Zakat as a global fiscal tool

Zakat as a global fiscal tool

The response to the 2008 economic crisis has relied on monetary stimulus, in the form of quantitative easing and ‘near-zero’ interest rates. Nonetheless, it did lack structural reforms. As a result, the excess liquidity injected into economies by central banks was not allocated efficiently, and global asset prices rose to levels even higher than those prevailing before 2008. NOOR ODEH explains how one of the Islamic economic tools can be utilized efficiently to tackle income inequality.

In 2013, former US treasury secretary Larry Summers proposed that the global economy had entered a long-term economic slump, invoking a previously discredited 1930s theory known as ‘secular stagnation’. According to Benjamin Friedman, a US political economist, prolonged periods of economic distress have also been characterized by public antipathy toward minority groups or foreign countries.

High levels of inequality can play a significant role in stoking conflict. According to research by Thomas Piketty, a French economist, a spike in income inequality is often followed by a great crisis. This correlation (although yet to be proven given the limited data) should not be taken lightly especially with wealth and income inequality at historically high levels.

Islamic economics is not limited to the provision of banking services. The third pillar, which relates to justice, is not about banking at all, but about Zakat, as Sheikh Abdal Hakim Murad, an English Sunni Muslim scholar, researcher, writer and academic, rightly describes it as a statutory purgation of our fiscal bloodstream.

The Zakat may function successfully in today’s odd financial system where wealth is poorly distributed. The pillar of Zakat, in Islam, is an instrument that can be used to reduce poverty and increase social welfare.

Income taxes have failed to limit the ever-increasing gap between the rich and the poor and this revelation proposes a different kind of solution — Zakat is effectively a net wealth tax. The collected wealth tax must be redistributed efficiently into lower and disadvantaged segments of our society.

The advantages of tax on wealth, rather than simply on income, are not only mentioned in the Quran. In 2014, Piketty pointed out in his book titled ‘Capital in the Twenty-First Century’ that when dividends on capital exceed the economic growth rate, the rich get richer. This will eventually threaten the entire global system. The solution he suggests is not an income or sales tax, but a tax on wealth which would also energize our economies.

For example, asset holders will be compelled to invest in profitable enterprises which in turn would generate higher revenue. Investment strategies should focus on real asset growth rather than the circulation of funds among passive investment vehicles. The result, Piketty predicts, would be an end to our era of secular stagnation and the return of a healthier economic model based on tax as a negative reinforce. Passive assets will suffer and economic activity will be rewarded. This will positively impact employment levels, investment and global trade.

France applies tax on wealth; however, the net result has been a capital flight to other countries. This is the usual argument used against the idea of a wealth tax. Regardless, this argument does not apply to Zakat, which is global and universal.

Zakat requires Muslims of a certain level of wealth to pay 2.5% of their assets to people and communities in need. The kind of people who receive Zakat are the poor, the needy, those in bondage, the debt-ridden and the wayfarer (the refugee), in the cause of God, Zakat administrators and friends of the Muslim community.

Shariah raises the level of tax wealth on certain asset classes and this fact has been neglected by many Muslims. An example is mineral wealth which falls under the category known as Rikaz. Rikaz means wealth with no previous owner which exists underground. Mineral wealth, on extraction, attracts a 10% or at times even 20% Zakat charge, according to Sheikh Abdal in his article titled ‘Zakat in a post-modern economy’ published by the National Zakat Foundation.

Zakat is an underutilized instrument that should not be neglected in our times of extreme poverty and income inequality. We live in a world with an estimated 22.5 million refugees. Humanitarian funding deficits have reached US$16.7 billion. An estimated US$200 billion to US$1 trillion is generated in Zakat globally, according to the Washington Post. If we only effectively channel these funds to the right players, we could see a significant change in the current status of refugees and poverty.

While there are rules for Zakat’s use and distribution, we lack international binding practices that govern its overall collection and distribution. Zakat is often donated informally, meaning there is no official record. Creating a unified Zakat collection and a transparent tracking system across all Zakat bodies globally would allow the clear estimation and distribution of Zakat funds.

Effectively implementing Zakat on all Muslims should be at the top of everyone’s agenda as humanitarian crises have reached new levels.

Noor Odeh was the head of Islamic finance at IDA Ireland before becoming an independent financial consultant in the ethical finance field. She can be contacted at [email protected]