Paper Title: Estimation of Zakat Proceeds in Bangladesh: A Two-Approach Attempt

Author:        Rashed Jahangir and Mehmet Bulut

Publisher:    Journal of Islamic Monetary Economics and Finance, 8(1), 133 – 148.

This research study calculates potential Zakat proceeds collectible in Bangladesh by using both classical and contemporary or alternative Zakat calculation methods. The results reveal that the percentage of potential Zakat collectible amount to GDP is significant as the estimates range between 2.3% to as much as 3.8%.

It shows that Zakat collectible amount can assist government to spend in welfare of the poor through cash transfers, educational stipends and providing in-kind assistance through asset ownership, such as tools of trade, equipment and business capital. The Zakat proceeds can be provided to the micro borrowers to improve their purchasing power. Since poor people have high marginal propensity to consume, Zakat based resource transfer would increase spending and amplify the multiplier effect. 

In calculation of Zakat, the authors use the alternative method employed in another paper “Welfare Potential of Zakat: : An Attempt to Estimate Economy wide Zakat Collection in Pakistan”. This method is built upon as an improvement over the classical method employed in research study of Prof. Monzer Kahf and Dr. Naseem Shah Shirazi.

In a more recent application of alternative method published in Moral Reflections on Economics, Vol 2, Issue 3, further improvements are made to the methodology of estimation which makes it more robust. 

It is difficult to obtain micro data on gold holdings from aggregate indicators. For this reason, we need to use proxy data.

The proxy data can employ demographic data, such as number of housing units in ownership with a minimum of three bedrooms. Through surveys, the average gold holding among this segment can be estimated. This average can be applied to the number of housing units in ownership with a minimum of three bedrooms to estimate the private gold holdings. This data can be multiplied with price to obtain value of gold holdings. Income and wealth distribution data can be employed to apply Zakat on this value owned in the top income or wealth quintile to obtain a conservative estimate of Zakat collectible on private gold holdings.

In another alternate method, the number of married couples can be used in place of number of housing units in ownership with a minimum of three bedrooms. Through surveys, the average gold holding among this segment can be estimated. Rest of the steps would follow the same procedure as in the first proxy.

For estimation of potential Zakat collectible in real estate, total aggregate real estate value data adjusted for income and wealth distribution can be used. If number of leased real estate can be identified, then Zakat on both rents and value of tradable real estate can be estimated.

Real estate platforms can be used to find average rental yield and per square foot price in real estate in different locations to estimate the value of real estate wealth from the micro-based approach.

It is very hard to compute the value of unsold inventory at a particular date. Wholesale and retail trade value in GDP is reported for each financial year. Assuming one-month inventory outstanding from the total annual value of production, we can estimate the Zakat base. Thus, we can assume average inventory turnover ratio of 12. We can apply 2.5% rate of Zakat on the estimated value of tradable inventory to come up with a potential figure of Zakat collectible on tradable inventory.

People also hold their wealth in bank accounts, mutual funds, stocks, annuities, and national saving scheme instruments. Among the individual heads related to financial investments, if only the wealth held by top 20% is assumed to be subject to Zakat where the payer has Nisab level value of wealth in excess of personal needs and debts, the total Zakatable base on each of the financial investment heads can be estimated. We can apply 2.5% rate of Zakat on the estimated aggregated value of financial investments held by top 20% wealth owners to come up with a potential figure of Zakat collectible on financial investments.

Most of the investments in shares in Pakistan are made by institutional investors who regularly trade shares in the market. Therefore, we can take the market capitalization and adjust it with respect to wealth distribution data from World Inequality Database as described before. We can apply 2.5% rate of Zakat on total market capitalization to obtain a conservative estimate of potential Zakat collectible on shares. 

Livestock population data is available in Economic Surveys. Applying average market value on these livestock categories, we can estimate the aggregate value of livestock. If only the wealth held by top 20% is assumed to be subject to Zakat where the payer has Nisab level value of wealth in excess of needs and debts, the total Zakatable base on livestock can also be estimated.

The rates on livestock wealth differ depending on whether the animal is goat, cow or camel. However, as argued by Yusuf al Qaradawi, the average rate can safely be taken as 2.5% for a preliminary potential Zakat estimation exercise since it is not assessment of Zakat for a particular individual.   

From Economic Survey data, cropped area that is depending on rain or irrigation for water supply can be identified. Assuming constant returns to scale on average, the Nisf Ushr (5%) and Ushr (10%) can be applied on the value of agricultural produce to estimate the potential of Ushr collectible in Pakistan.

In the classical understanding, only the production from land is subject to Ushr. Therefore, fish catch and poultry production is subject to Zakat if held for trade. Assuming inventory turnover ratio of 12, only 1-month production value can be assumed to be subject to Zakat from the total annual value of production. If 2.5% rate is applied on tradable inventory, the potential collection can be estimated on fish catch and poultry and dairy production.

Therefore, this newer version of alternate method is more detailed, micro-data based, in line with theory and robust. Using this, potential Zakat collectible can be estimated. Such estimations show the potential and prowess of Islamic redistributive institutions. If administration and governance is improved to ensure effective collection and disbursement of Zakat, then the benefits of this pro-poor redistributive institution can reach to the masses.