Albaraka Islamic Investment Bank Not Disclosed No No
Al Faysal Investment Bank 119,009 No No
Al Rajhi Banking & Investment Corp 27,052,314 No No
Bahrain Islamic Bank 124,955 No No
Bank Islam MalaysiaBerhad 373,876 No No
Dar Al Maal Al Islam (DMI) Group 1,512,000 No No
Faisal Islamic Bank ofEgypt 432,528 Yes Yes
Faisal Islamic Bank ofBahrain Not Disclosed No No
International Islamic Bank Not Disclosed No No
The International Investor 55,424 No No

Source: Compiled by Islamic Banker, March 1996

All currencies converted using current dollar rate.

We have now to examine these questions in the light of the Shariah and take into consideration present circumstances.

* In the first place we must differentiate between Zakat and tax. Zakat has a spiritual nature and has its roots in the Revelation, whereas secular taxes are imposed by the civil or secular authority.

* Secondly, the function of Zakat is clearly defined as catering for eight cate­gories, whereas taxes have much wider applications.

* Thirdly, tax collection depends on the power and skill of the authorities, which induces many people to seek to avoid, if not evade, payment. Zakat being a reli­gious duty has the consciousness of the believer as an inducement towards pay­ment. There is an invisible collector of Zakat living in the heart of every Muslim. You can cheat the government, but how can you cheat Allah? For this reason, 1 believe that Zakat must remain an obliga­tion on the tax-paying Muslim.

* Modern governments are far more organised and, with a few exceptions, far more honest than earlier rulers. There is therefore no excuse for Muslims to with­hold Zakat from them. It is now possible to ring fence the proceeds of Zakat, to be used for its legitimate outlets.

Muslims everywhere should urge their governments to establish Zakat authorities to help them fulfil their religious duty. There is no doubt a central authority would improve on the haphazardness of Zakat collection by individuals.

* A central authority would be able to accumulate sufficient capital for large and long-term projects. The aim of the Shariah is to help the poor and needy to be self-sufficient. It is not to encourage the culture of dependence. Islam abhors those who make begging a profession. The Prophet Muhammad once bought an axe for a poor man to collect fire wood to sell and feed himself and his family. This example should inspire the Zakat authorities into projects that effect the fundamental solu­tion of poverty. It should fund training schemes to make the skills of the poor more marketable. It should also finance projects that give jobs and supply needed goods and services such as textile facto­ries, machine tool manufacture, and cheap housing. The list is endless. Modern economics shuns aid which meets immediate consumption. There are of course, cases where the need for goods and other consumer goods is too urgent. But Zakat funds should plan to achieve the aim of the Shariah-that is to find a term solution to poverty and dependence.

In this respect, I would like to differentiate between Zakat Al Fitr (poll tax) and Zakat Al-Maal (wealth tax). The former should be exclusively for consumption. The Prophet Muhammad advised us to bring joy and plenty to every household and the occasion of Eid El-Fitr. But the later should be an allocation for long-term projects.

The imposition of an organised Zakat collection system should be the objective of every Islamic state, both for the benefit of social peace and religious fulfillment. This might create a problem where Muslims live side by side with non-Muslims. It would not be just to charge the Muslim with both civil and religious tax while the non-Muslim neighbour pays only one tax.

In the past, non-Muslims used to pay Jiziah which was the counterpart of Zakat. This, however, is no longer the practice. The solution, therefore, should be to deduct Zakat from the secular tax.

Zakat is ear-marked for social benefits, of service to all citizens. There should, however, be supervision in a Zakat authority to oversee the appropriate disbursement of funds, and to ensure that money is spent transparently in the way the Shariah specifies.

Modern economics shuns aid which meets Immediate consumption. There are, of course, cases where the need for food and other consumer goods is too urgent. But Zakat funds should plan to achieve the aim of the Shariah – that is to find a long-term solution to poverty and dependence.