comparison of zakat and interest

1. ZAKAK AND INTEREST
Prepared by: Ruquia Batool

2. Introduction:
Zakat is a certain fixed portion of the wealth and property that a Muslim is obliged
to pay yearly for the benefit of the poor in the Muslim community. The payment of
Zakat is obligatory, as it is one of the five pillars of Islam. Zakat is the major
economic means for establishing social justice and leading the Muslim society
towards prosperity and security.
Every Muslim who owns a fixed, minimum amount of wealth (called Nisab), and
who satisfies certain other conditions, must pay Zakat. The Qur’an mentions Zakat
in many places. For example, Allah (S.W.T) says:
“Take Sadaqah (obligatory charity) from their wealth in order to purify them and
sanctify them with it, and invoke Allah for them. Verily, your invocations are a
source of security for them, and Allah is All-Hearer, All-Knower.” (9:103)
Meaning:
The word “Zakat” is an Arabic word that shows two literary meanings i-e
 Purification
 Growth
Purification:
It means the purification of soul, character, life and wealth. Zakat purifies the
human soul by keeping a person away from illegal sources of earning, eliminating
the love for materialism and by overcoming the sense of pride for being wealth.
Wealth is dear to everyone but who spends wealth on others attains goodness and
purity . As Quran says in Sura al Toubah:
“take alms out of their property , thou wouldst cleans them and purify them
thereby”
Growth:
It means that a person who pays Zakat regularly , his individual wealth as well as
the community wealth keeps on growing by the blessing of the Almighty Allah .
Moreover Allah protects the wealth on which Zakat has been paid and in this way
the peace of mind of the person who pays
ISLAMIA UNIVERSITY BAHAWALPUR( DEP OF COMMERCE) 1

3. Definition:
In economics, Zakat can be technically defined as follows:
“Zakat is a transfer payment which Sahib –e – Nisab Muslims make at given rates
by themselves or through the Islamic state to the poor and the needy in or after the
month of Rajab.
Theologically
Spiritual purification resulting from paying zakat
Legally / Syariah
– Transfer of ownership of specific wealth to specific individual (s) under
specific conditions
– Religious payment made by a Muslim from his wealth or income or
business or crops or animals in the form of money or crops or animal
according to certain rate to the zakat authority that is Pusat
Pungutan Zakat (PPZ).
Assessment of Zakat
For the assessment of Zakat, the following must be kept in view.
1. Sahib-e-nisab muslim:
A muslim who owns and keeps in his or her possession at least 7.5 tola gold or 52.5
tola silver or cash money to the equivalent value is considered a sahib e nisab
muslim . it is his compulsion to pay Zakat at its prescribed rates by Quran and
Hadith.
2. Exposed and unexposed wealth:
Zakat is paid for two type of wealth i-e
Exposed/Visible wealth (Amwal-e-Zahirah)
Unexposed wealth/Invisible wealth (Amwal-e-Batinah)
Exposed wealth is the wealth which is exposed to the society e.g. agricultural goods
, camels , sheep, minerals, etc. on the other hand unexposed wealth is the wealth
which remains unexposed to the society e.g. gold , silver , cash , liquid assets etc.
3. The rates of Zakat:
ISLAMIA UNIVERSITY BAHAWALPUR( DEP OF COMMERCE) 2

4. Zakat is paid at the following fixed rates.
 Gold, silver cash:
For at least 7.5 tola gold , 52.5 tola silver or the equivalent value in terms of
business inventories or commercial goods or cash money , the rate of Zakat is 2.5%
of the total value of the goods or money.
 Agriculture:
Zakat which is called usher, is paid at the rate of 10% from the agriculture output
of the land which is irrigated by natural sources and is paid at the rate of 5% from
the output of the land which is irrigated by artificial sources like canals , tube wells
etc.
 Animals:
a. Zakat is paid on the commercial animals at the following rates:
b. One goat from 40-120 goats . two goat from 121-200 goats and three goats from
201-300 goats.
c. One cow from each 40 cows.
d. One camel from each 5 camels
d. Minerals
Zakat is paid on mineral e.g. coal , iron , salt , etc at the rate of 20%.
4. Time Span:
One year must elapse over the asset. It is necessary that one year elapses over the
asset which is subject to Zakat.
5. Exempted
The following properties and assets have been exempted from the levy of
Zakat:-
 Personal effects like clothes, articles of furniture, household goods except
ornaments and utensils of gold and silver.
 Horses and asses for conveyance or Jihad.
 Arms or weapons for personal use.
 Cattle employed in farming or transportation of goods.
 Tools of a professional for his personal use.
ISLAMIA UNIVERSITY BAHAWALPUR( DEP OF COMMERCE) 3

5.  Residential house.
 Slaves and servants.
 Books.
 Food for the owner and his family.
 Agricultural land and factory building and machinery etc
The Usage of Zakat Fund.
The revenue generated from the zakat tax is to be used for the following persons
and projects
Beneficiaries of Zakat:
The following can be beneficiaries of Zakat.
1. The poor:
These are the people who cannot be treated as sahib-e-nisab.
2. The needy:
These are the people who are unable to earn their living e.g. handicapped, disable ,
orphans etc.
3. Collectors of Zakat:
These are the people who collect and distribute Zakat among the poor and the
needy . their salaries are paid from the Zakat fund.
4. The new Muslims:
These are the people who have recently converted to Islam.
5. The Slaves:
Zakat can be used to make free the slaves and prisoners of wars from their masters
and enemies.
6. The debtors:
People who are heavily indebted can get Zakat to repay their debts provided that
the debt is not taken for sinful purpose.
7. The travelers:
ISLAMIA UNIVERSITY BAHAWALPUR( DEP OF COMMERCE) 4

6. The travelers can get Zakat to complete their journey in case they fall in need of
money.
ISLAMIA UNIVERSITY BAHAWALPUR( DEP OF COMMERCE) 5

7. 8. Mujahideen:
Zakat can also be given to Mujahideen to prepare them for jihad . Also the
dependents of the martyrs and the religious educational institutions can seek
assistance from the Zakat fund.
Thus, Zakat is a source of financial assistance for the poor and needy persons.
This list is based on the following verse of the Qur’an:
“The alms (zakat) are only for the poor, the needy, those who work (to collect) them,
those (unbelievers) whose hearts are inclined (towards the truth), the slaves, the
debtors, in the way of Allah, and the traveller. So does Allah ordain. Allah is
Knowing, Wise.” (9:60)
Economic and Social Importance of Zakat:
The following facts reflect economic and social importance of Zakat.
1. Purification of soul:
Zakat purifies the soul of contributor from the evils of miserness . It makes them
humble and God-fearing. It also creates wealth discouraging love among people.
2. Healthy growth of community:
Zakat leads to the healthy growth of the economy and the community. It uplifts the
less fortunate members of the society.
3. Narrow down the economic inequalities:
Zakat narrows down the economics inequalities in the community to the minimum
possible limit. The rich may not grow richer ant he poor poorer.
4. Wider circulation of wealth:
Zakat increases the speedy circulation of wealth. It discourages hoarding and
provides an automatic mechanism for the flow of wealth from rich to the poor thus,
it widens the circulation of wealth among the community.
5. Main source of income:
Zakat occupies a central position in the financial structure of a Muslim state ,
because it contributes too much towards national treasury and it provides sufficient
fund to Govt.
ISLAMIA UNIVERSITY BAHAWALPUR( DEP OF COMMERCE) 6

8. 6. Fair distribution of wealth:
Zakat meets an important purpose for spreading and distributing wealth that
becomes just and equitable .It guarantees that income is not centralized rather it
moves very rapidly among different groups of society.
7. Minimizes unemployment:
Zakat is very vital instrument for removing unemployment .the money received by
the people can be used and poor can start a business.
8. Economic stability:
The problem of instability does not take place in an Islamic economy due to the
mechanism of Zakat. Zakat promotes the velocity of circulation of money due to
which AD for goods and services rises. This determines the level of investment,
income and unemployment on stable footing.
9. Self-reliance:
Zakat eliminates poverty and diversity from the society. It brings amount
prosperity. People can take care of each other and in such a way Zakat enables an
economy to be self-reliant.
10. Capital accumulation:
By Zakat , people can use their liquid assets to promote capital formation in the
country . They invest their assets due to which growth rate of the economy goes up
and the country gets prosperity.
11. Mobilization of resources:
Such individuals who get income in the shape of Zakat are in a position to utilize
the available resources. In this way, maximum use of resources becomes possible.
12. Social security:
Zakat fund not only covers the poor and the disabled, but it also provides social
security to the unemployed individuals.
13. Social welfare:
Hospitals, schools and handicrafts centers for the poor can be constructed by
making use of Zakat fund. This promotes social welfare in the country.
14. Anti-social activities:
ISLAMIA UNIVERSITY BAHAWALPUR( DEP OF COMMERCE) 7

9. Zakat is paid obviously from rizq-e-halal. Thus, the Muslims who pay Zakat refrain
themselves from anti-social activities like hoarding, smuggling etc.
15. Control of crimes:
the major cause of crimes particularly theft is due to poverty of people. The problem
of poverty can be easily overcome by Zakat. In such a way , crime rate can be
controlled.
Zakat and Modern Economy:
Our Beloved Prophet Muhammad (pbuh) brought about the greatest revolution-even
economic and political miracle- in the human history. In Madina, where our
prophet first implemented the system of Salah and Zakat, immediately the
economic conditions of the people changed. He is reported to have said “if a single
person where to sleep hungry in a town, then GOD’s protection is lifted from such a
town.
This Hadith emphasizes that no one under this system should go hungry. This
Zakat system created the first universal welfare system in human history. History
tells us that there was a time when hardly anyone was in need of charity, during
the khilafat of Umar (R.A).
Primarily, Zakat is an act of Ibadah, but also in itself it is a unique distributive
mechanism which seeks to ensure that wealth and property are not expropriated
and controlled only by a few people, and that everyone can equally enjoy the
provisions and bounties of Our Lord, The Creator, The All Mighty- Allah
Subhanahu’wata’la.
In context of the economy, being a significant component of Islam, Zakat forms the
backbone of the Islamic economy-its role being both diverse and endless. It covers
all the aspects of an economy- from social, political to downright psychological.
By nature, we human beings are selfish beings. Implying that we require a
compelling force to make us part with our money. Divine orders make that happen
for the people who fear the consequences. Sacrifice, suppressing selfishness,
humility etc are the qualities instilled by Zakat in the hearts of the believers.
At the societal level, it’s primary objective is the eradication of poverty- which is the
mother of all social evils, by ensuring that the rich live up to their responsibility by
distributing a portion of their wealth and fortune to the poor and the needy of the
society at large.
Finally, at the economic level Zakat plays probably the most important role that it
ensures, that wealth and property are not held and controlled only by a section of
the society, this concept in Islam is completely against the western practice of
capitalism, which ensures that wealth is controlled only by the top few.
Zakat being the distributive mechanism that it is seeks to establish such a society
in which wealth and property are both equally distributed so that inequity and
injustice can be eradicated from the society.
ISLAMIA UNIVERSITY BAHAWALPUR( DEP OF COMMERCE) 8

10. In the Noble Quran, Allah Subhanahu’wata’la has constantly reminded us of doing
good deeds and avoiding the bad. We Muslims need to return towards adherence of
the Noble Quran .i.e. to practice justice, fairness and equality. Then we will
understand that Zakat not only leads to economic progress of individuals and
human beings but to their spiritual progress as well.
Interest Defined:
The standard dictionary definition for interest is as follows:
“A charge made for a loan or credit facility”
OR
“Any excess paid or received on the principal”
At first glance it seems reasonable for a charge to be levied in exchange for
receiving a loan. The capitalist system believes in money’s unbridled right to a
return irrespective of the level of profit or loss generated by the project to which the
money was loaned.
Islam fundamentally disagrees with the above view; and instead proposes that if
capital is lent on a ‘loan’ basis then it must be repaid with no excess; any excess
being interest.
The Qur’anic Ban on Interest:
‘The first ever verse revealed on Riba was Surah Ar-Rum, verse 39, where Allah
says;
‘And whatever Riba you give so that it may increase in the wealth of the people, it
does not increase with Allah’
The next occasion when interest is mentioned is in Surah Nisa, verse 161 where
Allah says;
‘And because of their charging Riba, whilst they were prohibited from it’.
Failures of Interest Based Economic System:
1. Banks are given too much power:
The ability to create money gives banks and other financial institutions incredible
levels of power by permitting the creation of artificial wealth for which they have
carried out no corresponding real economic activity. These elite have an
unacceptable level of control over society’s wellbeing. Abuse of this power takes
many diverse forms but can perhaps best be understood by examining the impact of
debt on the third world.
ISLAMIA UNIVERSITY BAHAWALPUR( DEP OF COMMERCE) 9

11. 2. Economic growth is hindered:
As money is permitted to attract a rate of return, banks are able to generate profits
through interest. Banks will invariably prefer to lend to those who have the
greatest collateral because they represent the lowest risk of default. Those who
have the most viable business plans are not always those who have the greatest
collateral. Consequently, interest based banking inhibits economic growth by
failing to promote the best business ideas which, if supported would result in
higher economic growth.
3. The rich get richer:
Those with the most collateral are by definition the wealthiest in society, By giving
these people preferential access to money, capitalism has a persistent tendency to
favor the rich and discriminate against the poor, ensuring that the rich just keep
getting richer, and the poor just keep getting poorer.
4. Inequality:
Social and economic inequality grow with a passage of time (the rich get richer and
everyone else gets poorer, many absolutely and the rest in relation to the rapidly
growing wealth of the rich).
5. Status Gap:
With such a gap between the rich and the poor, egalitarian social relations become
impossible (people with a lot of money begin to think of themselves as a better kind
of human being and to view the poor with contempt, while the poor feel a mixture of
hatred, envy and queasy respect for the rich).
6. Political Influence:
Those with the most money also begin to exercise a disproportional political
influence, which they use to help themselves make still more money.
7. Corruption
Increase in corruption in all sectors of society, which further increases the power of
those with a lot of money and puts those without the money to bribe officials at a
severe disadvantage.
8. Anti-Social Attitudes and Emotions
The same market experiences develop a set of anti-social attitudes and emotions
(people become egotistical, concerned only with themselves. "Me first", "anything
for money", "winning in competition no matter what the human costs" become what
drives them in all areas of life. They also become very anxious and economically
insecure, afraid of losing their job, their home, their sale, etc.; and they worry about
ISLAMIA UNIVERSITY BAHAWALPUR( DEP OF COMMERCE) 10

12. money all the time. In this situation, feelings as well as ideas of cooperation and
mutual concern are seriously weakened, where they don't disappear altogether, for
in a market economy it is against one's personal interest to cooperate with others.
Finally, the market economy leads to periodic economic crises, the economy stops
growing, fewer things are made, development of the forces of production slows
down, investment drops off, etc
Conclusion:
Zakat is one of the vital and most significant features of the Islamic finance and
economics System. Unfortunately for all of us ‘Zakat’ which is one of the Five
Pillars of Islam, has been reduced to just a ritual which we perform once a year and
most of us don’t bother to perform it also as a ritual. The concept of Zakat is the
foundation stone of the Islamic finance and economic system. Islamic Economic
system is best alternative to interest based economy, because interest based
economy have many inherent consequences like instability, shaken by periodic
crises and requiring massive bailouts. So to overcome all these difficulties and
loopholes there must be a system which contain all set of rules based on a
foundation of social justice, with the government responsive to the needs of society,
individuals members of society committed to ethical standards in all their dealings.
Then and only then can the fully functioning Islamic financial system as envisaged
in the Quran and interpreted by The Prophet be put into practice. In the meantime,
the best we can hope for is a system that proceeds methodically on the roadmap
that we have tried to outline and with a strong commitment to ethical regulation,
supervision and enforcement in order to develop the essential foundation of the
Islamic financial system.
ISLAMIA UNIVERSITY BAHAWALPUR( DEP OF COMMERCE) 11