Estimation of Economy-wide Potential Zakat Collectible in OIC Countries for Funding Poverty Gap

Zakat Collectible in OIC Countries for Poverty Alleviation: A Primer on Empirical Estimation

Mr. Salman Ahmed ShaikhPhD Scholar & Graduate Research AssistantNational University of Malaysia (UKM)salman@siswa.ukm.edu.myislamiceconomicsproject@gmail.com

National Seminar on ZakatDecember 8, 2016Pusat Studi Jepang,University of Indonesia, Depok, Indonesia

Presentation OutlineIntroductionScope of the StudySampleEstimation Method for Wealth Zakat Estimation Method for Production ZakatResults & AnalysisConclusion

Introduction: A Reality CheckHigh poverty in Asia and Africa where majority of the Muslims live. Half of the global poverty resides in the Muslim world while the Muslim population is 24% of the total global population.

Co-existence of poverty with affluence. 62 richest billionaires own as much wealth as the poorer half of the worlds population (Oxfam). In contrast, one in every four people in Africa goes to bed hungry every night (FAO).

Strikingly, the world agriculture produces 17% more calories per person today than it did 30 years ago, despite a 70% increase in the population (Pingali, 2002).

Scope of the StudyZakat is an important institution in an Islamic economic framework for poverty alleviation and economic welfare.

Islamic economics literature is rich in describing the economic potential of Zakat, but very few empirical studies have undertaken the estimation of potential Zakat collectible at the economywide level.

This paper intends to estimate potential Zakat collectible in OIC countries. It will help in assessing the potential of the institution of Zakat to fill the funding needs to overcome poverty gap.

SampleFor the estimation of potential Zakat collectible at the aggregate level, we had selected 17 members of OIC.

The selection is based on the availability of complete data.

Due to non-availability of data for some variables, we had to drop few OIC countries from the sample.

Estimation Method for Wealth ZakatFor estimating Zakat on wealth, we use the following heads:

Estimated private gold holdings.Broad money.Market capitalization of stocks.Inventory investment (as proxy for unsold inventory).To estimate private gold holdings, we use the following formula:

Estimation Method for Wealth Zakat

The proxy uses an assumption that government holds as much official gold reserves as a ratio of private gold holdings as it holds total reserves as a ratio of broad money.

Since we know the official reported gold holdings of governments, we can find an estimate of private gold holdings using the above formula.

We assume that the governments choice of keeping monetary and gold reserves as a proportion of broad money and total private gold holdings respectively is the same in the long run.

Estimation Method for Wealth ZakatSince Zakat is levied on currency in ownership as well as on money deposited in bank accounts, we use broad money as a proxy for the wealth held as currency and in bank accounts.

For Zakat on market value of stocks, we use market capitalization. It is calculated as:

Where Ni is the number of shares outstanding for company i and Pi is the current market price of the stock of company i.

Estimation Method for Wealth ZakatFor the estimate of unsold tradable inventory, we use inventory investment figure as reported in the national income accounts.

We are looking to estimate the value of this wealth Zakat function:

Here, WZ refers to total Wealth Zakat and Wx refers to wealth in ownership of individual x. MNA refers to minimum Nisaab amount, computed as the market value of 612 grams of silver.

Estimation Method for Wealth ZakatTo deduct the Nisaab amount at the aggregate level, we assume that people in the top income quintile of the population will have the wealth exceeding Nisaab amount.

We define PMNA as a set of all people belonging to the top income quintile and have wealth exceeding Nisaab amount.

If an individual x belongs to the top income quintile, he is assumed to have wealth exceeding Nisaab amount. From the aggregate value of assets that are subject to wealth Zakat, we have to deduct the product: {PMNA*MNA}.

Estimation Method for Production ZakatThe rate of production value Zakat can be 5%, 10% or 20%.

Output from production process which uses both labor and capital intensive mix of inputs is subject to 5% production value tax.

Output from production process which majorly uses either labor or capital intensive mix of inputs is subject to 10% production value tax.

Incomes from sources which neither use labor nor capital intensively are subject to 20% production value tax.

Estimation Method for Production ZakatMathematically, we can represent this principle of levy as follows.

Here, bars on L and K represent very minimal use of the inputs in fixed amount.

PVT refers to the production value tax.

Estimation Method for Production ZakatWe apply 5% production value tax on production arising from irrigated land and production value of output produced in industry and services sector.

We apply 10% production value tax on production arising from rain-fed lands.

Finally, we apply 20% production value tax on production arising from rents on natural resources.

Since Zakat is only levied on Muslims, we make the adjustment in all variables to account for that.

Some Terms Defined in Results

Here, PGI refers to Poverty Gap Index value and PHCR refers to Poverty Head Count Ratio.

Difference between the two ratios is that PHCR assumes poor have no income and hence, they require whole poverty line level of income to become non-poor. PGI only takes the shortfall into account between current income and poverty line required income.

yp refers to income at poverty line in current $. N refers to the total number of people in the country. GDP refers to the value of Gross Domestic Product.

Results I: Zakat-GDP vs. PGI-GDP & PHCR-GDPCountryZakat to GDPPGI-GDP($1.25)PGI-GDP($2.00)PHCR-GDP($1.25)PHCR-GDP($2.00)Albania2.60%0.01%0.09%0.05%0.47%Azerbaijan5.83%0.01%0.05%0.02%0.14%Bangladesh2.76%5.32%23.13%20.63%58.30%Egypt3.69%0.05%0.62%0.23%3.39%Indonesia3.53%0.35%2.74%2.13%9.10%Jordon4.30%0.00%0.02%0.01%0.17%Kazakhstan2.69%0.00%0.01%0.00%0.03%Kyrgyz Republic3.13%0.43%3.07%1.84%12.19%Malaysia4.59%0.02%0.16%Morocco5.01%0.08%0.74%0.38%3.30%Mozambique0.97%19.49%52.67%45.77%99.54%Nigeria2.20%4.17%10.88%9.41%19.97%Pakistan2.54%0.69%7.58%4.54%29.02%Saudi Arabia8.45%0.35%0.70%Tajikistan2.36%0.56%4.71%9.11%19.30%Tunisia3.73%0.02%0.16%0.27%0.76%Turkey3.42%0.00%0.03%0.06%0.17%

Analysis of Results Table IOnly in Bangladesh, Mozambique and Nigeria, the Zakat to GDP ratio is less than PGI-GDP ratio with poverty line defined at $1.25 a day.

Only in Bangladesh, Mozambique, Nigeria and Pakistan, the Zakat to GDP ratio is less than PGI-GDP ratio with poverty line defined at $2.00 a day.

Zakat to GDP ratio is less than PHCR-GDP ratio with poverty line defined at $1.25 a day in Bangladesh, Mozambique, Nigeria, Pakistan and Tajikistan.

Zakat to GDP ratio is less than PHCR-GDP ratio with poverty line defined at $2.00 a day in Bangladesh, Indonesia, Kyrgyz Republic, Mozambique, Nigeria, Pakistan and Tajikistan.

Results II: Year-Wise Zakat to GDP (%)Country200820092010201120122013Albania2.51%2.46%2.58%2.57%2.62%2.60%Azerbaijan7.57%5.92%6.13%5.86%5.41%5.83%Bangladesh3.48%3.06%3.01%2.91%2.83%2.76%Egypt5.34%4.02%3.85%3.99%3.72%3.69%Indonesia4.66%4.03%3.82%3.69%3.52%3.53%Jordon5.84%5.01%4.79%4.67%4.50%4.30%Kazakhstan3.62%3.05%2.97%2.95%2.72%2.69%Kyrgyz Republic2.98%3.02%3.28%3.12%3.20%3.13%Malaysia6.05%5.99%5.28%4.85%4.65%4.59%Morocco5.61%4.92%5.02%5.10%5.16%5.01%Mozambique1.21%1.07%1.12%1.03%0.98%0.97%Nigeria1.80%3.01%2.30%2.39%2.22%2.20%Pakistan3.06%2.68%2.68%2.64%2.59%2.54%Saudi Arabia10.58%8.81%8.53%8.85%8.48%8.45%Tajikistan2.39%2.37%2.44%2.37%2.36%2.36%Tunisia4.20%3.59%3.66%3.77%3.77%3.73%Turkey3.48%3.80%3.53%3.55%3.49%3.42%

Analysis of Results Table IIResults table II show that the estimates have little variance over the years.

Hence, the institution of Zakat can provide stable source of public revenue that can be spent on public welfare directly by transfer of monetary and non-monetary assets.

Since the institution of Zakat only collects Zakat from the people who hold at least a prescribed amount of wealth, it ensures that the Zakat payers are richer than the Zakat recipients.

This ensures socio-economic mobility and contributes towards egalitarian income distribution in the dynamic macro economy.

Results III: Correlation AnalysisCountryCorrelation Between GDPGrowth & ZGDPAlbania-0.58093Azerbaijan0.686503Bangladesh-0.25932Egypt0.785502Indonesia-0.22489Jordon0.895576Kazakhstan-0.42568Kyrgyz Republic-0.59264Malaysia-0.52276Morocco0.40042Mozambique-0.80824Nigeria0.241723Pakistan-0.71059Saudi Arabia0.436444Tajikistan-0.03663Tunisia0.301337Turkey-0.57057

Analysis of Results Table IIIResults table III show that the absolute value of correlation coefficient is more than 0.7 in only 3 out of 17 countries.

It is more than 0.8 in only 2 out of 17 countries.

In 10 out of 17 countries, the correlation is negative.

This suggests the countercyclical stabilization potential of the institution of Zakat.

Results IV: Years Required to Fill Poverty GapCountryZakat to GDPPGI-GDP ($1.25)PGI-GDP ($2.00)PHCR-GDP ($1.25)PHCR-GDP ($2.00)Albania2.60%0.000.040.020.18Azerbaijan5.83%0.000.010.000.02Bangladesh2.76%1.938.387.4721.12Egypt3.69%0.010.170.060.92Indonesia3.53%0.100.780.602.58Jordon4.30%0.000.010.000.04Kazakhstan2.69%0.000.000.000.01Kyrgyz Republic3.13%0.140.980.593.89Malaysia4.59%0.000.030.000.00Morocco5.01%0.020.150.080.66Mozambique0.97%20.0954.2947.19102.62Nigeria2.20%1.894.944.289.08Pakistan2.54%0.272.991.7911.43Saudi Arabia8.45%0.000.000.040.08Tajikistan2.36%0.242.003.868.18Tunisia3.73%0.010.040.070.20Turkey3.42%0.000.010.020.05

Analysis of Results Table IVResults table IV presents how much time it will take to fund the poverty gap through the institution of Zakat.

The time is shown in number of years for each of the four poverty measures that we have used in the study.

We have assumed that the Zakat recipients do not become Zakat payers immediately; else the speed of reaching the target will increase as the social mobility sets in.

For most countries, it will take less than a year to reach poor and help them with their income shortfall below poverty line.

Results V: Pooled Resources & Poverty GapCountryZakat (mln USD)PGI @ $1.25PGI @2.00PHCR @1.25PHCR @$2.00Albania335112661Azerbaijan3,95553713103Bangladesh4,1447,98134,69430,93687,450Egypt10,0381391,6956369,225Indonesia30,6243,05523,78518,46878,980Jordon1,44718357Kazakhstan6,232115862Kyrgyz Republic22631222133881Malaysia14,3696849968499Morocco5,202837733923,422Mozambique1523,0468,2327,15415,558Nigeria11,46021,75256,76649,111104,180Pakistan5,8951,61217,61810,55467,413Saudi Arabia63,2572,6315,2612,6315,261Tajikistan201484017751,642Tunisia1,7541076129358Turkey28,142172414791,422Total187,43240,478150,336121,497376,573

ConclusionZakat to GDP ratio exceeds PGI-GDP ratio in 14 out of 17 countries with poverty line defined at $1.25 a day and in 13 out of 17 countries with poverty line defined at $2.00 a day.

Zakat to GDP ratio exceeds PHCR-GDP ratio in 12 out of 17 countries with poverty line defined at $1.25 a day and in 10 out of 17 countries with poverty line defined at $2.00 a day.

The aggregate Zakat pooled together in 17 OIC countries will be enough to fund resources for poverty alleviation. With collaboration, OIC can transfer necessary resources from Zakat-surplus regions to Zakat deficit regions.

For Questions, Comments & FeedbackSalman Ahmed Shaikh

salman@siswa.ukm.edu.myislamiceconomicsproject@gmail.comwww.islamiceconomicsproject.wordpress.com