Maximising zakat’s impact on economy

Estimate shows zakat worth Rs2,743b, or 4% of GDP, can be collected annually

KARACHI:

Zakat, an essential pillar of Islam, holds remarkable promise not only as a religious duty but also as a driver of economic growth and societal welfare.

It is calculated based on one’s accumulated wealth and assets, aiming to distribute resources among the community, particularly benefiting the less fortunate. However, its impact goes beyond charity, offering significant advantages for the economy such as reducing poverty, ensuring fair wealth distribution, and promoting sustainable development.

The global Muslim population, being more than 1.8 billion, indicates a huge potential for zakat. Various reports by reputable international organisations estimate zakat’s annual potential between $200 billion and $1 trillion.

This is a significant amount to play an effective role in the reduction of global poverty and hunger while lifting the economic level of millions.

In Pakistan, with more than 96% Muslim population, there exists a huge potential for zakat, and if the amount is utilised effectively, it can play a meaningful role in the economic development of society.

According to the World Bank, poverty in Pakistan was more than 37% in 2023. This figure can also be attributed to the fact that zakat collection is not according to its true potential.

As per a report issued by the Institute of Policy Studies in March 2023, the estimated zakat collectible annually in Pakistan is more than Rs2,743 billion, approximately equal to 4% of GDP. To put this in perspective, this amount surpasses 28.6% of government’s 2022-23 budget.

If the amount of zakat is collected as per its potential and people are motivated to discharge their religious giving in a timely manner, the estimated potential of zakat in Pakistan would be enough to provide an amount of Rs100,000 to over 27 million individuals.

This transfer of wealth to the most deserving can play a catalyst role in lifting millions above poverty line and motivating them to contribute to the economic activity and well-being of their families.

Read: Zakat crisis deepens

While the promise of zakat is evident, its effective implementation in Pakistan faces several challenges. Despite the vast potential, government collection of zakat remains dismally inadequate.

In Pakistan, zakat is collected by the government through deduction from bank accounts on the first of Ramazan each year. However, in the 2021-22 budget, a mere Rs2.379 billion was collected, a small fraction of the potential.

This highlights the prevailing lack of trust and transparency in the government’s ability to manage zakat funds. The government system of zakat is overshadowed by political interventions, lack of clear SOPs for recipients of zakat, inadequate public disclosures, weaker audits and controls, and absence of professional zakat managers.

To circumvent government shortcomings, most individuals and NRPs turn to non-governmental organisations (NGOs) to fulfil their zakat and charity obligations. There are several NGOs, religious institutions, and welfare organisations that are trusted by the donors for their robust and Shariah-compliant zakat and charity systems.

This includes the process of collection, investment, and disbursement of zakat and charity funds. These NGOs and welfare entities are contributing in the area of health, education, poverty alleviation, and different social welfare projects, thus playing an important role and filling the void created by the government zakat system.

While there are good NGOs and welfare entities on one hand, there are many other NGOs, including some well-known names, where the transparency and Shariah compliance of the zakat and charity process are compromised, thus creating doubt in the minds of donors.

A review of financial statements of some NGOs in Pakistan also revealed a disturbing truth that their investment of zakat and charity funds is not Shariah compliant.

They have invested funds in interest-based avenues and government interest-based bonds, a practice contrary to Islamic principles, undermining their credibility and showing their lack of respect for religious guidelines.

A survey by the IBA’s Centre for Excellence in Islamic Finance (CEIF) also revealed that 95% of Pakistanis prefer donating to 100% Shariah-compliant organisations. It is imperative to establish a mechanism ensuring strict adherence to Shariah rules in fund collection and distribution.

Recommendations

To unlock zakat’s potential for socio-economic progress, some policy recommendations are presented that need the attention of policymakers for implementation.

Firstly, the zakat and Ushr Department should prioritise transparency and efficiency by adopting digitalisation, building effective control and audit procedures, ensuring non-political selection processes for zakat committees, and having professional management.

Secondly, the government needs to motivate people to give zakat timely as their religious obligation by creating awareness campaigns with the help of digital and media platforms while promoting transparency in zakat donations.

In terms of NGOs and welfare organisations, regulatory oversights and frameworks need to be developed by regulators like the Securities and Exchange Commission of Pakistan (SECP) and other regulatory bodies.

It is crucial to build public trust by ensuring Shariah compliance and transparency in the collection, investment, and utilisation of funds.

Lastly, for donors, it is strongly recommended to verify that the organisation should have separate accounts for zakat and charity, have interest-free investments, and have Shariah-compliant certification and systems for zakat disbursement to the deserving.

These policy measures can improve the trust and confidence of the public about the proper use of their donated funds in terms of zakat and charity. It would also motivate the public at large to contribute wholeheartedly, thus creating much-needed funding to address socio-economic challenges and foster inclusive development in Pakistan.

Furthermore, enhancing zakat collection and spending processes can significantly impact social security programmes like the Benazir Income Support Programme (BISP)/ Ehsaas to promote small-scale entrepreneurship.

Zakat holds significant promise in addressing poverty and promoting social development in Pakistan. However, transparency and Shariah compliance issues must be addressed.

Through robust regulatory measures, adherence to Shariah principles, and increased transparency, the government and NGOs can unlock the full potential of Zakat, benefiting both donors and the nation. By harnessing this system’s beauty and strength, we can strengthen our economy and ensure a brighter future for all.
Ahmed Ali Siddiqui is the Director of IBA-CEIF and Syed Hassaan Ali is an analyst at an Islamic bank

 

 

Published in The Express Tribune, February 26^th, 2024.

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