AN ANALYSIS OF ZAKAT EXPENDITURE AND

REAL OUTPUT: Theory and Empirical Evidence

Mohammed B. Yusoff
Department of Economics
International Islamic University Malaysia
E-mail: mohammed.yusoff@iiu.edu.my
Telephone: 603-2056-4637
 INTRODUCTION

• Zakat
is the third pillar of Islam
• is mentioned in the Al-Qur’an more than 30 times,
usually with Solah
• is an obligatory religious due imposed on Muslim on a
number of categories of physical assets and financial
assets, and income
• purifies the assets and the hearts of the contributors from
selfishness and greed and also purifies the hearts of the
recipients from jealousy
• is distributed to the 8 asnaf
 The Eight Asnaf

• Fakir
• Miskin
• Amil
• Mualaf
• Wayfarer
• Slave
• Debtor
• Fisabillah
 OBJECTIVES

• To build a simple Keynesian macro model

which incorporates zakat
• To analyze the impact of zakat on
equilibrium real income
• To suggest policy recommendations
 Table 1: Zakat Collection in Malaysia
•  
• Year Zakat (RM) GDP(RM, million.) Zakat / GDP(%) Tax Revenue / GDP(%)
• ___________________________________________________________________________________________
_ 
• 1991 61,107,168 135,124 0.0452 9.8
• 1992 76,131,823 150,682 0.0505 10.2
• 1993 91,933,241 172,194 0.0538 9.9
• 1994 109,620,365 195,461 0.0560 10.3
• 1995 121,868,020 222,473 0.0547 10.2
• 1996 159,171,621 253,732 0.0627 10.2
• 1997 203,455,228 281,795 0.0722 10.8
• 1998 197,864,322 283,243 0.0698 10.6
• 1999 195,506,008 300,764 0.0650 9.1
• 2000 258,698,918 342,157 0.0756 8.5
• 2001 320,368,661 334,589 0.0957 12.6
• 2002 373,924,167 362,012 0.1032 12.2

• 2003 408,430,403 395,017 0.1034 10.9  

• 2004 473,269,093 449,609 0.1053 10.8  
• 2005 573,088,305 487,379 0.1176 9.9  
• 2006 670,636,172 530,673 0.1264 9.8  
• ________________________________________________________________________________________
•  
• Source: Zakat Report 2001 and 2006, Pusat Pungutan Zakat, Federal Territory, Kuala Lumpur.
• Note: Figures in the parentheses are the percentage changes.
•  
 Table 1: Zakat Collections in Malaysia
Year Zakata GDPb Zakat/GDP(%) Tax Revenue/GDP(%)
______________________________________________________________________

1991 61,107,168 135,124 0.0452 9.8

(24.59)

1992 76,131,823 150,682 0.0505 10.2

(20.76)

1993 91,933,241 172,194 0.0538 9.9

(19.24)

1994 109,620,365 195,461 0.0560 10.3

(11.17)

1995 121,868,020 222,473 0.0547 10.2

(30.61)

1996 159,171,621 253,732 0.0627 10.2

(27.82)

1997 203,455,228 281,795 0.0722 10.8

(-2.75)
1998 197,864,322 283,243 0.0698 10.6
(-1.19)
 Table 1: Zakat Collections in Malaysia …..
Year Zakata GDPb Zakat/GDP(%) Tax Revenue/GDP(%)

1999 195,506,008 300,764 0.0650 9.1

(32.32)

2000 258,698,918 342,157 0.0756 8.5

(23.83)

2001 320,348,659 334,309 0.0957 12.6

2002 373,924,167 362,012 0.1033 9.8

2003 408,430,423 395,017 0.1034 10.2

2004 473,269,093 449,609 0.1053 9.9

2005 519,203,260 487,379 0.1065 10.3

________________________________________________________________________

Source: Zakat Report , Pusat Pungutan Zakat, Federal Territory, Kuala Lumpur.
Notes: Zakat in ringgit, GDP in million ringgit
Figures in the parentheses are the percentage changes.
 Table 2: Zakat Collections, Federal Territory of Kuala
Lumpur, 2001
Types of Zakat Total(RM) Percent of Total

Zakat on income 33,215,655.29 47.25

Zakat on business 13,557,868.53 19.29
Zakat on saving 7,943,297.68 11.30
Zakat on assets 14,850,088.19 21.12
Qadha Zakat 409,246.35 0.58
Others 325,175.14 0.46
__________________________________________________
Total 70,301,331.18 100.000
 Table 2: Zakat Collections, Federal Territory of Kuala
Lumpur , 2006

Types of Zakat Total(RM, million) Percent of Total

Zakat on income 89.1 62.18

Zakat on business 22.8 15.91
Zakat on saving 12.0 8.37
Zakat on assets 18.8 13.12
Qadha Zakat 0.3 0.21
Others 0.3 0.21
__________________________________________________
Total 143.3 100.000
 Table 3: Distribution of Zakat, 2001 Federal Territory of
Kuala Lumpur
Asnaf Total(RM, Million) Percent of Total
1.Fakir 4,767,202 6.64
2.Miskin 12,793,336 17.83
3.Amil 11,106,528 15.48
4.Muallaf 874,636 1.22
5.Al-Riqab 14,000 0.02
6.Gharimin 253,257 0.35
7.Ibnu Sabil 140,455 0.20
8.Fisabilillah 41,791,870 58.25
Total 71,741,284 100.00
 Table 3: Distribution of Zakat, Kelantan, 2007

_______________________________________________________
Asnaf Distribution(RM) Percent of Total
____________________________________________________

1.Fakir &miskin 14,341,035.54 59.0

2. Amil 3,544,325.47 14.57

3. Muallaf 708,875.47 2.92
4. Gharimin 8,900.00
5. Ibnu Sabil 1,550.00
6.Fisabilillah 5,708,343.59 23.5
Total 24,313,030.07
____________________________________________________
 Zakat Distribution to Fakir & Miskin, Kelantan, 2007 (RM)

__________________________________________________________
Monthly payment to Fakir-Miskin 6,751,910.00 (47%)

Business rehabilitation 150,000.00 (1.0%)

Living skill programs 206,644.94(1.4%)

Emergency assistance 273,550.60(2.0%)

Treatment & medication 229,310.00(1.6%)

Eid assistance 378,090

 Zakat Distribution to Fakir & Miskin, Kelantan, 2007 (RM)…..

__________________________________________________________
Schooling assistance 920,350.00 (6.4%)

Tertiary education(IPTA) assistance 1,334,800.00(9.2%)

Student bursary(YIK) 499,980.00(3.5%)

Traditional(Pondok) schools
31,900.00(0.22%)

Tengku Anis Scholarships 508,500.00(3.5%)

Housing rehabilitation assistance 300,000.00 (2.1%)

Housing(special projects) 2,756,000.00(19.4%)

 THE AGGREGATE OUTPUT - EXPENDITURE ANALYSIS

• The model is a three-sector model :

• household
• firm
• government
•
• Household:
• is divided into two:

• (i) one category supplies the factor of production to the business

and government sectors, receive income, pay zakat, and purchase
goods and services,
(ii) the 2nd group receives zakat from the government.
•  
 THE AGGREGATE OUTPUT - EXPENDITURE
ANALYSIS……….

• Business :
• employ labor and other factors of production to produce
goods and services and then sell them to the household
and government sectors.

• Government :
• collects zakat from the household and business sectors
and disburses to the eight asnaf
• the poor, the needy, amil, new convert, slave,
debtor, for the path of Allah, wayfarer,
•  
 Model Framework

• National Income Identity

•   Y = C1+ CZ + I (1)

• Y = Y1 + Y2 (2)

• desired consumption of the zakat payers:

• C1 = C01 + c1( Y1 – Z) , 0 < c1 < 1 (5)

• desired consumption of the zakat recipients :

• CZ = C0z+ czGz + c2Y2 , 0< cz< 1, 0 < c2 < 1 (6)

 Model Framework…..

• The desired aggregate consumption, C :

• C = C1 + C z (7)

• The Zakat Collection

• Z = z (Y1 – C0E - C0N ) + z A0 (8)

• The Reduced Form Consumption Equation

• C =C01+C0z + c1 z (C0E +C0N ) + c1Y1– c1 zY1 + czGz+ czY2+ c1 zA0

(9)
 AGGREGATE INCOME-EXPENDITURE ANALYSIS……

Substituting (9) in (1)

• Y = C01+C0z + (c1– c1z)Y1 + c1z C0E + c1z C0N

• + czGz + c2Y2 + I0 + c1 z A0 (10a)

• Substituting Y1 = Y and Y2 = Y into (12) and rearranging, and

simplifying we obtain

• Y={1/[1- (c1– c1z ) - c2 ]}[C01+C0z +c1z C0E

• + c1zC0N + czGz + c1z A0 + I0 ] (11)
•  
 AGGREGATE INCOME-EXPENDITURE ANALYSIS……..

• Taking total differential

•
• dy =[1/[1- ( c1 - c1z) - c2] [dC01+ dC0z+c1z dC0E+c1z dC0N
• + cz dGz +c1z dA0 +dI0 (14)
•
• The multiplier for zakat, is obtained as

• Y/Gz = [cz /[{1 -(c1 - c1 z ) -  c2}] > 0 (17)

•  
 THE BALANCED ZAKAT

• imposing a restriction such that zakat collection equals to zakat

disbursement,

• that is Gz = Z,
• and we shall call this as a balanced zakat.
•  
• Aggregate Consumption

• If all the zakat fund is spent then Z = Gz, then (7b) becomes

• C = C01 + C0z + c1Y1 + ( cz– c1)Gz + c2Y2 (19)

 Balanced Zakat…..

The Multipliers

• Substituting (19) in national income identity (1) , taking the total

differential ,and rearranging,

• Y =[1/(1- c1 - c2)] [C01 + C0z+( cz– c1)Gz+ I0]

• Taking total differential, we have the balanced zakat multiplier as

•
• Y/Gz = (cz –c1) /(1- c1 - cz) > 0 (22)
 EMPIRICAL MODEL AND ESTIMATION TECHNIQUES

• Equation (11) is our basic empirical model which , generally,

can be written as
•
• Yt = 0 + 1 GZt + 2 Xt + ut (25)

• where Y is the real output, represented by real GDP, GZ is

the zakat expenditure, X are other variables that influence
real output,
 Data

• We use panel data to analyse the effect of zakat on real output:

to exploit the rich information inherent in the cross-section and time

series analyses.

to take into account the heterogeneity of individual cross-sectional

units by allowing for individual-specific effects , and

to give more variability and degrees of freedom.

• The panels are the 14 states of Malaysia

 EMPIRICAL MODEL AND ESTIMATION TECHNIQUES

• We shall employ panel data with fixed effect model and therefore
equation (25) is rewritten as
•  
• Yit = 0 + 1 GZit + 2 Xit +i + uit (26)
•  
• where i denotes the cross-section units , 0 is the overall intercept,
and  is the fixed effect.
• The fixed effects model (FEM) assumes that the slope coefficients
1 and 2 are constant for all cross-section units

• while the intercept ,i, varies over individual cross-section units but
does not vary over time.
This intercept takes into account of the heterogeneity influence from
unobserved variables which may differ across the cross-section
units.
 TABLE 1: Panel Regression Results
• ____________________________________________________________________________
• 1. Panel Least squares on Level
• LGDPt = - 0.1706 + 0.5874 LZEt
• (2.0545) (0.1213)
• Adjusted-R2 = 0.3711, D-W statistic = 0.2495, F= 23.4278(0.0000)

• 2. Panel GLS on First Difference

•  
• LGDPt = 0.0477 + 0.0024 LZEt
• (0.0013) (0.0009)
• Adjusted-R2 = 0.9478, D-W statistic = 1.2698, F= 619.33(0.0000)
•  
• 3. Panel GMM - GLS on First Difference
• LGDPt = 0.0414 + 0.0651 LZEt
• (0.0048) (0.0293)
• Adjusted-R2 = 0.9204, D-W statistic = 2.0973.
•
________________________________________________________________
 CONCLUSION

This study analyzes and empirically verifies the impact of zakat spending on
real output

Empirical evidence using Malaysian panel data supports the hypothesis that
zakat spending is a potent fiscal instrument to generate economic growth.

It is suggested here that Muslim countries must make all effort to establish
zakat as the major tool to spur economic growth and

The zakat collection and zakat spending have to be effectively and efficiently
organized.

More effort and money should be spent to study the impact of zakat spending
on incone at micro and macro levels