A Review of Literatures on Current Zakat Issues: An Analysis between

Transcription

1 A Review of Literatures on Current Zakat Issues: An Analysis between FUADAH JOHARI, Faculty of Economics and Muamalat, Universiti Sains Islam Malaysia (USIM), Malaysia. AHMAD FAHME MOHD ALI, Faculty of Economics and Muamalat, Universiti Sains Islam Malaysia (USIM), Malaysia. MUHAMMAD RIDHWAN AB. AZIZ, Faculty of Economics and Muamalat, Universiti Sains Islam Malaysia (USIM), Malaysia. Abstract The objective of this article is to analyze the related literatures on zakat between 2003 until The methodology of this article is through qualitative research based on content-analysis on previous articles and literatures that specifically discuss about zakat between 2003 until This study looked at several variables which number of publication by year, subject areas, and a brief content analysis of zakat issues such as management, collection, distribution and poverty alleviation on zakat. This is important in order to examine its prospects for research in the future. The general finding of this article shows that there are a lot of issues pertaining to zakat management, collection, distribution and poverty alleviation program were published for this timeframe. Henceforth, this article provides significant suggestions and strategies for the future exploration on zakat. Keywords: Zakat Management, Zakat Collection, Zakat Distribution, Zakat Issues, Poverty, Islamic Finance. 336

2 1. Introduction The literal meaning of zakat can be defined as grow, blessing, pure, good and renowned. Therefore, Zakat is one of the pillars of faith in Islam that emphasizes the socio-economic development. Thus, any discussion on zakat in the context of worship usually associated with the socio-economic factor, especially in aiding the underprivileged based on the Maslahat (society) concept (al-qardhawi, 2000). Further, its purpose is to redistribute wealth of the society among the poor by providing a certain amount from a specific wealth (non-poor) for the benefit of those who are entitled to receive it as stipulated by Allah s.w.t. (Ibn. Qudamah, 1968; Ahmad, A., 1984, p.4). There are eight prescribed categories of the recipients of Zakat. Allah s.w.t has determined these categories when He says: Sadaqat (zakat) are for the poor and the needy, and those employed to administer (the Zakat), for those whose hearts are to be won over (Muallafat-al-Qulub), and for the freeing of human beings from bondage, and (for) those who are burdened with debts, and (for every struggle) in Allah s cause, and (for) the wayfarer: (this is) an ordinance from Allah, Allah is All-Knowing, full of Wisdom. (9:60) 1 Islam establishes the zakat as a compulsory charity tool that can be used to enhance the development of the eight categories of recipients (Al-Quran, 9:60). From eight categories of them, five are meant for poverty eradication such as the poor, the needy, the debtors, the slaves (release them from captivity), and the travellers in need. Others are the zakat administrative, 'those whose hearts are made inclined' (to Islam), and in the way of Allah. Although these eight categories of recipients have been mentioned in the Qur'an, but the first priority in the use of zakat funds has to be accorded to the alleviation of poverty through assistance to the poor and the needy (Hassan, M. K. 2007, p.28). 2. Literature Review Zakat conceptually can be defined as, a compulsory levy imposed on Muslim after fulfilling 1) minimum value required for zakat (nisab) and 2) evaluated after completing 1 Islamic year (1 Haul) which is about 355 days, as wealth redistribution mechanism from the comparatively well-to-do members of the Muslim Society to the destitute and needy (Bakar, N and Rahman, 2007, p.30). Zakat has several meanings according to literary term; it means blessing, growth, development, purity, and neatness (Razak, M. I. M., Ismail, M., & Hamzah, A. S. A. 2013, p.141). Economically, based on the study being done by Ahmad (2008, p.92), zakat in theory will result in economic prosperity as Zakat is paid from those who have surplus, to the poor. So that, this will improve and enhance the poor s purchasing power which may lead to a higher demand on goods. The institutions of zakat are among several instruments instituted by Islam to combat and enhance welfare in the society. Zakat helps to generate a flow of funds and recruit the necessary manpower. The word zakat means growth, cleanness and purity in Arabic (Hassan, M. K. 2007, p.28). 1 The Holy Al-Qur an 337

3 Zakat also play its role as a fiscal mechanism, zakat performs some of the major functions of modern public finance, which deals with social security entitlements, social assistance grants for childcare, food subsidy, education, health care, housing, and public transportation in a welfare state (Yusoff et.al 2012, p.449). Besides that, zakat creates a balanced growth cycle. When a certain percentage of one s wealth is spent annually over the foregoing eight categories as prescribed in the Qur an, zakat has a significant economic impact on society (Tarar et.al, 2012, p.153). Income support provided to the poor and needy would result in a measured increase of the money supply in the economy causing upward shift in demand for goods and services. To support this upward shift in the demand for basic necessities of life such as food, clothing and shelter, the production facilities would gradually expand and begin to absorb the idle capital. In order to support the increased production, the economy would generate more jobs and new employment opportunities. This added employment in turn would generate more demand for goods and services, more room for additional investments, and finally, the growth cycle based on balance consumption would contribute to a balance economic growth (Muhammad Ridhwan Ab. Aziz, 2012). 3. Methodology This article adopts content analysis based on several literatures on zakat issues for ten years between 2003 and The arrangement will be based on thematic according to the issues and the chronological review from 2003 and articles had been gathered based on online Google Scholar search on related articles. The review focuses specifically on the articles written in the areas of zakat. It follows that the articles would be classified into four categories namely zakat management, zakat collection, zakat distribution and poverty. The articles would be classified into four categories namely zakat management, zakat collection, zakat distribution and poverty. The classifications are made based on either the content or the abstract of the articles. It is noted that some areas might overlap due to different nature and research interest of the specified journals. Therefore, this review would categorize the article based on these criteria: most frequent mention of key words and also content inclined towards categories of zakat management, zakat collection, zakat distribution and poverty. 4. Results 4.1 Number of Publications by Year There were 108 articles published which were related to zakat from the observed 10 years period. Table 1 presents the distribution of articles by year. It shows that the number of articles published per year varies from 5 to 17, and most articles published in the year The least article was published during

4 International Review of Research in Emerging Markets and the Global Economy (IRREM) Year of Publication Number of Articles Percentage (%) Total Quantitative List by Subject Area of Articles Table 1: Number of Publications by Year Table 2 shows the growth of each subject according to the year of publication and subject involved. It is indicated that articles related to zakat management had been written and published almost every year (with total of 39 articles from the observed period), followed by Zakat and Poverty with 24 published articles, zakat collection and Zakat distribution with 22 published articles. Subject of Article Year of Publication Total Management Collection Distribution Poverty Total Table 2: Quantitative List by Subject Area of Articles 5. Discussion on Issues Highlighted Due to broad coverage of discussion on zakat, this article had categorized the issues into four topics of discussion which are management of zakat, zakat collection, zakat distribution and, poverty and zakat. 339

5 5.1 Issues in Zakat Management Salim (2003) in his research mentioned that, one of the recent developments indicating the resurgence of Islam is the growing of Islamic philanthropic and welfare organisations with modern management, drawing funds from Muslim alms and zakat. The objective of zakat management is to achieve the best possible outcome in the timely collection and distribution of zakat as ordained in Islamic Shariah (Rahman et.al 2003, p. 40). Therefore, the efficiency of any system proposed in zakat management must be assessed in terms of achieving that particular objective in the best possible way (Azeez, 2003, p.32). The role of zakat organization is to promote social justice and to ensure sustenance of economically unfortunate sections of the society (Johari, F, 2004, p.). The efficiency of the zakat system cannot be viewed independently of the extent of trust that zakat payers may assign to it. The whole idea of zakat management is to help Muslims perform this pillar of Islam and establish its primary function as a means to alleviate poverty. But if trust is not sufficiently maintained between Muslims and zakat centre, the potential zakat payers would prefer to pay out zakat directly to their own relatives who are poor or needy, rather than deal through the zakat centre (Wahid et.al, 2004, p.145). Like any other non-profit organization, zakat organizations face various kinds of challenges due to environmental changes in modern societies (Abdul Rahim, 2006, p. 93). Creativity and innovation are important elements to ensure the relevance of zakat organizations in modern Muslim societies (Mujaini, 2005). According to Abdul Rahim (2006), zakat practitioners need to change their mindset and be opened to new techniques in administering zakat (Abdul Rahim, 2006, p. 95). Al-Qardhawi (1999) indirectly recommended that zakat practitioners must be creative and innovative in facing new challenges such as changing needs and modern demands. Zakat administrators must ensure that the concept of ijtihad (diligence) should be incorporated in their management of zakat funds (Mujaini, 2005). Innovations on worldly affairs and ijtihad in the context of zakat must be part of their management practice (Abdul Hamid, 2003, p.96; Mujaini, 2005). In the modern management of zakat, practitioners must be knowledgeable for them to look at creativity and innovation as something that can assist them to achieve the objectives of zakat. According to Ahmad et.al (2005) the satisfaction on zakat distribution is positively correlated to the zakat compliant behaviour. He also found that zakat compliant between states are varies, implying that states possess different capabilities and performance in zakat management (Ahmad et.al, 2005, p. 63). Prime implication of this study is that in order to raise zakat compliant towards formal institution, effort for abolishing negative perception towards formal institution should be the prime agenda of zakat centre. Another problem that has been recognized in Malaysian zakat institutions is the shortage of staff and experts in the zakat institutions relative to the numerous tasks under their responsibilities. This limitation may lead to inefficiency and ineffectiveness of zakat management performed or in other words under potential performance by the zakat institutions (Sadeq; 1995; Masudul Alam Choudhury & Sofyan Syafri 340

6 Harahap, 2008, p.615). This happened because of several problems including lack of management expertise, lack of commitment, lack of information and legal aspects. On the other hand, Ahmad (2006) examines the factors that influence the individual dissatisfaction towards formal institutions in Malaysia. By using primary data, he found out that satisfaction towards the zakat management significantly influences individual compliance behaviour towards formal institution. He found out that 57% of 753 respondents were not satisfied with the current distribution of zakat in Malaysia which significantly affect their payment of zakat to zakat institutions. The result indicates that to attract more people to formal institutions, they should first increase the individual satisfaction. This can be done by constantly improving zakat management, maintaining good will, becoming more transparent and conducting more productive distribution scheme (Ahmad, 2006, p. 181). Many studies urged that to implement the zakat localization as a potential public policy, a consensus must be collected from the particular group that are the zakat recipients (asnaf) and zakat collectors (amil) because these two groups are the grass root support to the zakat system. Muhammad Syukri (2002) urged the implementation the concept of localization. His argument is based on several issues. First, the statistics of zakat distribution in Malaysia show deficiency where most of the zakat fund was not fully distributed to the zakat recipients. Only around 70 to 75 per cent zakat fund have been distributed in Malaysia from 2001 until 2007 and almost 25 to 30 per cent were left idle. The significant reasons referring to the problem were the emerging connection gap between zakat institution and zakat recipients. Bureaucracy problems also happen in zakat application procedure and finally are the geographical problem where potential zakat recipients could not be reached and identified by the amil because of their homes were scattered in the village, district or state. A second issue that may arise from this case is the payment done by zakat payer through the unofficial channel or in other word the zakat payer is paying zakat direct to the zakat recipients (Muhammad Syukri, 2002, p. 21). Consistent with this findings, Wahid et al. (2009) highlighted the issues of transparency and unclear method of zakat distribution as the main reasons of dissatisfaction towards zakat institutions in Malaysia. The majority of zakat payers in Malaysia are not satisfied with the way zakat institutions distributed the zakat; they have felt that the process of distribution is vague and the information regarding to the zakat distribution is unclear (Wahid et al., 2009, p. 1). Many studies also agreed that the zakat collection should be disbursed immediately to the recipients and also should not be postponed (Nik Mustapha, 1991) and without unwanted delay (Khaf, 1995, p. 20 and Mujaini, 1995). Wahid et. al (2010) investigated the perceptions of zakat recipients (the end user) and the Zakat Collector (the implementer) on whether localization of zakat distribution would be a possible solution to address the problem of zakat management in Malaysia. He found out that the process of localization in the long run could create another good output such as good governance, leading to higher investment in human capital and social services as the poorest regions of the country chose projects according to their greatest needs, increasing the democratic accountability of the state and others. In terms of zakat 341

7 management, localization could be implemented by forming the local committees in the villages (Wahid et. al, 2010, p.477). The zakat could be distributed closely to the zakat recipients especially the poor and needy group and also other zakat recipients such as Fi Sabilillah (in the cause of Allah), Ibn Sabil (wayfarer), Al-Riqab (slave) and others who could be recognized. It is learnt that this action could increase awareness amongst the zakat payers and will also increase their satisfaction to make a zakat payment through official channel. This will boost their confidence to pay zakat through zakat institution and finally the zakat collection will be increased year by year. It will give a huge benefit to the zakat recipients in the future (Bakar et.al, 2011, p.243). The main advantage is the local government could easily distribute the goods and services to the local residents, provides citizens with the public goods and services that they desire, able to target different bundles of public goods to different regions, because they are close to the local people. It is interesting to note that the basic pillar of efficient zakat management mentioned in the Quran is the class of zakat workers, not the head of State or ruler, even though the latter are necessary for facilitating the activity of zakat workers (Suhaib et.al, 2009, p.316). Meanwhile Hudayati (2010) support the centralizing zakat management due to strategic impact that zakat centre enjoys through this strategy. By having it centralised, coordination between national zakat institution and the fiscal policy maker might be implemented more easily. The zakat concept can also be incorporated into fiscal policy formulated by government. Finally, by having a good and effective management of zakat it is expected that the conversion of zakat recipients into zakat payers can take place to indicate that the welfare improvement of the under-privileged segment is guaranteed. For example, the Malaysia s zakat centre had provides interesting learning in term of zakat management by centralising it at the state level, due to the authoritative power of each state ruler on the religious matter, including zakat. This approach is very positive to make zakat collection effective and efficient. Further, she also clarifies the ineffectiveness of centralized strategy. Through this approach the zakat institutions fail to reach those needy people due to lack of information or worse due to absence of creative distribution management. Single entity of zakat in each state causes no competition at all. It might imply serious problem in managing zakat funds. Another potential problem is on how to deal with cross-state collection and distribution. Centralising zakat institution at state level might also be viewed as decentralising at federal level (Hudayati, 2010, p. 371). Furthermore, it is very important for zakat organization to improve organizational members learning capabilities in order to better understand and manage the organization and its environment. Halim et. al (2011) found out that learning culture elements of commitment to learning, knowledge sharing, and open mindedness were embedded among staff of Lembaga Zakat Selangor (LZS) 2. Some poverty alleviation projects undertaken have been successful. However, the lack of learning and knowledge in managing and monitoring projects awarded to aptitude deficiency beneficiaries, have led to many programmes failure. 2 Selangor Zakat Centre 342

8 The finding also reveals that the lack of knowledge and attitude of zakat beneficiaries too contributes significantly to the success and failure of zakat assistance package. Some zakat beneficiaries are now zakat payers but most are still zakat dependence despite they have been receiving the assistance for more than a decade (Halim et. al, 2011, p. 47). Thus, the role of the zakat centre in the collection and dissemination of zakat must be appreciated along the same rationale of intermediary services, which brings together suppliers and demanders of a particular product or service efficiently (Bakar et.al, 2011, p. 237; Duka, 2013, p.138). Suhaili Sarif (2014) found out that apparent from the usual collection and disbursement procedures, the zakat centre did not have sufficient knowledge to administer and utilize the fund effectively (Suhaili Sarif, 2014, p. 6). This situation, indirectly, suggests that the collection and disbursement of zakat during this era was considered purely from the religious point of view, as a means of enabling Muslims to fulfil their obligations. Zakat centre, at that time, had yet to realize the potential of the fund beyond the religious perspective, especially in the economic sphere. In addition, there were many weaknesses, such as the lack of reports and systematic records (Ahmad et.al, 2006, p.194). Zakat centre seldom disclosed collection and disbursement statistics, or released periodic information as to what had been done with the zakat money. This is actually not surprising, considering that the Zakat centre themselves did not have a clue as to how to administer the fund effectively. Once the money reached the council offices, it was normally kept in the council s account without being fully distributed (Ahmad et.al, 2005, p.57). Finally, issues in zakat management can be briefly looking at the shift in the current practice of zakat, the role of duty has been expanded beyond the religious perspective. The fund has been managed in such a way as managing a business entity. In the disbursement aspect, it seems that the newly corporatized bodies have to find the best way to persuade people to pay. The fund is also perceived as a tool in poverty eradication and economic development. The study reveals that there is a general misconception of zakat, as indicated in several standards and guidelines, which has consequently resulted in inappropriateness in their proposed corporate zakat recognition and measurement and hence presentations. These inaccuracies, in one way or another, have not been in line with the true spirit of zakat in Islam. Thus, some unfavourable consequences may and in fact have already been implicated on the larger Muslim community as a result (Muhammad et.al, 2009, p.9). 5.2 Issues in Zakat Collection Ahmed (2004) estimates the potential of zakat collection and resource required for poverty alleviation for a sample of 24 Islamic Development Bank (IDB) member countries by using a $1/day and $2/day international poverty lines. He found that, at one extreme, Tunisia required only 0.3 per cent and 1.4 per cent of its GDP for the alleviation of extreme poverty while at other extreme, Nigeria required huge amount that is per cent and per cent of GDP respectively for poverty alleviation. Shirazi et. al (2010) estimates the resources required and potential zakat collection for poverty elimination in 38 OIC members countries. He found out that half of the sample countries not only meet their resources shortfall 343

9 by potential zakat collection but also generate surplus funds which sufficient for the resource deficit countries. He suggest that pooling of zakat funds from zakat surplus countries is needed because its providing for resource deficit countries to eliminate the poverty (Shirazi et. al. 2010, p. 69). In calculating the potential of zakat, Zarqa (2002) comes with estimation of the potential zakat proceeds in a contemporary Islamic economy at about 3 per cent to 3.6 per cent of the GDP. He expresses reservation on the possibility of using the extent of the coverage of zakat collection as a policy tool. He further argues that the disbursement, mix ratio, cash mix ratio, the equilibrium share of other claims, and the dates of collection and disbursement, all of which can be used as a controlling tools of fiscal policy since there is nothing which prevents that in shariah. Shirazi (2006) attempts to estimate the resource shortfall and potential zakat collection for poverty elimination in the low income Muslim countries. He estimates the resource shortfall by utilizing the international poverty lines (under USD 1 and 2) headcount and poverty gap index estimated by the World Bank. Potential zakat collection has been estimated by utilizing Kahf's definitions of zakatable items with some modifications. The study finds that some of the low income Muslim countries can meet their resource gap under USD 1 international poverty line with potential zakat collection. However, other countries, mostly belonging to Africa, cannot meet their resources shortfall from their potential zakat collection (Shirazi, 2006, p. 17). Yaumidin (2009) estimates the resource needed for poverty alleviation and potential zakat collection for Malaysia and Indonesia. She concludes that Malaysia performs better than Indonesia. She replicates the methodology employed by Ahmad (2004) which suffers the same shortcoming as discussed above. Hassan and Khan (2007) find that zakat fund can largely facilitate the government budgetary expenditure and support the poor through transfer of payment in Bangladesh. By allocating funds into eight groups of zakat recipient, it is possible to increase the income and employment with the improvement of safety net programmes. Zakat funds can increase the tax potential of the government through the improvement of productivity, employment and output. They conclude that Zakat funds can replace the government budgetary expenditures ranging from 21 per cent of ADP (annual development plan) in to 43 per cent of ADP in These funds can be used for other developmental and social expenditures. They suggested that zakat should be included, for Bangladesh and rest of the Muslim countries, as a poverty alleviation instrument in their PRSP (Hassan and Khan, 2007, p.27). It has been emphasized that in Islam, the primary motivation of paying zakat should be the worship (ta abudi) factor. Muda et.al (2009) investigates the factors affecting individual decisions in zakat contribution hence provide an understanding of their motivation. He indicates that participation in zakat is not only motivated by religious factor but also self-satisfaction and organizational factors. The implication is that the efforts to raise the level of zakat activities should emphasise not only the religious aspect but also the individual s and organizational dimensions (Muda et.al. 2009, p.9). This may have significant impacts on the personal financial planning and development of Islamic economic systems in 344

10 general. Reinstein (2006) supported worship factor as one of the main motivations that contributes to the compliance of zakat, sadaqa (donation) and other prosaically behaviour (ijtima i). He further claimed that the act of paying zakat could be an indicator of high level of iman (faith). This is because individual compliance towards religious obligation to pay zakat is highly dependent on his belief of the religious teaching. Apart from the worship factor, the individuals level of understanding on Islamic principles will also motivates people to comply the injunction to pay zakat. Lastly he also identified that religious belief as an important determinant of religious and secular giving. Muhammad Firdaus et.al. (2012) found out that Muslims who pay zakat on both periods monthly and annually have a stronger faith, appreciation, altruism, and self appreciation. The place of choice to pay the zakat/alms also affects the respondents choice to pay the zakat on a monthly basis. The respondents who pay zakat to formal institutions have a good judgment of the organization s performance. But there is almost no significant difference between the perceptions of those who pay their zakat to formal or informal institutions. Therefore, he estimates the total of zakat potential in Indonesia and explores the relationship between demographic characteristics and zakat payment. The results show that total of all zakat potential in Indonesia from various sources is approximately 217 trillion rupiah. This number is equal to 3.4% of Indonesia s 2010 GDP. The study shows that education, occupation and income are important factors which influence respondent s frequency and choice of place when paying zakat and alms. In addition, the new approach to fund collection has incorporated many ways of modern transaction, such as Internet banking and other financial facilities. Such new practices are actually associated with the business strategy where the zakat centre needs to have a corporate link with many financial institutions (Suhaili et.al. 2009). To accomplish the strategy, it appears that the zakat centres have to think beyond religion, treating the fund as a type of secular taxation in which people must be persuaded rather than hoping they will willingly fulfil their own obligation (Suhaili et.al. 2009, p.495). As this zakat collection is treated as a positive redistribution mechanism to improve socio-economic impact to the society. 5.3 Issues in Zakat Distribution The traditional practice of zakat distribution in the form of cash payment will basically not help the recipients, especially in the long term (Ahmed, Habib, 2004). Zakat beneficiaries are more likely to spend most of the distributed wealth for the consumption as according to Qureshi, these groups have high propensity to consume where there will be nothing spare for them to generate income (Qureshi, D. M., 1989, p.41). Rahman also reminds that such a disbursement may also create a permanent class of dependants with no motivation to work (Rahman, Afzalur, 1986). Hence, the traditional practice of giving zakat in the form of monthly dole or in daily necessities should be limited to those who have no power of sustenance, as such a distribution, according to Ahmed, will only manage to fulfil the basic necessities without significantly changing the living standard of the recipient. He also further mentions that any 345

11 ttempt to treat productive recipients like an unproductive one will only result in the poverty persisting continuously (Ahmed, Habib, 2004). Response to this issues, Parid (2001) suggests that zakat distribution must acquire at least a level of sufficiency and comfort living for the recipient and his dependents. The distribution must be in certain proportion that ensures continuity of quality life where the impact of the distribution is that the recipient must obtain certain standard of living. Standard of living here means attaining the level of mobilizing basic essentials (daruriyyat) and comfort (hajiyyat). Othman al- Habshi (1990; 1998; 2006) clarifies that zakat is the most effective means to assist the poor and needy. Islam has often stresses on the believers to consider the role of zakat seriously, in particular, in improving the lives of the downtrodden. He also expresses that the proportion of zakat received by the poor should have helped them improve their standard of living, namely, in fulfilling their daruriyyat and hajiyyat needs which forms as the minimum of their quality of life. Therefore, the funds received should enable them to enhance their life. As for the disbursement aspect, the consideration is mostly to utilize zakat as a poverty eradication mechanism. The current target is not merely relieving the poor temporarily but enriching them instead in the hope that the recipients will be transformed and become payers (Hassan, 2007, p.27). Hence, the zakat fund is now being used as an income generation initiative, a modern development approach to release the poor permanently. The redefinition of recipients and the introduction of new ways of disbursement alongside the economic perspective of poverty eradication is a step towards the translation of what has been imagined by the scholars. The concept of income generation through zakat has never been extensively discussed in any specific writing (Suhaili et.al. 2009, p.467). There are, however, a number of Muslims economists and Islamic jurists who propose that zakat should be disbursed in such a way that empowers the recipients and builds their capability to generate income. Ahmed (2004, p. 64), suggests that zakat distribution should be able to provide the necessary inputs such as human, physical and financial capital in order to reduce the poverty of the able bodied group. According to him, specific programs have to be designed to provide support for skill development, provision of physical capital such as taxis and sewing machines, and financial capital to start a business so that the poor can be fully employed and earn a living. Afzalur (1986) also argues that zakat should be used in providing sources of livelihood to the poor and the needy according to their skills, individual skill and varying needs of different geographical units (Afzalur Rahman, 1986, p. 260). He also stresses that zakat funds should be used to provide necessary technical equipment and machinery to artisans and craftsmen. In the meantime, he proposes that cottage industries should be set up in rural areas where poor villagers who have plenty of free time to be busy with subsidiary occupations for extra income. He believes that direct cash disbursement will not be effective in bringing about any better changes to the eligible recipients. 346

12 In discussions of the above matter, researchers usually distinguish between productive and unproductive recipients, where the former refers to able bodied persons and the latter to the incapacitated, such as the disabled and the elderly (Ahmed, 2003). He said: The productive households are poor because they cannot use the full potential of their resources due to some constraints. These constraints are related to the limited human, physical and financial capital needed for an economic activity that provides the household a decent income. Thus, the institutions of zakat and awqaf should be able to provide the necessary inputs like human, physical and financial capital in order to reduce the poverty for the productive group. Specific programs have to be designed to provide support for education and skill development, provision of physical capital (like a taxi, sewing machine, etc), and making financial capital available to start a business so that the poor can be productively employed and earn a living. For the unproductive members of the society such as elderly, sick, widows, handicapped, etc., the institutions of zakat and awqaf should be able to provide them with periodic stipends to afford consumption of the basic needs. From the above statement, it can be concluded that a productive recipient is one who has potential to earn their living independently despite their limitations. Thus, according to Ahmed, this group must be facilitated based on their need in order to enhance their capabilities so that they can earn their living independently. This, however, must be properly managed; a specific program has to be designed to provide necessary supports such as education, skill developments and financial capital. Differing from the productive, unproductive recipients such as elderly, sick, widows and disabled must be helped by periodic stipends with zakat funds disbursed from time to time to fulfil their basic needs (Suhaili, 2009, p.460). The distribution of zakat funds for helping recipients to yield income is also sometimes classified as productive in nature as the zakat provision could help recipients to produce something to generate their income and will not end in itself. For example, Suhaili (2009) uses the term productive fund to refer to the use of zakat for capital support of the economically weak entrepreneur (Suhaili, 2009, p.461). On the other hand, in the case of distribution where the recipients will spend the zakat on food and basic necessities, the disbursement is usually seen as for consumption in purpose. According to Abdul Rahman and Ahmad (2010), in general zakat distribution method is still focused on the periodical form of direct payment where asnaf (zakat recipient) is given zakat money monthly or annually (Abdul Rahman A., 2010, p. 291.). Nevertheless, many cases have shown that direct payments reducing asnaf s incentive to work and end up being dependent on zakat funds. Although direct payment of zakat is still acceptable especially for non-productive asnafs such as the disabled and elderly, it is recommended that zakat should be distributed in the form of capital finance to the poor and needy in order to encourage business activities among asnaf. In a long run, it is expected that the productive asnaf will be more independent, and able to support themselves and their families, thus escaping from the poverty (Hayati et.al. 2012). Moreover, in some countries such as Malaysia and Pakistan, zakat funds are also used to help the household dependants by sponsoring their school and university fees (Ahmed, 2004). 347

13 It seems that these educational and training programmes are useful to prevent the asnafs children from living in poverty in the future due to the lack of knowledge. The effectiveness of zakat collection and distribution mainly depends on the good governance of zakat institution. However, distribution of zakat is very significant to the Muslim country and community especially to eradicate poverty, improve economic growth and also the quality of life (Wahab et.al. 2012, p.108, Bakar et. al, 2011, p.237; Semerdjian, E. 2010, pp.505). However many studies illustrate that zakat management reported incidences of negative perceptions from the zakat payers on the management on zakat funds especially in term of distribution (Sanep et. al 2006, p.270; Syukri, 2002; and Abdul Halim et. al, 2008, p. 129). If the zakat institution cannot be addressed properly, it could raise negative impact on the future development of the zakat institution. Indeed, there was a study suggested the zakat institution should apply the concept of corporate governance in its management (Shawal and Hasan, 2007, p.66). Saladin et.al. (2011) examines the present poverty measurement practiced by Islamic institutions in Malaysia. He compared the difference between three monetary variables which are Income, Poverty Line Index (PLI) and Zakat Poverty Line (ZPL). He found out that these monetary variables are significantly related with each other. This association could be used by authorities to understand the poverty phenomenon from an Islamic perspective. However, there are some drawbacks in the monetary approach. Firstly, the needs of individuals within the same age group is not exactly the same due to the differences in metabological rate. Secondly, nonmonetary items which reflect the quality of life such as size, type and ownership of house, education level are not included in the calculation of ZPL and PLI. Due to these reasons, policy makers and researchers in the developed nations have opted for other approaches such as capability and social exclusion approaches which are multidimensional in nature that includes nonmonetary indicators. He then proposed a new indicator called Islamic poverty indicator (IPI) incorporating the various dimensions would have an impact on Islamic institutions as it gives a new perspective of measuring poverty from a micro perspective. Using methods such as index, the IPI is envisaged to reflect the multi-dimensional phenomenon of poverty in a more holistic way. Thus, it is strongly recommended that a study on formulating the IPI to be carried out. This would enhance the poverty measurement from an Islamic perspective as it comprises of monetary and non-monetary components using maqasid al-shariah principles (Saladin et. al, 2011, p. 127). Fuadah et.al. (2013) demonstrates literately the importance of zakat towards the economic development among new convert. As one of the several instruments by Islam, Zakat is important to combat and enhance welfare in the society. It also helps to generate a flow of funds and recruit the necessary manpower (Fuadah et.al. 2013, p.36). She found out that zakat has a significant economic impact on society mostly on new convert by taking a certain percentage of one s wealth is spent annually over the foregoing eight categories as prescribed in the Qur an. Income support provided to the new convert would result in a measured increase of the money supply in the economy causing upward shift in demand for goods and services. To support this upward shift in the demand for basic necessities of life 348

14 such as food, clothing and shelter, the production facilities would gradually expand and begin to absorb the idle capital. To support the increased production, the economy would generate more jobs and new employment opportunities. This added employment would generate more demand for goods and services, more room for additional investments and finally, the growth cycle based on balance consumption would contribute to a balance economic growth. This research later been supported with consequence findings, show that zakat distribution gives positive impact in reducing poverty in unique aspect of the particular recipients in Malaysia (Johari, F et al, 2014a, p.337) (Johari, F et al, 2014b, p.48) (Johari, F et al, 2015, p.50). 5.4 Issues in Zakat as a Tool for Poverty Alleviation According to Kahf (2004), implementation of zakat can provide micro financing to the poor. Zakat can be given out to the poor for consumption purposes to avoid diversion of funds from production. The combination of micro financing and zakat funds will make it easier for the poor to break out of the poverty cycle (Kahf, 2004, p.19). In addition, Islam establishes zakat as a compulsory charity tool that can be used on eight purposes. Among them, five are meant for poverty eradication such as the poor, the needy, the debtors, the slaves (to free them from captivity), and the travellers in need. Other heads are the administrative cost of zakat, 'those whose hearts are made inclined' (to Islam), and in the way of Allah. Although eight heads for spending Zakat revenue have been mentioned in the Qur'an, there is general agreement that the first priority in the use of Zakat funds has to be accorded to the alleviation of poverty through assistance to the poor and the needy (Hassan, M. K., 2006, p.16). The effectiveness of helping the poor is depends on the method of distribution and also the purpose of it. This method however, needs to be strengthened and analyzed from time to time so it will serve the purpose to help the poor to have a better life. The previous research which discussed on the effectiveness of zakat on poverty reduction strategy focused on several aspects. Hairunizam Wahid. et.al. (2004, p.160) assess zakat distribution based on the quality of life, Fuadah Johari (2004) viewed this form the effects of the distribution of the income, while Mujaini Tarimin (2005) also assess the impact of zakat in terms of income but towards professional management, while Ahmad Fuad Mohammad (2006) evaluated in terms of income. Patmawati Ibrahim (2010, p.110) viewed this on the pro rata distribution, Nurzaman (2011, p.15) measures the effectiveness of zakat distribution based on the Human Development Index (HDI) and Rosbi (2009, p. 60) measure the successful of zakat distribution based on five elements (religion, life, mind, dignity and wealth). Mashreque et.al. (2006) revealed that the strength of zakat as a poverty alleviation tool depends on how much of the prevailing poverty gaps would be financed by zakat proceeds. The strength can be measured by portion of poverty gap that zakat 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 encourage resources to be transferred wherever these would be of best use. It is quite evident that from his study on 349

15 poverty alleviation in Bangladesh, zakat collected from rural area can cover only 14.8% of the rural poverty gap in The coverage rises over time and becomes 24.7% in Per capita urban zakat receipts covers 67% of the urban poverty gap and it increases up to 84.3% by the year The extremely low coverage of poverty gap by rural zakat receipts shows severity of rural poverty compared to urban poverty and the limitation of any poverty alleviation strategy solely based on rural zakat (Mashreque et.al, 2006, p. 245). This warrants for mitigation strategy with tools beyond zakat with the necessary condition that the intervention package must be rural biased and ensures net transfer of resources primarily from the rich to poor and equally from urban to rural. Yusoff (2006) analyses the potential of zakat as the major fiscal policy instrument in an Islamic State. Zakat plays its role in the macroeconomic stabilization policy through the non-discretionary and discretionary policy. The built-in stabilizer mechanism occurs when zakat collection is automatically reduced during recession giving more money to people to spend which tends stimulate the economy; while during the boom period more zakat is collected, reducing the ability of the people to spend which tends to dampen economic activities. These reduce macroeconomic fluctuations. As a discretionary fiscal policy, the government varies the disbursement of zakat to the recipients whenever necessary during the phases of the business cycle (Yusoff, 2006, p.141). During the expansion phase of a business cycle, the government decreases zakat disbursement to reduce aggregate spending. Likewise zakat disbursement is increased when the economy is in the downswing to increase aggregate spending. Then Yusoff (2010) provide concrete empirical evidence in support of zakat as a fiscal tool in an Islamic state. Specifically, his empirical evidence using Malaysian panel data supports the hypothesis that zakat spending is a potent fiscal instrument to stabilize macroeconomic fluctuations. He suggests that Muslim countries must make all effort to establish zakat as the major tool for stabilization policy. In order to make this a success, the zakat collection and zakat spending have to be carried out in the most effective and efficient manner (Yusoff, 2010, p.158). As long as zakat collection and spending are disorganized we can never achieve the potential of zakat as an effective fiscal instrument. M. Kabir Hassan and Juanyed Masrur Khan (2007) estimate the impact of zakat funds on the annual development plan of Bangladesh. The zakat funds can increase the taxation potential of the government through the improvement of productivity, employment and output. Further, the implementation of zakat in Bangladesh has several potential effects on government budgets such as relieving budget categories targeted for poverty alleviation for other budgetary need, increase the potential of taxation through the improvement of productivity, employment and output, and also zakat collection can be used as an important economic policy tools by the government (M. Kabir Hassan and Juanyed Masrur Khan, 2007, p. 25). Saiful Azhar Rosly, (2010) explained that zakat plays an important role in a pivotal role in poverty eradication and income redistribution of the Muslim people and it forms a critical component of public finance in Islam. Zakat administration in essence deals with the collection of zakat from zakat payers and 350

16 distribution of zakat to the eight recipients (asnafs). He explained that the increasing number of shareholdings by Muslims in business corporations as well as companies using the Islamic label such as Islamic banks and takaful companies has provide strong basis for a systematic and efficient zakat system of collection and distribution (Saiful Azhar Rosly, 2010, p. 144). Dimas Bagus et.al. (2010) study about the power of zakat in poverty alleviation and found out that zakat can give impact in terms of consumption and investment variable. Thus, the more zakat disbursed to the recipient, the more in increase the amount of aggregate consumption created into economy (Dimas Bagus et.al, 2010, p. 420). In spite of in the Islamic economic system, zakat payer will transfer their excess income or wealth to zakat recipient which indirectly will promote the higher propensity to consume of zakat recipient. For the zakat payer side, they will reduce the consumption, and turn into saving/investment activities. However, it finally also will create real economy through investment project financing or credit instrument. Further, Hussin and Ahmad (2010) reported that overall, only 6.9% out of 537 respondents that received capital aid from zakat institutions in Selangor and Kuala Lumpur managed to pass the Had Kifayah (Zakat Poverty Line) of poverty. The study further explained that the reason behind the high percentage of failure is mainly due to the amount of capital aid received from the Zakat institutions (Hussin and Ahmad, 2010, p.5). They found that the percentage of success is highest if the amount of capital received is sufficient. Furthermore, Wahid et al. (2004) studied on the impacts of zakat to the quality of life of the Asnafs (recipient) by examining their satisfaction on the zakat received. It was found that the respondents were generally not satisfied with the zakat distribution as education and social involvement were the only factors that the respondents were satisfied with relative to other quality of life variables such as transportation, communication, health, and shelter (Wahid et al. 2004, p.7). Hossain, M. (2005) looked at how the implementation of the institution of zakat commerce and the merchants. He presented the problems about the concept, trading systems, receiving alms, division and problems encountered. The results of the study provide implications for the influence in a commercial implementation of the charity Muslim region (Hossain, M., 2005, p.17). Mohamad (2011) examines the impact of zakat spending and education on economic growth using panel data where the cross-section units are the fourteen states of Malaysia. Education and economic growth are represented by student enrolment ratio and growth of real GDP of each state (Mohamad, 2011, p.181). Empirical evidence supports the hypothesis that zakat spending and education are important determinants of real GDP growth suggesting that they are essential ingredients to be considered in formulating economic development programs in the Muslim countries. Therefore, Muslim countries must make all efforts to establish zakat and education as the major ingredients in the development policy. In order to make this a success, every Muslim country must organize zakat collection and zakat spending in the most effective and efficient manner. 351

17 Several issues highlighted in previous studies on the effectiveness of zakat in alleviating poverty in Malaysia. Ab. Rahman et al. (2012) highlighted the issues of inefficiency of zakat distribution thus affecting the objective of combating poverty. They argued that studies found that there were bureaucracy problems in zakat Institutions (ZI) in Malaysia which slow down the application process such as the requirement for students to make an application every year to ZI although their application has been approved during their first year. Besides distribution process, inefficient in collecting zakat has also been highlighted. For example, the Pusat Pungutan Zakat /MAIWP 3 on 2010 report, only 160,000 out of approximately 2 million Muslims population in Kuala Lumpur (8%) are paying zakat. Md. Ramli et al. (2011) highlighted the issue of asnaf attitude in receiving capital aid from zakat institution in Malaysia. They found that some of the recipients of the capital aid did not possess the right behaviour to become entrepreneurs thus affecting their business performance (Md. Ramli et al. 2011, p.13). Ahmad Fahme et al. (2013) examines the effectiveness of monthly zakat distribution as a mechanism to poverty reduction in the state of Kelantan, Malaysia. 481 respondents were randomly selected from Kelantan s zakat recipient s list from the poor and needy category for ten districts in Kelantan. In-depth interview were used to gather the data. For analysing the data, descriptive statistics were applied. Results indicate that zakat elasticity is about 0.46, suggesting that, holding other variables constant, if the zakat distribution goes up by 1 per cent, the monthly income goes up by 0.46 per cent. Further, the male coefficient is about 0.15, meaning that the male gender receives about 0.15 per cent more income compare to female gender, again holding other variables constant (Ahmad Fahme et al. 2013, p.181). Thus, zakat distribution is significant in determining the income distribution among this group and bringing positive effect towards improving the income distribution of this group. 6. Conclusion Analysis of the articles related to critical current zakat issues between 2003 to 2013 can be concluded that, zakat management can be briefly looked at the shift in the current practice to the beyond of the religious perspective. This is because, the main objective of zakat is the achievement of socio economic justice. Thus, it is important for zakat to be managed in the most efficient way. The whole idea of zakat management is to help Muslims perform this pillar of Islam and establish its primary function as a means to alleviate poverty. However, if trust is not sufficiently maintained between Muslims and zakat centre, the potential zakat payers would prefer to pay out zakat directly to their own relatives who are poor or needy, rather than deal through the zakat centre. Issues such as zakat fund not fully distribute, dissatisfaction from zakat payers and delaying the payment of zakat should be tackled immediately so that the zakat centre can avoid the payment done by zakat payer through the unofficial channel or in other word the zakat payer is paying zakat direct to the zakat recipients. Zakat administration, on the other hand, should play an important role in monitoring the activities of the involved recipients besides 3 Malaysia Federal Territory Zakat Centre 352

18 providing them with necessary skills, so that they can optimize the zakat funds channelled to them and avoid unnecessary misspending. On top of that, in terms of collection, a new and modern transaction approach to fund the collection must be established such as such as Internet banking and other financial facilities. It requires a business strategy where the zakat centre needs to have a corporate link with many financial institutions. To accomplish the strategy, it appears that the zakat centre have to think beyond religion, treating the fund as a type of secular taxation in which people must be persuaded rather than hoping they will willingly fulfil their own obligation. The zakat disbursement has the ability to increase consumption since the marginal propensity to consume of the zakat payer is lower than the zakat recipient, so that increasing the purchasing power parity of the poor. The disbursement of zakat for income generation has also been viewed as a strategic measure to solve the serious problems of poverty and unemployment in the majority of Muslim countries. It is believed that the use of zakat funds for income generation programs can reduce the poverty problem besides fostering sustainable economies. Most previous studies confirmed that the utilization of zakat funds for income generating activities, such as setting up small and cottage industries and providing necessary training for poor communities, will improve income and reduce the poverty rate. Through this program, zakat funds can finance the economic activities of the eligible recipients based on their skills and capabilities. Lastly, the effectiveness of zakat in helping the poor is depends on the method of distribution and also the purpose of it. This method however, needs to be strengthened and analysed from time to time so it will serve the purpose to help the poor to have a better life. Often, there are various and interesting issues occurred in zakat management, collection, distribution and poverty field which may gain interest from researchers of Islamic scholar as well as economic researchers. This study not only explore in-depth for those issues, but may also allow researchers to suggest solutions and produce new knowledge to solve issues related to zakat. Acknowledgement Appreciation and thanks to Universiti Sains Islam Malaysia on university s grant: code (PPP/FEM/IWM/30/14012) for the research titled: Membangun Model Pelan Pembangunan Ekonomi Dalam Membasmi Kemiskinan Di Kalangan Asnaf New Muslim (Muallaf) : Kajian Kes Di Negeri Selangor. Reference Ab Rahman, A. (2012). The Role of Zakat In Islamic Banking Institutions In Developing The Economy of The Poor and Needy In Malaysia. Tazkia Islamic Finance and Business Review, 7(2). Abdul Rahman, A. R. (2003). Zakat on business wealth in Malaysia: corporate Tax Rebate, Accountability, And Governance. Jurnal IKIM, 11(1), pp

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