Reducing Poverty through Zakat System

East West University Submitted by Department, Economics Kazi Sohag 27-04-2008 2005-2-30-016

This Research Paper is written as Partial Fulfillment for the Course Eco 490- Research Methodology

Submitted to

Dr. Amir Hussaint Adjunct Professor

Department, Economics East West University

3

Abstract “Reducing Poverty through Zakat System” Poverty alleviation has been a priority in Bangladesh’s development plans and programs since 1972. Official and NGO efforts based primarily on IRD (integrated rural development) and micro-credit models, by 2000 succeeded in eradicating dire poverty and reducing the overall level to around 50 per cent of the population. Since then Bangladesh has adopted the UN sponsored MDG which aims to reduce poverty level by half by 2015. A carefully crafted strategy (PRSP) through much local and international consultation is essentially based on the elements which succeeded in the 1980s and 1990s. It is surprising that Zakat, an expressly designed poverty eradication tool, clearly prescribed in the Holy Qur’an and Sunnah, has been completely ignored in all poverty alleviation plans and programs in Bangladesh, where more than 85 per cent of the population are Allah- fearing Muslims. Also, there is confusion and ignorance about true practices of Zakat in the mind of these people, which resulted in lasting benefits not accruing to the traditional Zakat receivers. From the very begging of Bangladesh there are so many NGOs have been running micro credit poverty alleviation project as well as Government running different types poverty eradication programs. But The Governmental and Non Governmental PAPs have several limitations. In order to remove these limitations the Zakat System should be taken in an efficient way. If the Zakat system will implement in the way of prescribed in this paper then poverty might reduce.

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Acronyms

i. BBS = Bangladesh Bureau of Statistics

ii. FFW = Food for Work

iii. FFE = Food for Education

iv. HIES = Household Integrated Economic Survey

v. IMF = International Monetary Fund

vi. MDGs = Millennium Development Goals

vii. MACCA = Masjid Council for Community Advancement

viii. NGO = Non Governmental Organization

ix. PAPs = Poverty Alleviation Programs

x. VGD = Vulnerable Group Development

xi. WB = World Bank

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Acknowledgement

This research paper could not have been written without Dr. Amir Hussain who not only served as my instructor but also encouraged and challenged me throughout my academic program. He and the other faculty members, Dr. Enamul Haque, patiently guided me through the dissertation process, never accepting less than my best efforts. I thank them all. Then I would like to thank my Uncle, Moulana Abul Kalam Azad, Chairman of MACCA for giving me very crucial ideas about Zakat. He provided me with much insight as to how Zakat can reduce poverty that I had no idea how to perform yet. Special thanks should be given to Dr. S. M. Ali Akkas, Policy Leadership Unit Ministry of Women, and Children Affairs Government of the People’s Republic of Bangladesh who has given me a dynamic Research Paper regarding Zakat. I would like to thank Dr. Mizanur Rahman, honorable Research Director, Islami Bank Bangladesh Limited for supporting me throughout the entire project, and for helping me get through it all. I would like to thank my beloved Uncles Shah Abdul Hannan, Former secretary, People’s Republic of Banngladesh and Mr. Azizul Haque, MD Islami Bank Bangladesh limited for their direction, assistance, and guidance. Finally, words alone cannot express the thanks to my friends Siddiquer Rahman and Touhidur Rahman, for their encouragement and assistance.

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Contents

Chapter 1 1.1 Introduction 1.2 Survey of Literature 1.3 Methodology Chapter 2: Why the poverty is sustaining in Bangladesh 2.1 Poverty situation 2.2 Rich- Poor gap 2.3 Micro- credit 2.4 Government safety net programs 2.5 Root cause in the Failure of Poverty Alleviation Programs Chapter 3: Zakat 3.1 What is Zakat 3.2 Misconception About Zakat 3.3 Why Zakat 3.4 Principal of Zakat 3.5 Uniqueness of Zakat 3.6 Role of Zakat in reducing dependence on IMF, WB Chapter 4: How Zakat Reduces poverty: 4.1 Aggregate Zakat Receipts: Rural and Urban 4.2 Interventions by Zakah to Eradicate Urban Poverty 4.3 How Much of the Poverty Gap Zakah Can Cover Chapter 5: Implementation 5.1 How the program should be run? 5.2 Ideal village project 5.3 Survey Report 5.4 Strategy 5.5 How they Generating Income

Conclusion

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Chapter 1 1.1 Introduction:-“Poverty Eradication” is the very important aspect of millennium

development goals. One question may arise that what should be the best instrument to reduce poverty? We have already seen the governmental and non government intervention to alleviate poverty which leaves seasonal and poor impact on the goal. Therefore a continuous process should be taken like Zakat (Islamic compulsory charity). In the proposed study I seek to examine whether Zakat reduce poverty or not.

1.2 Survey of Literature

Although the concept of Zakat based reducing poverty is very older since 600 AD but the system is not yet well known to us. None of modern economist came to develop the theory of “Zakat based poverty reducing System” except a few. The notable studies M Umar Chapra1, AbulHasan Muhammad Sadeq2. But in the perspective view of Bangladesh, Dr. S. M. Ali Akkas3 has formed the concept of An Islamic Alternative to Poverty Alleviation: The “PARSHI” (Neighbourhood) Model. This paper will proceed based on “An Islamic Alternative to Poverty Alleviation: The “PARSHI” (Neighbourhood) Model” by Dr. S. M. Ali Akkas. Note that this model is running in Chandirchar, Zagir Manikgonj Sadar Upazailla by MACCA. This paper has picked up the empirical evidence from the Piloting project by MACCA4.

1.3 Methodology The type of research paper is as follows descriptive and analytical which will include surveys and fact-finding enquiries of different kinds. Sources of Data: “Reducing Poverty through Zakat System” is based on time serious data which has been directly collected from MACCA unit of Ideal Village Project. Here is taken mainly two types of data i) Socio-Economic Background of Villagers (procured in December, 2005) ii) Monthly disbursement and saving as well as income changes. Also there are some secondary data has been adopted.

1 M. Umer Chapra, Islam and Economic Development, The International Institute of Islamic Thought and Islamic Research Institute, 1993, Chapters 3 and 4. 2 “Economic growth in an Islamic economy”, International Islamic University Press, 1991, pp. 55- 72. 3 Policy Leadership Unit Ministry of Women and Children Affairs Government of the People’s Republic of Bangladesh 4 NGO Masjid Council for Community Advancement

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Sample size selection: The frame of sample is eight neighborhood and every neighbor contains 30 -40 families. Here is one neighborhood has been taken randomly which neighborhood contains 30 families. Data processing: Collected all the raw data has been entered in to computer software (SPSS) and analyzed them in accordance with objectives of the study. Chapter 2: Why the poverty is sustaining in Bangladesh 2.1 Poverty situation In recent days though poverty rate is declining but the number of poor people is increasing. Poverty has been reduced 7% during 1991 to 2005, but total number of poor people increased 4.4 million in this period. On the other hand, only from 2000 to 2005, number of hard core poor people increased 3 million. According to latest survey of HIES 2005 of BBS, 56 million people live under poverty line. In 1991-92 total number of poor people was 51.6 million and in 1995-96 increasing number reached at 55.3 million. In 2000 number of poor people was 55.8 million. From 1991 to 2005 in this 15 years more than 4.4 million people has been added to poverty line5. 2.2 Rich- Poor gap “A nation is poor because they are poor” while it’s true for the nation also true for the individual because they can’t involve themselves into the economic activities and the main reasons are behind their malnutrition, less education, no vocational training and so on. Therefore the gap between rich have been fostering day after day. Rising unemployment and declining share of the poorer populaces in national income are two major challenges for the country in achieving the Millennium Development Goals (MDGs), says a government report. In 1992, the Poor’s share in national income was 6.5 percent. But it dropped to 5.3 percent in 2005, marking a decline of 18.46 percent in 13 years. One of the shortcomings in Bangladesh’s effort to attain MDGs is failure to make growth process sufficiently pro-poor, says the report, adding that depleting share of the poorer segments of the society in national income and consumption shows that the poor are not benefiting from the growth. “Appropriate interventions are required so that benefits of economic growth reach the poorest quintile”. Observes the report prepared by Planning Commission on progress toward MDGs.

5 BBS

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2.3 Micro- credit From the very begging of Bangladesh there are so many NGOs have been running micro credit poverty alleviation project even though the number of hardcore people increasing day after day. This paper is not against any micro credit or any development programs. The study regarding NGO found out a few limitations those limitations are highly interrupting the mechanism of reaching goal. The limitations are following 6

o MFIs are not economically viable due to lack of fund mobilization and high administrative cost.

o MFIs need to depend on grant of donors which is by naturally unsustainable.

o The type of activity for which the funds are used money also be low productivity

activities. o Institutions do not server the poorest, who are either not given loan or drop out

of credit schemes.

o Grameen Bank borrowers often take loans from other sources to pay installments

and are trapped in spiraling debt cycle o Compounded interest impositions

o The declared objective of targeting women as recipients of fund is to empower

them. But targeting the women as beneficiaries of credit by MFIs create tension within the household and increase frustration and violence in the family.

o Some groups of people are not addressed by NGOs, such as a) poorer men b)

hardcore poorest women those who can’t payback c) those who are physically disorder

6 6 CDF: Microfinance Statistics, 2002.

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2.4 Government safety net programs

Government safety net programs are often seasonal and poor impact on the goal. The

safety net programs are basically Food for Works (FFW}, Food for Education (FFE), and

vulnerable Group Development (VGD) Program for disadvantage women and Test Relief

(TR). Among these programs FFW is the largest and second largest programs is the FF. it

is evident that the highest level of delivery of those programs took place in 1995-96

distributing 1078 thousand metric tons of wheat costing Tk. 13,970.9 million and 70

thousand tons of rice valued Tk. 907.2 million. That means, food grains costing a total of

Tk. 14,878.1 million were distributed in 1995-96. It should be noted that the safety net

programs are based on donors’ humanitarian grants with high degree of fluctuations. At

the same time, it is hardly a net transfer mechanism since FFW, the major component of

the safety net programs, is given as wage to construct and repair rural infrastructure7.

Even though there are few poorer areas where the development programs can’t reach such as

o The people are deprived from FFW programs those who are not capable to work o The programs don’t run through out the year o Development programs regard as improving infrastructure which can’t foster the

situation of poorest people. 2.5 Root cause in the Failure of Poverty Alleviation Programs

o PAPs are bound to be unsustainable because of donor dependence o Inability to provide initial basic minimum ownership- capital. o Less organizational sustainability due to low capital productivity

Chapter 3: Zakat

3.1 What is Zakat

Zakaat (Arabic: ةاكز zakaat or zakāh, meaning 'grow', 'purify', or 'foster') is the Islamic concept of tithing and alms. It is an obligation on Muslims to pay 2.5% of their wealth to specified categories in society when their annual wealth exceeds a minimum level (nisab). Zakat is one of the Five Pillars of Islam.

7 Ibid.

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3.2 Misconception About Zakat

Most of people Most of the people of our country think that Zakat is charity but according to holy Qur’an the people are ought to give the Zakat if his or her wealth is above the nisab level. Another common misconception of people that Zakat is only applicable on the gold, money and nothing else but a pure hadith may crystallize this perception

Nisb

1. Gold: The Nisab for Gold is 3 oz/100 gms. 2. Silver: The Nisab for Silver is 21 oz or 700 gms. 3. Cash: The Nisab for Cash is an equivalent to the value of the Nisab of Silver. The evaluation on the basis of Silver was the practice of all the Sahaba, Imams and rulers, therefore on this basis all Muslims have to pay Zakat. Since the price of Silver is less than that of Gold this makes easier for large number of people to contribute. 4. Merchandise and Inventories: The Nisab for Merchandise and inventories is the same as Nisab for Cash. Note: Stocks and shares are considered same as cash and inventories. However tools, equipments, and machinery used in business are excluded from Zakat deduction. This means they are not Zakatable.

3.3 Why Zakat It is already mentioned above the limitations of PAPs so far have been taken in our country. In order to solve all the limitations another form of PAP should be taken like Zakat. More over Zakat is not man made instrument rather it is divinely. It is that system which narrows gap between the haves and the have-nots, for which the socialists had been relentlessly fighting during the bygone century, but failed. It is not a fiction but a part of the recorded history that during the rule of Hazrat Omar (Ra.), the Second Caliph of Islam, there was not a single man to accept Zakat. All men became rich enough to be able to give Zakat within 5 years of the introduction of the Zakat system8. Why was the system proved to be so successful? The answer is simple. Because, it came from Allah, the Almighty, who is the creator of everything. Allah, who created men, knows very well how to solve the economic problems.

8 History of Islam

3.4 Principal of Zakat There are four basic principal of Zakat those are following

o Economy well being within frame work of model of Islam o Universal brotherhood and Justice o Equitable distribution of wealth o Individual freedom within context of social welfare

3.5 Uniqueness of Zakat

o Pure transfer from rich to poor o Direct incentive on the poor people o No interest and no payback o Hardcore poorer peoples are addressed by Zakat o Those who are not addressed by any other PAPs, Zakat addressed to them. o Zakat does not increase poverty o Whatever the amount that is very small portion o Making down flow of money o Bridge between rich and poor o Zakat reduces social crime

3.6 Role of Zakat in reducing dependence on IMF, WB The experts in Islamic economy say that in Bangladesh every year ten thousand crore of Taka, which is almost one fifth of our national budget of the current fiscal, can be realized as Zakat. And by proper distribution of this Zakat money through the state machinery, poverty, which is at the root of our lingering backwardness, can be eradicated in ten years only. Moreover, we can reduce substantially, our dependence on the IMF and the World Bank Chapter 4: How Zakat Reduces poverty: 4.1 Aggregate Zakat Receipts: Rural and Urban Fig-1 shows total amount of Zakat (Zakat & Ushr) to be collected in Bangladesh during the period under simulation. An amount of Tk. 28,337 million may be collected as Zakat (including Ushr) in the base year of the simulation, which stands at Tk. 47,213 million in 1998 and becomes Tk.110,517 million in 20109.

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Fig-1: Zakah Collectable in Bangladesh

47,2

13

44,2

24

49,6

98

53,1

87

57,5

16

61,1

75

65,1

49

69,2

54

76,0

80

83,7

51

91,7

77

100,

919

110,

517

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

In M

illio

n Tk

.

Zakah Bangladesh

9 Bureau of Islamic Economic

4.2 Interventions by Zakah to Eradicate Urban Poverty

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ion. If so, per household annual Zakah receipts would be

able-1: Interventions to alleviate urban poverty

Tim

Urban poverty gap is

estimated to be Tk. 2,666 in

1997. That means both

urban ultra and very poor

can be covered by Zakah

receipts each year. Per

capita Zakah receipts by

urban ultra and very poor

being Tk. 3,756 they can be

brought under immediate

intervention for poverty alleviat

around Tk. 22,536. In 1999 per capita Zakah receipts by urban ultra and very poor would

be Tk 4,221 which would lead to a per household annual Zakah receipts of Tk. 25,326.

The amount, if provided at a time, should form an initial capital for running at least a

subsistent level livelihood possibly without requiring further help in the next year10.

Fig-2: Percent of Urban Poverty Gap could be covered by Urban Zakah

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

1997 1998 1999 2000 2001 2002 2003 2004 2005

Zakah/Poverty Gap:Urban

T

e 1997 1998 1999 2000 2001 2002 2003 2004 2005

Per capita Zakah

or 12,686 13,957 14,255 15,382 15,950 16,669 17,744 18,881 20,076receipt by ultra po

Per capita Zakah

receipt by very poor 5,337 5,871 5,996 6,471 6,710 7,012 7,464 7,943 8,446

Per capita Zakah

receipt by ultra &

very poor

3,756 4,133 4,221 4,555 4,723 4,935 5,254 5,591 5,945

Per capita Zakah

te

3,409 3,750 3,830 4,133 4,286 4,479 4,768 5,073 5,395

receipt by modera

poor

Source: Model gene a e m n f - o

rated d ta bas d on si ulatio run o the 26 Sector CGE m del.

10 Bureau of Islamic Economic

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Assuming that ultra and very poor are covered in the first year of urban intervention

.3 How Much of the Poverty Gap Zakah Can Cover

ol depends on how much of the

pre

t is quite

evid

hapter 5:

ram should be run

for poverty alleviation, all moderate urban poor can be covered immediately in the next 1 (one) year. That means, within two years time it would be possible to eradicate income poverty (in terms of calorie intake). This will allow release of urban Zakah money from the third year to make available for eradication of moderate poverty in rural Bangladesh. This strategy, if pursued, will lessen the period of eradicating poverty of rural moderate poor to 5 (five) years instead of 10.5 years.

4

Strength of Zakah as a poverty alleviation to

vailing poverty gaps would be financed by Zakah proceeds. The strength can be

measured by portion of poverty gap that Zakah can finance at rural and urban areas. This

rural-urban segregation does not have any legal implication but it provides insights on the

effect of interventions pursued on regional basis. The information so received may help

preparing policies which will encourages resources to be transferred wherever these

would be of best use.

I

ent from the

Fig-3 that Zakah

collected from rural

area can cover only

14.8% of the rural

poverty gap in

1997. The coverage

rises over time and

becomes 24.7% in

200511.

C

F ig -3 : P e rc e n t o f R u ra l P o v e rty G a p c o u ld b e c o v e re d b y R u ra l Z a k a h

0 .0 %

2 0 .0 %

4 0 .0 %

6 0 .0 %

8 0 .0 %

1 0 0 .0 %

19971998

19992000

20012002

20032004

2005

Z a k a h /P o ve rty G a p :R u ra l

Implementation

.1 How the prog5

11 Bureau of Islamic Economic

15

tablishing charitable centers covering area of

ings

le

m

5.2 Ideal village project

Based on the previous experience in the area of community development, MACCA is

rty, sits

ity people

er

rces.

The total program is run by the active participation of the beneficiaries. The gonj

The program would be more than es

population that forms neighborhood. Basis of the program would be the notable say

of the Prophet (S.M) that “those who go to bed leaving their neighbors unfed are not

Muslims”. This will be an initiative, which will work for a hunger-free community ab

to discharge their duty as vicegerents of God. The program components may include

Zakah assistance to eligible persons with a view to build enabling environment for the

so that they are able to lead a sustainable livelihood. Assistance, capacity building, socio-

economic and religious orientations for discharging the responsibility of vicegerency

would be some of the important functions of the program. It would be ideal if the

neighborhood community can be based centering a mosque.

now piloting this project. It adopts an integrated approach to community development.The core concept behind the project is strengthening relationships among the neighbors-making them sensitive to the needs of others living in the community. The core component of the project is Parshi. A Parshi (a Bengali word means neighbor),involving 30-40 people of the same locality (mainly neighbors) living under povetogether to sort out their problems and solutions as well to them. PRA tool is applied to identify community needs. In a community there can be a number of Parshi(s). It has various development components such as health, sanitation, education, income generation, capacity building, and leadership building etc. Resourceful communcontribute to financial support of the project in the form of Zakat. Apart from individual zakat money, the Zakat Board of the GoB also supports the project. In all interventions community ownership is ensured. Participation in the program is family based and gendequity is strictly maintained. The vision of the project is to solve the community problems through community leadership and preferably through community resouThe major tasks of MACCA under the project are to enhance the capacity of the Parshi people, link them up with existing service delivery institutions, and mobilize communityresources etc.

program currently runs in Chandirchar Village under Zagir Union Parishad in ManikSadar Upazailla. The number of Parshi stands as of now 8 that engage approximately 300 people. The project is expected to be replicated in other parts of the country after the successful completion of the piloting

5.3 Survey Report

Here is taken only one Parshi as research study the Parshi no 1. The Parshi 1 has been formed with 30 members in December 2005. The MACCA surveyed their Scio-economic status which is given below

Parshi 1

Chandirchar, Zagir Manikgonj Sadar Upazailla

Economic Background

Table 2

No of Families

No of Family Members (average)

Monthly Income (average)

Monthly Expenditure

(average)

Area of Land

Involvement in Another NGO( in percentage)

30 4 2500 tk 2600 tk 25 (Satangsa)

90%

Occupation

Table 3

Small Business Agriculture Rickshaw puller

Daily Labor Service

5 7 5 7 5

17%

25%

17%

24%

17%Small BusinessAgricultureRickshaw pullerDaily Labor Service

5.4 Strategy

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The strategy of MACCA is almost similar with other Microcredit system. At first MACCA has form an authority there to make a best use of their money and trying to make sure an optimum use of money by the recipients. At the initial stage MACCA gave them 100000 taka (one lac taka) to the authority instead of hand of the members in December, 2005, so each member was receivable 3333 taka approximately. Thereafter every member was allowed to take the loan according to his/her needs to invest in income generating something as prescribed by the authority. The members are not in a position for investment, has been getting 12.5% profit against his deposit. If any member takes a loan more than that of his or her deposit he/she is liable to share 12.5% profit or loss he earned against his/ her investment. Beside of this each member who withdraws his/her deposit he/she is ought to give installment 25 taka against 1000 taka per month. Like this way the authority is circulating the money. In one word they are following the strategy of Islamic Banking system.

5.5 How they Generating Income

For example those who are the Rickshaw pullers they used to hire a Rickshaw with 50 taka as a rent per day. If he earns 150 taka per day he would have 100 taka left over his hand from that of view his income level has gone up by 1500 taka per month after purchasing Rickshaw by the Zakat money. Let’s take another example those who are farmers now they are able to purchase seeds, fertilizer, pesticide etc on the time and after harvesting the farmers very easily pay back. Then those who are little bit physically weak they are running small business. These are mechanism to foster the velocity money which role of Islamic economic system. The growth of their income level is following

5.6 Progress Report

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Descriptive Statistics

Initial Income 88000 taka Current Income 151905 taka Total Growth of Income 63905 taka Growth per Month 22961.26 Rate of Growth 1.9% per Month Rate of Growth 22.8% per Year This project will continue there until making them able to give Zakat. Then the project will switch to another poor place.

30 88000 151905 122961.26 30

N Mean Minimum MaximumINCOME Valid N (listwise)

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Conclusion The task of every Muslim ummah in creating solidarity with the poor is to struggle with them to eradicate social injustice and poverty. People do not wish to be poor or simply happen to be poor. Their poverty is largely the byproduct of capitalism and oppression. And this is why the Quran stresses the importance of zakat within the society and as an obligation of the Muslim ummah. The call for a reliable and efficient zakat collection system is only one side of the coin. We needed a two-pronged approached to this issue. Firstly, the real standing issues are whether we as individuals have done our duty to Allah by giving zakat to the relevant authorities and secondly, whether this fund is managed in a manner that will result in reducing the poverty rates, dependency and to a large extend creating sustainable employment for the intended recipients as laid out in the Quran.

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Bibliography Name Sources Amount of Zakat Masjid Council for Community Advancement (MACCA) Literature survey The holy Quran and authentic hadith, Akkas, S.M.Ali (1999) An Islamic

Altrnative to Poverty Alleviation: The “PARSHI” (Neighborhood) Model Income Inequality through market mechanism

Akkas, S.M.Ali (1999) An Islamic Altrnative to Poverty Alleviation: The “PARSHI” (Neighborhood) Model

Zakat collectable in Bangladesh

Bureau of Islamic economics

Poverty classification Internet http://www.zakatguide.org/english/zakat_guidelines.html

Percent of Rural Poverty Gap could be covered by Rural Zakat

An Islamic Alternative to Poverty Alleviation: The “PARSHI” (Neighbourhood) Model Paper Presented By

Dr. S. M. Ali Akkas Policy Leadership Unit

Ministry of Women and Children Affairs Government of the People’s Republic of Bangladesh

Paper Presented in the

International Seminar on

Islamic Alternative to Poverty Alleviation: Zakat, Awkaf and Microfinance

24-26 November 2006

Other sources 1 HDR 2005 – Country Fact Sheets, Bangladesh,

http:/hdr.undp.org/statistics/data/country_fact_sheets/cty_fs_BGD.html 1 Akkas, S. M. Ali (1999). Simulating Role of Zakat in Poverty Alleviation of Bangladesh under a Dynamic Computable General Equilibrium Model, Policy Studies Series 1, Centre for Development Studies and Services Network, Dhaka.

Thank you