An Empirical Work on the Relationship between Zakat and Development

Development is a multidimensional process that includes speeding up economic growth, reducing inequality and poverty, and shifts in social structures, general mindsets, and national institutions. Income distribution plays a vital role in the acceleration of economic growth. However, there has been a great debate about whether a more equal distribution of income leads to growth. Equality in income distribution has been supported by the wide-ranging theoretical and empirical literature for its positive effect on economic growth, poverty eradication, and societal unity. Overall, a reduction in income inequality stimulates development.

The Zakat has a distributive role where wealth is taken from the rich and distributed among the poor. The theoretical and empirical literature on the role of Zakat suggests that Zakat improves the welfare of the recipients. It becomes a source of higher and more predictable income for the poor. Therefore, it enables them to secure food and nutrition, better health care, and education (build human capital). Thus human capital results in higher productivity, livelihood, and diversification – which enable them to access services and also enable them to save and develop productive assets. Literature also reveals the crucial role of Zakat in increasing investment as it ultimately leads to diminishing the volume of idle wealth. Additionally, it will boost growth and employment by increasing aggregate demand via the consumption function and multiplier effect.

The chapter focuses on empirical studies, especially diagnosing the role of Zakat on growth, income inequality, and poverty, which are components of overall development. Zakat significantly improves income distribution and reduces poverty, ultimately leading to overall development. However, Zakat is not implemented in Muslim countries, with few exceptions, to its true spirit. Therefore, it is suggested to enforce the zakat system in all the Muslim countries in its totality.