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EditorialZAKAT - As a tool for Poverty AlleviationAbdul Rahim Suriya, FCA

Presidents MessageS. M. Shabbar Zaidi, FCA

ZakatQuestions and Answers on ZakahJustice Maulana Taqi Usmani

Zakat & Ushr in Modern TimesSadia Kaleem, ACA

Rudiments of ZakatIrfan Ahmad Khan, ACA

Zakat Self Assessment FormContributed by School of Business Studies

General Rules Governing Calculation of Zakat

Contributed by Ishaque Noor

Islamic Economic SystemIssues in Islamic BankingKamran Akhtar, ACA

The Basic Principles of Islamic Economy andTheir Effects on Accounting Standards-SettingMohammad R. Taheri

MurabahaContributed by Yasin Zairy, FCA

Financial Reporti ngIAS 17 - Changing FacemaskYasir Khan, ACA

Internal Auditi ngPre-payment checks, compliance audit or risk-base

audit what is the most effective role for internal audi

Andy wynne

Institute NewsObituaries

Moosa Yousuf Lulat, Abbas Mohamed PeerbhoyMohsin Mustafa and Syed Iftikhar Ali

VCD of CPD Activities Conducted by SRC

Healt h NewsMedical Experiment Miracles with WaterContributed by Dr. Khawaja Amjad Saeed, FCA

That s Lif eMe DeafAltaf Noor Ali, ACA

Students Sect ion

Collective Zakat SystemNadia Wahid

P U B L I C ATIONS COMMI TTEE

ChairmanAbdul Rahim Suriya, FCA

Vice-ChairmanAhmad Saeed, FCA

MembersSalim Chamdia, FCA

Faisal Habib, FCATausif Ilyas, FCAAsif Jamal, FCA

Fazal Mahmood, FCAShakil Akhtar Qureshi, FCA

Abdul Rashid, FCAM. Arshad Siddiqui, FCA

Sophia Ahmed, ACAJehan Zeb Amin, ACA

Muhammed Amin Bhimani, ACAFaisal Imran Hussain, ACA

Muhammad Mahmood Marfatia, ACAAdnan Ahmad Mufti, ACA

Ahsan Ghaffar Mehanti, ACARahil Rafiq, ACAHena Sadiq, ACA

Junaid Haji Zikar, ACA

THE COUNCIL

Council and Office Bearers

PresidentSyed Mohammad Shabbar Zaidi, FCA

Vice PresidentsImran Afzal, FCA

Ahmad Saeed, FCA

MembersRafaqat Ullah Babar, FCA

Dr. Tariq HassanShahzad Hussain, FCA

Nasimuddin Hyder, FCASyed Shahid Husain Jafri, FCA

Farrukh Viqaruddin Junaidy, FCADr. Faizullah Khilji

Arif MansurShaikh Saqib Masood, FCARashid Rahman Mir, FCA

Asad Ali Shah, FCAAbdul Rahim Suriya, FCA

Mohammad Abdullah Yusuf, FCA

Executive Director:Moiz Ahmad, FCA

Secretary:

F. H. Saifee, FCA

Publications Coordinator:

Asad Shahzad

EDITORIAL OFFICEThe Pakistan Accountant

Chartered Accountants Avenue Clifton Karachi (Pakistan)

Phone: 9251636-39 Fax: 9251626

E-mail: [email protected]

Website: www.icap.org.pk

Vol # 38 Issue # 4Ac c o u n t a n t

July - August 2005

Pakistan Accountant can be downloaded from Institutes website at www.icap.org.pkThe views expressed here do not necessarily represent the official policy of the Institute.

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July - August 2005The Pakistan Accountant 03

EditorialZAKAT - As a tool for Poverty Alleviation

Although Pakistans economy has grown at anappreciable rate over the last few years the povertylevel in the country has not reduced. Despite thegovernments poverty reduction program, it is believedthat roughly one-third of the population currently lives

below the poverty line. The situation is indeed prettygrim, and radical measures are required to redress thesituation.

Of the many options available to the economicmanagers of the country, Zakat one of thefundamental pillars of Islam - has the potential toprovide a quick fix solution to the problem. Its potentialcan be gauged from the spate of advertisements in theprint and electronic media by the NGOs andCharitable Organizations for collection of Zakat as the

holy month of Ramadan approaches. Why do peopleprefer to pay to these organizations rather than thegovernment? The answer is pretty simple. People haveconfidence in them. They share information with thedonors - how much Zakat did they collect and how didthey utilize it. Furthermore, the work that theseorganizations do or not do is physically evident to thepeople.

Although the Zakat and Ushr Ordinance have been onthe statute books for many years now, the government

has not realized the full potential of this levy.U n f o r t u n a t e l y, the system suffers from a lack oftransparency, and the public has no trust in it. No oneknows how much is collected by the state as Zakat, andhow it is spent. As a first step to restore confidence inthe system the government should make public theaccounts of the Central Zakat Fund.

Apart from paying to the government and thecharitable organizations people pay zakat directly tothe needy. While this practice ensures that the money

reaches the needy, the drawback is that the Zakat isused for satisfying their immediate needs, and notmuch heed is paid to strengthening their economicbase on a long-term basis. As a result they becomedependent on Zakat for survival from year to year. Thiscertainly is not an objective of Zakat. The endeavorshould be to make the needy self-reliant as soon as

possible.

As this issue was going to the press, the countrysuffered its worst natural disaster. A massive earthquakehit the Northern areas of the country, and AzadKashmir. There is death and misery all over. Thousandshave perished, many more have been injured, mil lionshave been rendered homeless, cities, towns, andvillages have been wiped out, the communicationnetwork has been badly mauled. Our heart goes out tothe bereaved families, and we offer our profound

sympathies to them.

The whole nation has risen to the challenge. Donationsin cash and kind are pouring in. Indeed so much hasbeen donated in kind that transporting these goods tothe affected people is becoming a logistical nightmare.The Institute too is cognizant of its responsibilities inthis regard, and has launched an appeal to its membersto donate funds. I would urge the members tocontribute generously to this noble cause.

Finally, I pray to Almighty Allah to protect us all.Aameen!

Abdul Rahim Suriya, FCA

Chief Editor


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July - August 2005The Pakistan Accountant 04

Presidents MessageThe newly elected council has taken charge on September

12, 2005. I reiterate the comments made in the council's

meeting whilst taking charge as the President for the term

2005-2006 that I consider this office as a responsibility for

maintaining the high standards set by my predecessors; and

the trusteeship bestowed upon us by the members.

Accounting is not the end but a mean to attain the end of

economic prosperity and development. All of our members,

whether in practice and industry have to acknowledge and

demonstrate that we are engaged in providing 'service' to

businesses. This includes our role as accountants as well as

'auditors'. There is no place in the modern world for

'Inspectorial' role.

Development of the profession is directly linked with the

economic development, that too in organised and

documented sector, therefore, the first priority of the

profession has to act as a facili tator, and 'service provider' to

businesses which leads to overall economic development of

the country.

There cannot be any sustainable reduction in unemployment

and poverty unless there is a creation of wealth by

businesses and its reinvestment. The role of governments has

changed. Private sector is now the only player in this field.

Accountants, specially those, in practice, have to act like

'Umpires' rather than 'judges' whilst rendering their services.

An umpire will only interfere if someone plays against the

rules of the game.

The new counci l would endeavour to bring about awareness

for change in the paradigm of the role of accountants in the

economy. In the forthcoming issues, I will describe in detail,

the strategy for the growth of the profession as envisaged by

your new council.

Main theme of this issue viz Zakat in my view relates to

subject of social responsibility. Objective of such obligations

is to remove disparity in the distribution of wealth; however,

it would be a restrictive interpretation if we keep the same to

one fortieth (1/40th) of net increase in wealth only. This

threshold is the minimum responsibility only.

Philanthropy has played a vital role in promotion of health

and education in development of economies. All big

re s ea rch and educational institutions in the developed

economies are being financed by endowments. In our

country, there are misapprehensions in respect of utilisation

of sum so collected, including zakat. In the recent past,

trends have changed and now institutions like Aga Khan

Hospital, Shaukat Khanum, SIUT, Shifa Hospital etc. are

receiving substantial sums on that account. This trend should

be continued as the overall shortfall is immense.Nevertheless, it is important to note that all these institutions

are related to 'health services' sector where there is an

immediate need in this country, however, unless

philanthropy in our country, which includes zakat, is used

for development of modern education, including science

and technology, the objective of sustainable economic

development cannot be achieved. Education of masses on

modern lines is imperative for survival in the present world.

Members are requested to improve their role in social

services including proactive participation in the financialmanagement of non-profi t organisation.

I will dilate further on the matter discussed above in the

following i ssues.

Syed Shabbar Zaidi


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The Pakistan Accountant July - August 2005 05

Zakat

Questions and Answers on Zakahby Justice Maulana Taqi Usmani

How to Calculate Zakah on Business?

Q.1 Is zakat payable on business? If so, how does one

calculate the amount? I have overdrafts and loans inbusiness too, as well as receivables outstanding.

Q.2 Is zakat payble on stocks? I have stocks from variousperiods starting from 30 days to over 365 days. There

are certain stocks which are not sellable anymore.

A. First of All , you should set a particular date of a lunar

month for the valuation of your assets for the purposeof zakah. Better you choose the first of Ramadaan forthis purpose, because this is the date on which thegovernment also collects zakah from all the citizens.

This date will be your zakah valuation date for each

year as long as you remain sahib-e-nisab (the one onwhom zakah is obligatory).

Then, you should calculate the value your zakatable

assets as it stands at that valuation date. The zakatable

assets are the following:

a) Cash (including the balance of your bank deposits)at that date.

b) The market value of the shares of joint stockcompanies of NIT units or mudaraba certificates

held at that date.

c) Face value of the financial papers, like bonds,

KDCS, NDSCS etc.

d) The whole-sale value of the balance of stock-in-trade (including raw material) at that date,irrespective of the period of their retention.

e) Receivable amounts (book debts) as on that date.

From the total amount of the aforesaid assets, thefollowing amounts may be deducted:

i) Amounts payble to the suppliers of stock(including raw material)

ii ) Amounts payable at that date a rent to the landlord

or to the lessor if equipment is acquired on lease.

iii) The Principal amount of loans borrowed from

financial institutions and employed in acquiring

zakatable assets, or any personal loans.

iv) The amounts deducted by the government at source

as zakah.

After the deduction of these amounts from the total

value of the zakatable assets, as mentioned above, the

balance will be your zakatable value. 2.5 percent of

this zakatable value is payable as zakah.

The period of retention of the stock is not material. The

balance standing at the date of valuation shall be

valued, no matter whether some stocks are acquired

some month ago, and some are acquired just one day

earlier. The completion of one year is needed only for

the minimum amount of nisab. If somebody has been

owing the minimum amount of nisab for the most parts

of the year, he has to pay zakah on the balance

remaining with him, on the date of valuation.

'Retention for one year' is not necessary in respect of

each and every item. Therefore, whatever comes or

goes during the year has no bearing on the calculation

of zakah. It is only the balance remaining on the

valuation date which is subject to zakah.

You have also asked about the stocks which are not

"sellable any more". If you mean that these stocks are

kept for personal use or for charitable purpose, they

shall not remain zakatable any longer. But if you mean

that they are available for sale, but nobody comes

forward to purchase them, they are still zakatable.

However, it should be remembered that zakah can

also be paid in kind, therefore you can pay their zakah

from those assets themselves i.e. you can give 2.5 % of

those stocks in kind to a person entitled to receive

zakah.


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Payment of Sadaqatul-Firto a Non Muslim

Q. Can the Sadaqatul-fitr be paid to aneedy non-Muslim?

A. According to Imam Abu Hanifah,the Sadaqatul-fitr can be paid to a

needy non-Muslim resident in anIslamic country if he does not own

the nisab (a surplus amountequivalent to the value of 52.5

totals of silver).

Paying Zakah to anIndebted Person

Q. A businessman suffered a loss in hisbusiness. He sold all his properties

and paid his debts. He hired a

house on rent and shifted from aposh locali ty to an ordinary localityin a far off area of the city and

joined a service. From appearance

his standard of living still looks like

his previous one (although he iswithout a car, telephone and other

luxuries). He is still under the debtof approximately Rs. 2 million. He

pays some amount every month

from his salary to his creditors.Now, the question is:

(a) Can his debts be cleared by Zakahmoney?

(b) If it is permissible, should we pay

his debts directly to his creditors, orshould we pay him first and then

ask him to pay off his debts?

Please also note that this

businessman has to receive aboutRs. one million from other peoplewhich is being received by him in

parts and after long intervals.

(c) Is it necessary to tell him that it is

the Zakah money, or can we pay

him without any reference to

Zakah, because he may feel

humiliated if we tell him that it is a

zakah money?

(d) If he pays some or all of his debts byzakah money, then he again

becomes a rich man, should he

return the money of Zakah to itsoriginal owners, or can he pay it to

other poor people, or he need not

do it? (Ibid)

A.

(a) The principle is that i f the debts of a

person are equivalent to his surplus

assets (including his receivables) orare more then that, he is entitled to

receive Zakah. Likewise, if hissirplus assets are sufficient to clear

his debts, but after paying his debts,

his remaining surplus assets do not

reach the quantum of nisab he can

also receive Zakah. However, if hissurplus assets are such that even

after clearing all his debts, they are

equivalent to or more than the

nisab, he cannot receive Zakah.

It is worth mentioning that the term

"surplus assets" includes moneyand all those household goods and

properties which are not required

for his day-to-day needs.

In the light of this principle, the

businessman under question canreceive Zakah, because his debts

are 2 million while his surplus

assets (including his receivables)

are less than that. Therefore, one

can help him in clearing his debts

out of the Zakah.

(b) If his debts are intended to be paid

out of Zakah, the creditors should

not be paid di rectly. Instead, money

should be given to the indebted

person who will pay it to his

creditors, if he so wishes.

(c) It is not at all necessary to tell thebeneficiary of Zakah that he isbeing helped out of Zakah. Onecan give him the amount as a gift or

as a persent without referring toZakah. The only condition is thatwhile giving it to him, one should

have a clear intention in his heart topay Zakah. Even if a person gavemoney to the beneficiery as a Qardor a loan, while in fact he intendedto pay zakah and never intended toget it back from him, the obligationof Zakah is discharged. How- ever,if he comes thereafter to repay theloan, he should refuse to accept it.

(d) Once a person has received Zakah

while he was entitled to receive it,

he is not required to return it to the

original payer, how rich he maybecome late...Therefore, if that

businessman becomes rich once

again, he is not required to payback the Zakah, neither to the

original owners, nor to other poor

people. However, he will be

required to pay this own zakah

according to his assets owned by

him at that time.

Zakah on Unquoted SharesQ. "How is zakah calculated and paid

on the unquoted shares which

cannot be sold through stock

Exchange?"

A. Zakah is obligatory on the marketvalue of the shares of every joint

stock company. Although the

market value of the unquoted

shares cannot be determined

through the stock Exchange, yet

there are two ways to determine

their value.

1. Some unquoted shares are sold andbought through "over the counter"transactions i.e. by mutualagreement of the buyer and sellerand without the meditation of astock Exchange. These "over thecounter" transactions may

determine the market value of theunquoted shares.


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2. If the market value cannot beascertained in this way for some

reason, then the value of the

unquoted shares should becalculated on the basis of thebalance sheet of the company.

It has already been explained in

Albalagh (June 1990 p.20) that ashare holder can deduct from the

Zakatable value a proportionequivalent to that of the fixed assets

of the company. The same

principle is applicable to theunquoted shares also.

Zakah on Trust Fund

Q. "Instead of our managing aportfolio of ahares, we have

invested some spare cash in some

trust funds i.e. private ones andalso those set up by the

government. The price of the fundis closely linked with the index of

quoted shares and the price is

given each day. Dividends are also

declared and given each year.

Do we have to treat this as cashand pay zakah on its market value

or only on its dividents? In this casethe dividends should be enough to

cove rfor the zakah of 2.5 % oftotal market value, therefore, it

would not cause undue hardship as

we do not have to sell the capitalportion to pay the zakah."

(Ibid)

A. A "Trust Fund" is a mutual fundwhere a portfolio of the shares ofdifferent listed companies is

maintained. The share of aparticipant in such a fund is

represented by a negotiable

instrument usually called a 'unit'.These 'uni ts' represent their

holders' proportionate share in theportfolio, and ultimately a

proportionate share in differentcompanies, as well as a

proportionate share in the capitalgain the portfolio earns. Thus, a

unit of a "Trust Fund" does not

represent cash only, like the bonds,but it represents a proportionateshare in the assets of the releventcompanies also.

Therefore, it will be treated like a

share of a quoted company for the

purpose of Zakah, and all the rules

mentioned with regard to the

shares of a company are alsoapplicable to the 'units' of a Trust

Fund. Therefore, zakah will be

payable on the market value of thesuch units, irrespective of the

amount of divident declared on

them. It is like the stock in trade on

which zakah is payable on thebasis of its market value,

irrespective of the rate of profit

earned on i t.

Zakah on the Employees

Provident Fund

Q. In Malaysia, 20% of monthly salaryis paid to the Employees provident

Fund which keeps and manages the

funds for us until retirement age. weare not allowed to take the money

before retirement except in the case

of death of the employee where it is

paid to the heirs. How do we treat

this asset in the payment of zakat?

(Ibid)

A. If 20% of the salary is deducted at

source without giving this amountto the employee, zakah is not

payable on the amount kept in theemployees' Provident Fund until

the same is received by the

employee. When an employee

receives it on his retirement, the

amount so received shall from partof his zakatable assets of that year

only, and such part os it as is not

spent before the valuation date

shall be subject to zakah, and

zakah will be payable on the

aggregate balance of his assets

(including the balance of the

amount received from the Fund) onthe valuation date.

Who is Entitled to Receive

Zakah?

Q. Can you tell precisely who is

entitled to receive zakah? Can we

spend the zakah money for the

following purposes:

(a) In building a religious school which

is a profit making concern for the

operator?

(b) In buying a computer or anairconditioner for a religious or a

social body?" (Ibid)

A. Zakah should always be given to a

poor person who does not own the

nisab. The nisab is 613.35 grams of

silver. Any person whose surplusbelongings do not reach the value

of 613.35 grams silver can receive

zakah. Zakah can be paid in cash or

in kind, but in both cases the

ownership of the property given in

zakah must be transferred to a

particular real person (and not afictitious person) who is entitled to

receive zakah. So, the construction

of the building of a charitable

institute is not a valid way of the

disbursement of the zakah money,

becuase in this case the property is

not transferred to a particular realperson. Likewise the donation of a

computer or an airconditioner for a

religious or a social organization

cannot be made out of the zakah

money. However, i f these things are

given to a poor person (entitled to

receive zakah) by making him theowner of a computer, or of the

building, the obligation of zakah is

discharged.


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Zakah on AgriculturalProduce

Q. "There is no need to pay zakah onsalary unless there is a saving leftfor a period of one year, whereas10% of the farm produce is payablebased on the current value of theproduce irrespective of whether

produce is sold or not. The Zakahin such circumstances is paidupfront whereas the salary earnerhas the liberty of choosing how touse his earnings without having todeduct a certain portion first for

zakah. It means that if he choosesto spend all his earning then thereis no need to pay zakah. Would itnot be a dis-incentive to the farmer

as compared with the salary earner?Perhaps you can clarify thisfurther". (Ibid)

A. Let me first clarify some

misconceptions found in yourquestion:

1. The rate of zakah levied on theagricultural pruduce is normally

5% and not 10%. The rate of 10%is confined to unirrigated landsonly. The majority of cultivatedlands are irrigated by canals, wellsetc. The rate of Zakah on all these

lands is 5%.

2. The zakah of the agriculturalproduce is payable in kind.Although it may be paid in cash,

yet it is at the option of the owneronly. It means that if the produce issold, he can pay the zakah in kind.

3. The agricultural produce should notbe compared with personal

savings. It should be compared

with the stock-in-trade, because

trade and agriculture are both

productive activities. So, both of

them are subject to the sameprinciple. Zakah is payable on the

stock-in-trade at the current market

value irrespective of whether it has

or has not been sold. Similarly, the

agricultural produce is subject to

zakah, even before it is sold. But inboth cases the obligation is fulfilled

by paying zakah in kind. The rate of

zakah on agricultural produce is nodoubt, double the rate of zakah on

stocks, but the reason is obvious.

The initial input in the case of

agriculture is lesser than the initial

investment in stocks, and the rate of

output is greater in agriculture thanin stock. There may be some

exceptions to it, but the rules arealways framed according to the

normal conditions and not on the

basis of exceptions.

A salary-earner has an advantageonly when he does not invest his

money in any type of trade, nor

does he keep the surplus with him.

This can only be imagined where

the income is so little that he can

neither save it nor invest it in a

profitable business, and his salarysuffices only for his personal needs.

Zakah is not payable in such

c i rcumstences. He cannot be

compared with a farmer who

cultivates land for productive

purposes. However, if the produceof a farmer is so little that there is

no surplus after providing food for

his family, zakah is not payable

according to the majority of the

Muslim jurists.

Change in Finanacial

Status and Zakah

Q. "Mr."A"is Sahib-e-Nisab and pays

zakah regularly. Say, in 1989 hepaid his zakah, and when the

valuation date came in 1990, his

financial condition became

adverse. Consequently, he did not

have the minimum wealth which is

liable to zakah. In other words, on

the valuation date, he againbecame Sahib-e-Nisab. Now, the

question is, whether Mr. "A" should

pay the zakah of the wealthaccumulated on his previous

valuation date when it comes in

1992 or by virtue of his becoming

Sahib-e-nisab after a gap of twoyears, he should let one year pass

on his new wealth and then pay the

zakah?"

A. In this case, the previous valuation

date will not be applicable for the

purpose of calculation of zakah. He

will be liable to pay zakah after onefull lunar year will pass on his

newly acquired nisab of zakah.

The principle is that the valuation

date, for the purpose of zakah, is the

day on which the person acquires

the amount of nisab for the first

time. This valuation date will

remain applicable as long as he

remains Sahib-e-Nisab and he shall

calculate his zakah on the basis of

the valuation of his assets on thatdate each year. For example, Mr.A

became Sahib-e- Nisab for the first

time on the 1st of Muharram in

1408 A.H. Now, he shall calculate

his zakah on the 1st of Muharram in

1409 A.H. if he is still Sahib-e-

Nisab on the that date. Thus, the

first of Muharram is his valuation

date for all the following years as

long as he remains Sahib-e-Nisab.

He will calculate his zakah on the

first of Muharram each year.

If he does not remain Sahib-e-Nisab

on the first of Muharram in any of

the following years then the first of

Muharram will case to be his

valuation date. Therefore, if he

acquires the nisab once again, the

zakah will be subject to the newvaluation date i.e. the date on

which he acquires the nisab second

time.


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on which he, for the first time,acquired the ownership of thenisab (minimum quantum) ofZakah, i.e. the value of 613,35grams of silver. For example, youhave acquired the ownership of613,35 grams of silver for the firsttime on the first of Muharram. Thefirst of Muharram is yourvaluation date for the purpose ofZakah. You should calculate thevalue of your zakatable assetsowned by you on that date everyyear. The amount spent beforethat date need not be included inthe zakatable assets. Only the

balance remaining with you onthe valuation date is subject toZakah. If you do not rememberthe exact date on which youbecame the owner of the nisab forthe first time, you can estimate thevaluation date. Therefore, themonth of Ramadan is not thevaluation month for everybody,the valuation date differs fromperson to person. However, oncethe amount of zakah is calculatedon the basis of correct valuation

date, i t may be paid any time afterthe valuation date. But thepayment should not be delayedunnecessarily.

Q. 8We pay income tax and wealth taxregularly. The rate of wealth taxoften corresponds to the rate ofZakah. Can we deduct theamount of such taxes from zakah?

A. The payment of government taxescannot discharge you from the

obligation of Zakah. However, ifyou have paid the taxes prior toZakah valuation date, asexplained in answer to theprevious question, the amounts oftaxes so paid need not beincluded in your zakatable assets.But if you have not paid the taxesupto the 'Zakah' valuation date,even though they have becomedue, you cannot deduct theamount of taxes from thezakatable assets.

Various Zakah Questions

Q.1 (a) Is 'Zakah' payable on a

Bungalow/House irrespective ofhow big it may be, which isoccupied by us? If 'Zakah' ispayable, should it be on cost oron the Market Value?

(b) If any loan is taken against theBungalow or House, should Loanamount be deducted beforecalculating 'Zakah' Amount?

A. (a) Zakah is not payable on theBungalow/House which you own

and utilize for residentialpurposes. However, if theBungalow/House is purchased orbuilt with the intention of resale,then Zakah wil l be payable on it'smarket value.

(b) A loan taken against theBungalow/House can bededucted from the Zakatableamount.

Q. 2 Is 'Zakah' payable on Furnitures,

Fixtures, such as ElectricEquipment, A i rc o n d i t i o n e r s ,Carpets, Crockery, etc.? Ifpayable, should it be on the costor on the market Value?

A. Zakah is not payable on furniture,electric equipment,aircondi tioners, carpets, crockery,and their items that are forhousehold util ization.

Q. 3 Is 'Zakah' payable on

Bungalows/Houses or Flats whichare given on rent or which remainvacant. If payable, should it be onthe original cost or on the marketvalue?

A. Zakah wi ll be paid only on therent accrued from the propertiesowned. Zakah wil l not be paid forvacant property, unless ifprocured for resale purposes;more specifically, for the sale ofsuch assets.

Q. 4 Is 'Zakah' payable on the cost orthe market value of an investment

made in open land (Residential

plot)?

A. If the residential plot is purchased

for the purpose of resale then

Zakah will be liable at the market

value, but if the plot is acquired

for purposes other then being

resold then Zakah will not be

payable.

Q. 5 JEWELLERY

(a) Is 'Zakah' payable on jewelleryand Diamonds? If so, on the

purchase value or on the marketvalue?

(b) Is 'Zakah' payable on Gold/Silverjewellery in use by wife, daughteror kept as investment-If so, iszakah payable on the purchase

value? or the market value?

A. (a) Zakah wi ll be payable on gold

and silver jewellery, if suchjewellery exceeds the minimum

weights:

For Silver: 52.2 Tolas / 613.35 Grams

For Gold: 7.5 Tolas / 87.479 Grams

Zakah will be paid as follows :[Number of Tolas / Grams x cost

of 1 Tola / Gram (Silver / Gold)]multiplied by 2.1/2 % = Zakah

amount

Zakah is not payable on

diamonds, despite their value.

(b) Zakah is not payable on jewellery

of Gold / Silver even if it is usedby your wife or daughters (Hanafi

view).

Such Zakah is calculated on the

market value of the gold or silverused in the jewellery.


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13/56


Zakat

Zakat and Ushr in Modern Times

About 1,400 years ago Zakat was imposed as a compulsorylevy on all Muslims. A lot has changed since then - our waysand standards of living, economic systems, nature and scopeof wealth, means of making livelihoods. A glance at the

schedule of rates in Hadith shows that it contains items likecattle, animals, agriculture, gold and silver. Today, the

composition of assets has changed and comprises items,such as: Plazas, buildings, plots, shares, insurance, factories,fleet of vehicles, ships, aeroplanes, bank balances, etc

However, while computing zakat, numerous problems anddifficulties are encountered. This article attempts to describethese difficulties and suggest practical solutions toovercoming them.

1. Liable to Zakat

According to the Holy Quran and Hadith, an individual isliable to Zakat. Firms, companies and association of personsare not natural persons and are, therefore, not liable to zakat.Individuals' interest in such organisations is surely liable to

zakat. However, valuation of such interests is altogether adifferent matter.

2. Nisab

Nisab is defined as net assets equal in value to 87.48 grams(seven tolas) of gold or 612.36 grams (52.5. tolas) of silver

whichever is less. These days value of 87.48 grams goldtezabi is Rs.62, 102 and of 612.36 grams pure silver is Rs.5,878. The rates of these metals are changing. Who knows in

future, silver being in high demand, and might be morevaluable? As such, the minimum nisab (exempt limit) should

be lower of the two.

Usher is not payable annually. It is payable on production,which may be twice a year or even more frequently.

3. Valuation Date, Time & Year

a. Zakat is payable after an asset (savings) has remained

with an individual for one year. In this day and age of

frequent changes it is quite difficult to calculate Zakat

exactly after one year of each transaction. Theintervening events, losses and even bankruptcy may

change the situation and lot of assets may escape

Zakat. Since the transaction of Zakat is between man

and Allah, and its main objective is that the rich should

help the poor, one must exercise caution in calculating

it. It is proposed that the day for valuation should be adate of the current year, and not of the last one. No

doubt, in such a case, earnings and savings of less than

one year shall also be subject to Zakat, but it is prudent

to err on the higher side in this case.

b. Valuation Time: In this modern age, an individual's

total wealth in the morning and in the evening may be

different. As such, it would be better if with the date,

the time of valuation were also given, e.g. the time of

appearance of Ramazan moon.

c. Year: It wil l not be solar (Christian) year of 365 days,but the Lunar (Hijri) of 354 days.

4. Amwale Batina

a. Valuable kept in bank locker and safe deposit vaults

should also be included in Amwale Batina. Even

though being in bank, these are not considered as

deposit in banks.

b. Zakat on Amwale Batina and current deposits should

not be compulsorily collected, but be payable

voluntarily. The Return of Zakat must show the detailsof such Amwale Batina.

c. SAVINGS CERTIFICATES

i. Rate of zakat on government savings certifi cates should

be 2.5% per year of the accumulated value.

ii . The issuing agency should transfer zakat to zakat fund

every year, rather than piling it up till redemption and

that also 2.5% once only for 3 or 10 years.

Sadia Kaleem, ACA


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Zakat


d. SHARES

i. Shares quoted on the stock exchange should be valuedat their market values. In case of private company, it

should be face value or break-up value.

ii . There is an additional interest in owning the controllingshares and the persons holding such shares should addthis. For example, if a limited company's share isquoted at par on the Stock Exchange but a family isholding 51% of the equity, i t wi ll not sell i ts holding atpar because they are availing a privilege of managingand ownership of the concern. Therefore, in such casesthe persons holding the interests should add a premiumfor the holding the privilege.

e. LIFE INSURANCE POLICYZakat on li fe insurance policy @ 2.5% on maturitydoes not appear reasonable. Premiums paid are a sortof savings. As such the rate of Zakat should be 2.5%per year on premiums paid plus bonuses added to thepolicy or surrender value which ever is lower. LifeInsurance Companies should transfer such 2.5% everyyear to the Zakat Fund.

f. PROVIDENT FUND

Employees' contribution plus profit on it is his savingsand so is liable to zakat @ 2.5% per year. After a

period of service, employee gets entitlement toemployer's share also. From this date 2.5% zakat peryear should be calculated on both the employer andemployee contribution plus accumulatedinterest/profi t on both the balances.

It may be added that this measure will not involve anyundue hardship on poor employees (or poor insurancepolicy holders), as the interest on provident funds (andbonus on insurance policies) is generally higher thanthe Zakat of 2.5% per year. Furthermore, if a personfiles a declaration of being under Nisab, no deductionshould be made.

g. STOCKS

All sorts of business stocks are liable to Zakat.Therefore, along with the raw material and finishedgoods, material in process should also be included.

5. Other issues

a. If a loan is taken against an asset, such loan should bededucted from that asset up to the value of that veryasset.

b. Zakat paid in excess should be carried forward to thenext year.

c. Dues of Zakat, in case of deceased, can be recoveredfrom the wealth after death upto 1/3rd of his totalwealth. It should have priority over and above otherclaims.

d. Recovery of Zakat shall be affected at a place nearerand convenient to the payer.

e. Zakat on animals in Pakistan would not beeconomical to collect in view of scattered and smallfarms.

6. Exempted Assets

Keeping in view the basic spirit of Zakat, vehicles and housein personal use, household effects, and all other assets inregular and personal use should be exempted from Zakat.

7. List of Assets Liable to Zakat

Followings should also be added in the list of assets liable toZakat.

a. TRANSPORT VEHICLES

It is said that because few camels of a Companion ofthe Holy Prophet (Sahabi) engaged in transportation

were exempt from zakat, trucks, buses, wagons,rickshaws and other means of transportations shouldalso be exempt. If this rationale is accepted, atransporter, despite increasing his fleet over time, andbeing a mil lionaire will not be paying zakat. On theother hand a petty shopkeeper would be liable toZakat on his stocks. This situation is patently unjustand unfair, and cannot be approved.

b. PROPERTY ON RENT

Several i ndividuals rent out buildings and plazas. Theyearn their li velihood through this business. 1,400 years

ago, this business of renting property was not existing(Land was free, construction cost was negligible) sothe question of zakat on rented property has not beendiscussed in Hadith. In the modern days, rent is asource of business income, so such property should beliable to zakat. The question will remain how to valuethe building, because the actual market value due tooccupation by tenants is reduced to much lower level.According to occupied buildings market rates, thevalue should be 9 years net rental income for zakatpurpose. Zakat as such comes to about 2fi monthsrent. Landlord gets 9fi months rent plus any capitalgain in the value of such properties.


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Zakat


c. Plant and Machinery

It appears to be quite lubricious that plant and

machinery worth millions of rupees owned by an

individual or i ndividuals should not be li able to zakat.It is business wealth and must be added for zakat. It

may be noted that those who considers it to be

exempt, should also bear in mind that gross

production is liable to Zakat @2fi %, which shall be

much more than the two and a half percent paid on

the value of plant and machinery.

d. INTEREST IN PARTNERSHIP FIRMS

It is exactly similar to a share of a company. Similar to

Rule 8(8) of the Wealth Tax Act, to ascertain market

value of the assets of the Firm, beyond the book value,some additions must be made for the hidden reserves,

rise in fi xed assets value and goodwill . In other words,

present value of interest in a Firm should be the capital

in books plus something to arrive at market value ofownership of the Firm.

8. Ushr

a. Not only gross agricultural or forest produce, but also

mining and fishing are also liable to Ushr on the basis of

gross production.

Ushr is calculated on the Gross Product whi le Zakatis determined on the Net Assets of a person at a given

date. However, its proceeds are subjected to the same useas Zakat, and in Hadith its discussion is clubbed with

Zakat. Therefore, its merger with the Zakat Fund is quite

in order.

It may further be noted that fishermen, agricul turists,

and mine owners, are liable to Zakat even after payment

of Ushr because ZAKAT IS ON THEIR SAVINGS. Thissituation is similar to income tax wherein; agriculturist

income to the tax-free limit is liable to Wealth Tax.

b. LEVY OF USHER

i. Honey is also liable at 10% on the gross product.

ii . Vegetable, grass, dry frui t, firewood are exempted

according to Hadith

ii i. Fishing and sea products are also subject to Usher on

gross product.

iv. Amber & pearls are liable to 20%

9. Recovery of Ushr

Ushr may be recovered both in kind or cash. Pakistan has

four major cash crops: cotton, sugar cane, wheat & rice.Cotton is generally procured by ginning factories; wheat by

the Food Department and local markets, sugar cane by sugar

mills and rice paddy by the rice mills. If it is made

compulsory for these organisations to recover 5% of the

price from the gross proceeds, the recovery would be easier

and leakage would be more difficult and complicated.

Similar steps may be taken for recovery of Ushr on mining

and sea products.

10. Check on Evasiona Honesty, integrity & intention of both the payers &

collectors are also different from what it was 1,400 years

ago. For instance a week before Ramzan there is a heavy

demand for prize bonds while bank deposits decline

sharply. This phenomenon occurs year after year because

the public knows that two and a half percent will be

deducted as zakat on their saving deposit balances on the

first day of Ramzan.

To check evasion it is proposed that technology shouldbe full y util ized. Records of vehicles, houses, current

deposits, postal savings and deposits, shares, debentures,

NIT units, provident funds, life policies, agricultural

lands, fruit farms and similar other investments can easily

be kept on computers and counter checked. Benami

assets on Power of Attorney wil l come to l ight very easily.

b. A provision should be made that the Government can

acquire the asset on a declared value plus 10% of the

declared value. It will enforce zakat payer to declare the

values much nearer to the amount on which anindividual is willing to dispose these off.

About the Author:

Mrs. Sadia Kaleem ACA is also Chartered Secretary (UK).

She has also completed Final Exam of CIMA (UK). She is

also finalist of ACCA.


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Zakat

Rudiments of Zakat

Zakat is one of the pil lars of Islam. Allah describes the taking

of zakat in the following manner.

"Take alms from their wealth in order to purify them and

sanctify them with i t." [Soorah at-Tauba 103].

The payment of Zakat becomes obligatory on every sane andmature Muslim and Muslimah whenever there is an

economic activity resulting in the net increase in their

wealth. The following are the categories of production.

Profit, investments and savings are subject to Zakat.

1. They produce of land. The rate is one tenth of the produce

of the unirrigated and undeveloped land and one

twentieth of the produce of the irrigated and developed

land.

2. Pure economic profit business.

3. Inheritance, once for all.

4. Cash, investments, food, merchandise, jewelry, gold and

silver kept in the inventory for full one year and above the

certain value defined as Nisab.

The rate of Zakat on each of the above categories is different.

The rate of Zakat and the amount of Nisab can be decided

by the Islamic State taking into consideration the prevailing

standard of living and the risks and uncertainties of different

modes of productions.

For the articles in category four the rate of Zakat is two and

half percent on the amount which is more than the Nisab.

If the individual items in category 4 do not come up to the

Nisab but the combined value of all the items is more thanNisab, Zakat is obligatory.

It should be kept in mind that these rates of Zakat are the

minimum rates and the Muslims have been urged by Allah

and the Prophet time and again to pay as much as they can

after providing for their legitimate needs.

Thus the rate of Zakat and the amount of Nisab is dynamic

with a given minimum, but the maximum amount is left to

the Ijma of Ummah.

Who is deserving of Zakat

The Holy Quran describes the following eight categories

who are entitled to receive Zakat:

1. Fuqara: the people who have some money but not enough

to meet their needs. They live in precarious circumstances

but do not ask for help.

2. Miskins: these are a very miserable people who do not

have anything for food, clothing and shelter. The Khalifa

Umar ibn al-Khattab also included in them those who are

fit to earn but do not have means to earn.

3. Aamileen (Collectors of Zakat): the officials engaged in

the collection and distribution of Zakat are paid from the

Zakat fund.

4. Muallafat-ul-Qulub (Those whose hearts are to bereconciled): this includes the new Muslims, to strengthen

them in Islam, as well as those for whom it may be

necessary to give Zakat to win their heart.

5. Fir -ri qab.(Emancipation of slaves): this means the person

who wants to free himself from the shackles of slavery

should be given Zakat so that he can pay to this category(those persons who are imprisoned for nonpayment of

fines).

6. Al-Gharimeen: this means the people who are in debt,

which is more than the assets so that after paying the debt,

their wealth that is left is less than the Nisab.?

7. Fi Sabeelillah (in the cause of Allah): this is a common

word used for all good deeds, but in the case of Zakat it

means rendering help to an endeavor to serve Islam such

as the propagation of Islam, Jihad, etc.

Irfan Ahmad Khan, ACA


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Zakat


8. Ibn-us-Sabil (the wayfarer): a

traveler, if he is in need of money

while traveling , is entitled to Zakat .

Some essential Points

about Zakat

1. A person who quali fies to pay Zakat

is not eligible to receive.

2. It is not permissible to pay Zakat to

your husband, wife, parents,

grandparents, and the children and

grandchildren.

3 Expenditure to Zakat fund is not

permissible on the construction of

mosque.

4. It is preferable to pay Zakat to

deserving relatives.

5. The Zakat of every locality should

be spent on the poor inhabitants of

the same community except if there

is a calamity in other parts of the

country or the world.

6. Any one who qualifies to receive

Zakat, can be given it as assistance

or a gift, without telling him that it

is Zakat.

7. All articles of household use and

properties given on rent are

exempted from paying Zakat.

8, Zakat money of a particular year

could be spent during the same

year in advance, could be given all

at once or in installments.

The collection of Zakat

In the Islamic state, it is theresponsibi li ty of the state to collect and

distribute Zakat.

The Prophet (PBUH) says: I have been

commanded to collect Zakat from the

rich among you and distribute it to the

poor among you.

In case an Islamic society does not

exist or in a non-Islamic society, the

local organization of the Muslims

should make arrangements for thecollection and distribution of Zakat.

Wherever such arrangements exist,

every Muslim is required to pay Zakat

to this organization and conform to the

rates and the amount of Nisab decided

by the organization.

Allah has made Zakat one of the pi llars

of Islam and has often mentioned it in

the Quran immediately after thePrayer, saying, "And perform Prayer

and give Alms ".

The Prophet (PBUH) said, "Islam has

been built on five [pillars]: testifying

that there is no god but Allah and that

Muhammad is the Messenger of Allah,

performing the prayers, paying the

Zakat, making the pilgrimage to the

House (Hajj), and fasting in Ramadan"

(Bukhari, Muslim).

Allah has warned those who do not

give Zakat that they will face dire

consequence. He says, "O you who

believe! Verily, there are many of the

rabbis and the monks who devour the

wealth of mankind in falsehood, and

hinder (them) from the way of Allah.

And those who hoard up gold and

silver, and spend it not in the Way of

Allah-announce unto them a painful

torment (Quran 9:34).

To d a y, how many Muslims in the

world honestly, sincerely and properly

pay zakat to purify their wealth and to

help their Muslim brethren. Is it any

surprise that:

So many Muslims are starving and in

need today.

So much Muslim wealth is wasted on

luxury.

So much Muslim wealth is spent on

forbidden items.

So little Muslim wealth is spent on

jihad and sacrificing for the sake of

Allah.

The Messenger of Allah (peace be

upon him) was ordered to fight the

people until they made the shahada,

established prayer and paid zakat.

Hazrat Abu Bakar (RTU) continued that

teaching after him. What does that

mean for us today? Does that mean

that if they were alive today, we would

be from those who would be fighting

alongside them or would we be from

those whom they would be fighting?

About the Author:

M r. Irfan Ahmad Khan is an

Associate Member of ICAP,

currently working as Financial

Controller of Descon Engineering

Qatar-L.L.C, Doha, Qatar.

Readers are welcome to contact

him at : [email protected]


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Zakat

Zakat Self Assessment FormName of Assessee : Assessment year

Lunar Date on which Zakat has become due

ZAKATABLE ASSETS

NISAB: 52.5 Tolas or 612.36 grams of Silver or its equivalent value

Details of possessions on this date, which qualify for Zakat: Valuation for Zakat

1. Value of Gold (in whatever form or for whatever purpose)

2. Value of Silver (in whatever form or for whatever purpose)

3. Cash:

a. In hand or at bank or wi th someone else for safeguarding or in the form of Prize Bonds or in

foreign currency.

b. Cash deposited for some future purpose, e.g. for Hajj, cash paid in an insurance poli cy.

c. Money given out on loan, as long as the borrower accepts it as a loan lent and not as a grant,money deposited in as Bachelors Committee (BC) or Voluntary Committee etc.

d. Money invested in business (Partnership or Shares, etc.) All forms of saving certificates,

NIT, FEBC, Shares, etc. All cash that has been invested in Provident Fund of anyorganization etc. through ones own choice. (Investment as per employees advice).

4. Goods, Property, shares, raw material, etc. bought for resale/trade.a. Money due for goods already sold. (Credit Sale)

b. Value of any i tem obtained in exchange of Trade goods or in l ieu of any rent due on them.

Total Zakatable Assets

LIABILITIES:

1. Loans (Borrowed money, Goods bought on credit, Wifes Mehr (if there is an intention to pay),

remaining amount due in a Bachelors Committee (BC).

2. Wages due to employees as at thi s date.

3. Taxes, rent, util ity bill s, etc., due at this date.

4. Any Zakat due for previous years.

Total Liabili ties

Circulated by SBS School of Business Studies. Karachi, to facilitate the correct calculation of Zakat.

Please e-mail your comments for improvement to [email protected]

X

_

=

=Value of Total Possessions

Qualifying for Zakat

Liabilities

2.5%Amount of Zakat Payable

Net Amount on which

Zakat is due

Net Amount on whichZakat due


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Zakat

General Rules Governing

Calculation of ZakatA VERSE FROM THE HOLY QURAN

And be steadfast in Salat (prayers) and give Zakat. And whatever good you send forth for yourselves, you will find it with Allah.From Surah (No. 2) om Al Baqarah

Verse 1 erse 110 10

A SAYING OF THE HOLY PROPHET (peace be upon him)The Holy Prophet (peace be upon him) said, Islam is based on five things: bearing witness that there is one God and Mohammad (peacebe upon him) is his messenger, to establish salat, pay zakat, perform Haj pilgrimage to Allah's house and fasting in the month ofRamadhan.

Sahih Bukhari & Muslim Hadith

IMPORTANCE / BLESSINGS Zakat is Ibadah (worship) not a tax. Giving Zakat is one of the signs of Taqwa (obedience of Allah). Payment of Zakat attracts Allah's blessings. Zakat purifies and protects wealth. Payment of Zakat causes ones sins to be forgiven and Paradise is promised for him/her.

PUNISHMENT FOR NOT PAYING ZAKATAs for those who accumulate gold and sil ver and do not spend it in the way of Al lah, give them the 'good' news of a painful punishment,on the day it will be heated up in the fire of Jahannam, then their foreheads and their sides and their backs shall be branded with it:"This is what you had accumulated for yourselves. So, taste what you have been accumulating."

From Surah (No.9) om Al-T Taubah aubah

VVerse 34 and 35

METHOD OF ZAKAT

CALCULATIONITEMS OF ASSETS

Equities- (shares of all companies, banks,

insurance companies whether publiclyquoted or private)

Properties including real estate, vehicles,yachts etc. for personal use

GENERAL RULESOPINION OF JUSTICE (Rtd.) MUFTI MOHAMMAD TAQI USMANI

Dividend on SharesInvestment in shares of banks and insurance companies is not permissible. Hence allincome on these should be given in charity. However, i f specific permissible activities inbanks and insurance companies can be identified then zakat would be payable on suchportion(s) and the balance to be paid as charity.

Income from all other equities is zakatable.

Value of Shares - zakatable.

Acquired for trading purposes - zakat is payable on market value.

Acquired for dividend income (long term investment) - at break-up value if known,otherwise on market value. However, whether at break-up value or market value, in bothcases, the value of shares so determined would be reduced by percentage of non-zakatable assets included in the total assets of the Company e.g. if the total assets of thecompany is 100 including nonzakatable assets of 25, then the value of shares sodetermined would be reduced by that ratio (e.g. 25%) to arrive at the zakatable value.

Note: Investment in shares of bank and insurance companies is not permissible and oneshould not retain these. However, if at Zakat date this is included in the assets, theamount of zakat should be paid on it as above in order to lessen one's liability towardsAllah.

Real Estate and other assets acquired for the purpose of residence or personal use isnonzakatable. Any loans taken to acquire such non - zakatable assets will also beexcluded from calculation of net zakatable assets.


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Zakat


Real Estate acquired for Leasing (for renting out)

Properties acquired for trading purpose

Cash in Hand & at Banks

Gold held for trading purpose

Gold held fo for personal use by family

Loans given to independent thirdparty Cos.

Treasury and other corporate bonds / bills

Mutual funds

Other funds (such as Hedge funds)

Is Zakat calculated on the individualcompany assets or on the consolidatedGroup assets.

Can losses in one company be offsetagainst profi ts in another company throughconsolidation.

If Zakat is calculated on the assets of the

overall company, would there be a furtherliability forZakat on the individualshareholders once theyreceive thedivi dends in their hands because they holdshares in that company, or is there amechanism for a setoff.

Non Zakatable

Zakatable - at Market value

Zakatable

Zakatable - at Market value

Zakatable per Hanafi School. Non-zakatable per Hanbali, Maliki and Shaafie School.

Zakatable on the face value of the loan amount. However, it is allowed to exclude suchloan amount from zakatable assets and defer zakat on it until the loan is received back.But once such loan is received back then one wi ll have to pay zakat for all the past yearsthat this amount was excluded from the zakatable assets.

Zakatable on the principal amount paid to purchase them or market value if it is lowerthan the principal amount (because the difference represents the loss of the assets).Interest or capital gain accrued thereupon, being impermissible, should all be given incharity.

Zakatable. Subject to rules relating to underlying investments.

Hedge Funds will be subject to same rules as the bonds, that is, the principal will be

subject to zakat and not the gains. The entire amount of gains is to be paid as charity.However, if thereare Hedge Funds of commodities then it will depend on the nature ofunderlying contracts as specific activities may be acceptable from a Shariah point ofview.

If all the companies of the group belong to the same owners, and there is no difference

in shareholding of any one of them, then Zakat may be calculated on consolidated basis.Therefore, if the liabilities of one company exceed its zakatable assets, these liabilitiesmay be deducted from the aggregate zakatable assets of the whole group. But if there isa company with a different shareholding, it should not be included in consolidatedcalculation.

If Zakat is paid by the company as a corporate entity and all the zakatable assets have

been included in the calculation on their fair value, the shareholders do not have topay zakat on their shares. However, the dividends they receive will be included intheir cash, the balance of which at the zakat valuation date is zakatable. The amountsspent during the year need not be calculated.

Other question with regard calculation of Zakat for a Group of Companies

WHO IS TO PAYZAKAT (NISAB OF ZAKAT)Any one who has a 'net worth' above 87.48 grams of gold or 612.36 grams of silver or its cash equivalent (Dh.4,310*) as of his/her zakatdate has to pay Zakat. The 'net worth' for this purpose will be arrived at after deducting any loans and all items retained for personaluse or consumption li ke residential house, transport, utensils in use, clothes and furni ture all ofwhich are non-zakatable.

* as per market value of gold (US $ 417 per oz) on 4th October 2004.

RATE OF ZAKATZakat is 2.5% per Lunar Year. If for any reason Zakat must be calculated at Gregorian year it should be adjusted proportionately forexcess number of days i.e. if one is paying on the basis of Gregorian year, the rate of zakat would be 2.578%.

PAYMENT OF ZAKATZakat is payable every year on the Zakat date.

Zakat can be paid in advance and thereafter adjusted at the Zakat date.

Zakat of one year should preferably be paid before the next Zakat due date.

In the Holy Quran (Surah No. 9, Al - Taubah, Verse 60) Allah has Himself determined the recipients of Zakat.

In general, Zakat should be paid to poor persons who do not own the Nisab and preference should given to the one who is the closesti.e. close relatives followed by neighbours, fellow countrymen and then people in other countries.


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Islamic Economic System


Islamic banks when undertakeMurabaha transactions, they actuallyassume the role of trader. However, ifwe analyze the Murabaha undertakenby Islamic banks, it is devoid of typicalcharacteristics of trade or trader.

l Bank does not have any set ofcommodities in which it specializesin trading, and is wi ll ing to do trade(Murabaha) of any commodity forwhich a customer comes and wantsto obtain financing.

l Bank does not assume any risk ofthe commodity as it only purchases

a commodity when it already has abuyer who is willing to buy it frombank at a fixed margin over cost.When banks margin over cost isfixed, how it can be said that bankis assuming the risk of holding thecommodity.

l Bank is willing to sell a commodityonly on credit and not on cashbasis. If a person is selling goodsonly on credit and people arecoming to buy goods from that

person at a higher price becausethey do not have means to purchaseit on cash basis, isnt it obvious thathe is providing a financing facilityand any markup on cash price he ischarging can not be called as ahalal trading profit or Ribafree?.

In view of above is it justifiable toequate the murabaha transactionundertaken by Islamic banks to be a

trade transaction or it is merely afinancing tool.

Car Financing - IjarahIjarah is a term of Islamic Fiqh and itmeans to give something on rent. Thisterm Ijarah is used in two situations,one in case of hiring some personsservices against wages and secondlywhen hiring some asset or propertyagainst rent. This second type of Ijarah,which is also called lease, is used byIslamic banks for fixed asset financing.

The basic concept of Ijarah (lease) inIslamic Fiqh can be summarized asfollows:

l The asset remains the property ofthe owner or lessor and its usufructright to use is transferred to thelessee.

l All risks and rewards incident toownership remain with the lessorwhile the risk and rewards relatingto the use of the asset are with thelessee.

l Ijarah allowed in Islamic Fiqh is

similar to rental agreements such asrenting a car, apartment, machineryetc for use and it is NOT AFIANCING TOOL.

l The rental paid during Ijarah isagainst the consideration of usingthat asset and it is never considereda payment against the purc h as eprice of the asset.

l Leasing as practiced by a number ofbanks and financial institutions as amode of financing is calledFinance Lease which is strictly notallowed in Islamic Shariah whichallows only Operating Lease.

Islamic banks are mainly involved inIjarah Financing of cars. Lets analyzethe Ijarah Financing being done byIslamic Banks in the light of aboveprinciples.

l The individual who comes to the

Islamic bank for obtaining a car hasa clear intention of buying a car andwants to obtain financing for it fromthe bank. Bank has also the sameintention that it wants to ultimatelysell the car to the lessee and neverwants to keep it for further Ijarah.This defeats the first principle ofIjarah that the asset remains theproperty of the owner.

l Risk and rewards incident toownership of car are also not with

the bank as it is not at all interestedin how the lessee is maintaining thecar but rather it is interested only in

timely payment of lease rentals.

l Rentals paid in Ijarah are not onlyfor the use of that asset but alsoincludes a principle repaymentportion. At the end of the lease termassets are sold to the lessee at aprice, which is usually significantlylower than the original cost. This issame in case of leasing by aconventional bank and Islamicbank with the only difference thatin case of conventional banks,

p u rchase option is usuallystipulated in the lease agreementt h a t s why it is considered aFinance Lease, however in caseof Ijarah by Islamic banks thisoption is not explicit in the leaseagreement but is in the form of aunilateral promise by the bank tothe lessee that the bank will sell thatasset at a particular price to thelessee.

l Since the price which is set by theIslamic bank for the ultimate sale tothe lessee is significantly lower thanthe cost as well as expected marketvalue of the asset, it is reasonablycertain that lessee will exercise thisoption. Since this intention ispresent at the start of theagreement, doesnt it becomeFinance Lease right from the start?

Below is an extract from Mr. TaqiUs m a n i s book An introduction to

Islamic Finance, Chapter Ijarah, pg174-175.

Another important feature ofFinance Leases is that after theexpiry of the lease period, thecorpus of the leased asset is usuallytransferred to the lessee. . Leasedasset is generally transferred to thelessee at the end of the lease,either free of any charge or at anominal token price..This c o n d i t i o nwhe ther express o r imp l ied


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is not in accordance with theprinciples of Shariah. It is a wellsettled rule of IslamicJurisprudence that one transaction

cannot be tied up with anothertransaction so as to make theformer a pre-condition for theother. Here the transfer of the assetat the end has been made anecessary condition for thetransaction of the lease, which isnot allowed in Shariah.

In case of Ijarah financing by Islamicbanks, ultimate sale of the leased assetis clearly connected with the leasetransaction and although not expresslymentioned in the contract. Is lease aprecondition for the sale? Islamic

banks usually argues that these twotransactions are not linked as one is ofa lease transaction through Ijarahagreement and other is a saletransaction through a separateunilateral promise to sell to the lesseeand they are not linked. If we acceptthis argument then following questionarises.

l If the transactions are not linked,why is the bank only willing to sellthe asset to the lessee and why notany other person who also is willingto buy that asset at that price.

l If the transactions are not linked,would the bank still honor itsunilateral promise to sell the asset ifthe lessee terminates the leaseagreement earlier than the term andwithout payment of all rentals.

The answers to above questions arevery obvious and that makes it a clearcase of Finance Lease that is notallowed in Shariah. Besides theprinciples of Shariah, if we apply aneutral yardstick of InternationalFinancial Reporting Standards toanalyse the transaction of Ijarah aspracticed by Islamic banks, it wil l ful fil lat least the following two criteria ofFinance Leases as per IFRS 17 Para 8:

b) The lessee has the option topurchase the asset at a pricewhich is expected to besufficiently lower than the fairvalue at the date the optionbecomes exercisable such that, atthe inception of the lease, it isreasonably certain that theoption will be exercised;

d) At the inception of the lease thepresent value of the minimumlease payments amounts to at

least substantially all of the fairvalue of leased asset;

House Financing

Diminishing MusharkaHouse Financing is being done byIslamic banks through diminishingmusharka. It is based on the concept ofShirkatul Milk, which means jointownership of property. In this case,bank and client jointly purchase aproperty say with 80% banks share

and 20% clients share. Clientoccupies the property and gives rent tothe bank and also gives some amountto gradually purchase the share of thebank in the ownership. As banks sharein the property reduces and clientsshare increases, the amount of rentalso reduces accordingly.

Lets analyse this transaction from theconcept of Shirkatul Milk.

Under the concept of shirkatul Mi lk or

joint ownership, both partners wouldshare the risk and reward incident tothe ownership. Risk includes decline inthe value of property and rewardincludes an appreciation in the valueof the property. If we analyse the housefinancing transaction by Islamic banks,we see that the price of property isfixed at the time of purchase and clientis bound to repay the banks portion init irrespective of actual increase ordecrease in the value of the property. If

the value of the property increases, i t isthe client who would be happy andnot the bank as it will be receiving itsfixed portion.

In view of this how can it beconsidered a joint ownership, whenonly one partner is bearing the risk andreward of ownership? It appears thatthe client merely has a financialobligation towards bank and it isdischarging it with an element of Ribain it.

ConclusionIt appears from the structure of theabove mentioned products that these

Islamic Finance products have beendesigned by contemporary Islamicbanks as an easy alternative to Ribabased lending while in most cases theunderlying substance of thesetransactions differ from the legal form.

The main issues in each product canbe summarized as:

l Murabaha is a mode of tradeallowed in Shariah while MurabahaFinancing is being used in place ofworking capital financing and in

practice it is devoid of basic spirit oftrade while contains closerproximity to Riba based lending.

l Ijarah is an operating leasetransaction allowed in Shariah,while the Ijarah Financing is thename given by Islamic banks to apurely Finance Lease transaction.The underlying substance of thetransaction makes it a FinanceLease; however it is called anIjarah.

l Shirkatul Milk is a mode of jointownership of property allowed inShariah. This concept is being usedby Islamic banks to develop ahouse-financing instrument basedon diminishing musharaka, whichlacks the basic concept behind a

joint ownership i.e. joint sharing ofrisk and reward. The customer ofthe bank is concerned with thechange in the value of the propertywhile the bank is only concernedwith its income stream that hasbeen determined on the basis ofinitial price of the property.

Hope this would be a food for thoughtfor researchers and scholars in Islamicbanking.

About the Author:

M r. Kamran Akktar is an A s s o c i a t eMember of the Institute of CharteredAccountants of Pakistan, currentlyworking as Finance Manager of AlliedEngineering & Services Ltd. - RentalDivision. Readers are welcome to contacthim at: [email protected]


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The Basic Principles of IslamicEconomy and Their Effects on Accounting Standards-Setting

Mohammad R. Taheri

AbstractThis paper examines the basic principles and other salientfeatures of Islamic economy, such as the principles of multi-faceted ownership, economic freedom within a defined limitand social justice. Then their effects on users of financialstatements and objectives of financial statements have beenconsidered.

This paper compares the British- American model with anIslamic model in term of financial statement users, objectivesand theoretical concepts of financial accounting.

The theoretical concepts of accounting in the British-American model are self-evident statements or axioms thatrepresent the nature of accounting entities operating in freeeconomy characterized by private ownership of property.Whereas behind them there are hidden basic principles ofeconomies which have not been written in accountingliterature because they are assumed as axioms. The mostimportant attribute in Islamic economy is social justice. One

of the most important elements for establishing social justiceis zakat. Another important element is Riba [ Interest]. Riba isforbidden in Islam and people are not allowed to makemoney by lending their capital on interest. In the Islamicv i e w, State has responsibi li ty to create a suitableenvironment to implement Shari'ah [Islamic Teaching] ins o c i e t y. An Islamic accounti ng model is based onMacroeconomics. While the British-American, accountingmodel is based on Microeconomics.

Key Works: Basic Principles of Islamic Economy; An IslamicAccounting Model; Standard-Setting.

IntroductionThere is a little attention about the basic principles ofeconomic in the accounting literature. Generally, accountingstandards setters start their discussion from needs of users orobjectives of financial statements though the assumptions ofeach economic community have strict considerations forcharacterize in various dimensions of accounting.

Cultural, social, economical, and political factors haveconsiderable effects on the kind of financial statements to beprovided. However, these factors are not similar in allcountries and each country uses an accounting system,which fits its own specifications.

In western countries with regard to basic principles of

economy the most important users of financial statements areinvestors and creditors. Thus, other groups such asgovernment, social authorities, and people are in the secondsteps.

The theoretical concepts of accounting in the British-American model are self-evident statements or axioms thatrepresent the nature of accounting entities operating in free

economy characterized by private ownership of property.Whereas behind them there are hidden basic principles ofeconomies which have not been written in accountingliterature because they are assumed as axioms.

The concept of " Basic Principles of economy " in accountingstandard setting has been mostly ignored in spite of itspotential to provide a more systematic appreciation of thestandard setting process.

In the west, however, ever since the eighteenth century theeconomists such as Smith, Ricardo, Marshal, and Mill beganto write about the significance of amassing wealth and theimportance of economic activity. Economics becamegradually both a scientific discipline and a distinct activity ofits own and in many areas, it became divorced from ethics.

It must not be forgotten, however, that classical economics,which arose in the eighteenth century and which wasbrought to the new world by the Puritans was related to acertain aspect of Protestant ethics which emphasized thevirtue of hard work and the amassing of wealth in contrast toCatholic ethics. But very soon the religious roots of capitalisteconomics become more or less eclipsed and there arose, asa result of the excesses of this type of economics based onlyon the importance of the incentive to amass wealth, thereaction to capitalism by socialism which was espoused byMarx and other socialists. Nasr (1993, 205).

The Basic Principles of Islamic EconomyBefore to explain the basic principles of Islamic economy,the basic principles of economic of liberalism from anIslamic view is expressed, because it is useful forcomparison. Then some of the salient features of basicprinciples of Islamic economy and their effect on accountingstandards setting will be consider.

According to Holton (1992, 54-69) the basic principles ofeconomics of liberalism as outlined here, represents anamalgam of ideas derived and adopted from a range ofsources. These include the 18th century economist AdamSmith, the neo- classical school of economics and morerecent post-war economists such as Milton Friedman. Thebasic principles of this tradition include the following:


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Private Property Rights,

Individual Sovereignty,

Self-interest,

Rationality,

Self- Regulating Market.

Needless to say, economics as that partof man's activity which, deals with theproduction of goods, the amassing ofwealth, labor, work, trade andexchange of material objects, etc, hasbeen important in every civil ization.

From Islamic view, as in othertraditional civilizations, economicswas never considered as a separate

discipline or distinct domain ofactivi ty. Consequently, there is no evena word for economics in classicalArabic. The term of Iqtisad (economic)being a fair recent translation of themodern term "economics" in Arabicand having a very different meaning inclassical Arabic. Where it meansprimarily moderation and keeping tothe golden mean as witnessed by thefamous book Ihya Ulum-id-Din,Gazzali. (1971,265).

According to Sadr (1994,51-55), the

Islamic economy is composed of threebasic components, according to whichits theoretical content is defined. Thusit is distinguished from other economictheories in terms of the broad lines ofthese components, which are:

The principle of multi-facetedownership;

The principle of economic freedomwithin a defined limit;

The principle of social justice.

Islam differs essentially from capitalism

and socialism in the nature of theprinciple of o w n e r s h i p , which itacknowledges.

Capitalist society believes in theprivate individual form of ownership,i.e. private ownership. It allowsindividuals private ownership ofdifferent kinds of wealth in the countryaccording to their activities andc i rcumstances. It only recognizespublic ownership when required bysocial necessity and when experiencedemonstrated the need for

nationalization of this or that utili ty.Socialism society is completelycontrary to that. So common

ownership is the general principal,which it is applied to every kind ofwealth.

However, the basic characteristic ofboth societies are not applicable toIslamic society because Islamic societydoes not agree with capitalism in thedoctrine that private ownership is theprinciple, or with socialism in its viewthat common ownership is a generalprinciple. Rather it acknowledgesdifferent forms of ownership at thesame time. Thus it lays down the

principle of multi-faceted ownership.That means from Islamic viewpointownership is accepted in a variety offorms-instead of the principle of onlyone kind of ownership, such as, privateownership, public ownership and stateownership.

For this reason, it would be a mistaketo call Islamic a capitalist society, eventhough it allows private ownership of anumber of kinds of property and meansof production, because in its view

private ownership is not the basic rule.In the same way it would be a mistaketo use the term "socialist society" forIslamic society, even though it hasadopted public ownership and stateownership for some kinds of wealthand property, because in its view thesocialist form of ownership is not thegeneral rule.

According to Quaranic verses, everything in this universe belongs to Godalmighty. "Whatever is in the heavens

and whatever is in the earth belongs toAllah." [Al-Baqarah, 2:284]. He is thereal owner of everything "And Allah'sis the kingdom of the heavens and theearth, and Allah has power over everythings." [Al- Imran, 3:189].

Sadr (1994, 98-114) make clear thatindividual ownership, state ownership,and public ownership are threeparallel forms in Islamic law. Realownership belongs to Allah, man holdsproperty in trust for which he isaccountable to Him, in accordance

with rules clearly laid down in theShari'ah Islami'iah [Islamic Teaching]underlined above.

According to Siddiqi (1981, 191-209)acquisition of property as well as itsuse and disposal are subject to limitsset and should be guided by the normslaid down by Allah. A b s o l u t eownership of man is a concept alien toIslam, as it belongs to Allah alone.There are definite obligations towardsothers attending upon the individualrights of ownership. The respectivescopes of the three kind of ownershipare not rigidly defined but left to bedetermined in the light of certain

principles, depending on the needsand circumstances.

The principle of economicfreedom within a definedlimitThe second of the components of theIslamic economy is to allowindividuals, at the economic level, alimited freedom, within the bounds ofthe spiritual and moral values in whichIslam believes.

The execution of this principle in Islamwas performed in the following way:

1. The sacred law, in its generals o u rces, provided the textualstipulation to forbid a group ofsocial and economic activities,which hinder, in the view of Islam,the realization of the ideals andvalued adopted by Islam, such asusury, monopoly and the like.

2. The sacred law laid sown inprinciple the supervision of theruler over general activities and theintervention of the state to protectand safeguard public interestthrough the limitation of freedom ofindividuals in the actions theyperform. Regarding s e l f - i n t e r e s t,Islam emphasizes that the successof both the individual and thesociety depend a balance betweenthe spiritual and the material needsof man. Based on principle of


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limited ownership which is derivedfrom the Qur'anic text thatmentioned above, man is neither

the absolute owner nor the totalpossessor of the earth and itsresources. He does not have theright to possess as much as hedesires or to obtain material wealthin any way he may choose. Indeed,because vicegerency belongs to allpeople, each individual is aguardian of the public trust. Inaddition, his ownership should belimited for the public welfare.

According to Maudoodi (1973, 87-98)It must sustain a right balance between

the needs of the body and of the soulso that its personal interests as well asthe welfare of the society might beprotected. In addition, this must not beignored that human progressnecessarily depends on the successfulcoordination of and the essentialharmony existing between the spiritualand material aspects of life. When thespiritual life is detached from theeconomic struggle of man, therequired dominant balance will beupset. Of course, the prevalence of

such a constructive balance is verycrucial to the maintenance of stabilityin the economic structure. In respect toRationality, various views and di fferentsenses often exist in reference to thedefining meaning of it. According toWeber (1970, 56) rational action isexplicitly defined as a delimitingcharacteristic in terms of which theways adopted to reach the ends arespecified. As a matter of fact, values oremotions in this respect are not inthemselves considered rational. Islamhas its way of thinking of life according

to which the life of a Muslim in thisworld is a temporary phase in hiseternal life Hereafter. "But seek theabode of the Hereafter in that whichGod has given you and neglect notyour share of the world." [Qasas28:77]. According to Islahi (1978, 122-128) his success in the Hereafter isdependent on the utilization of theresource of this world in the best andright way.

On the subject of s e l f - r e g u l a t i n gm a r k e t , Kamali (1994, 25-36) has

stated that Suq [Market] enjoys havinga distinctive place in the history ofIslamic economy. Markets are

regulated by price mechanism. Theessential feature of the pricemechanism is its capacity to regulateand bring into equilibrium the demandfor and the supply of commodities.According to Chapra (1980,126) withrefer to Islamic principles, the force ofsupply and demand has been wellrecognized on market. People are leftfree to transact and exchange goodsand services and the state can onlyintervene if a Dhulm [transgression] isunlawfully committed against oneparty. According to Beheshti (1992,126) the Shari'ah calls for fair and freetrading, fully complying withprinciples. Besides, price controlmerely as a means of vindicating thisfreedom and fighting corruption isreasonably validated. In fact, althoughIslam has recognized the marketsystem because of the freedom it offersto individuals, it is not to be consideredsacred and inalterable. It is the goals ofthe Muslim society, which are moreimportant, i.e. Ihtikar [hoarding andprofiteering] of people's urgent need

for particular commodities areabsolutely prohibited.

The principle of social justice

The third component in the Islamiceconomy that is the most importantattribute in Islamic economy is theprinciple of social justice. This isembodied in Islam by the elements andguarantees which, Islam provided forthe system of the distribution of wealthin Islamic society.

The Islamic image of social justicecontains two general principles eachone of them has its own lines andparticularities. The first of them is theprinciple of general mutualresponsibility the other is the principleof social balance.

Islam permits difference in wealthwithin reasonable limit but does nottolerate this difference growing sowide that some people spend their life

in luxury and comfort, while the greatmajority of people are left to lead a lifeof misery and hunger.

According to Tabatebaei (1980, 94-105) the key social justice of Islamiceconomy lies in man's relationshipwith Allah, his universe and hispeople, and the nature and purpose ofman's li fe on earth. Ta w h i d[monotheism] defines Man-Godrelationship. If a man believes in Godand Day of Judgment, he is fullyconscious of his duty andresponsibi li

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