Welfare Potential of Zakat: An Attempt to Estimate Economy Wide Zakat Collection in Pakistan

Abstract

Islamic economics literature is rich in highlighting the welfare potential of Zakat, but very few empirical studies have undertaken the quantitative estimation of potential Zakat collection. In this study, we attempt to estimate potential Zakat collection at economy wide level to explore the welfare potential of the institution of Zakat. We attempt to estimate economy wide Zakat collection by including heads like Zakat on agriculture produce, value of livestock, tradable inventory, currency in circulation, foreign exchange reserves, estimated gold and silver deposits and financial assets like investments in National Savings Scheme (NSS), mutual funds, stock market capitalization, pension schemes and remunerative bank deposits. Our estimates suggest that approximately Zakat collection in Pakistan could reach 7% of total GDP and is sufficient for covering poverty gap in Pakistan. We also discuss that the institution of Zakat system can also have positive effects on flow of investment, promoting entrepreneurship culture and making capital markets and real estate markets more competitive. At the macroeconomic level, we also discuss the role of the institution of Zakat as a stabilizer.