The commentaries on Quranic and Hadith texts extol the benefits of Zakat and provide an extensive rationalization for its institution as a pillar of Islam. Some benefits include Zakat’s impacts on fostering social cohesion, providing a safety net for the poor, and forcing capital circulation in the market. Zakat, as annual stimuli to the economy, is one dimension that is understudied and theorized, which should be viewed as part and parcel, if not a central aspect of capitalizing various sectors of the economy on regular intervals.
The circulation of money and products in the market, among a diverse set of actors, are central to a healthy economy and balanced growth. I use the term “growth” here not in its current sense of boom to bust trajectory, but rather in the sense of assisting individuals and communities move toward a balanced productivity and earning an honest living to support the pursuit of their potential in life. Parking massive amounts of wealth for prolonged periods of time to avoid the “dangers” of the market is the strategy pursued by the rich. The security of wealth and steady investments represent the very cautious approach but in reality, the returns are limited and the growth is stagnant and sometimes mostly driven through dependence on movement in interest rates and shifts in tax burdens in current global capitalist economies.
At times of economic crisis and uncertainty, the wealthy and banks tend to freeze the circulation of capital into the market, thus causing further deterioration of the market conditions and a possible greater loss or depreciation of the assets. The countermeasures to an economic crisis and freezing of money circulation include building confidence and infusing liquidities into the market. We did witness these measures in 2008, post-economic crisis, but the problem was that the bulk of this infusion of liquidity from tax payers’ pockets was directed at the banks and corporations that caused the collapse in the first place, while the middle class and the poor ended up subsidizing the rich and wealthy. While the economy recovered in many parts of the world, the growth and expansion, however, in the past 10 years, have gone to the global top 1 percent, while the rest saw their income and wealth stagnate or go into the negative. Furthermore, the process is stoking a massive boom cycle that is heading in the near future into a deeper and more complex bust.The short discussion above is important and very much connected to Zakat as annual capital stimuli to the economy with a heavy focus on the consumer products side of the market. Taking the 2.5 percent annual Zakat on wealth, which is paid by those who have set aside capital for a period of a year, is the opposite of trickle-down economics. The current tax and corporate codes in the U.S. is based on trickle-down economic theory, which posits that the more money we give to those on top the more jobs, investment and growth is generated. However, evidence from previous periods of trickle-down economics policies shows that this kind of measure ended in economic disasters and the shrinking of the real income and wealth for the poor and middle class. More capital in the hands of the wealthy did not and will not translate to real growth or expansion of economic opportunities in the market but only produce a fictitious boom followed by a certain bust that punishes the poor and middle class again. Zakat is fresh liquidity for the markets
Zakat is an annual stimulus to the market and is carried out through a net transfer of real capital from the wealthy to those who qualify according to established criteria. The poor, needy and indebted, among the eight categories, receive the capital which is immediately infused into the market to address pressing needs. The trickle-down economic model results in wealth accumulation and the further removing of liquidity from the market, the opposite of the claims made by those who champion this theory.
Assuming a Zakat eligible person receives $1,000, there is a possibility that this amount is used to pay rent, buy food, fix the fridge and other deferred items. Here, we have an important outcome of the Zakat expenditures, which resulted in putting capital into circulation by means of the expenditures undertaken by the recipients. For a period of time, I was thinking about the Quranic and Hadith texts that speak of or define Zakat both as a purification and as a growth in wealth for those who give it out. The existing classical explanation viewed growth in terms of rewards in the afterlife, a correct metaphysical understanding, but I wanted to explore its temporal impact since they are interconnected.
The Zakat-eligible person puts whatever funds received into the market, which is structured around products and services that are owned and managed by those with businesses and possibly wealth. Consequently, the more Zakat or capital stimuli is put into the market, the more wealth circulates horizontally and vertically back to those who are producers in the market, namely the wealthy. It is possible that some Zakat recipients will put their funds into small business ventures of their own and create new opportunities in the market while helping themselves move out of dependence on Zakat and, in the long run, become Zakat contributors.
In more ways than one, Zakat will have the same function as a microfinancing, but without the pernicious lenders who are seeking direct and immediate secured returns. When Zakat is given to someone who uses it as a source of microfinance to create a new venture with the desire to become financially independent, then the broader community benefits in a myriad of ways. Let me be clear, the Zakat recipient is not obligated to undertake such a route, but some do on their own and are religiously motivated in the desire to give back to the community that helped them in their moments of need.
Furthermore, a profound aspect to Zakat as stimuli is that it humbles the wealthy who must offer the Zakat to those who qualify while expressing gratitude to them because they are the means of purification and are the real agents of the divine. One should not underestimate the value of humbleness and gratitude in shaping microeconomic relations and fostering social stability in the Muslim community. Business and markets flourish when stability, codependence, security and cohesiveness are at hand and Zakat allows for an annual recalibration of the disruptive factors that impact the flow of goods and services. When we examine the eight different categories of eligible Zakat recipients, we find out that it is directed at removing or reducing the exigencies of the market and resetting back into a more “normative” pattern. If we take the global wealth of over $110 trillion that is currently parked and stashed away and apply a basic Zakat of 2.5 percent to it, then the stimuli would come close to $3 trillion that would be put into circulation. The impact of a direct $3 trillion stimuli directed at the poor and those at the bottom would create a considerable level of market expansion and would possibly lead to doubling or tripling the returns to those who gave out the Zakat or the wealth in the first place. The stimuli would lead to a global recalibration, reduce the global debt owed by the global south, bring more producers to the market, and create a massive circulation of goods and products emerging from the bottom-up rather than the ill-fated, failed many times over and shortsighted trickle-down economics. Zakat is the real and well-proven trickle-up economic modality. It is time to revive and embrace Zakat as the real stimuli for the global economy, and not tax breaks or deregulations!