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This paper aims to show that zakat solves the collective action problem by changing the framework of giving. An additional purpose of this paper is an attempt to fill a critical gap in the Islamic economics literature. This gap concerns the nature and role of zakat in effectively delivering aid to those in need while mitigating the potential for free riding. There is also a general gap in the current literature on Islamic economics that the issues of zakat and charity have not received the same attention as the focus remained mostly on money, banking and the issues of interest and usury. The paper is also an attempt to provide a refocus.

This paper attempts to build an argument to show how zakat can function as a unique solution to the free-rider problem in voluntary charity. The author’s argument is based on a precise theoretical framework, namely the “free-rider problem,” and how zakat can function as a unique solution to this problem. The author also uses game theory to show how reputation can lead to cooperation in a repeated game. The author uses an example from Pakistan to show how reputation can be a disciplinarian of zakat collection organizations.

Zakat solves both the free-rider problem in ordinary charity and the coordination problem between members in a large group. The free-rider problem is solved by changing the very framework of giving and the coordination problem between Muslims around the globe disappears because the rates and details of levying zakat are centrally created based on divine revelation.

This paper presents an important topic as it addresses one of the most popular giving practices in Muslim societies, called zakat. It also provides a framework in examining the meaning and function of zakat in Muslim societies.