Morality of Poverty Reduction in Islam: zakats effect on poverty in Pakistan, 1980-1994.

“Morality of Poverty Reduction in Islam: zakat’s effect on poverty in

Pakistan, 1980-1994”

What is Zakat?

• One of the fundamentals of Islam’s belief structure and, consequently, is one of the most important religious duties in Islam

• Considered as the right of the poor people to the wealth of the rich and is to assure the basic necessities of life for those who cannot undertake gainful employment or otherwise deserve society’s help and assistance

• Zakat is to be utilised for alleviation of poverty by disbursing it to the poor, widows, orphans and the handicapped eligible to receive it. Thus it lays down the ground for the Islamic social security system

• Zakat is a redistributive and an obligatory tax levied at 2.5% per annum on the net wealth of Muslims including minors and orphans who possess wealth above a certain exemption level known as nisab

Imposition of Zakat in Pakistan• Soon after coming to power in 1977, General Mohammad Zia-ul-Haq

announced the Islamisation of Pakistan to be his prime objective

• On 10 February 1979, President Zia-ul-Haq addressed the nation on ‘The Introduction of the Islamic System in Pakistan’, at the National Assembly Hall in Islamabad, and selected zakat (one of the five fundamentals of the Islamic faith) as the beginning of the Islamisation process

• The formal institutionalisation of zakat took place under the Zakat and Ushr Ordinance 1980, No. XVIII on 20 June 1980

• With the passing of the Ordinance a Zakat Fund was created with the amount of Rs.2250 million

• The zakat system of taxation was parallel to the federal fiscal system and thus its revenue and expenditure were not part of the secular budget

Assertions regarding Zakat

• Theological:• Islamic state would instrumentalise zakat in a way that would eliminate

destitution and poverty in the Islamic society, and break the association between the rich and the powerful

• Islamists also affirm that zakat has major potential for mobilising resources in favour of poverty reduction

• Official (as in Pakistan):• Address to the nation on 10 February 1979, General Mohammad Zia-ul-Haq

pointed out:zakat is one of the most important pillars of Islam and related to the ‘economic and welfare aspects of the societynarrow the gap between the rich and the poor and look after the indigent and the destitute

Charging Zakat

• Zakat was deducted on a compulsory basis on savings held in banks or other financial institutions the value of which was equivalent to 612.32 grams of silver, at the rate of 2.5% from the accounts of the Muslim citizens and private companies, corporations and enterprises of Pakistan of which the majority shareholders were Muslims (excluding religious schools, mosques and orphanages) on the first of Ramadan (the ninth month of the Islamic calendar)

• The assets subject to the compulsory levy of zakat were categorised in two schedules, the First and the Second. Schedule I included assets held by financial institutions on which zakat was deducted on a compulsory basis and Schedule II included assets on which zakat was levied but its payment was left to the discretion of the individual holding the asset

First Schedule

The assets subject to zakat for credit to the Central Zakat Fund were:

• Saving Bank Accounts with banks operating in Pakistan

• Savings Deposit Certificates, e.g. Defence Savings Certificates, National Deposit Certificates

• Units of National Investments

• ICP (Investment Corporation of Pakistan) Mutual Funds Certificates,

• Government Securities

• Securities including shares and debentures of statutory companies or corporations

• Annuities

• Life Insurance Policies

• Provident Funds

Second Schedule

The assets subject to the levy of zakat included:

• Gold and silver items at 2.5% of the market value on the Valuation Date

• cash at 2.5% of the amount

• Current accounts

• foreign currency accounts

Zakat Administration

Central Zakat Council

4 members nominated by the President(including 3 Ulema )

Provincial Zakat Council (for each 4 provinces)

Secretary of the Provincial Government Department of Finance

District Zakat Committee(for each District)

Deputy Commissionerof the district

Sub-Divisional Zakat Committee(for each sub-division)

Assistant Commissioner

Local Zakat Committee

of the Local Zakat Committee) the Muslims of a locality)

Chairman

Administrator General

(Judge of the Supreme Court)

Chairman (elected by the members

Chairman

7 members (elected or selected by

One member from each province (nominated by the President)

Secretary of the Provincial Government

Chief Administrator

Secretary Govt. of Pakistan

5 members

Chairman(Judge of the High Court)

5 persons nominated by the Governor

(elected by the Provincial Zakat Council)

Local Government Department

Ministry of Religious Affairs

Secretary Govt. of PakistanMinistry of Finance

Secretary of the Provincial Government

Social Welfare Department

Chief Administrator(from each province)

(1 from each sub-division)

Chairman(elected by the Zakat Sub-Divisional

Committee members)

6 members (elected by the chairmen of the Local Zakat Committees

within a sub-division)

ZAKAT COLLECTION AND DISBURSEMENT

Central Zakat Fund

Zakat deduced at source

Zakat paid in voluntarily

Zakat funds transferred from

provincial accounts

Zakat paid in voluntarily

Transfer from local Zakat Funds

Provincial Zakat Fund

(for each 4 provinces)

Local Zakat Fund (for each Local

Committee)

Zakat paid in voluntarily

Orphans, disabled, for subsistence and rehabilitation, vocational education centre and hospitals, etc.

Institutions (medicare, religious schools,

educational institutions, social welfare institutions)

Aim of this Presentation

• To assess the impact that zakat had on poverty in Pakistan keeping the theological assertions and the official objectives of zakat in mind

• The study uses poverty measures such as the headcount (Hc) and poverty gap (Pg) approach

Headcount= Where q is the number of households below the poverty line and n is the total number of households. This measure gives the proportion of the poor households among the total households

Poverty gap=

Where N is the number of households below the poverty line, y is the adult equivalised income for households and pl is the poverty line. The poverty gap thus measures an average percentage of how far people fall below the poverty line

100*/ nqH c

100*1

1

N

s

s

pl

ply

NPG

Previous work on the impact of zakat on poverty

• Shirazi’s study attempts to estimate the impact of zakat and ushr on household poverty alleviation

• He uses the Household Integrated Economic Survey (HIES) for two years: 1987-88 and 1990-91

• Shirazi uses the Poverty Headcount and Poverty Gap approach

• He concludes that the impact was not that significant, but he does assert that zakat and ushr accounted for 39% of the average disposable income of the lowest income decile, which he applauded as extremely encouraging and evidence that zakat was targeting the right group

Data Used

• The Household Income and Expenditure Survey (HIES) for the 1980s and the

Household Integrated Economic Survey (HIES) for the 1990s is used

Sizes of the different surveys

Years

Number of Households

per HIES

1985-86 16536

1986-87 17183

1987-88 18144

1990-91 6393

1992-93 14594

1993-94 14669

Source: HIES, Government of Pakistan, 1985-86, 1986-87, 1987-88, 1990-91, 1992-93 and 1993-94.

The subset of variables taken from the HIES database include

• household income

• zakat given and received

• household composition in terms of number of earners, and ages of the household members

Equivalent scale used

• Wasey (1997) and Havinga (1989) scaleThis scale assigns the weight of 1 to the earning adult of the household represented by x1, 0.8 to non-earning adults represented by x2, and 0.7 to children under 10 years represented by x3

The application of this scale is as follows:

AE=x1+0.8* x2+0.7* x3

Data Limitations• Households dependent entirely on charity are excluded

from the scope of the surveys

• Illiteracy of the population in general and particularly in rural areas is another issue that hampers the quality of the survey

• Household income and expenditure accounts are not kept by the households and there is a wide variation in the mode of the purchase of consumption goods from area to area, even from household to household

• Many statements of expenditure may be incorrect because of memory bias due to the long reference period for certain items

Data Limitations Contd.

Income

Pakistan’s Household Income Distribution

Income distribution in Pakistan is typical of a less developed country

Inflation Adjusted Adult Equivalised Household Income

Distribution for 1980s & 1990s

0.00

10.00

20.00

30.00

40.00

50.00

60.00

1 2 3 4 5 6 7 8 9 10 11

income groups

% h

ouse

hold

s

1985-86 % freq

1986-87 % freq

1987-88 % freq

1990-91 % freq

1992-93 % freq

1993-94 % freq

Poverty Line used

A Havinga et al adult equivalised poverty line of Rs.214 per month based on the calorific intake approach

Pakistan Poverty Statistics without Zakat based on the HIESs

Poverty Line (rupees-hundred)

Households with Adult Equivalent

income below the Poverty Line (%)

Poverty Gap (%)

1985-86 226.0 20.9 -20.3

1986-87 233.9 18.8 -19.4

1987-88 244.9 17.1 -19.3

1990-91 313.4 19.0 -27.3

1992-93 383.7 22.3 -27.3

1993-94 422.0 21.9 -26.0

AE Pre-Zakat

Income

AE Post-Zakat

Income% point

difference

AE Pre-Zakat

Income

AE Post-Zakat

Income% point

difference

AE Pre-Zakat

Income

AE Post-Zakat

Income% point

differenceHead Count 20.9342 21.5902 0.6561 18.7854 18.8084 0.0229 17.0750 17.1945 0.1195

Poverty Gap -20.2707 -20.3769 -0.1062 -19.4452 -18.8565 0.5887 -19.2806 -18.6683 0.6123

1985-86 1986-87 1987-88Pre and Post Zakat Income Poverty Head Count and Gap Measure

AE Pre-Zakat

Income

AE Post-Zakat

Income% point

difference

AE Pre-Zakat

Income

AE Post-Zakat

Income% point

difference

AE Pre-Zakat

Income

AE Post-Zakat

Income% point

differenceHead Count 19.0424 19.0424 0.0000 22.2678 22.3499 0.0821 21.9318 21.8910 -0.0408

Poverty Gap -27.286 -27.2405 0.0454 -27.2504 -27.0628 0.1876 -25.983 -25.8055 0.1776

1990-91 1992-93 1993-94Pre and Post Zakat Income Poverty Head Count and Gap Measure

Data Limitations Contd.

• Compulsory Zakat and Voluntary Zakat (paid to the Govt.)

• Head of Zakat includes:

For the 1980s survey

‘zakat, gifts and assistance, ushr, nazrana (charity), and philanthropy’

For 1990s survey

nazrana, zakat, ushr, assistance, inheritance, and gifts

HIES Years

GDP Deflator

Adjustment Ratio

1985 1.471986 1.51 1.031987 1.58 1.081990 2.00 1.371992 2.49 1.701993 2.71 1.85

Deflator Application to Income brackets

Source: www.datastream.net and Author’s own calculations.

(Rs. Million)

Total Zakat Collected (current prices) Deflator (1980)

At constant prices (zakat collected/deflator) % of GDP

1980 844.3 1.00 844.3 0.41981 902.4 1.11 812.8 0.31982 1027.0 1.21 845.7 0.31983 1490.0 1.28 1165.5 0.41984 1334.8 1.40 952.2 0.31985 1521.0 1.47 1038.0 0.31986 1658.9 1.51 1096.0 0.31987 2069.5 1.58 1308.2 0.41988 2279.4 1.73 1314.5 0.31989 2573.2 1.88 1366.6 0.31990 2792.0 2.00 1392.9 0.31991 2770.0 2.27 1222.3 0.31992 2658.4 2.49 1065.6 0.21993 2884.4 2.71 1064.0 0.21994 3073.2 3.06 1004.5 0.2

Total Zakat Collected (Rs. Million)