AAOIFI Shari’ah Standard No. (35) Zakah

Statement of the Standard

1. Scope of the Standard
• This standard covers identification of the Zakah base for Institutions (including Islamic insurance companies) as well as the subsidiary and the mother company of the Institution (the company). This will be done through identification of the items of financial statements that should or should not be included in calculation of the Zakah base, and the liabilities or allocations that should or should not be deducted from Zakatable assets. The standard also covers payable Zakah rates, disbursement of Zakah funds on the eight categories of Zakah recipients, and the rulings pertaining to disbursement.

2. Procedural Rulings

2/1 Methods of calculation of Zakah base
• There are two methods for calculation of Zakah base: the first is the method of net assets, and the second is the method of net investment assets. The two methods have different bases of assessment, yet if such difference is well recognized the final outcome will be the same. This standard is based on the net assets method.

Net Assets Method

2/1/1 Calculation of Zakah base by using the net assets method is done as follows:
• Zakah base = Zakatable assets – (liabilities payable during the financial year as at the date of the balance sheet + all installments of liabilities of the financial year which will become due during the coming financial period + rights of the holders of nonrestricted investment accounts + minority rights +sovereign rights + Waqf rights + charitable rights + rights of non-profitearning organizations that have no specific owner).
• Zakatable assets include: cash and the like, receivables (minus) doubtful debts, assets prepared for trading (such as goods, financial papers and real estate), and financing assets ( Mudarabah, Musharakah, Salam , Istisna’a …..). Deductions from financial assets include fixed assets relating to them as well as deductible allocations as shown in item 7.

2/1/2 Assets prepared for trade are to be assessed in terms of their expected cash value (selling market value) at the time when Zakah is due.
2/1/3 In determination of zakatable assets in agriculture and livestock other than articles of trade, application of the ratios and rates specified by Shari’ah should be observed.

2/2 Direct payment of Zakah by the institution
2/2/1 The institution or the company is committed to pay Zakah under the following cases:

a) Enactment of an enforceable Zakah law.
b) Stipulation of commitment to pay Zakah in the articles of association.
c) Issuance of a Zakah commitment resolution by the general assembly.

2/2/2 When the Institution accepts agency for payment of Zakah on behalf of all or some of its equity holders or the holders of investment accounts, funds should be available – or submitted by the principals of such agency – for payment of Zakah on their behalf.
2/2/3 There should be coordination between the mother Company and its subsidiaries with regard to payment of Zakah so as to avoid double payment.
2/2/4 In case of establishing a Zakah fund, or preparing Zakah accounts, clearance by the Shari’ah Board of the institution or the company should be obtained. Clearance by the Shari’ah Board is particularly required for disbursement of the Zakah funds, when performed directly by the institution/company, or through an accredited Zakah agency. Moreover, a comprehensive report on Zakah disbursements should be presented to the Shari’ah Board on annual basis.
2/2/5 In the absence of any of the conditions indicated in item (2/2/1) above, payment of Zakah shall become the responsibility of shareholders and holders of the investment accounts. In this case the Institution or the company has to indicate the amount of Zakah payable per share or per a given balance of an investment account.

2/3 Zakah-related financial statements
2/3/1 The Balance sheet
• Due to the fact that Zakah relates to ownership of zakatable assets, what matters to the Institutions in Zakah calculation is the financial data included in the balance sheet of the institution (the budget), which comprises assets, liabilities, and their related allocations.

2/3/2 Income statement
• Income statement (profit and loss account) does not form a basis for Zakah calculation, yet it is referred to for knowing the income or profit of the income-earning fixed assets. In order to pay Zakah the Institution should not necessarily be making profits. Incurring losses by the Institution does not prevent Zakah from becoming due. The Institution is still committed to pay Zakah , except when its liabilities (debtors) absorb all its assets.

3. General Rulings
3/1 Shari’ah definition of Zakah , status (Hukm) of Zakah in Shari’ah, and Zakatable funds
3/1/1 Zakah is a right which becomes due in certain types of wealth, and disbursable to specific categories of recipients. It is an in rem duty when its conditions are satisfied.
3/1/2 Zakah is obligatory on gold, silver, currencies, trade articles, livestock (camels, cows and goats), agricultural produce, minerals and Rikaz (treasures).
3/1/3 Zakah is not obligatory on wages, salaries and income from free occupations at the time of receiving such income; whereas it is obligatory on that portion of such income which remains unexpended for a whole year.
3/1/4 Zakah is not obligatory on fixed assets which generate income and which are not acquired for trade, such as leased assets. Nevertheless, at the end of the year, Zakah is obligatory on the remaining portion of the income generated by these assets.
3/1/5 Zakah is not obligatory on public wealth (public sector) or the insurance funds of public institutions.
3/1/6 Zakah is not obligatory on the charitable Waqf ( al-Waqf alKhayri ). As regards the family Waqf ( al-Waqf al-Ahli ) the beneficiaries should pay Zakah , at the end of the year, from that portion of the Waqf income which remains unexpended.
3/1/7 The above ruling which relates to exemption of charitable Waqf from Zakah is also applicable to trust funds as well Irsad (allocation) of public funds and properties for (non-profiteering) educational, charitable, and social Institutions, which have no specific owner, even if such institutions make profits.

3/2 Conditions for Zakah obligation
3/2/1 Full ownership
• Full ownership materializes when nobody else has a right in the asset in question, the owner can dispose of the asset the way he likes, and the owner of the asset is the sole owner of the income generated from the asset. In this case, no matter if the asset is allocated for any specific purpose other than settlement of debts (for instance, no matter if it is allocated for implementation of investment projects).

3/2/2 Nisab (Zakatable wealth stratum)
• The Nisab for gold regardless of its form is 85 grams of pure gold or its equivalent in currency (paper or coins), and the same Nisab is also applicable to articles of trade after valuation, as well as to extracted minerals. For silver, the Nisab is 595 grams of pure silver. The Nisab which is widely recognized as applicable to articles of trade is that of gold. Nisab for Zakah on livestock is shown at the end of this standard.

3/2/4 Al-Hawl (Zakah year)
• The Zakah year for cash and commercial assets as well as livestock is a lunar year (354 days). In case of adopting the solar year for cash and commercial assets, the Zakah rate becomes 2.577%. (2) As regards agricultural products no consideration is to be given to the Hawl (Zakah year) because what matters is harvesting. Similarly what should be considered for minerals and Rikaz (treasures) is their extraction.

3/3 Applicable Zakah rate
• The rate of Zakah applicable to gold, silver, currencies and articles of trade is 2.5%, with due consideration to item 3/2/3 above, whereas the rate applicable to agricultural produce is one tenth (10%) for the produce of non-irrigated lands, half of the tenth (5%) for the produce of irrigated lands, and three quarters of the tenth (7.5%) for the produce of partially irrigated lands. Zakah rates applicable to livestock are shown at the end of this standard.

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