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International Journal of Islamic Economics and Business Sustainability (IJIEBS)

Abstract

Purpose - The purpose of this study is to compare zakāh with more mainstream forms of public finance both on the collection and redistribution side in order to gain a deeper appreciation of zakāh as a redistribution instrument through the perspective of modern microeconomics.

Design/methodology/approach - A literature review of the modern public finance and fiscal literature is conducted and used to highlight the public finance aspects of zakāh. The general equilibrium framework is then used to model zakāh as part of a 2x2 pure exchange economy. Comparative statics are then conducted in order to examine how an economy with zakāh is affected by exogenous shocks.

Findings - As zakāh has various progression structures, different sectors of the economy may be affected differently by exogenous shocks e.g. the zakāh rate for the financial sector is flat but the rate for livestock is slightly progressive. More generally, the model shows that an economy of zakāh is still vulnerable to various demand-side shocks which will be counter-productive to zakāh as demand-side shocks may bring up prices and reduce the purchasing power of zakāh transfers.

Implications - Regarding the aspects of zakāh modeled, there is a risk of zakāh being rendered useless if not accompanied by moderation in consumption. Other aspects of zakāh are discussed and explored, specifically regarding production and information asymmetry. In an economy with production, a zakāh administrator would do well to keep track of demand and production technologies as some forms of zakāh are in-kind. As discussed in the literature, it may therefore be more efficient in terms of both procurement and transaction costs to simply transfer zakāh in-kind to those who consume it or transform it as may be the case with agriculture and livestock. In terms of information asymmetry, zakāh administration suffers from the same issues as general public finance administration e.g. prevalent moral hazard on the collection and redistribution side. While zakāh is decentralized, this will only be an advantage if the recognized `āmil is pious and dutiful.

Originality/value - To this author’s knowledge, this is the first paper to explore the public finance implications of zakāh to such an extent both in terms of reviewing the literature and attempting to model an economy with zakāh in such a way that its effect on inequality may be directly examined. Bank Indonesia has several works on Islamic public finance but they tend to be rather shallow and while P3EI (2019) does examine zakāh under general equilibrium, they stop at the Edgeworth Box diagram and do not perform further analysis.

References

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