The Idiot's Guide to Islamic Finance

Issue 48 September 2008

Zakat: The basics

Along with the rise of Islamic finance in the UK comes a plethora of incomprehensive jargon. Hamza Mian navigates through the financial maze to shed some light

Zakat is the third pillar of Islam and is mandatory for all Muslims who have anything above a certain pre-determined minimum level of wealth. Its application is extensive to the extent that it is the opinion of many contemporary scholars such as Yousuf Al Qaradawi that it applies equally to men, women, children and even those who are not considered to be mentally sound. (In the case of children and those not of sound mind, their zakat should be paid by a parent or guardian).

Zakat is payable on any wealth owned by an individual that is beyond what is required for bare minimum living expenses and in excess of the nisab amount. The nisab is defined for monetary wealth as 85g of gold or the equivalent. At the time of writing this equates to approximately £1250. Therefore any individual in possession of an amount in excess of this, that is not required for their basic necessities, for more than one lunar year must pay 1/40th (2.5%) of that total amount in zakat.

Determining how much to pay

Zakat is payable on any form of wealth (however, this article restricts itself to considerations of monetary wealth only). This includes not only cash in bank (and under the pillow) but also any property and other assets above and beyond what is required for personal use including anything acquired for the purposes of trading or business orientated merchandise.

Broadly speaking, assets may be separated into two different categories, those that generate an income and those that provide capital growth. (Some contemporary scholars, but not all, exclude some depreciating assets or those assets that will retain no value in future).With regard to non earning assets, the treatment for all such assets is identical insofar that any amount that is beyond what is required for personal use, is in excess of the nisab and has been in the individual’s possession in excess of one lunar year, is subject to zakat at 2.5%. It is important to remember to include Child Trust Funds, ISAs, pension funds, any shares, bonds or  sukuk in addition to all your savings and current accounts. It is the opinion of most modern jurists that any jewellery, regardless of its nature, is not liable for zakat, provided that it is for personal use and not excessive in quantity. If however, it is held as an investment, then zakat becomes payable upon it.

Earning assets however are treated differently, in this case zakat is payable immediately upon any income generated from the asset, provided it is in excess of what is required for personal use and is greater than the nisab (or it is greater than the nisab when combined in total with other wealth). Rented property and dividends from shares both fall into this category. Additionally it is the opinion of some scholars (both classical and contemporary) that zakat should be payable on one’s salary or wage. The classical scholars Ibn Masud, Ibn Abbas and Mu’awiya and contemporary scholars Al Qaradawi, Al Ghazali and Kahf all subscribe to this opinion however it remains a minority opinion.

Debts

It is universally agreed amongst the Ulema that any debts may be offset against that total wealth of an individual prior to calculating their zakat. If the subsequent amount falls below the nisab, no zakat will be due. If it is still above this amount then zakat will only be due on the  adjusted amount. Conversely however, any loans that that are expected to be returned must also be included in the calculation as assets. If it is not expected that the loan will be returned, it is not included. Should it be repaid it is treated as new income. The issue of mortgages in this context is an especially tricky one. Some scholars permit the capital (but not interest) amount as an offset in the zakat calculation but not others. Further, only the minimum possible amount to provide basic accommodation is permitted in this adjustment. Anything in excess to this is excluded regardless of the actual size of the loan and property.

Eligibility

There are seven categories of people eligible to receive zakat. The needy and poor, those who need to be reconciled to Islam, slaves (in order to purchase their freedom), those in debt, anything in the cause of Allah (Islam), travellers in need of money and those who administrate the collection and distribution of the zakat.

Zakat ul Fitr

This is an additional form of zakat and is due upon everyone that has sufficient food to feed themselves for a day and is payable before the end of Ramadan every year. It is defined as one Sa’ of the staple grain of the country of residence (such as potatoes, rice or wheat), this equates to approximately £5 in currency terms.