Economic role of zakat in reducing poverty and income inequality in the province of DKI Jakarta, Indonesia :case study of the government board of zakat and Dompet Dhuafa Republika

Abstract

Poverty and income inequality are still the major problems faced by Indonesia. Some scholars argue that economic development in the country had created a trade-off between economic growth and distribution. Therefore, the number of the poor for the last two decades did not fall significantly. Likewise, income inequality in the country tends to worsen. The Central Board of Statistics (2008) found that the gap between the rich and the poor is widened for the last decade. Given these facts, policies for alleviating poverty and reducing income inequality must be evaluated. The conventional distribution approach seems to fail in overcoming these two problems. Hence, the introduction of zakat mechanism is highly needed as an alternative approach to solve the problems. This research attempts to examine the economic role of zakat in reducing income inequality and poverty in the country, by taking a case study in the Province of DKI Jakarta. Three zakat institutions namely, the National Board of Zakat (BAZNAS), the Jakarta Board of Zakat (BAZIS DKI) and Dompet Dhuafa Republika, have been selected to represent the government as well as the private institution of zakat. A number of well-known inequality and poverty measures have been utilized including Lorenz curve, Gini coefficient, Atkinson index, headcount ratio, poverty gap and income gap ratios, Sen index, and FGT index. These comprise the analytical method of the study. After analyzing 1,195 households as the respondents of the research obtained from simple random sampling technique, this study finds that zakat fund has increased monthly income of the households by 8.94 percent. The income share of the bottom 40 percent of the respondents can be increased by 1.90 percent while that of the top 20 percent can be reduced by 2.20 percent. In general, the presence of zakat helps lower the income inequality by an average of 0.57 percentage points. However, when social welfare aspect is taken into consideration, the findings suggest that the presence of zakat has worsened the income loss of the respondents by an average of 12 percentage points. This contrasts the theoretical expectation. Furthermore, the existence of zakat is able to decrease the poverty incidence by an average of 16.79 percentage points. The depth of poverty can be reduced as the poverty gap and the income gap show the reductions of 13.90 percent and 13.72 percentage points, respectively. Similarly, the severity of poverty can also be lowered as evidenced from a 26.69 percentage points increase in the Sen index and a 36.70 percentage points increase in the FGT index. Given these findings, this study urges the government to integrate zakat in the national economic policy.