The Impact of Zakah on Malaysian Economic Development

The Impact of Zakah on Malaysian Economic Development

Abdelkader Laallam (Institute of Islamic Banking and Finance, International Islamic University, Malaysia), Mansha Rafiq (Institute of Islamic Banking and Finance, International Islamic University, Malaysia) and Rafik Harkati (Institute of Islamic Banking and Finance, International Islamic University, Malaysia)
Copyright: © 2021 |Pages: 17
DOI: 10.4018/978-1-7998-3452-6.ch002


Many Muslim countries use zakah as an element that implies economic changes. This chapter aims to investigate the effect of zakah distribution in the economic development of Malaysia. The chapter is based on a quantitative methodology using statistical procedures, such as multiple regression and Pearson correlation, in order to explain the relationship between zakah and economic development. The findings of this chapter reveal a positive relationship between zakah and GDP as well as zakah and Human Development Index. It also indicates that with every increase in the distribution of zakah, there will be a positive change in the GDP too, further implying that zakah effects economic development in the case of Malaysia.
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Islam consists of five pillars1, namely, the witness of that there is no God except Allah and Muhammad (Peace be upon him) is the messenger of Allah, implementing prayer five times a day, paying zakah, fasting in the month of Ramadan, and performing pilgrimage (Hajj). Zakah is the fourth pillar of Islam and the wisdom behind the ordination of zakah is that wealth may not, merely, make a circuit between the wealthy people, this is clearly pointed out in the Quran, specifically in the chapter (Surah) of Al-Hashr2. Given that economic development is the aspiration of all countries, several previous studies were written based on the instruments developed by non-Muslims and Muslim countries, where the differences lie in the tools used to achieve economic growth. For Muslim countries, generally, zakah is considered as a significant mechanism in treatment process aimed to solving the grave issues in the society i.e., poverty. In some of Muslim countries, zakah is used as an alternative to redistribute the wealth and realize income equally so that the gap between the rich and the poor is reduced (Yusoff, 2011).

More than 190 countries in the year 2015 committed to achieve 17 Sustainable Development Goals (SDGs) to end poverty, reduce inequality and address climate change. All the SDGs are universal in nature and aim to address concerns of every individual on the planet so that no one is left out. Many countries are aligning their local policies, plans and budgets as per the SDGs targets. Accordingly, the Islamic finance industry also needs to be aligned with the SDGs, especially in countries where Islamic finance and banking sector have already flourished. This provides Islamic finance industry an opportunity to readdress their position in various areas such as social finance, especially in micro enterprises for empowerment of the poor that resonate with the SDGs. State funds in countries such as Brunei, Malaysia and Singapore can be expanded through sustainable and responsible investments. Therefore, there are several possibilities for Islamic finance sector to grow as the SDG goals have parallel relevance with the Islamic finance practices. Alongside this, zakah is an obligatory payment that all Muslims whose earnings exceed a certain threshold, are obliged to pay. Also, zakah is one of the most effective ways for the redistribution of wealth in favour of the poor (Ismail et al., 2019).

Extreme poverty and inequality are two of the serious challenges that SGDs are intended to eradicate. Protection of property (Hifdh-ulmaal) is one of the foundational goals of the comprehensive objectives of Shariah (Maqasid al Shariah) and paying zakah is an obligation that purifies and cleanses the wealth of individuals. In the broader context, At the societal level it promotes wealth circulation which in turn implies an overall impact on the economic activity of the country/region. The striking commonalities between zakah and SDGs cannot be overlooked, as Islamic values can be seen reflected in many SDGs (as shown in the table below), be it minimizing inequality or reducing hunger through redistribution of wealth. As zakah has inbuilt transfer, it is therefore in agreement with the 1st, 3rd, 8th and 10th goals of the SDGs that focus on inclusive growth, promoting well-being, fostering employment opportunities, and alleviating inequality through various policies, thus enhancing financial inclusion (Noor and Pickup, 2017).

Table 1.
List of Selected Sustainable Development Goals (SDGs)

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