Poverty has been an economic as well as social concern since time immemorial. According to their respective systems and settings, various religious, sociological and economical ideologies have provided their responses varying in thoughts and actions and with different degrees of success. For instance, the socialist philosophy sought common ownership of all means of production and, therefore, proposed an agenda whereby everyone was asked to contribute according to his or her ability and get what was duly needed. In capitalism, there is over whelming emphasis on individualism, yet it also proposed a welfare state to satiate the equity demands. Because of certain extremities, with respect to the individual and the society, imbalances have been visible in the capitalistic and socialistic approaches, whereas solution lied in a balanced approach that was comprehensive as well. This leads us to yet another ideology that is ISLAM, which emphasizes the moral aspects of economic policy. Of the three monotheist religions, Islam has put the greatest emphasis upon the plight of the poor and the destitute and in the Holly Quran neglect of the poor is directly associated with the “most grievous penalty”. Moreover, although both Judaism and Christianity urge the believers to provide support for the poor, this support is of voluntary nature, whereas in Islam supporting the poor assumes an obligatory character and disregard for the poor becomes tantamount to abandoning Islam. This research was conducted to investigate the role of zakat in poverty alleviation in order to prove that whether the Islamic Economic System has potential to alleviate poverty or not? For this purpose the researcher proposed two hypotheses, one of them was that, “Greater the practice of Islamic Economic System greater would be the chances of poverty alleviation.” and another was, “Greater the transparency in the system of Zakat distribution, greater would be the chances of earning opportunities”. There were three categories of respondents i.e. the beneficiaries, the chairmen of zakat committees and the religious scholars, with respect to these different categories of respondents the following objectives were kept in view during the study. i) To ascertain the socio-economic status of beneficiaries before and after receiving Zakat. ii) To know about the views of beneficiaries about the prevailing system of zakat, its transparent distribution, social benefits and suggestions for improvement. iii) To find out the views of chairmen zakat committees about the prevailing zakat system, improvement in the socio-economic status of Mustahiqeen-e-Zakat / beneficiaries and social benefits of Zakat. iv) To know about the views of religious scholars regarding effective methods of Zakat disbursement and relief to Musthahiqeen-e-Zakat / beneficiaries through Zakat and poverty alleviation. v) To dig out the obstacles paralyzing the role of zakat in poverty alleviation. vi) To examine, the relationship between the economic system of Islam and poverty alleviation. In order to prove the validity of theses research hypotheses and to achieve the objectives of the study the researcher selected the Khyber Pukhtunkhwa (ex-N.W.F.P) of Pakistan as the universe of the study and interviewed 600 respondents. The respondents were categorized into three categories, i.e. 200 zakat beneficiaries, 200 zakat chairmen (staff) and 200 religious scholars from ‘Kohat’, ‘Charsadda’, ‘Swat’ and Battagram. For this purpose three separate interview schedules for the beneficiaries, the zakat chairmen or staff and religious scholars were prepared and pre-tested on two respondents from each category and finalized after necessary modifications. Most of the beneficiaries responded that poverty alleviation is one of the social benefits of Zakat because their income has increased. According to 80% of the chairmen responded that the number of the poor people is increasing while Zakat fund given by the District Zakat Committee to the local zakat committee remains the same that is why the zakat disbursement policy of the government is not yielding the expected results. Most of the religious scholars (i.e. 80%) said that zakat can accelerate purchasing power in the market, which alleviates poverty but inspite of the fact that the zakat institution has been functioning since 1980, the widespread existence of poverty indicates defects in the existing economic system of Pakistan. Religious scholars 54% preferred indirect zakat disbursement with major focus on investing in establishment of technical institutions, cottage industries and vocational centers as would lead to prevalence of prosperity. Thus little chances of finding the zakat payees, at it happened in the regime of two caliphs (Umarain Razi Allaho Anhoma). The study concluded that Islamic Economic System has great potential to alleviate poverty through fair and transparent zakat system.