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Rev. Integr. Bus. Econ. Res. Vol 2(1) 133
Copyright 2013 Society of Interdisciplinary Business Research (www.sibresearch.org)
The Impact of Zakat on Poverty and
Income Inequality in Bahrain
Dr. Hisham H. Abdelbaki
Department of Economics, Mansoura University,
EGYPT
Email: habdelbaki@hotmail.com
The main objective of this paper is to assess the impact of Zakat on poverty and
income inequality in Bahrain.
ABSTRACT
To achieve this, the author analyzes the failure of
conventional economy tools in the treatment of problems of poverty and inequitable
distribution of income, then presents the ability of Zakat to eliminate poverty in the
Muslim community and eliminate the income gap, finally, the author estimates Zakat due
in Bahrain and then states its role in eliminating poverty and income inequality. The most
important results of the research are that Zakat can eliminate poverty in Muslim countries
and achieve the desired justice in the distribution of income. The most important
recommendations of the paper are the need to pass legislations for the collection of Zakat
from different sectors, organizations, institutions as well as individuals in Bahrain. Also,
the custodians of the Zakat and charity Fund in Bahrain must completely split between
the Zakat funds and charity funds, so they can distribute the Zakat funds among the eight
legitimate recipients.
1.
Key words: Zakat, poverty, income inequality, Bahrain
INTRODUCTION
Statistics indicate that only 20% of the world's population live at a high level of
comfort and luxury, while the vast majority of the population are experiencing poverty,
ignorance, hunger, and some of them live on less than a dollar a day, and the gap between
the two lives is increasing day after day (Todaro, 1981). The widening of that gap is aided
by some policies which affect the income and wealth of both parties. The odd thing that
such conditions are found in the same country, where there are regions / sectors /
categories sharply experiencing the manifestations of the low living standards, while
others live in the same country in a completely different life of luxury and wealth. All of
this is due either to the policies leading to poor distribution of income and wealth, or
policies that would widen the income gap or both.
Rev. Integr. Bus. Econ. Res. Vol 2(1) 134
Copyright 2013 Society of Interdisciplinary Business Research (www.sibresearch.org)
Poverty and income inequality are associated with strong interactive relationship,
Poor income distribution leads to the existence of the poor, and the existence of the poor
leads to lack of life and hence, lack of reasons to earn adequate income to meet living
expenses, thereby increasing poverty and widening the income gap between sectors,
thereby talking about the distribution of income may not be complete without first talking
about poverty. With varying levels of income among households in the same society
varies the demand for health, education and training, therefore members of the same
society will vary in their capacity and skills gained, then chances for employment and
obtaining appropriate wages will also vary and members of poor households would have
access to jobs of lower wages, while members of rich families to find higher wage jobs,
and thus the poor remains poor and the rich remains rich1
Table (1) correlation of poverty and income inequality in some countries
. Table (1) reflects that poverty
and income distribution are related. In developed country like Norway, the spending on
health, education and the military sector stands at 8.6% , 7.7%, and 2.05 of the total GDP,
respectively, and the GINI coefficient records 25.8, while these percentages represents
2.1% , 4.0% and 1.4% respectively in the State of Senegal where the GINI coefficient
reaches 41.3.
Country Health
expenditure
(% GDP)
2003
No. of
doctors per
100,000
persons 1990
- 2004
10 % the
richest to
10 % the
poorest
the 20%
richest to 20%
the poorest
GINI
Coefficient Public expenditure
on education (%
GDP(
Military
sector
(%GDP (
2004
High Human Development
Norway
8.6
313
6.1
3.9
25.8
7.7
2
USA
6.8
256
15.9
8.4
40.8
5.9
4
France
7.7
337
9.1
5.6
32.7
6
2.6
UK 6.9 230 13.8 7.2 36 5.5 2.8
Kuwait
2.7
153
--
--
--
8.2
7.9
Bahrain
2.8
109
--
--
--
--
4.4
Qatar
2
222
--
--
--
--
--
AUE 2.5 202 -- -- -- -- --
Medium Human Development
Libya
2.6
356
--
--
--
--
2
KSA
3
137
--
--
--
--
8.3
Jordan 4.2 203 11.3 6.9 38.8 -- 8.2
Tunisia
2.5
134
13.4
7.9
39.8
8.1
1.5
Algeria
3.3
113
9.6
6.1
35.3
--
3.4
1 In the majority of developing countries ,education is an important factor in getting a job
Rev. Integr. Bus. Econ. Res. Vol 2(1) 135
Copyright 2013 Society of Interdisciplinary Business Research (www.sibresearch.org)
Syria
2.5
140
--
--
--
--
6.6
Egypt
2.5
54
8
5.1
34.4
--
2.8
Morocco
1.7
51
11.7
7.2
39.5
6.3
4.5
Sudan
1.9
22
--
--
--
--
0
Low Human Development
Senegal
2.1
6
12.8
7.5
41.3
4
1.4
Nigeria
1.3
28
17.8
9.7
43.7
--
1
Source: UNDP, Human Development Report 2006
In sum, poverty and income inequality are phenomena afflict the majority of
countries around the world, and despite the large number of studies and researches that
have been made to explain these phenomena and provide strategies to eradicate them, but
these solutions have failed for various reasons. Now, does Islam offer a viable solution to
eliminate these phenomena? 4TOn the other hand, despite the large number of researches on
the themes of poverty, the poor and income distribution, as well as the Islamic framework
on those topics, but there is no analytical study that encompasses the conventional
economic side for those issues together with the Islamic framework of them, hence the
importance of the current research which provides an analytical framework for the
conventional economic view on poverty and income distribution, indicating the
deficiencies of such view, and then shows that Zakat - the third pillar to the pillars of
Islam -is worthy of the eradication of poverty and income inequality in the Muslim
community. In practice, Bahrain did not estimate the size of Zakat to be collected, and of
course did not examine the economic impact of Zakat funds in solving the problems of
poverty and income inequality, and this - no doubt - is another importance for this
research. On this basis, the objectives of the research are to show that for the Muslim
community to observe and perform Zakat as was commanded by God almighty would put
an end to poverty and the income gap in the community, which was failed to be done
through policies and practices adopted by governments and nations in the conventional
economies. To achieve this, the author estimates Zakat due in Bahrain and then shows its
economic impact in the eradication of poverty and income inequality.
After the introduction, the author presents the concept of poverty and strategies to
fight poverty in the conventional economy, then the failure of policies and practices
adopted to fight poverty and income inequality in conventional economies is shown, as
well as the failure of international practices in this regard, after that, the author presents
the concept of poverty and income distribution in Islam and shows that, 4Tthe Zakat, if
observed and performed as ordered by God almighty, is capable of eradicating poverty
and income inequality in the Muslim communities. The model used to estimate the value
of due Zakat in Bahrain's economy and their impact on poverty and income distribution is
introduced. The author then displays the measurement results, and finally offers some
recommendations.
Rev. Integr. Bus. Econ. Res. Vol 2(1) 136
Copyright 2013 Society of Interdisciplinary Business Research (www.sibresearch.org)
2. THE CONCEPT OF POVERTY IN CONVENTIONAL ECONOMY
To start, we must admit that poverty is a complex issue with political, economic and
social dimensions, and if the talk was about the presence of certain poor countries, we do
not rule out the conspiracy theory to keep them poor and in permanent destitute of rich
countries. For this, there is no specific definition that reflects this problem in all countries
due to different economic, political, social and ideological conditions. In general we can
say that poverty is the deprivation of any inability to acquire what an individual needs,
resulting in reduced consumption, and low health status and educational level, .... etc. The
World Bank has defined low-income or poor countries as those countries in which the per
capita income is less than $ 600 annually. Around 45 countries mostly in Africa match
this definition. Hence, the concept of poverty varies from country to country and also
within a single country from time to time, poverty is a dynamic phenomenon viewed
differently according to several factors, including economic, social and political factors.
It may be easier to identify who the poor are in order to develop an alternative definition
of poverty. The poor are those who cannot meet the basic needs of their livelihoods, and
consequently, suffer from malnutrition and sometimes from a lack of nutrition, low health
level, spread of diseases and also unemployment in its wider sense. Poor people suffer
from hunger, disease, ignorance and unemployment. The picture differs from one country
to another which called people to distinguish between many types of poverty, such as
relative poverty, absolute poverty and extreme poverty in addition to other types such as
individual poverty and social poverty, and so on. There are categories of work that is.
There are groups that work, gain a share of the education, have health insurance but their
income is not enough to remove their status of poverty (Abdelbaki, H., 2011).
3. STRATEGIES TO FIGHT POVERTY IN CONVENTIONAL ECONOMY
Countries use packages of policies include price policies, income and wage policies,
labor market and production polices and other policy packages such as structural and
stabilization policies to alleviate poverty and achieve income equality. The effects of
these policy packages on poverty and income gap in the national economy may be direct
or indirect. The indirect effects conducted through effecting on demand and supply.
Whereas, the direct effect of the policies conducted through using employment, subsidy
and wage polices that effect directly on the workers especially in the formal sector. The
World Bank provides three approaches for poverty alleviation (The World Bank, 1991
& 2004): the first is to strengthen economic growth through helping the poor to increase
their productivity and then their wages. The main economic growth policies include
encouraging the small and medium businesses, supporting the rural development and
agricultural sector and offer the finance to the poorer areas. But experience has shown
Rev. Integr. Bus. Econ. Res. Vol 2(1) 137
Copyright 2013 Society of Interdisciplinary Business Research (www.sibresearch.org)
that
Analyzing the World Bank strategies to fight poverty state that these strategies are
marred by a lot of shortages and even conflicts with each other, they are demanding an
increase of government spending to support the poor, increase transfer payments, follow
the policies of price discriminations in the health sector and increase public investment to
bush the economic growth, particularly in rural areas.
effects of such policies have been limited. The second approach aims at increasing
the investment in human capital to push human development especially in the poorer
areas. The main objectives of these policies are to reduce dropout rates, decline illiteracy
rates, improvement the infrastructure in health and education areas, extend the health
insurance umbrella to cover the poor, provide clean water and sanitation to poor areas,
support civil society institutions, increase decentralization and participation in political
life. But those policies conflict with the deflationary policies that form the pillars for the
economic reform programs supported by the international monetary Fund and the World
Bank, as well as low public investment in general in these countries due to lower public
revenues available. Finally, the third approach is to raise the transfer payments to the
poorer areas to enhance the economic welfare. Again, this approach is contrary to
policies of economic reform programs.
4. FAILURE OF PREVALENT POLICIES
All those strategies are contrary to
the general characteristics of the capitalist system which control the economic reform
programs imposed on the countries required to follow strategies for fighting poverty.
Consequently, the final results confirm the failure of those strategies as will be detailed.
In the following, we demonstrate the failure of policies applied in the conventional
economy to fight poverty and income inequality.
4.1 Failure of the Minimum Wage Policy
Government specifies a minimum wage for government workers to ensure them
the return that guarantees a decent life. There is no doubt that the value of minimum
wage varies from country to country and from time to time within the same country,
which requires continuous review of such policy to make sure it fits with current
prices. But what is happening in many countries, especially poor ones, that governments
are reluctant to carry this role, especially with the policy of hiring graduates and which
burdens governments and increases deficit in their public budget. This has led to a wage
freeze and a commitment only to the annual raise that does not commensurate with the
rates of inflation, which means a decrease in real wages. Real wages declined in Egypt
from 80.4 in 1980/1981 to 67.8 in 1994/1995 (Radwan, S., 1997); they also declined in
Yemen from 5,600 Yemeni riyals in the early nineties to less than 1,000 Yemeni riyals in
1996 (The World Bank, 1996). For the private sector, governments tend to consider that
the contract is the law of the contractors, which means that wages in this sector are
determined by supply and demand away from government control, which led to the
Rev. Integr. Bus. Econ. Res. Vol 2(1) 138
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increasing wage gap between public sector and private sector wages in some Arab
countries, including Kuwait and Saudi Arabia.
Wages and level of productivity are associated with a close relationship. With the
low level of labor productivity in poor countries generates low wages that do not provide
the basic needs of workers, for example, the cost of labor unit in Oman was reduced by
33% during the period 1980 to 1995 (Chami, S., 1991). Worker productivity is affected
by three factors, namely (Koriem, K., 2005): (1) the educational level (2) the availability
of health services and (3) the availability of access to assets and credit.
Unemployment leads to a high rate of dependency burden which
These factors are
also reasons for the low productivity which again supports low wages. Wages in many
poor countries became like subsidies for employees that weighs heavily on the public
budgets. Low productivity results in increasing numbers of unemployed and the
unemployment rate goes up leading to lower production and thus less employment and
income and the consequent problems of the recession. Although low labor productivity is
the main clear reason for unemployment, there are other reasons to support that, where
causes of unemployment differs from one country to another according to adopted
policies, In Egypt, the policy of hiring graduates that have been followed for a number of
years was a fundamental reason for the overcrowding in the public and government
sector with unemployed of the disguised unemployment type, while the policy of
bringing in foreign labor followed in the Gulf economies was an important reason in
overcrowded informal sector with non-skilled expatriate labor that competed with local
labor leading to spread unemployment among national workers for reasons, like not
accepting to work in some jobs on the one hand and not accepting low paid work taken
by the expats on the other hand.
affects income
distribution. For individuals with large families, the burden is high for family members at
working age that means that the working members will save less, since they need to
spend on the family, which will affect the distribution of income between different
groups due to different rate of dependency among them. It is worth mentioning that high
dependency ratio increases poverty and income inequality in the economy.
4.2 Failure of the Interest Rate Policy
In the conventional economy, the interest rate policy is used to achieve many
goals, including providing the necessary liquidity for the poor, but this goal in itself is
incompatible with the objectives of banking and financial sector in the conventional
economy, which aims to achieve higher profits, with the need for higher levels of
guarantees in the case of lending, which means that the rich are those who can benefit
from the financial sector in the economy. This conclusion is supported by the fact that the
financial system especially banks may be available in high income-classes and urban
areas and not available in low income-classes and rural with the same efficiency. And
that the families in the high income category in some regions may be aware and familiar
with banking transactions more than low-income groups in other regions. It is obvious
Rev. Integr. Bus. Econ. Res. Vol 2(1) 139
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that the marginal propensity to save among households with high-income groups in urban
areas often exceeds the marginal propensity to save in low-income families in rural areas.
Finally, the prevalence of self-investments in rural areas more than those in urban areas
results in the inability of those areas to benefit from that sector.
The negative impact of uncertainty on the financial markets and credit in the
national economy is shown in: (1) dealing in lemons, where the high interest rates affect
the return of financial institutions through two effects: the familiar positive effect, where
an increase in interest rates increases the revenues of financial institutions assuming
unchanging of other influencing factors. Then comes what is called the impact of adverse
selection, which works in the opposite direction, where raising the interest rates by
financial institutions increases projects with high returns and high risk as well, as
borrowers who are willing to pay high interest rates are themselves the owners of high
returns and high risk projects. At the same time borrowers with low yields and low-risk
projects retreat, as they do not want to pay high interest rates. As a result of this effect,
most borrowers are of the group of borrowers with low capacity to meet financial
obligations of financial institutions, here financial institutions have to deal with them and
name that process - that is, dealing with the worst credit borrowers – as deal in lemons2.
On the other hand, higher interest rates may result in negative change in the behavior of
borrowers (Moral hazard), as higher interest rates will attract projects with high risk, and
reduce the expected return to borrowers of projects with low risk and low yield at a rate
greater than that for projects of high risk and high return, which may induce borrowers to
demand for the first projects, thereby reducing the revenues of financial institutions. If
interest rates were low, the direct positive impact for the increased interest rates may
have an effect equivalent to that of adverse selection and moral hazard, and then the
revenues for financial institutions would increase with the increase in interest rates up to
a certain level then the return falls as a result of the two mentioned effects. And (2) when
the two mentioned effects for interest rate are dominant, financial institutions prefer to
reduce the credit with consequent reduction of investment, leading to deflationary effects
on the national economy as a whole, and of course the poor segments are affected more
than others due to economic stagnation (Abdelbaki, H., 2012).
4.3 Failure of the Price Policy
2 Akerlof (1970) presented the problem of Lemon, where the buyer of a used commodity does not usually
have information on the quality of that commodity which is known to the seller that is why the buyer is
willing to pay an average price for the commodity. Then owners of good commodities would have to leave
the market because the average price is too low. Then lower-quality goods only remain which are called the
Lemons.
The use of price policy to affect poverty and income distribution means that the
government is reducing the prices of certain goods owned by categories, regions or
Rev. Integr. Bus. Econ. Res. Vol 2(1) 140
Copyright 2013 Society of Interdisciplinary Business Research (www.sibresearch.org)
specific sectors of society. Government sets a price ceiling for essential commodities
acquired by the poor3
.
Experiments proved the failure of those policies to restrain inflation as well as
countries that are required to follow those policies are also required not to intervene in
the functioning of markets and leave them to the supply and demand force.
4.4 Failure of the Exchange Rate Policy
But the practical application of the policy determines that its implementation
comes through the
By exchange rate policy, the price of the currency exchange is depreciated or
appreciated with an intention to make an impact on income distribution. Devaluation
policy affect the relative real prices of goods, which increases the prices of export
commodities denominated in local currency and lowers the prices of those commodities
denominated in foreign currency, which lowers domestic demand for foreign goods, and
increases foreign demand for domestic goods leading to increased exports and reduced
imports, or in other words, more cash inflow and less cash outflow. Such changes would
encourage production for export, increasing domestic production and thus employment
and income in the export sectors, which means to redistribution of income in favor of the
sectors concerned.
Devaluation policy with the consequent of high inflation rate due to
rising import prices, which adversely affects the poverty and the poor, in addition that the
wealthy sectors are benefiting from this policy at a degree more than the poor sectors.
4.5 Failure of the Subsidy Policy
3 Another purpose of setting a price ceiling is to stop the inflationary trends in the community.
The networks of social security, aim at reducing the income inequality by
providing different forms of support to the poor. The efficiency of such networks is
measured by their ability to deliver support to various beneficiaries. On comparing the
efficiency of Zakat and the efficiency of the social and governmental security networks in
Yemen, the study showed that the efficiency of Zakat to reach the beneficiaries is greater
than that of social and governmental security networks. The study also indicated that the
effect of Zakat network is wider than that of the social and governmental social networks,
as well as the average value of the amounts transferred to needy family in the case of
Zakat exceeds that of the support received through social networks, (Alqudsy, S., 1995),
which is shown in table (2), where the poorest deciles received YR 940 of Zakat, and the
same deciles received 886 riyals from security networks. The richest deciles got 469
riyals from Zakat, and 739 riyals from security networks, which confirmed the efficiency
of Zakat to reach the deserved recipients compared to social and governmental security
Rev. Integr. Bus. Econ. Res. Vol 2(1) 141
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networks. It is noted that transfers of international organizations are characterized by low
efficiency as well.
Income
deciles
Table (2) Zakat and government and non-government networks efficiencies in Yemen
Zakat
Government and
non-government
transfers
Individual
transfers
from inside
individuals transfers
from abroad
organizations
transfers
poorest
deciles
940
886
1147
492
58
Second
895
666
2869
1334
50
Third
820
717
3628
1634
14
Fourth
795
462
4171
2284
20
Fifth
700
371
3050
2950
54
Sixth
690
728
3886
4472
20
Seventh
671
432
4666
8332
219
Eighth
678
706
4882
13594
107
Ninth
618
914
8198
22444
3820
Richest
deciles
469
739
14758
94228
20624
4TSource: Alqudsy, S., 1995.
As for subsidy of goods, studies have shown that the kind of government subsidy
programs do not always achieve efficiency in the delivery of subsidy to those who
deserves it, especially with the spread of corruption in various forms like bribes and
embezzlement etc4T. In Egypt, the government's subsidy of bread was characterized by low
efficiency, especially in rural areas (Adams, 2000). In Yemen also, the subsidy programs
for wheat, electricity and fuels are characterized by low efficiency to reach those who
deserve them, as the share of the poorest deciles of wheat subsidies does not exceed 2.5,
while the share of richest deciles of the same mounts up to 30.7. The case is same for fuel
subsidies; the share of the poorer deciles reaches only 2.0, while the share of richest
deciles reaches 37.1. In the case of electricity subsidy, the share of poorest deciles
reaches 6.4, this amount increases until the sixth deciles then falls for the seventh deciles,
then starts increasing with the income till it reaches 13.1 for the richest deciles (table 3).
The situation in Kuwait does not differ a lot with government providing a package of
cash and good-subsidy programs, where subsidy for high spending elasticity commodities
like electricity and fuel makes the higher income groups benefit more than low-income
groups. In the case of drinking water subsidy, the share of the richest deciles is higher
than the share of the lowest deciles by 21-times (Al qudsy, S., 1995).
4T Table (3) Distribution of good subsidies in Yemen
Income deciles
Wheat
Electricity
Fuels
Rev. Integr. Bus. Econ. Res. Vol 2(1) 142
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poorest deciles
2.5
6.4
2
Second
4.2
7.5
3.3
Third
5
8.9
3.5
Fourth
6
9.2
5.1
Fifth
7.2
9.8
6.1
Sixth
8.2
10.9
6.8
Seventh
9.6
10.6
8.8
Eighth
11.9
11.7
12.4
Ninth
14.6
11.7
14.9
Richest deciles
30.7
13.1
37.1
4TSource: The World Bank, 1996
In summary, the social security networks have failed to deliver support to those
who deserve it for many reasons, especially the spread of corruption in the countries that
suffer from poverty and income inequality.
4.6 Failure of Tax Policy
4TIn developing countries, which usually suffer from problems of poverty and
income inequality among its citizens, the main objective of taxation is to increase
revenues through increasing tax rates, which leads to a decline in economic activity and
decreases production, employment and income. The influence of this policy is stronger
on the poor. 4TMoreover, the tax policy in the majority of developing and poor countries
suffers from many disadvantages and obstacles that eliminate the efficiency of such
policy and its role in the income redistribution in favor of the poor classes. 4TOf those
problems are tax evasion, costs of collection, corruption of tax collective system, poor
use of tax revenues for the benefit of the economy, in addition that an inappropriate tax
policy leads to inflation, with all the burdens it leave on the poor.
5. FAILURE OF INTERNATIONAL PRACTICES / POLICIES AND ITS
FAILURE IN REMEDIES
In addition to internal policies exercised optionally or mandatory by each country for
the treatment of problems of poverty and income inequality, there are some practices and
international policies that affect developing and poorest countries and aggravate their
problems of poverty and income inequality. Following are the most important of these
policies:
5.14T Economic Reform Programs
No doubt that the economic reform programs determined by the IMF and World
Bank are capitalist programs aimed at reducing the economy’s role in economic activity
Rev. Integr. Bus. Econ. Res. Vol 2(1) 143
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by reducing public spending in general and subsidies, in particular, activating the market
prices mechanism
Regardless of the mandatory policy for poor countries to implement such
programs, the negative effects of these programs as a whole exceeded their positive
effects, resulting in increased numbers of the poor, spread of unemployment, deepening
recession and the consequent effects in those countries
, encouraging the private sector. These policies and procedures are
negatively affect the poorer sections of society and increase the income gap. The effects
of economic reform programs on poverty and income distribution in the national
economy can be measured using three standards: first is the standard of real income,
where a drop of the real income in the economy means that the economic reform
programs had a negative impact on poverty and income distribution, second is the
standard of cost of living, where the rise in the cost of living reflects the negative effects
of the programs concerned, and finally the standard of social services provided by the
national economy at affordable prices, where an increase in such services means that the
economic reform programs have positive effects on poverty and income distribution in
the society.
. After Algeria had come a long
way in economic reform programs, the unemployment rate among citizens less than 20
years old was 49% in 2004, 44% among young people aged between 20-24 years, and 73
% among those less than 30 years in that year compared to 42% in the year 1996. It is
not different in Egypt, which adopted the economic reform programs with the IMF and
the World Bank in 1990, where such programs had resulted in deep negative effects on
poverty and the poor as well as widening the income gap. Although Egypt tried to
mitigate the negative impacts on the poor through some programs including the Social
Fund but, malpractice, corruption and weak budgets prevented the achievement of
desired objectives, poverty and the poor has increased significantly, as the Egyptian
household Expenditure Survey showed that 44% of the populations are not able to get the
minimum adequate food (Abdelbaki, H, 2003).
5.2 Globalization and the New World System
International economic system means the set of rules and arrangements that have
been developed after World War II to set the code of conduct in the economic relations
between different countries, and globalization is one of the steps in this system. The
international economic system consists of 1 - the international monetary system, which is
the system that governs and sets rules of conducting in all matters relating to exchange
rates, balance of payments, sources to finance deficit and the quality of corrective
policies that countries may be follow, and thus the system is supposed to ensure
international monetary stability in the new world economic system, through the
International Monetary Fund. And 2 - the international financial system, which is the
system that governs the code of conducting in all aspects of transactions or transfer of
international capital, whether they were in the form of foreign aid or foreign loans,
Rev. Integr. Bus. Econ. Res. Vol 2(1) 144
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whether they were formal or of business form and whether they were foreign direct or
indirect investment, through the world bank. Finally, 3 - the international trading system,
which is the system that governs the rules of conduct in all matters relating to export and
import of goods, and to determine what may and may not be of protectionist measures or
export subsidies, and even work through this system to liberalize world trade to increase
international exchange and consolidate the principle of interdependence and maximize
the return on international trade for all parties in the global economy. The Secretariat of
GATT worked to maintain the continuity of this component of the global economic
system, until the formation of the World Trade Organization (WTO), following the
Uruguay multilateral trade negotiations, to take over the administration of the
International trading system as of January 1995 (Sharaf, A., 1992; Sameeha, F., 1993).
It goes without saying that the worst consequences of globalization and new
international system were those huge changes which negatively impacted social
development, including what happened in Eastern Europe and Central Asia, where the
numbers of poor were aggravated, also the ignorance of industrialized countries of the
global warming issue which was originally caused by them. But, the most serious result
of globalization and new international system was the global economic and financial
crises, which when appear in one country quickly spread all over the world whether
poor or rich, but the greatest impact, of course, falls on the poor countries which were not
the cause of these crises. The world is still recovering from the recent global crisis that
began in the United States as a result of irresponsible practices from the financial and real
estate sectors, but the impact covered the bulk of the international economy, and perhaps
the effect was weak in China because it has been conservative on globalization and its
application. Then comes the blatant interference by dominant countries in the politics of
weaker nations, which adversely affects the economics of these nations causing situations
to worsen.
In sum, the international practices, although sometimes designed to treat the
problems and shortcomings in the policies of poor countries, but the overall effects are
not in favor of the poorer classes in those countries.
6. CONCEPTS OF POVERTY AND INCOME DISTRIBUTION IN ISLAM
In this part, the concepts of poverty and income distribution in Islam, and then
how the Zakat, as one of the pillars of Islam, can eliminate poverty and achieve the
equality in distribution of income among the members of the Muslim community as well
as among different generations is presented. Then the author displayed a model to
estimate the value of Zakat in Bahrain, and measure their impact on poverty and income
distribution.
6.1 Concept of Poverty in Islam
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Islam encourages people to go for the legitimate productive work through a
several orders and instructions in holly Quran and Hadith: God almighty said: And when
the Prayer is finished, then may be dispersed through the land, and seek of the Bounty of
Allah. And celebrate the Praises of Allah often (and without stint): that may prosper.
(Al-Jumaa, verse, 10). The prophet's says: (the best profit for a man is what he makes
with his hands and whatever a man spent on himself, his sons and his servants is charity)
way of (Sunan) Ibn Majah, chapter of motivation to gain, No. 2137. Also He says (the
best food eaten by a man is from the work of his hands, and that Prophet of God David
was eating from the work of his hand) Fath albari to explain Sahih Al-Bukhari, Ibn Hajar,
book of sales, chapter of earning of the man, section 9, p 154. Islam forbids beggary
where Islam considers the legitimate productive work as the right way to fulfill the needs.
Beggary are only permitted in three cases: 1) in case of extreme poverty, 2) in case of the
debtors, and 3) in case of those fined due to blood money. It is clearer that begging
without an urgent need is illegitimate in Islam. The holy Prophet says “(he who ask
people for their money to grow his money is just asking a firebrand, so he might ask for
more or less”, Muslim, Saheeh, the chapter of hatred of Begging, section 2, p
720. However Islam acknowledges poverty and considers it a danger to the family and
the society as a whole, Islam also considers poverty as scourge and we should seek refuge
in Allah from its evil. The Holy Prophet used to seek refuge saying (O Allah, I seek
refuge in You from the trials of fire, torment of the grave, and seek refuge in You from
the temptation of wealth, and seek refuge in You from the trials of poverty) also the
prophet peace and blessings be upon him used to pair seeking refuge from poverty and
disbelief saying (O Allah, I seek refuge in You from disbelief and poverty, I seek refuge
in You from the torment of the grave, there is no god but You,) "narrated by Abu
Dawood. Poverty in Islam means need or want, God Almighty says " O mankind, you are
those in need of Allah " in the sense you are in need of God. God also said "and God is
rich and you are the poor who need him" in the sense of the need for the necessities of
life. Islam differentiates between the poor and needy, the poor is who have what is not
enough, the needy is who have nothing to take shelter with. Islam also distinguishes
between different types of poverty, relative poverty means variation of people's income
which is recognized as a universal norm due to the varying capacities of individuals and
the amount of efforts they put in their work, God almighty says, " And it is He who has
made you successors upon the earth and has raised some of you above others in degrees
[of rank] that He may try you through what He has given you" (165, Al-Anaam),also God
almighty says," Do they distribute the mercy of your Lord? It is We who have
apportioned among them their livelihood in the life of this world and have raised some of
them above others in degrees [of rank] that they may make use of one another for service.
But the mercy of your Lord is better than whatever they accumulate" (32, Zukhruf). The
goal behind the variation in livelihoods is tribulation, dedication of work and order to set
life straight, people vary in their abilities, their skills and efforts, and then their works,
revenue and income. Then there is class poverty which means the inability of the
individual to satisfy his needs, in other words, the inability to achieve sufficiency.
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Sufficiency means the necessary money to provide the basic needs of the individual, to
set his life straight and live according to the prevailing living standards, hence sufficiency
is a dynamic concept that changes from one society to another and from time to time
within the same society. For the Muslim community to live in harmony, peace and
security Islam imposed many forms of mandatory and redundancy worships to reduce
poverty in the Muslim community on the one hand and to ensure full security between
rich and poor on the other, in order to ensure minimum standard of living for the poor,
which guarantees them sufficiency.
6.2. The Concept of Income Distribution in Islam
Islam sees that absolute justice means the disparity of livelihoods with the need to
achieve human justice. Islam also rejects considering money as the great fundamental
value, but the individual should have sufficiency preferably through individual ownership
or through a productive work in its various forms. Islam confirms absolute equality of all
Muslims in the provision of sufficiency, in other words, if a Muslim is unable to provide
enough for his illness or old age or.... etc, the government should provide that to him
from the treasury. God almighty says "Indeed, it is [promised] for you not to be hungry
therein or be unclothed. And indeed, you will not be thirsty therein or be hot from the
sun." (Taha, verses 118 and 119), the prophet (pboh) says "he who sleeps sated and his
neighbor is hungry is not a believer in me" (al Suyuti), but, for more than sufficiency,
Islam confirms variation
In Islam, income and wealth are distributed via three stages: first is the initial
distribution of wealth through acquisitions, where Islam recognizes private property
according to specific conditions and procedures based on the principle (that wealth is the
wealth of God and human beings are appointed as successors to that wealth). Islam also
regulates the investment of private property by a set of rules and restrictions to ensure the
provision of community needs and well-being of its members. Islam also recognizes
public property in order to achieve specific goals, such as achieve balance between
individuals in one generation, achieve balance between successive generations, and
achieve development of the Muslim community. Second, through which revenues are
distributed over the factors of production in the community. Finally in the third stage,
some changes are introduced to the existing distribution of income and wealth, or the so-
called redistribution of income in favor of certain groups at the expense of other
categories.
6.3 The Role of Zakat in Eradicating Poverty and Income Inequality
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In this part, the author demonstrates that Zakat is an important tool, if performed
as it should, can eliminate poverty and achieve justice in the distribution of income and
wealth in Muslim societies.
6.3.1. The Objectives of Zakat
God almighty imposed Zakat, as He says "So establish regular Prayer and give
regular Charity; and obey the Messenger that ye may receive mercy,"(Al-Nur, verse 56).
From Zakat many effects are resulted on the individual and society, it cleanses the heart
of the one who performed Zakat and removes rancor and hatred from the heart of the one
who deserved Zakat, and then establishes security and tranquility in the community, and
addresses many other social problems. In addition, Zakat Blesses and develops the money
and increases the merits of the performer. God almighty said, "The parable of those who
spend their substance in the way of Allah is that of a grain of corn: it growth seven ears,
and each ear Hath a hundred grains. Allah gives manifold increase to whom He please:
And Allah cares for all and He knows all things." (Al Baqara, verse 261). Objectives of
Zakat are many; those can be summarized into moral, social and economic objectives.
The moral objective is visualized in cleansing of the Zakat funds; the social objective is
visualized in the redistribution of income in favor of the eight social groups4 especially
the poor and needy. The economic objectives is visualized in fighting hoarding and
moving the cash 5flow to support the necessary expenditure at the expense of luxury
spending, fighting consumer loans and encouraging non-usury loans for those in
bondage or heavily indebted (AL GHARMEEN).
6.3.2. Zakat and Eradicate Poverty and Achieve Equitable Distribution
Zakat plays an important role in reducing the problem of poverty in the Muslim
community, in addition to its vital and influential role in its development through
redistribution of income and wealth for the benefit of the poorest. But the important
question now is: is performing Zakat alone in the manner intended by God Almighty
sufficient to achieve these two objectives: eradication of poverty and the achievement of
equal distribution? We try to answer this question through the following points:
4 God almighty says” Alms are for the poor and the needy, and those employed to administer the (funds);
for those whose hearts have been (recently) reconciled (to Truth); for those in bondage and in debt; in the
cause of Allah. and for the wayfarer: (thus is it) ordained by Allah, and Allah is full of knowledge and
wisdom.”Al Baqara, verse 60.
Islam had exclusively determined the eight groups to whom Zakat funds could be
given, and it is noted that these groups are the poorest in society, consequently,
expenditure on necessary consumption increases thus increasing the aggregate demand in
the community. Employers respond to this increase by increasing employment and
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production in the next stage which increases income. Depending on the income, a new
cycle of increased demand and employment, production and income starts and so on. Due
to spending multipliers in the community, income will be multiplied accordingly, and the
national economy will be revived. On the other hand, the marginal utility of money for
the rich is lower than that of the poor, and therefore the latter will be keen to spend Zakat
funds received to purchase the necessary goods only as already mentioned. Also
increased spending leads to increased marginal propensity to consume in the community,
thereby increasing the value of the multiplier, and then increase the strength of its effect
on the national economy.
Since Zakat was imposed on saved money, the lack of investment of such money
leads to erosion year after year which is an irrational behavior that Islam does not
approve, so 'Umar ibn al-Khattab said (Do trade in the property of orphans so as not to be
eaten by Zakat)6. Also holding the money and not performing Zakat on that money is
forbidden in Islam. Thus, the saved money would move into investment which would
benefit the community, through the revitalization of demand and production and then
employment and income.
The individual who is to pay Zakat must go to where there is Zakat beneficiary to
give him his due, and here is where the greatness of Islam is shown, this consolidates in
the owner of the money that there is a due to be paid and he needs a Zakat beneficiary to
give him this right, on the other hand, it saves the face of the person entitled to Zakat.
And economically, this means the absence of evasion from payment of Zakat as is the
case of tax, and also eliminates the expenses of collection.
One of the forms of giving Zakat is to the indebted (AL GHARM) , and AL
GHARM is a person who cannot meet a debt he has which is not the result of sin or
wrong doing, this form also include a person who lost his business, his factory or his
goods. Hence the direction of Zakat to them means to re-integrate them into the
production process, and hence the community will continue to benefit from them and the
production is not affected by their circumstances7
Zakat may be accelerated when needed, for example, the payment of Zakat may
be accelerated in the case of economic recession, which will help to avoid recession
.
6 "See Imam Malik bin Anas al-Muwatta, number (588), (103/2), the Arab Book House, Beirut, 1988."
7 Mujahid said - a Mujahid bin Jabr Al Imam Sheikh of readers and commentators - in share of debtors: "
debtors are Three: A man flood wipes his money, a man fire went away with his money, and a man with
children and no money ,he is indebted and spends on his family" and this year we don't exempt someone
lost his investment and lost his money, or someone who borrowed for investment business and lost for
one reason or another".
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through payment of debts, production, employment and income. It is also allowed to pay
the full Zakat in one of its eight forms to ensure the achievement of its objectives.
Zakat does not cease to exist once you do it for one time, but it remains
mandatory as long as its two conditions: the required amount of money and the time
period exist. Also the diversity in Zakat forms means that it could be performed
throughout the year.
Zakat will not be accepted by God unless they were from a good legitimate source
(halal), the Prophet (pboh) says: (God the almighty only accepts charity from good
money, and a charity from a good source given by a man would be accepted and
developed by God as if someone is developing and caring for his foal)
In sum, the Zakat - If performed as imposed by God Almighty -would be enough
to eradicate poverty and then poor distribution of income in Muslim societies. It is
sufficient to note that the financial assets in banks for the wealthy Arabs – their number is
estimated at two hundred thousand - is more than 1190 billion dollars (Boulard, B.,
2001), and then value of Zakat levied on those amounts is 29.8 billion dollars. These
amounts are capable of eradicating poverty in Arab countries, and create employment
opportunities for the unemployed in all Arab countries. Therefore following the
principles of Islam through one pillar only (Zakat) can guarantee the eradication of
poverty and then income and wealth inequality in Islamic communities.
7. ESTIMATING THE EFFECT OF ZAKAT ON POVERTY AND INCOME
INEQUALITY IN BAHRAIN
The Kingdom of Bahrain has taken many procedures and policies for the
reduction of poverty and poor distribution of income in the Kingdom (Abdelbaki, H.,
2011). Among the most important procedures taken in this regard were the establishment
of the Zakat and charity Fund based on the Decree-by- Law No. (8) For 1979 amended
by Decree-by- Law No. (12) For the year 1993, to be the official agency accredited for
the collection of Zakat and charity and distributing them to recipients according to their
legitimate forms. The fund aims to increase awareness of the obligation of Zakat and
show the importance of performing it, the development of sources of Zakat and alms and
the mechanisms for their collection and disbursement and work to bridge the need of poor
families eligible for Zakat. The total aid provided by the Fund for needy families over the
last six years was about 1060458, which included more than 2000 families. In practice in
the Kingdom of Bahrain, the Zakat and charity Fund collects Zakat and alms money
optionally from institutions, bodies and banks that are willing to pay that money and the
majority of that money is donated as alms. The Fund does not Separate the Zakat funds
and charity funds when distributing, as well as the fund suffers lack of human resources
required to manage work perfectly.
7.1. Calculating total value of Zakat in the Muslim national economy
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Three types of Zakat should be collected in Islamic economy; 1- Zakat on the current
income, 2- Zakat on capital and 3- Zakat on saving. The total Zakat value is:
R = Ry + Rs + Rk
Ry= Z (1)
y
Rk = Z £ Y (2)
k x Kn
Rs = Z (3)
s x S = Zs
* j * g * Yd 0 < j < 1 , g = 1- b
(4)
Where R is the total value of Zakat in the national economy, Ry is the Zakat value on current
income in the economy, Rs is the Zakat value on savings, Rk is the Zakat value on capital in
the economy, ZRyR is the Zakat ratio on current incomes, £ Y is the committed to Zakat, ZRsR
Zakat ratio on savings, S saving committed to Zakat, g is the propensity to save, b is the
propensity to consume, ZRk RZakat ratio on capital, and finally, KRnR is committed amount of
capital to Zakat. The total Zakat value equation can be rewritten as follows:
R = ZY (£ + j * g) + ZKRnR = z (Y (£ + j * g) + KRnR)
(5)
Where Z Is the average weighted of ZRsR ،ZRyR ،ZRkR
7.2. The Effect of Zakat on Poverty
The Zakat value on the national economy will be spent on its Sharai outlays which is the
poor. Then will help in alleviating / eradicating the poverty and the poor in the economy.
To catch the effect of Zakat in this issue, we estimate the portion of the Zakat that goes to
consumption and, partly, to the investment in the national economy. The Zakat value
directed to the consumption can be written as:
RRc R = dR (6)
RRc R = d x z (Y (£ + j * g) + KRnR)
(7)
7.2.1. Effect of Proportion Spend on Consumption
The consumption function in a conventional (secular) economy can be written as:
CRSR = a + b Y (8)
In Islamic economy, the consumers divided into two groups: Zakat payers (group 1) and
Zakat recipients (group 2). The marginal propensity to consume for group 1 is different
from that for group 2. The consumption function in Islamic economy, therefore, becomes:
CRI R= a + b (β Y – α Y) + c ((1- β) Y + α Y)) (9)
Where b and c are marginal propensity to consume of group 1 and 2 respectively. βY Is
income of group 1, (1- β) Y , is income for group 2, and αY is the amount of Zakat paid.
The consumption function above is greater in value than that is in a conventional (secular)
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economy. The effects of that are two effects; it will reduce the poverty and the poor
people in the economy and will increase the total demand which leads to increase
production and employment in the economy which support the first effect especially with
the expenditure multipliers effects. This analysis is based on three assumptions; first, the
marginal propensity to consume of the Zakat-receivers is higher than that of the Zakat-
payers. Second, there are always enough poor people in the country to receive Zakat.
Third assumption is the government spends the Zakat on its eight categories with a very
high priority to the poor and needy.
7.2.2. Effect of Proportion Spending on Investment
This part of spending comes from invest in projects that support increases the
poor income such as investment in small skill project and by reactivate the projects of AL
GHARMEEN by paying their debits. The investment function in Muslim economy can
be written as follows:
I1 = I0
Where I
- β (r – Z) (10)
0
I = I
is the independent investment, r is the share return, Z is Zakat ratio, and β is the
constant investment coefficient. Adding the Zakat portion that directed to the investment
function becomes as follows:
1
R + RI (11)
I
Where I refers to total investment, I
= (1- d) R = (1-d) x z(Y (£ + j * g) + Kn) (12)
1 independent investment, RI
8. THE RESULTS
is the Zakat value
directed to investment.
Using the previous model, we calculated the total value of Zakat imposed in
Bahrain's economy during the period 1990 - 2010, which is consisting of Zakat on the
current incomes, Zakat on Investment and Zakat on savings. The results show that the
value of total Zakat has increased from BD 95.3 million in 1991 to BD 139.1 million in
1997 and decreased in 1998 to BD 114.7 million, then increased to reach BD 623.5
million in 2008 and decreased again in 2009 to BD 485.8 million.
To measure the impact of Zakat on consumption, the value of oriented Zakat
(allocated) for consumption is calculated assuming three values of 0.7, 0.75 and 0.8 for
the marginal propensity to consume, then the number of families that can benefit from
those values is estimated. The number of beneficiary families is estimated by dividing the
value of Zakat for consumption on the middle-income, as the studies that were conducted
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on poverty in Bahrain during the period 1987 - 2008 set the poverty line between 309
dinars to 403 dinars per month (Abdelbaki, H, 2011), so we assumed that the poverty
line in Bahrain is determined at 400 dinars per month. The number of families that can
benefit from the funds of Zakat reached 17,070 families in 1990, this number increases
during the period 1990 to 2010 with the exception of 2009, to reach up to 119,288
families in 2008, and 102,275 families in 2010, which means that, based on the marginal
propensity to consume which is equal to 0.7, the Zakat funds are capable of eradicating
poverty in Bahrain. These numbers would increase in the cases of marginal propensity of
0.75 and 0.8, respectively.
For measuring the impact of Zakat on investment, the author calculated the
number of projects that could be financed with Zakat funds allocated for investment on
the basis that the portion of Zakat funds allocated for investment equals the total value of
Zakat money minus the portion of Zakat funds for consumption. The numbers of projects
that can benefit from the Zakat funds allocated for investment were calculated by
dividing these funds on the average cost of small projects based on the estimations of the
studies carried out in this regard. The number of projects that can benefit from that
money reached 44 projects in the year 2001 increased to 263 projects in 2010. Assuming
that a small-scale project employs 10 workers, these projects could provide 440 and 2630
job opportunities in the years 2001 and 2010 respectively. So, providing job opportunities
would increase income and consumption in addition to savings and investment and, due
to spending multipliers, the domestic income of the Bahraini economy would double8
Finally, to assess the impact of Zakat on the gross domestic product, the
researcher calculates the gross domestic product after the impact of Zakat on
consumption and investment, as well as calculating the value of change in gross domestic
product as a result of change in investment multiplied by the investment multiplier
.
All that would reduce poverty and income disparities between income groups in Bahrain
because Zakat money funds small projects owned by low income groups and also provide
jobs for the unemployed.
9. The
results show GDP values after Zakat are greater than those before it and the gap between
them increases over time10
9. CONCLUDING REMARKS
8 According to the three assumed values of marginal propensity to consume.
9 Value of the multiplier was calculated according to the three assumed cases of marginal propensity to
consumption in the research.
10 It goes without saying that the decline in GDP in 2009 was due to the negative impact of the global
financial crisis.
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The research aimed at showing that the problems of poverty and income
inequality represent global phenomena that, despite the attention of researchers and
politicians in them and the efforts made to reduce them through many strategies and
policies but, they failed to achieve the desired results. The author explained that the third
pillar of Islam "the Zakat" is capable of eradicating poverty in Muslim communities and
achieve the desired justice in the distribution of income and wealth. The author estimated
the size of Zakat imposed in Bahrain and its economic impact on the eradication of
poverty and income distribution. The most important recommendations are the need to
pass legislation that requires the collection of Zakat from different sectors, organizations
and institutions as well as individuals. Also, the administrators of the Zakat Fund must
completely separate between the Zakat funds and charity funds, so they can be able to use
Zakat funds in the eight legitimate ways. The most important limitation of the current
research is not taking into account the possibility of not directing all Zakat revenues to
the poor, where the more money directed to poorest eligible (first of the eligible
categories) the greater the effect will be on consumption, then on poverty and income
distribution, and that requires a comprehensive field study.
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