Payment of Zakat on financial instruments and funds.

By | July 25, 2018

The place of Zakat in the life of a Muslim cannot be overemphasized as stated in our previous publication – zakat on agricultural products. The modern day financial market has evolved and most of what we have today were not present during the times of the Prophet (SAW) when the laws of Zakat were made known to man. However, the laws of Allah are universal and it’s not tied to specific time or period of man’s existence. These laws have taken care of the present when it was promulgated and the future events that were not known to man as it were then; Allah His omnipresent so also are His laws, therefore they are applicable always and in different epoch.

The financial domain might be very difficult to understand particularly for those not in the financial sector, but we shall demystify it with simple examples thus providing the general framework applicable for us to understand the matter at hand. Below are the general rules and understanding we should have to calculate zakat for our funds and financial instruments.

  1. Firstly, financial instruments in simple terms are monetary contract between parties, they are your cash in the bank, funds used for trading, trading assets, halal investments such as sukuk, stocks, equity funds and private investment in companies and partnerships.
  2. It should be known that zakat is applicable to all financial instruments, the ones that are Halal anyway because we are not meant to deal in transactions that are not halal.
  3. Traded goods, this is a form of investment and are zakatable. For example, a trader that deals in cars, or clothing items or a grocery store or any form of halal items that are meant for sales are required to pay zakat on the current market value of their goods after one year as elapsed and the value is more than the nisaab.
    • For example, if you have a grocery store, to pay zakat on your goods you add up all your current stock items/goods (the current market value, that is, the selling price) only the ones that are tradeable. Note that furniture, machinery and other equipment that are not tradeable should be excluded from the list.
    • Breaking it down further a car dealer with 4 cars for sales in his showroom and each of the car cost 2 Million naira (the market value) this amounts to 8 Million Naira. The dealer will be required to pay zakat on 8 million naira which is 2.5%, this equals to 200,000 Naira as zakat payable, if all the other conditions for zakat are met.
    • Once the addition is done zakat will be paid on that amount if it’s above the nissab and one full hijirah year as passed. This is the position advanced by shaykh Ibn Baaz in (Risaalah fi’l_Zakaah by Shaykh Ibn Baaz, p. 11)
  4. For other forms of investments/ financial instruments such as sukuk, stocks, equity funds that are halal, the first thing to consider is the intension behind the investment, it could be one of either of two things.
    • One, is it with the aim of benefiting from the annual profit of the share and not with the intention of dealing (selling) in them, then no zakat is due on the shares, rather one must pay zakat on the yield, that is, dividends received. This is at the rate of 2.5% after one full Hiirah calendar year has passed after taking possession of the dividends.
      • For example, if you have 1,000 units of Dangote Cement with the intension of benefitting from the annual profit/ dividends only. If the company declared 5 Naira for every unit of share held you will get a payout of 5,000 Naira. The calculation of your zakat will be based on 5,000 Naira received if all other conditions are met.
    • Secondly, if it’s with the intention of dealing (buying and selling when the price is up) then zakat will be paid on the market value of the shares plus the dividends when one hijrah calendar year as passed since the shares came into your possession. This is applying the same rule as tradeable goods as stated in point 3 above.
      • For example, you purchased 1,000 units of Dangote Cement at 500 Naira per unit which is valued at 500,000 Naira. If after one-year Hijrah calendar year since the stock was purchased and the current value is now 700 Naira per share the market value of your investment will be 700,000 Naira, if you have received dividends of 50,000 Naira within that same period, the total funds that will be zakatable will be 750,000 Naira if all the other conditions are met.
  5. The position explained in 4 above is according to Majallat Majma’ al-Fiqh al-Islami (1/879).
  6. For an individual with several investments – stocks, equity funds, fixed sum in his bank account, sukuk certificate, a trader with lots of goods and other forms of halal financial investments. It will become very complex to start tracking each of these investments and start calculating when one year as elapsed considering the fact that they are acquired at different time of the year. One of the key conditions of zakat is that the funds/ asset should be in one’s possession for a period of one year. The solution to this as advanced by the scholars is that the person should chose a day in the year it could be 1st of Ramadan, 1st of Muharam or any day at all. Do a calculation of all your financial investment and if the cumulative sum of your worth is above the nisaab then pay zakat on that value. Going forward every year base on the selected date, for example 1st of Ramadan this evaluation should be done and zakat is paid on that value. This implies that you now have a fixed date for your zakat evaluation. Once a date has been selected that is what you should apply going forward.
    • For example, if I chose 1st of Ramadan as my valuation date and I have all the following financial assets as at the 1st of Ramadan:
      • Shares in Dangote cement worth               1,200,000
      • Investment in Lotus capital worth                500,000
      • Sukuk certificates worthy                            1,000,000
      • Bank account balance                                        20,000
      • Balance in cooperative society                         50,000
      • Other forms of fixed investment                   100,000
      • Total                                                          1,870,000
    • Base on the figures above my cumulative worth is 1,870,000 if the amount is above the nisaab, 2.5% will be paid for zakat, if it’s not then no zakat will be paid.
    • This cycle and template will be executed every 1st of Ramadan of every year once you have chosen that as your cut-off date.
  1. Another critical point of note is: Are we meant to pay zakat on our pension funds, the answer is no because these funds are not in our possession. Same question was asked and the scholar responded thus: Shaykh Ibn ‘Uthaymeen (may Allaah have mercy on him) was asked about retirement pensions – is zakaah due on the payments? He replied: We think that no zakaah is due on the money that deducted from the salary for the pension, because the person can only withdraw it if he meets certain conditions, so it is like a debt that is owed by one who is in financial difficulty, and there is no zakaah on debt that is owed by one who is in financial difficulty. But if he takes possession of it, then in order to be on the safe side he should pay zakaah for one year on it. There is nothing wrong with taking it because it is in return for what the state took of his earnings and saved it for him until it was needed. End quote. (Majmoo’ Fataawa Ibn ‘Uthaymeen (18/174).

The onus is on us to ensure that we pay zakat on all our financial instruments and funds, the first step is to know that this is an obligation that should be discharged by us, followed by knowing how it should be done. We have laid down the structure and the framework for actualizing this. As you proceed towards implementation we are available at info@tijarahhub.com to clarify any of your doubts about the subject matter.

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