How zakat can ease the budget gap in social protection

Bangladesh is preparing its next national budget at a difficult moment when living costs remain high, private investment is weak, foreign exchange reserves are under pressure, development needs exceed domestic revenue, and a growing share of public expenditure is absorbed by debt servicing. The IMF expects the country to grow by 4.7 percent in real GDP terms in 2026, while consumer price inflation is projected to remain high at 9.2 percent. The upcoming budget must, therefore, be both a crisis management budget and a socially missioned one.

A budget is not simply a list of income and expenses. It is a statement of national priorities: who will bear the burden, who will be protected, and what kind of development the country seeks. Bangladesh’s budget-making process must move beyond large expenditure targets and unrealistic revenue projections. It needs a clear vision, a credible mission, and a sustainable funding plan.

Recent discussions suggest that the FY2026-27 budget may be more expansive than the current FY2025-26 budget. The outgoing budget totalled Tk 7,90,000 crore, with a projected revenue of Tk 5,64,000 lakh crore and a deficit of Tk 2,26,000 lakh crore. Interest payments alone were estimated at Tk 1,22,000 lakh crore, showing how much fiscal space has been narrowed by past borrowing.

The underlying issue is the country’s structurally weak revenue base. The IMF has identified weak tax revenue and financial sector vulnerability as major threats to macro-financial stability. Fiscal discipline should not mean cutting essential social and development spending. It should be based on stronger revenue collection, better quality expenditure, lower waste, prudent debt management, and improved governance.

Alongside tax reform and public financial management, Bangladesh should formally recognise Islamic social finance, especially zakat and waqf, as supplementary instruments for social protection and poverty reduction. Zakat is not a conventional tax, nor should it replace the state’s fiscal responsibility. But in a Muslim-majority country, zakat is a substantial, recurring, and morally grounded source of social finance.

In my academic research with co-authors, we estimated that Bangladesh’s zakat potential increased from about $809 million in FY2000-01 to over $9.749 billion in FY2018-19. This was nearly four percent of GDP, 21 percent of the national budget, and around 35 percent of total revenue in FY2018-19. The sectoral composition is also important to consider. Services accounted for about 32 percent of total zakat potential, while bank deposits reflected 23 percent, agriculture reflected 16 percent, and manufacturing accounted for 10 percent, among others.

If even a modest share of this potential were mobilised through credible, voluntary, transparent, and professionally managed institutions, Bangladesh could strengthen its social safety net without additional debt. In FY2025-26, the government allocated Tk 1,16,731 crore, about 1.87 percent of GDP, to social safety net programmes. The abovementioned estimate placed zakat potential at nearly four percent of GDP in FY2018-19. Zakat should not replace public social spending, but it could supplement poverty graduation, healthcare for the disadvantaged, education support, disability assistance, elderly care, climate displacement support, and livelihood creation.

Therefore, the upcoming budget should introduce a national zakat and social finance framework. Such a framework should not compel zakat through the tax system. Rather, it should create an enabling environment in which individuals, Islamic banks, businesses, wealthy families, and charities can channel zakat through nationally monitored social priorities. A credible framework would include digital registration, independent Shariah oversight, audited accounts, beneficiary databases, clear distribution criteria, and annual public reporting.

Zakat can support the national budget in five practical ways. First, it can relieve the pressure on social protection by supporting targeted poverty-fighting programmes. The existing programmes in the country often feature inadequate benefits, targeting errors, leakage, and fragmentation. A well-governed zakat system could align Shariah-defined eligibility with national poverty databases and increase coverage without relying entirely on additional tax-financed spending.

Second, zakat can promote poverty graduation over mere survival. Public transfers often keep poor households just above desperation but below self-reliance. Zakat can finance working capital, tools, livestock, training, healthcare, and education assistance so that beneficiaries can move towards sustainable livelihoods.

Third, zakat can reduce the pressure to resort to deficit financing in social sectors. Bangladesh’s deficits are funded through domestic borrowing and external lending. When increasing borrowing is used partly to pay interest on earlier borrowing, fewer resources remain for growth-enhancing investment. If zakat helps finance poverty alleviation, emergency health support, food security, and livelihood programmes, more resources can be allocated to infrastructure, education, and climate adaptation.

Fourth, zakat can stimulate local demand. Poor households spend transfers quickly on food, medicine, clothing, shelter, and essential services. Targeted zakat distribution can protect purchasing power during inflation without the fiscal burden associated with broad, untargeted subsidies.

Fifth, zakat can strengthen public trust when administered transparently. Bangladesh’s budget process remains insufficiently open. The Open Budget Survey 2023 gave the country a transparency score of 37 out of 100, far below the level required for meaningful public debate. Zakat institutions that publish audited accounts, annual reports, programme outcomes, and beneficiary-impact assessments could set a higher standard for accountable social finance.

This integration must be carefully designed. Concerns about politicisation, misuse, bureaucratic control, double-charging, and violations of Shariah principles are legitimate. The government should not treat zakat as ordinary revenue to be absorbed into the Consolidated Fund. Instead, Bangladesh should create an independent national zakat and waqf commission representing Shariah scholars, economists, accountants, civil society, Islamic banks, poverty experts, and credible organisations. The commission could accredit zakat institutions, oversee digital registration, develop beneficiary standards, coordinate with social safety net agencies, and assess distribution performance. The National Board of Revenue could also consider limited tax recognition for confirmed zakat payments made through approved channels, while preserving the secular and inclusive character of the tax regime. This would encourage formalisation without coercion.

Waqf should be the second pillar. While zakat is redistributive, waqf creates durable social infrastructure. Cash waqf and corporate waqf can support clinics, schools, scholarships, skills centres, shelters, water systems, and climate-resilient community assets. Properly governed, waqf can reduce future fiscal burdens by creating permanent public-benefit institutions.

The broader budget process also requires reform. Bangladesh’s Public Financial Management Reform Strategy (2025-2030) recognises the need for stronger strategic budget planning and clearer fiscal communication. The budget should clarify how public expenditure, zakat, waqf, CSR, NGOs, and private philanthropy can collaborate without duplication.

Bangladesh’s next budget should be bold but realistic. It should improve the quality of expenditures, strengthen revenue collection, reduce waste, protect poor households from inflation, and create innovative social finance channels. Zakat and waqf cannot solve all fiscal challenges, but together they can help bridge the gap between state capacity and social need.

Dr M Kabir Hassan is professor and Moffett chair in finance at the University of New Orleans in the US, recipient of the 2016 IDB Prize in Islamic banking and finance, and a member of the AAOIFI Ethics and Governance Board and chair of the board’s education committee.

Views expressed in this article are the author's own. 

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