Economic Role of Zakat in Reducing Poverty and Income Inequality

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 conventional distribution approach seems to fail in overcoming these two problems. Hence, 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 poverty and income inequality in the country, by taking a case study in the Province of DKI Jakarta. After analyzing 1,195 households as the respondents of the research, this study finds that zakat fund has increased monthly income of the households by 8.94 percent. The presence of zakat programmes has reduced the poverty incidence by an average of 16.79 percentage points and income inequality by an average of 0.57 percentage points.