Is Zakat Capable of Alleviating Poverty and Reducing Income Inequality?: An Analysis of the Distribution of Zakat Fund in Malaysia

Introduction

Zakat in etymology derives from the word zakat, which has meaning purification or growing (Purbasari, Fauzan, and Azizah 2018). Zakat is one of the teachings in Islam, which is obligatory for every Muslim who already meets a certain minimum point of wealth. For wealthy Muslims, it is their responsibility to spend a part of their wealth, in term of Zakat, that will be distributed to the people and other unfortunate Muslims that have been specified in Islam.

Zakat is compulsory for Muslims whose wealth reaches nisab (particular limit in sum) and haul (particular limit time). For instance, if a Muslim deposits 100 grams of gold, he must pay its zakat with the sum of 2.5% from its weight after a year of safekeeping because it reaches the nisab of gold deposit, namely 85 grams and its haul or time belonging (a year). Thus, he must pay 2.5% x 100 grams of gold, and it equals to 2.5 grams of gold. If the Muslim wants to pay with money, he must multiply 2.5 grams of gold with the current price of a gram of gold. In other words, Moslem, who has gold less than 85 gram, is not muzakki.

As the third pillar of Islam, zakat is also believed to be an instrument for eradicating poverty and distributing income more equally. Zakat institution has been recognized as an essential institution in an Islamic economic framework that able to help poverty alleviation and enhance economic welfare (Shaikh and Ismail 2017). In practice, however, the development and performance of the zakat institution have been relatively weak. Studies reported that zakat collections in Muslim countries are, on average very low, less than 1% of GDP.

In Malaysia, the Malaysian government has been committed to eradicating poverty through various Malaysian policies. For example, the New Economic Policy (1970-1990), National Development Policy (NDP, 1991-2000), “Vision 2020”, Industrial Master Plans, National Agriculture Policies, Privatization Master Plan, and the New Economic Model has been incorporated the need for the poor. In addition to that, various initiatives such as eKasih system, 1AZAM program, Federal Land Development Authority of Malaysia (FELDA), and the 1Malaysia concept has been introduced (Manaf and Ibrahim 2017). As a result, the number of poverty has been reduced in the country. As of 2019, it is reported that there is only less than 1 percent of Malaysian households living in extreme poverty (The World Bank 2019). As such, the government has shifted their attention toward addressing the well-being of the most deficient 40 percent of the population, which also known as “the bottom 40”, due to the fact that this low-income group remains particularly vulnerable not only to economic shocks but also increases in the cost of living and mounting financial obligations (Arjuna Chandran 2019). According to The World Bank (2019), compared to other East Asian countries, income inequality in Malaysia is relatively high. For example, in 2014, the income inequality in Malaysia stood at 0.401, compared to neighboring countries such as Thailand, Indonesia, and Myanmar, which stood at 0.394, 0.381, and 0.300, respectively (CompareHero.my 2018).

In light of the above, this chapter mainly aims to discuss the role of zakat in alleviating poverty and reducing income inequality, specifically in Malaysia. The content of this chapter is as follows; the next section, section 2, consists of interlinkages between the institution of zakat and Maqasid-al-Shariah. Section 3 of the paper provides a descriptive about Malaysia and review of the zakat institution in Malaysia, followed by section 4 on the strategies and policies implemented by the Malaysian government in poverty eradication and income inequality reduction. Section 5 of the paper presents the role of Malaysian zakat institutions in supporting the government poverty eradication and income inequality reduction initiatives, while conclusions and recommendations are presented in Section 6.