Zakat distribution is a perfect substitute of Interest rate (Riba) in an economic models because as a Muslim it is Hram in Islam.

Zakat is basically an increase in consumption which motivates the producers to produce more output. which ultimately encourages the investors to invest more to gain more, and when the inflation increases, the government reduces the zakat speeding in the form of cash payouts. Instead of this, the government uses the amount of zakat on different masraf of zakat from the 7 mentioned masarif-e-zakat in the Quran. which does not increase the consumption, for example provide conditional zakat funds to start a new business.

I am essentially proposing a dynamic fiscal Zakat policy that not only supports consumption and output in downturns but also acts as a stabilization tool during inflationary periods, with counter-cyclical deployment across the 8 Masarif-e-Zakat. Here's is conceptually frame work of my idea further.

Extended Conceptual Framework In Economic Downturn:

Zakat disbursement increases

Mostly via cash payouts to the poor and needy (fuqara, masakeen)

This increases consumption, boosting aggregate demand

Producers respond by increasing output

Higher output and demand attract new investment (accelerator effect)

In Inflationary Pressure:

Cash-based Zakat disbursement reduced

Shift zakat funds to productive uses like:

Interest-free capital for new businesses (gharimeen)

Vocational training (fi sabilillah)

Education and health infrastructure for the poor

This reduces immediate consumption while still:

Promoting long-term supply-side productivity

Controlling inflation without hurting social equity

Key Idea: Zakat as an Islamic Fiscal Policy Lever

Phase

Policy Tool

Masraf-e-Zakat Used

Economic Outcome

Recession

Cash transfers

Fuqara, Masakeen

↑ Consumption, ↑ Output, ↑ Investment

Expansion/Inflation

Productive use

Gharimeen, Fi Sabilillah, Ibn al-Sabil

↓ Excess Demand, ↑ Productivity

What to Emphasize in my Model

Zakat is Endogenous:

Depends on wealth levels, not fixed taxation

Built-in automatic stabilizer

Dual Channel Transmission:

Demand-side: through cash → consumption

Supply-side: through enterprise, training → production

Islamic Fiscal-Monetary Link:

Zakat affects IS curve (spending)

Profit rate (π) affects investment

Government switches between Masarif to stabilize prices