IRP 110 – Zakat Calculation Methodologies of Islamic Financial Institutions in Malaysia: A Critical Review

The accounting of zakat remains an area of debate. For instance, should an Islamic financial institution (IFI) as a legal entity pay zakat, or is zakat obligatory only on Muslim shareholders, without any involvement of IFIs at all? If the IFI is responsible, then what is the correct methodology for calculation of zakat?

Malaysia has undertaken several initiatives to standardise IFIs’ zakat calculation practices. The Malaysian Accounting Standards Board (MASB) issued ‘Technical Release i-1: Accounting for Zakat on Business’ in 2006. The Jabatan Wakaf, Zakat dan Haji (JAWHAR − Department of Waqf, Zakat and Hajj) published a manual on zakat calculation in 2007 and another manual on zakat calculation for the banking industry in 2010. Each of the fourteen states of Malaysia also has its own guidelines for zakat calculation. The financial reporting standards have changed a lot since the issuance of these guidelines. Hence, at the present time it may not be practical to fully adhere to those guidelines.

Furthermore, the Sharīʿah committees of the IFIs may have their own resolutions on zakat calculation. On the other hand, the Shariah Advisory Council of Bank Negara Malaysia has not issued guidelines on zakat calculation. With this background, this research aims to investigate the current practices of zakat calculation adopted by the IFIs in Malaysia and identify the pressing Sharīʿah issues. The findings of this research will open the avenue for further research on the identified issues.

The research first reviews the zakat calculation methodologies adopted by international authorities; e.g., the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), the Islamic Fiqh Academy of the Organization of Islamic Cooperation (IFA-OIC) and Zakat House (Bayt al-Zakat) in Kuwait. Kuwait is highlighted in this study because of its well-established zakat administrative system. The first International Conference on Zakat in 1988 vested Zakat House with the responsibility of being the patron-cum-secretariat of its internationally reputed annual conference series on zakat. Zakat House has issued a detailed manual on zakat titled Dalīl Irshādāt li Ḥisāb Zakāt al-Sharikah, in which the adopted calculation methodology is generally in line with AAOIFI’s.