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FIQH OF
ZAKAT
Mufti Faraz Adam
Amanah Advisors
Summary
of Topics
Introduction to Zakat
Calculation Principles
Zakatable Assets
Deductible liabilities
Zakat Distribution
Zakat payment principles
1.
2.
3.
4.
5.
6.
SECTION 1:
INTRODUCTION TO ZAKAT
Amanah
Advisors
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WHAT IS ZAKAT?
ZAKAT IS THE THIRD OF FIVE CORE PILLARS OF ISLAM AND
BY QURANIC RANKING, IS NEXT AFTER PRAYER IN
IMPORTANCE.
IT HAS BEEN INTERLINKED WITH PRAYER 28 TIMES IN THE
QURAN.
IN TERMS OF PAYMENTS, ZAKAT REFERS TO AN
OBLIGATORY PAYMENT OF 2.5% ON QUALIFYING
ZAKATABLE WEALTH ANNUALLY.
FIQH
OF
ZAKAT
FROM
ZAKAT
TO ALLAH
Every practice in Islam is there to ultimately connect us
with Allah.
Each Islamic practice plays a different role in facilitating our
recognition of Allah.
Zakat brings order to the chaos in the economy, markets
and society, allowing the economy and all its participants
to recognise Allah.
AMANAH ADVISORS
ROLE OF
ZAKAT
Zakat finances the growth of faith and the faithful.
Zakat is a human capital fund which seeks to empower
individuals.
Zakat guarantees every struggling person a baseline
provision and support to give them more opportunities to
break out of the cycle of poverty.
Zakat is liquidity injections to the market and acts as an
economic stimulus by activating consumer spending.
Zakat is a social contract between communities to look
after one another and to grow together.
AMANAH ADVISORS
Zakat establishes subservience to Allah in one’s life.
Zakat is a gratitude for the blessing of one’s wealth.
Purification of the soul.
Zakat is a means to multiply one’s reward for the Hereafter.
Zakat is to sympathise and show compassion for the less fortunate.
Zakat is a means to bless and purify one’s wealth, and make it full of barakah.
Zakat is to alleviate poverty and the need of the needy.
Zakat removes any ill-feeling and spiritual diseases in the needy such as jealousy, rancour or malice against those who have
wealth.
Zakat is there to allow the recipient to survive and get free access to basic necessities.
Zakat is a means of developing and strengthening the Islamic economy.
Zakat is a means of Da’wah and propagation of Islam.
Bridge the gap between the rich and the poor
Develop brotherhood and sisterhood between different classes of society.
Zakat can be described from multiple angles depending on which angle you are describing Zakat.
For the payer:
For the recipient:
For society:
BENEFITS OF ZAKAT
SECTION 2:
CALCULATION
PRINCIPLES
Amanah
Advisors
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CONDITIONS
FOR ZAKAT
OBLIGATION
1.CONDITIONS RELATING TO THE PAYER
Muslim
Adolescence - only in the Hanafi school.
Mental Capacity - only in the Hanafi School.
1.
2.
3.
2. CONDITIONS RELATING TO WEALTH
Ownership
1.
Zakat is due on assets owned by (1) individuals (2) Sole traders (3) Partners in an
LLP on their share (4) Shareholders in a privately held company (5) Beneficaries
of a bare trust which one has access and control over.
Zakat is not due on wealth in (1) Charities (2) Waqf (3) Charitable trusts (4)
Interests in possession trusts and (5) discretionary trusts as long as the
beneficiariy is not a trustee.
2. CONDITIONS RELATING TO WEALTH
Either actual in one's hands or constructive where one has access or has
delegated control to another party.
Possessed assets also include assets that are invested, whether locked-in or
accessible during the investment period.
Zakat is only due on assets that are owned for exchange purposes like cash
which by design is for exchange, or trade assets which are acquired to resell
for profit and a return, or on assets that naturally grow in units and size. In the
context of Zakat, this is referred to as Mal Nami. These assets are (1) Cash and
Receivables (2) Gold and Silver (3) Trade assets (4) Animal livestock (5) Crops.
2. Possession
3. Productive Assets
2. CONDITIONS RELATING TO WEALTH
Zakatable wealth should be equal to or exceed the Nisab.
The Nisab is 87.48 grams of gold or 612.36 grams of silver in one opinion.
Another view is 85 grams and 595 grams respectively. (Different countries use
either gold or silver based on local scholarly guidance with slight variances in
the precise conversion).
Zakat is only payable after one lunar year passes and one has Zakatable
wealth equal to or above Nisab at the Zakat year-end.
If at year-end the Zakatable wealth is below the Nisab, Zakat will not be
payable and that date is no longer valid as one's Zakat year-end.
AAOIFI permits the usage of the Gregorian calendar. If the Gregorian calendar
is used, the Zakat rate will be 2.577%.
4. Nisab
5. Passing of a lunar year
NISAB
What is Nisab?
Amanah Advisors
Nisab is the threshold upon which Zakat becomes obligatory.
The rationale of Nisab is that it reflected and distinguished
between the wealthy and the needy for Zakat purposes.
This threshold was set by the Prophet Muhammad (peace be
upon him), he said:"If you have 200 dirhams (silver), and it has
been saved for a year, (you are) obliged to pay 5 dirhams of
Zakat from it. And there is no obligation of Zakat in gold, until
you have 20 dinars. If you own 20 dinars and it has been saved
for a year, half a dinar must be paid.” [Sunan Abu Dawud]
What is Nisab?
Amanah Advisors
Gold = 87.48g
Silver = 612.36g
Another opinion is 85g gold & 595g silver respectively.
Gold = £3456.51
Silver = £361.27
The Nisab was based on gold and silver as the Prophet's time was
an era of the bimetallic standard as a monetary system.
The Nisab weights:
The Nisab amounts as of 8th March 2021:
Using Nisab
Amanah Advisors
If you own Zakatable assets equalling the Nisab, your Zakat
year starts counting the lunar year.
If you own Zakatable assets equalling Nisab after one lunar
year on your Zakat year-end, Zakat becomes obligatory to pay.
If during the year your Zakatable assets drop below the Nisab,
it does not matter, you will only consider the value at year-
end.
The Nisab year is cancelled if your net Zakatable assets are
depleted and the valuation becomes zero.
Zakat obligation and obligation to pay works in the following
manner:
Why two Nisabs?
Amanah Advisors
In the Prophetic era, the difference in value between the two
Nisabs was 10:1; Silver was 200 dirhams and gold was 20 dinar.
However, the purchasing power was identical between the two
so the actual Nisab was identical. 10 dirhams would be able to
buy exactly what 1 dinar could buy in the markets. Since both
currencies were commonly used, there were two standards.
That means that in terms of value, the Nisab was actually one!
Gold or Silver Nisab?
Amanah Advisors
Many scholars are of the view that the silver Nisab should be the
threshold to determine who qualifies to pay Zakat. They argue
that if the silver Nisab is the threshold, more people are likely to
pay Zakat and the needy will benefit more due to the volume of
Zakat payments. Other scholars are of the view that the gold
Nisab should determine who qualifies to pay Zakat. They argue
that the silver Nisab is very low and does not accurately
differentiate between the rich and the needy. Silver is the more
common of the two but gold is gaining traction.
SECTION 3:
ZAKATABLE ASSETS
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Advisors
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Zakatable Assets
Cash
Receivables
Gold and Silver
Trade assets
Investments in Zakatable Assets
Agricultural Produce*
Animal Livestock*
1.
2.
3.
4.
5.
6.
7.
*Agricultural Produce and Animal Livestock will not be addressed in this presentation.
Amanah Advisors
Cash
1.
Amanah Advisors
Zakat is payable on all cash assets in one's ownership.
Zakat is due on petty cash at home as well as savings in bank
accounts.
Zakat is due on all currencies in one's ownership.
Zakat is not payable on cash that has been spent before the
Zakat year-end.
2. Receivables
Amanah Advisors
Loans: Zakat is payable on the loan each year. The lender has the
option to pay annually, or alternatively pay for all previous years
upon repayment.
Credit sales: Zakat is payable each year on the outstanding
payments from trade stock and assets.
Non-trade receivables
Payouts and awards
Claims and damages
Settlements
Inheritance shares
ZAKATABLE ANNUALLY WHILST OUTSTANDING
NOT ZAKATABLE ANNUALLY WHILST OUTSTANDING
3. Gold and Silver
Amanah Advisors
HANAFI: The Hanafi school treats all gold and silver as Zakatable,
regardless of whether it is worn, stored, an investment or trade stock.
NON-HANAFI: Gold and silver as trade stock, investment or an asset class
in one's investment portfolio are Zakatable. However, gold and silver
jewellery owned by a woman for personal use to wear is not Zakatable.
MIXED METAL JEWELLERY: According to the Hanafi school, Zakat on gold
and silver is always due even if it is 9 carats. Only the gold & silver
elements are Zakatable in such jewellery.
Formula: Price of gold carat per gram x no. of grams.
WHICH PRICE: Gold and silver should be priced at what you will receive if
you were to sell these assets. This is known as scrap value.
You can search the scrap value online.
4. Property
Amanah Advisors
RESIDENTIAL PROPERTY - No Zakat: One's residential property & holiday
homes are not Zakatable as they are part of one's personal assets which
are needed for living.
BUY-TO-SELL - Zakatable at listed price: Properties bought for trading &
capital gain are Zakatable. Zakat is due on their listed price.
If you change your mind and decide not to sell a 'buy-to-sell' property,
Zakat will no longer be due on the property.
BUY-TO-LET - on rental income only: Buy-to-lets are income-generating
assets to sustain the costs of living. As such, they are not Zakatable like
other capital goods.
Deciding to sell rental/residential property afterwards will not make the
property Zakatable.
INVESTMENTS
INVESTMENT FUNDS, LISTED EQUITIES & SHARES
1.
Amanah Advisors
1. BUY-AND-HOLD TRADING STRATEGY: Zakat is not due on the full market
value of the listed equity investment. Zakat is only due on the underlying
Zakatable assets. If it is difficult to determine the net Zakatable assets value,
a proxy of 25% can be used for the net Zakatable assets.
2. SAVINGS AND STORE OF WEALTH: Zakat is not due on the full market
value of the listed equity investment. Zakat is only due on the underlying
Zakatable assets. If it is difficult to determine the net Zakatable assets, a
proxy of 25% can be used for the net Zakatable assets.
This proxy was researched by Mufti Faraz Adam and a team of scholars at the National Zakat Foundation UK where the balance
sheets of the FTSE 100 companies were reviewed. 66 out of 100 had net Zakatable assets below 25%. The other 34 were non-
compliant companies. Hence, the majority of the companies had net Zakatable assets below 25%.
3. ACTIVE TRADING STRATEGY: Zakat is due on the full value of the
investment at market value. Active trading here means an investment with
the sole intention to sell and capture short-term positive price fluctuations.
2. PRIVATE EQUITY INVESTMENTS
Amanah Advisors
Company book valuation = £10m
Net Zakatable assets (Zakatable assets - deductible debts) = £5m
£5m:£10m = 50%
Zakat will be due on 50% of your investment
2.5% of 50% of the value.
According to many scholars, since private equity investments are long-term in
nature, Zakat is only due on the net Zakatable assets of the company
throughout the duration of the investment. There is no intention to actively
sell them at present and therefore, private equity are long-term buy and hold
investments and a store of wealth.
An investor will apply the net Zakatable assets ratio to their investment and
pay 2.5% as Zakat. For example:
3. LAND AND REAL ESTATE
Amanah Advisors
1. Zakat is payable on any land and real estate bought to on-sell immediately.
2. Land or real estate purchase as a long-term store of value and not with the
intention to sell at present is not Zakatable.
3. If land or real estate is leased, Zakat is not due on the value of the asset.
Instead, Zakat is due on any rental income in one’s ownership on the Zakat
date.
4. PENSIONS & RETIREMENT PLANS
Amanah Advisors
WHICH PENSIONS ARE ZAKATABLE?
Zakat is due on all defined contribution schemes whether SIPPs, AVCs, Personal Pensions or
Stakeholder Pensions.
Zakat is not due on defined benefit schemes such as final salary schemes and career average
schemes.
WHY IS ZAKAT PAYABLE ON DEFINED CONTRIBUTION SCHEMES?
It is an investment wherein members have an interest in the underlying assets of the fund, bear the
investment risk, can opt-out & have discretion on the type of fund to invest in. It is similar to other
investments albeit with a longer-term and tax benefits.
WHAT ABOUT ACCESS?
Lack of access refers to scenarios where one cannot use an asset, trade or invest it. However,
pension assets are invested and the assets are traded for long-term growth on the member's
behalf! A pension is basically a long-term savings plan and an investment. However, access is
barred for the member's benefit so they don't consume the funds now and instead save it for
retirement.
A pledged collateral which is held by a creditor is an example of an asset on which there is no
Zakat due to ‘no access’. Since a person cannot use, trade or invest the asset, it is not Zakatble.
5. PENSIONS & RETIREMENT PLANS
15% Direct Property Fund
26% Shariah Compliant Fund
27% Equity Fund
50% Diversified/Multi-asset/Mixed Fund
100% Bonds/Fixed Income
PAYING ZAKAT ON DEFINED CONTRIBUTION SCHEMES
Zakat is due on the proportion of Zakatable assets in the fund. This is visible from the fact
sheet.
One should pay annually. If it is difficult to pay due to large sums, one should pay whatever is
in their capacity regularly and make a note of any outstanding Zakat.
Ideally, one should pay Zakat according to the percentage of Zakatble assets in the pension
fund. If that is not possible, one may use the following proxies:
Calculation Formula: pension value x proxy percentage x 2.5% = Zakat due
Note: These proxies are based on research conducted by Mufti Faraz Adam at NZF Worldwide
on the 100 most common pension funds offered to UK employees. the research is available
here: https://www.nzfworldwide.com/zakat-on-pensions-determining-proxies-for-different-
6. CRYPTO-ASSETS
Amanah Advisors
Any crypto-asset purchased for capital gain will always be Zakatable at
100% of its current market value.
Any crypto-asset purchased with another intention, Zakat will depend on
the type of crypto-asset.
PRINCIPLES
1.
2.
COINS/EXCHANGE TOKENS/PAYMENT TOKENS: Zakat is always due on these
types of crypto-assets at 100% of your current holding value regardless of the
intention.
SECURITY TOKENS: If purchased to resell, it is Zakatable at 100% of your
current holding value. If purchased for dividend income & long-term
investment, Zakat will depend on the underlying assets of the company.
6. CRYPTO-ASSETS
Amanah Advisors
UTILITY AND PLATFORM TOKENS: If purchased to resell, it is Zakatable at
100% of your current holding value. If purchased to use, Zakat will not be due
on these tokens.
ASSET-BACKED TOKENS: If purchased to resell, it is Zakatable at 100% of
your current holding value. If purchased as an investment, Zakat will depend
on the underlying asset. If it is a Zakatable asset, it will be Zakatable.
GOVERNANCE TOKENS: If purchased to resell, it is Zakatable at 100% of your
current holding value. If purchased to use, Zakat will not be due on these
tokens.
7. SUKUK
Amanah Advisors
1. SUKUK IJARA: Zakat is not due on the principal value of the Sukuk
certificates. Only the rental income is Zakatable.
2. SUKUK MUSHARAKA: Zakat on Sukuk Musharakah certificates is
proportionate to the ownership share in underlying net Zakatable assets
in the equity.
3: SUKUK MURABAHA: Zakat is due on the face value of the Sukuk
certificates as they represent a debt receivable for a trade commodity.
4. SUKUK MUDARABA: Zakat is due on the market value of the Sukuk
certificates if the underlying assets are traded. The income will also be
Zakatable.
ZAKAT
TREATMENT
OF
BUSINESS
Which business assets ?
Amanah Advisors
Zakat is due on 'exchange assets' which are primarily for exchange & trade
purposes. Zakat is not due on fixed assets, capital goods, factors of
production or income-generating assets. One wisdom behind this is that
these are already contributing to the economy, sustaining needs &
facilitating development. On the other hand, the exchange assets are the
result of growth. Further, in their current & static state, exchange assets do
not produce or add value to the economy. Hence, Zakat facilitates its
contribution to the economy. Zakat also incentivises spending, investment
& trade by disincentivising the hoarding of such goods.
Zakat Treatment of Trade Assets
Amanah Advisors
Bank deposits & petty cash
Trade receivables
Loan receivables
Inventory
Stock
Investments in Zakatable assets
Property, plant & equipment
Capital & fixed goods
fixtures & fittings
collaterals
Intangibles not developed/sourced for trade such as copyrights, patents,
trademarks and software
ZAKATABLE TRADE ASSETS
NON-ZAKATABLE ASSETS
Valuation of Trade Assets
Amanah Advisors
Stock should be valued at retail price for Zakat purposes and not cost
price.
If goods do not have a retail price, nor a known market value, another
proxy can be used to estimate the current value.
Zakat can be paid in cash or in asset form provided calculations are
accurate & the best interests of recipients are preserved.
SECTION 4:
DEDUCTIBLE LIABILITIES
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Advisors
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DEDUCTIBLE DEBTS
Amanah Advisors
The following debts can be deducted from your gross Zakatable assets:
1) Incurred debts payable in full within 12 months
Incurred expenses to be settled in full within 12 lunar months can be
deducted from one’s Zakat calculation.
2) 12 months’ instalments of long term liabilities
If the debt is scheduled to be repaid over a number of years, on the Zakat
anniversary, one may deduct one year’s worth of instalment repayments.
DEDUCTIBLE DEBTS
Amanah Advisors
3) Arrears
All arrears and overdue payments can be deducted from one’s Zakat
calculation.
4) Personal loans from relatives and friends
The amount you intend to repay in the next 12 months.
5) 12 months' of Bank loans
The capital repayment due for the forthcoming lunar year from a long-
term bank loan can be deducted. Any interest element is prohibited and
cannot be deducted.
ZAKAT FORMULA
Zakatable assets - deductible liabilities =
Net Zakatable Assets
(Gold + silver + cash + receivables +
investments in Zakatable assets + business
stock) - (liabilities due now) = Net Zakatable
assets
Net Zakatable assets ≥ Nisab = Zakat
payable
Net Zakatable assets < Nisab = No Zakat due
SECTION 5:
ZAKAT DISTRIBUTION
PRINCIPLES
Amanah
Advisors
www.amanahadvisors.com
ELIGIBILITY CHECK
Amanah Advisors
According to the Hanafi school, the eligibility formula for any recipient of
Zakat is as follows:
(cash + gold + silver + Zakatable assets in investments + business stock +
unused personal assets for over a year) – (deductible debts) < below the
Nisab = eligible
Check with your local scholars whether to consider the gold Nisab or silver
Nisab.
WHO CANNOT RECEIVE YOUR ZAKAT
Amanah Advisors
Their spouse
Their children and grandchildren
Their parents and grandparents
A non-Muslim
A wealthy person
According to the Hanafi school, a person cannot pay their Zakat to:
1.
2.
3.
4.
5.
When giving Zakat to any charity, ensure they have a Zakat policy and that
the distribution is performed according to the principles of Zakat. It always
helps to see if the Zakat policy has been reviewed and certified by a
Shariah advisor.
SECTION 6:
PAYING ZAKAT
Amanah
Advisors
www.amanahadvisors.com
PAYING ZAKAT
Amanah Advisors
The four mainstream schools of Islamic jurisprudence, namely, the Hanafi,
Shafi’i, Maliki and Hanbali schools are all in agreement that the payment
of Zakat is due immediately upon one’s anniversary.
Zakat can be paid in advance before one’s Zakat anniversary. If a person
does pay Zakat in advance, it is still necessary to make a Zakat calculation
on one’s Zakat anniversary to ensure the advance payments offset the
actual Zakat liability.
Zakat
Formula
ADD
Add the value of all Zakatable
assets.
DEDUCT
Subtract any deductible debts
from the gross value of Zakatable
asset.
PAY
Pay 2.5% of the net as Zakat.
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Fiqh of zakat

  • 2. Summary of Topics Introduction to Zakat Calculation Principles Zakatable Assets Deductible liabilities Zakat Distribution Zakat payment principles 1. 2. 3. 4. 5. 6.
  • 3. SECTION 1: INTRODUCTION TO ZAKAT Amanah Advisors www.amanahadvisors.com
  • 4. WHAT IS ZAKAT? ZAKAT IS THE THIRD OF FIVE CORE PILLARS OF ISLAM AND BY QURANIC RANKING, IS NEXT AFTER PRAYER IN IMPORTANCE. IT HAS BEEN INTERLINKED WITH PRAYER 28 TIMES IN THE QURAN. IN TERMS OF PAYMENTS, ZAKAT REFERS TO AN OBLIGATORY PAYMENT OF 2.5% ON QUALIFYING ZAKATABLE WEALTH ANNUALLY. FIQH OF ZAKAT
  • 5. FROM ZAKAT TO ALLAH Every practice in Islam is there to ultimately connect us with Allah. Each Islamic practice plays a different role in facilitating our recognition of Allah. Zakat brings order to the chaos in the economy, markets and society, allowing the economy and all its participants to recognise Allah. AMANAH ADVISORS
  • 6. ROLE OF ZAKAT Zakat finances the growth of faith and the faithful. Zakat is a human capital fund which seeks to empower individuals. Zakat guarantees every struggling person a baseline provision and support to give them more opportunities to break out of the cycle of poverty. Zakat is liquidity injections to the market and acts as an economic stimulus by activating consumer spending. Zakat is a social contract between communities to look after one another and to grow together. AMANAH ADVISORS
  • 7. Zakat establishes subservience to Allah in one’s life. Zakat is a gratitude for the blessing of one’s wealth. Purification of the soul. Zakat is a means to multiply one’s reward for the Hereafter. Zakat is to sympathise and show compassion for the less fortunate. Zakat is a means to bless and purify one’s wealth, and make it full of barakah. Zakat is to alleviate poverty and the need of the needy. Zakat removes any ill-feeling and spiritual diseases in the needy such as jealousy, rancour or malice against those who have wealth. Zakat is there to allow the recipient to survive and get free access to basic necessities. Zakat is a means of developing and strengthening the Islamic economy. Zakat is a means of Da’wah and propagation of Islam. Bridge the gap between the rich and the poor Develop brotherhood and sisterhood between different classes of society. Zakat can be described from multiple angles depending on which angle you are describing Zakat. For the payer: For the recipient: For society: BENEFITS OF ZAKAT
  • 10. 1.CONDITIONS RELATING TO THE PAYER Muslim Adolescence - only in the Hanafi school. Mental Capacity - only in the Hanafi School. 1. 2. 3. 2. CONDITIONS RELATING TO WEALTH Ownership 1. Zakat is due on assets owned by (1) individuals (2) Sole traders (3) Partners in an LLP on their share (4) Shareholders in a privately held company (5) Beneficaries of a bare trust which one has access and control over. Zakat is not due on wealth in (1) Charities (2) Waqf (3) Charitable trusts (4) Interests in possession trusts and (5) discretionary trusts as long as the beneficiariy is not a trustee.
  • 11. 2. CONDITIONS RELATING TO WEALTH Either actual in one's hands or constructive where one has access or has delegated control to another party. Possessed assets also include assets that are invested, whether locked-in or accessible during the investment period. Zakat is only due on assets that are owned for exchange purposes like cash which by design is for exchange, or trade assets which are acquired to resell for profit and a return, or on assets that naturally grow in units and size. In the context of Zakat, this is referred to as Mal Nami. These assets are (1) Cash and Receivables (2) Gold and Silver (3) Trade assets (4) Animal livestock (5) Crops. 2. Possession 3. Productive Assets
  • 12. 2. CONDITIONS RELATING TO WEALTH Zakatable wealth should be equal to or exceed the Nisab. The Nisab is 87.48 grams of gold or 612.36 grams of silver in one opinion. Another view is 85 grams and 595 grams respectively. (Different countries use either gold or silver based on local scholarly guidance with slight variances in the precise conversion). Zakat is only payable after one lunar year passes and one has Zakatable wealth equal to or above Nisab at the Zakat year-end. If at year-end the Zakatable wealth is below the Nisab, Zakat will not be payable and that date is no longer valid as one's Zakat year-end. AAOIFI permits the usage of the Gregorian calendar. If the Gregorian calendar is used, the Zakat rate will be 2.577%. 4. Nisab 5. Passing of a lunar year
  • 13. NISAB
  • 14. What is Nisab? Amanah Advisors Nisab is the threshold upon which Zakat becomes obligatory. The rationale of Nisab is that it reflected and distinguished between the wealthy and the needy for Zakat purposes. This threshold was set by the Prophet Muhammad (peace be upon him), he said:"If you have 200 dirhams (silver), and it has been saved for a year, (you are) obliged to pay 5 dirhams of Zakat from it. And there is no obligation of Zakat in gold, until you have 20 dinars. If you own 20 dinars and it has been saved for a year, half a dinar must be paid.” [Sunan Abu Dawud]
  • 15. What is Nisab? Amanah Advisors Gold = 87.48g Silver = 612.36g Another opinion is 85g gold & 595g silver respectively. Gold = £3456.51 Silver = £361.27 The Nisab was based on gold and silver as the Prophet's time was an era of the bimetallic standard as a monetary system. The Nisab weights: The Nisab amounts as of 8th March 2021:
  • 16. Using Nisab Amanah Advisors If you own Zakatable assets equalling the Nisab, your Zakat year starts counting the lunar year. If you own Zakatable assets equalling Nisab after one lunar year on your Zakat year-end, Zakat becomes obligatory to pay. If during the year your Zakatable assets drop below the Nisab, it does not matter, you will only consider the value at year- end. The Nisab year is cancelled if your net Zakatable assets are depleted and the valuation becomes zero. Zakat obligation and obligation to pay works in the following manner:
  • 17. Why two Nisabs? Amanah Advisors In the Prophetic era, the difference in value between the two Nisabs was 10:1; Silver was 200 dirhams and gold was 20 dinar. However, the purchasing power was identical between the two so the actual Nisab was identical. 10 dirhams would be able to buy exactly what 1 dinar could buy in the markets. Since both currencies were commonly used, there were two standards. That means that in terms of value, the Nisab was actually one!
  • 18. Gold or Silver Nisab? Amanah Advisors Many scholars are of the view that the silver Nisab should be the threshold to determine who qualifies to pay Zakat. They argue that if the silver Nisab is the threshold, more people are likely to pay Zakat and the needy will benefit more due to the volume of Zakat payments. Other scholars are of the view that the gold Nisab should determine who qualifies to pay Zakat. They argue that the silver Nisab is very low and does not accurately differentiate between the rich and the needy. Silver is the more common of the two but gold is gaining traction.
  • 20. Zakatable Assets Cash Receivables Gold and Silver Trade assets Investments in Zakatable Assets Agricultural Produce* Animal Livestock* 1. 2. 3. 4. 5. 6. 7. *Agricultural Produce and Animal Livestock will not be addressed in this presentation. Amanah Advisors
  • 21. Cash 1. Amanah Advisors Zakat is payable on all cash assets in one's ownership. Zakat is due on petty cash at home as well as savings in bank accounts. Zakat is due on all currencies in one's ownership. Zakat is not payable on cash that has been spent before the Zakat year-end.
  • 22. 2. Receivables Amanah Advisors Loans: Zakat is payable on the loan each year. The lender has the option to pay annually, or alternatively pay for all previous years upon repayment. Credit sales: Zakat is payable each year on the outstanding payments from trade stock and assets. Non-trade receivables Payouts and awards Claims and damages Settlements Inheritance shares ZAKATABLE ANNUALLY WHILST OUTSTANDING NOT ZAKATABLE ANNUALLY WHILST OUTSTANDING
  • 23. 3. Gold and Silver Amanah Advisors HANAFI: The Hanafi school treats all gold and silver as Zakatable, regardless of whether it is worn, stored, an investment or trade stock. NON-HANAFI: Gold and silver as trade stock, investment or an asset class in one's investment portfolio are Zakatable. However, gold and silver jewellery owned by a woman for personal use to wear is not Zakatable. MIXED METAL JEWELLERY: According to the Hanafi school, Zakat on gold and silver is always due even if it is 9 carats. Only the gold & silver elements are Zakatable in such jewellery. Formula: Price of gold carat per gram x no. of grams. WHICH PRICE: Gold and silver should be priced at what you will receive if you were to sell these assets. This is known as scrap value. You can search the scrap value online.
  • 24. 4. Property Amanah Advisors RESIDENTIAL PROPERTY - No Zakat: One's residential property & holiday homes are not Zakatable as they are part of one's personal assets which are needed for living. BUY-TO-SELL - Zakatable at listed price: Properties bought for trading & capital gain are Zakatable. Zakat is due on their listed price. If you change your mind and decide not to sell a 'buy-to-sell' property, Zakat will no longer be due on the property. BUY-TO-LET - on rental income only: Buy-to-lets are income-generating assets to sustain the costs of living. As such, they are not Zakatable like other capital goods. Deciding to sell rental/residential property afterwards will not make the property Zakatable.
  • 26. INVESTMENT FUNDS, LISTED EQUITIES & SHARES 1. Amanah Advisors 1. BUY-AND-HOLD TRADING STRATEGY: Zakat is not due on the full market value of the listed equity investment. Zakat is only due on the underlying Zakatable assets. If it is difficult to determine the net Zakatable assets value, a proxy of 25% can be used for the net Zakatable assets. 2. SAVINGS AND STORE OF WEALTH: Zakat is not due on the full market value of the listed equity investment. Zakat is only due on the underlying Zakatable assets. If it is difficult to determine the net Zakatable assets, a proxy of 25% can be used for the net Zakatable assets. This proxy was researched by Mufti Faraz Adam and a team of scholars at the National Zakat Foundation UK where the balance sheets of the FTSE 100 companies were reviewed. 66 out of 100 had net Zakatable assets below 25%. The other 34 were non- compliant companies. Hence, the majority of the companies had net Zakatable assets below 25%. 3. ACTIVE TRADING STRATEGY: Zakat is due on the full value of the investment at market value. Active trading here means an investment with the sole intention to sell and capture short-term positive price fluctuations.
  • 27. 2. PRIVATE EQUITY INVESTMENTS Amanah Advisors Company book valuation = £10m Net Zakatable assets (Zakatable assets - deductible debts) = £5m £5m:£10m = 50% Zakat will be due on 50% of your investment 2.5% of 50% of the value. According to many scholars, since private equity investments are long-term in nature, Zakat is only due on the net Zakatable assets of the company throughout the duration of the investment. There is no intention to actively sell them at present and therefore, private equity are long-term buy and hold investments and a store of wealth. An investor will apply the net Zakatable assets ratio to their investment and pay 2.5% as Zakat. For example:
  • 28. 3. LAND AND REAL ESTATE Amanah Advisors 1. Zakat is payable on any land and real estate bought to on-sell immediately. 2. Land or real estate purchase as a long-term store of value and not with the intention to sell at present is not Zakatable. 3. If land or real estate is leased, Zakat is not due on the value of the asset. Instead, Zakat is due on any rental income in one’s ownership on the Zakat date.
  • 29. 4. PENSIONS & RETIREMENT PLANS Amanah Advisors WHICH PENSIONS ARE ZAKATABLE? Zakat is due on all defined contribution schemes whether SIPPs, AVCs, Personal Pensions or Stakeholder Pensions. Zakat is not due on defined benefit schemes such as final salary schemes and career average schemes. WHY IS ZAKAT PAYABLE ON DEFINED CONTRIBUTION SCHEMES? It is an investment wherein members have an interest in the underlying assets of the fund, bear the investment risk, can opt-out & have discretion on the type of fund to invest in. It is similar to other investments albeit with a longer-term and tax benefits. WHAT ABOUT ACCESS? Lack of access refers to scenarios where one cannot use an asset, trade or invest it. However, pension assets are invested and the assets are traded for long-term growth on the member's behalf! A pension is basically a long-term savings plan and an investment. However, access is barred for the member's benefit so they don't consume the funds now and instead save it for retirement. A pledged collateral which is held by a creditor is an example of an asset on which there is no Zakat due to ‘no access’. Since a person cannot use, trade or invest the asset, it is not Zakatble.
  • 30. 5. PENSIONS & RETIREMENT PLANS 15% Direct Property Fund 26% Shariah Compliant Fund 27% Equity Fund 50% Diversified/Multi-asset/Mixed Fund 100% Bonds/Fixed Income PAYING ZAKAT ON DEFINED CONTRIBUTION SCHEMES Zakat is due on the proportion of Zakatable assets in the fund. This is visible from the fact sheet. One should pay annually. If it is difficult to pay due to large sums, one should pay whatever is in their capacity regularly and make a note of any outstanding Zakat. Ideally, one should pay Zakat according to the percentage of Zakatble assets in the pension fund. If that is not possible, one may use the following proxies: Calculation Formula: pension value x proxy percentage x 2.5% = Zakat due Note: These proxies are based on research conducted by Mufti Faraz Adam at NZF Worldwide on the 100 most common pension funds offered to UK employees. the research is available here: https://www.nzfworldwide.com/zakat-on-pensions-determining-proxies-for-different-
  • 31. 6. CRYPTO-ASSETS Amanah Advisors Any crypto-asset purchased for capital gain will always be Zakatable at 100% of its current market value. Any crypto-asset purchased with another intention, Zakat will depend on the type of crypto-asset. PRINCIPLES 1. 2. COINS/EXCHANGE TOKENS/PAYMENT TOKENS: Zakat is always due on these types of crypto-assets at 100% of your current holding value regardless of the intention. SECURITY TOKENS: If purchased to resell, it is Zakatable at 100% of your current holding value. If purchased for dividend income & long-term investment, Zakat will depend on the underlying assets of the company.
  • 32. 6. CRYPTO-ASSETS Amanah Advisors UTILITY AND PLATFORM TOKENS: If purchased to resell, it is Zakatable at 100% of your current holding value. If purchased to use, Zakat will not be due on these tokens. ASSET-BACKED TOKENS: If purchased to resell, it is Zakatable at 100% of your current holding value. If purchased as an investment, Zakat will depend on the underlying asset. If it is a Zakatable asset, it will be Zakatable. GOVERNANCE TOKENS: If purchased to resell, it is Zakatable at 100% of your current holding value. If purchased to use, Zakat will not be due on these tokens.
  • 33. 7. SUKUK Amanah Advisors 1. SUKUK IJARA: Zakat is not due on the principal value of the Sukuk certificates. Only the rental income is Zakatable. 2. SUKUK MUSHARAKA: Zakat on Sukuk Musharakah certificates is proportionate to the ownership share in underlying net Zakatable assets in the equity. 3: SUKUK MURABAHA: Zakat is due on the face value of the Sukuk certificates as they represent a debt receivable for a trade commodity. 4. SUKUK MUDARABA: Zakat is due on the market value of the Sukuk certificates if the underlying assets are traded. The income will also be Zakatable.
  • 35. Which business assets ? Amanah Advisors Zakat is due on 'exchange assets' which are primarily for exchange & trade purposes. Zakat is not due on fixed assets, capital goods, factors of production or income-generating assets. One wisdom behind this is that these are already contributing to the economy, sustaining needs & facilitating development. On the other hand, the exchange assets are the result of growth. Further, in their current & static state, exchange assets do not produce or add value to the economy. Hence, Zakat facilitates its contribution to the economy. Zakat also incentivises spending, investment & trade by disincentivising the hoarding of such goods.
  • 36. Zakat Treatment of Trade Assets Amanah Advisors Bank deposits & petty cash Trade receivables Loan receivables Inventory Stock Investments in Zakatable assets Property, plant & equipment Capital & fixed goods fixtures & fittings collaterals Intangibles not developed/sourced for trade such as copyrights, patents, trademarks and software ZAKATABLE TRADE ASSETS NON-ZAKATABLE ASSETS
  • 37. Valuation of Trade Assets Amanah Advisors Stock should be valued at retail price for Zakat purposes and not cost price. If goods do not have a retail price, nor a known market value, another proxy can be used to estimate the current value. Zakat can be paid in cash or in asset form provided calculations are accurate & the best interests of recipients are preserved.
  • 39. DEDUCTIBLE DEBTS Amanah Advisors The following debts can be deducted from your gross Zakatable assets: 1) Incurred debts payable in full within 12 months Incurred expenses to be settled in full within 12 lunar months can be deducted from one’s Zakat calculation. 2) 12 months’ instalments of long term liabilities If the debt is scheduled to be repaid over a number of years, on the Zakat anniversary, one may deduct one year’s worth of instalment repayments.
  • 40. DEDUCTIBLE DEBTS Amanah Advisors 3) Arrears All arrears and overdue payments can be deducted from one’s Zakat calculation. 4) Personal loans from relatives and friends The amount you intend to repay in the next 12 months. 5) 12 months' of Bank loans The capital repayment due for the forthcoming lunar year from a long- term bank loan can be deducted. Any interest element is prohibited and cannot be deducted.
  • 41. ZAKAT FORMULA Zakatable assets - deductible liabilities = Net Zakatable Assets (Gold + silver + cash + receivables + investments in Zakatable assets + business stock) - (liabilities due now) = Net Zakatable assets Net Zakatable assets ≥ Nisab = Zakat payable Net Zakatable assets < Nisab = No Zakat due
  • 43. ELIGIBILITY CHECK Amanah Advisors According to the Hanafi school, the eligibility formula for any recipient of Zakat is as follows: (cash + gold + silver + Zakatable assets in investments + business stock + unused personal assets for over a year) – (deductible debts) < below the Nisab = eligible Check with your local scholars whether to consider the gold Nisab or silver Nisab.
  • 44. WHO CANNOT RECEIVE YOUR ZAKAT Amanah Advisors Their spouse Their children and grandchildren Their parents and grandparents A non-Muslim A wealthy person According to the Hanafi school, a person cannot pay their Zakat to: 1. 2. 3. 4. 5. When giving Zakat to any charity, ensure they have a Zakat policy and that the distribution is performed according to the principles of Zakat. It always helps to see if the Zakat policy has been reviewed and certified by a Shariah advisor.
  • 46. PAYING ZAKAT Amanah Advisors The four mainstream schools of Islamic jurisprudence, namely, the Hanafi, Shafi’i, Maliki and Hanbali schools are all in agreement that the payment of Zakat is due immediately upon one’s anniversary. Zakat can be paid in advance before one’s Zakat anniversary. If a person does pay Zakat in advance, it is still necessary to make a Zakat calculation on one’s Zakat anniversary to ensure the advance payments offset the actual Zakat liability.
  • 47. Zakat Formula ADD Add the value of all Zakatable assets. DEDUCT Subtract any deductible debts from the gross value of Zakatable asset. PAY Pay 2.5% of the net as Zakat.