Alternative Economics

Zakat is one of the five pillars of Islam, upon which the religion is built. Usually translated as almsgiving, zakat is a requirement on Muslims (both male and female) of sound mind who possess at least the minimum amount of net worth deemed to classify them as not in need.

Who must pay zakat

There are a number of requirements before zakat is applicable on a Muslim, the main two of which are the nisab and the hawl. The nisab is the minimum net worth level a person needs to reach before zakat becomes obligatory. A person who has less than the nisab is not obliged to pay zakat. It’s therefore a threshold amount that is used to determine who must pay zakat.

When it comes to money (as opposed to livestock and crops, which one may also have to pay zakat on), the nisab is the value of 3 oz of gold or its equivalent in cash (currently $5,049.30) or 21 oz of silver or its equivalent in cash (currently $450.45). Although the two amounts are different, at one time, the values of these specific amounts of gold and silver were similar. Furthermore, in the past 1400 years, the values of gold and silver diverged significantly, so it’s important to look up the current value when calculating zakat.

Just having a net worth above the nisab is not enough for zakat to become obligatory. The other requirement is the hawl. A person must have a net worth above the nisab for the duration of one hawl, or 12 lunar months, before zakat is applicable. Depending on the date when one’s net worth originally surpassed the nisab, zakat could become due any time during the year.

Importance of zakat

Zakat is important in Islam as it is one of the ways in which those of little means can be provided with financial assistance to lighten the burden of their dire situation. It’s a way by which the Muslim community can come together and provide the weak and vulnerable members of society with help to alleviate the pains of their difficult situations.

Zakat is also a motivator of behaviour to ensure that assets remain productive and do not remain idle (e.g. in a bank account or “stored under the mattress”), thereby not helping the person that owns these assets, nor diverted to others who can benefit from them (through investments).

How is zakat calculated?

The specific amount of zakat that Muslim must pay depends on pre-determined calculations that depend on the asset class in question. For example, a Muslim woman who has an amount of cash in her bank for one lunar year (assuming the cash is above the nisab level described earlier) would have to pay out 2.5% of that amount at the one year mark. This is typically the simplest case (i.e. paying zakat on excess cash). If a Muslim holds other assets, e.g. livestock, farmland, and the like, the calculation method for zakat could become a bit more complex.

Many of us don’t have to worry about zakat on cattle, agriculture land, and the like, as those cases don’t usually apply in our modern day. One asset class however does pertain to adherent Muslims, and that’s investments, and more specifically those of a financial nature, like investments in company shares and stocks (equity-based investments).

How should zakat on such financial assets be computed?

For our intents and purposes, we will assume that the investor in these financial assets is in fact a long term investor as opposed to a speculator or a frequent buyer/seller of company shares/stocks.

Some scholars consider frequent traders of stocks to be similar to short term traders of a commodity (e.g. gold, silver, crude, grains, etc.). When you’re a frequent trader of a commodity, you need to pay zakat on the value of that commodity in your possession. Hence, short term investors would pay zakat on the full value of their stocks in the same way that an oil trader would pay zakat on the value of oil in his inventory. In both cases, they are paying zakat on the commodities they are trading.

The following represents a couple of methods that scholars have outlined which Muslims can utilize in calculating zakat amounts on longer-term investments in securities such as company shares and stocks.

Mark-To-Market Method

The simplest way to calculate zakat on financial investments is to base the calculation on the market value of the assets or portfolio of investments (the collection of company shares or stocks that the investor owns).

So, assuming a lunar year has now passed and zakat is due, one would mark-to-market (i.e. calculate the market value of) the assets and pay 2.5% of that value in zakat.

Take the hypothetical example of a person who owns 1,000 Suncor Energy shares which were bought one year ago for $25/share at a total cost of $25,000. If the current market price of each Suncor Energy share is $50/share, the market value is $50,000. Using this method, the zakat outstanding is 2.5% of $50,000, or $1,250 ($50,000 * 0.025).

Mark-to-market basically means one would ignore the cost of the investment and would assume the entire portfolio is to be liquidated at once. Given that company shares are liquid, meaning that they can be converted to cash practically at any time, some scholars have gravitated towards the opinion that treats such investments as cash.

Current Asset Percentage Method

A company’s assets can be divided into current assets (also known as short term assets) and fixed assets (also known as long term assets). The Current Asset Percentage method involves paying zakat based only on the percentage of your investment that is comprised of short term assets. This portion of the investment is considered liquid and subject to zakat at the full 2.5%

The rationale here is that the capital portion of the investments (long term or fixed assets) should not require zakat, given that in general, capital investments are not subject to zakat in Islam. Fixed assets are those acquired to produce revenue in the future, rather than being sold in the short term to generate income. For example, if you own a bakery you wouldn’t have to pay zakat on the equipment in the store (e.g. the oven) but would have to pay zakat on the profits from the bakery (i.e. bread sold from that oven).

The liquid portion of the investment (e.g. cash in the company’s bank accounts, inventory, etc.) is to be treated like cash. One can determine this proportion of short to long term assets by examining the balance sheet of the company representing the investment.

In the above example of the Suncor Energy shareholder, let’s assume that 65% of Suncor’s assets are classified as long term while 35% are not. Recall that the market value of the shares is $50,000. Zakat would only be calculated on the 35% of the $50,000 which is comprises the short term assets of the company. The zakat payable would therefore be $437.50 ($50,000 * 0.35 * .025)

We personally believe that the latter method (Current Asset Percentage) is the more accurate one, but it is definitely the more tedious to compute.

One important factor to keep in mind is that this method cannot be readily applied when the underlying assets are not specifically and individually known. For example, when investing in a mutual fund, the investor owns units of the fund and not the shares of the companies themselves. Since the investor typically does not know all the constituents of the fund that they own, she would not be able to compute zakat of the mutual fund investment by this method. In this case, she can resort to the Market-to-Market method highlighted above.

Conclusion

Islam is built on a number of important pillars, and zakat is one of them. It is our hope that we empowered our fellow Muslims to understand how this pillar can be implemented in cases where the underlying asset is an equity based investment like company shares or stocks.

The prohibition of interest (a.k.a usury/riba) is a central concept of Shariah (Islamic Law) that has been agreed upon by the scholars of the religion since the birth of the religion in the 6th century.

Below are some of the references from the origional sources of legistlation in Islam, namely the Quran (Muslim’s holy book) and the Hadith (the tradition of the Prophet of Islam Muhammad, may the peace and blessing of the All Mighty be upon him).

Quran

Chapter 2:

Those who consume interest cannot stand [on the Day of Resurrection] except as one stands who is being beaten by Satan into insanity. That is because they say, “Trade is [just] like interest.” But Allah has permitted trade and has forbidden interest. So whoever has received an admonition from his Lord and desists may have what is past, and his affair rests with Allah . But whoever returns to [dealing in interest or usury] – those are the companions of the Fire; they will abide eternally therein.

Allah destroys interest and gives increase for charities. And Allah does not like every sinning disbeliever.

Indeed, those who believe and do righteous deeds and establish prayer and give zakah will have their reward with their Lord, and there will be no fear concerning them, nor will they grieve.

O you who have believed, fear Allah and give up what remains [due to you] of interest, if you should be believers.

And if you do not, then be informed of a war [against you] from Allah and His Messenger. But if you repent, you may have your principal – [thus] you do no wrong, nor are you wronged.

And if someone is in hardship, then [let there be] postponement until [a time of] ease. But if you give [from your right as] charity, then it is better for you, if you only knew. (Quran 2:275-280)

Chapter 3:

O you who have believed, do not consume usury, doubled and multiplied, but fear Allah that you may be successful. (Quran 3:129)

Chapter 4:

And [for] their taking of usury while they had been forbidden from it, and their consuming of the people’s wealth unjustly. And we have prepared for the disbelievers among them a painful punishment. (Quran 4:161)

Chapter 30:

And whatever you give for interest to increase within the wealth of people will not increase with Allah . But what you give in zakah, desiring the countenance of Allah – those are the multipliers. (Quran 30:39)

Hadith:

From Jabir : The Prophet, peace be upon him (pbuh) said: “May they be cursed, the receiver and the payer of interest, the one who records it and the two witnesses to the transaction. They are all alike [in guilt].” (From the Compilations of Muslim, Tirmidhi, and Musnad Ahmad)

Jabir ibn ‘Abdallah , giving a report on the Prophet’s Farewell Pilgrimage, said: The Prophet (pbuh) addressed people and said “All of the riba of Jahiliyyah is annulled. The first riba that I annul is our riba, that accruing to ‘Abbas ibn ‘Abd al-Muttalib [the Prophet’s uncle]; it is being cancelled completely.” (Muslim and Musnad Ahmad)

From Abu Hurayrah : The Prophet (pbuh) said: “There will certainly come a time for mankind when everyone will take riba and if he does not do so, its dust will reach him.” (Abu Dawud and Ibn Majah)

 

When discussing the subject of “interest free economic systems” it is important to properly define what is meant by “interest” which is sometimes interchangeably used with the word “usury”.

According to the Merriam-Webster dictionary, interest is defined as a charge for borrowed money generally a percentage of the amount borrowed, or as the excess above what is due or expected. Usury is likewise defined as interest in excess of a legal rate charged to a borrower for the use of money.

It is interesting to note that legally speaking, some governments stipulate a criminal rate of interest, in excess of which debtors are not allowed to charge borrowers. In Canada for example, section 347 of the criminal code defines an effective annual rate of interest calculated in accordance with generally accepted actuarial practices and principles that exceeds 60% on the credit advanced under an agreement or arrangement to be criminal.

So, although many now define usury as excessive or abusive interest rates charged in debt transactions on loans, historically in Christian societies and still in many Islamic societies today, charging any interest at all would be considered usury.

The word used for interest in Islam is called “ribaa” (which we use interchangeably). Linguistically, the word means excess. From an Islamic legal perspective, the word ribaa generally has two meanings, one that is specific and the other more general.

The general definition of ribaa in Islam is:

• all excess in monies (or time) in debt based transactions,
• or illegal sale based transactions.

The more specific definition of ribaa is:

• Loan based ribaa: To the  early Arabs (those who lived around the time of the Prophet of Islam, Muhammad), this is known as ribaa al-nasi’ah, ribaa al-duyun, or ribaa al-jahiliya.
• Sales based ribaa: also knows as riba al-buyu’

Loan based ribaa or interest is simply every excess beyond lent out capital that is stipulated in a loan based transaction. Such excess is usually represented by a fixed or variable rate that is calculated based on the term of the outstanding loan. It is basically excess that is charged on monies that are lent over a period of time.

Loan based interest is clearly not permissible under Islamic law. It is important to note that the operative word in the definition of loan based interest is “stipulated”. If an excess amount is paid by the debtor to the creditor out of the debtor’s free will, when it is not stipulated in the loan contract, is not usually considered ribaa or interest.

Interest is therefore defined as the excessive charge on the use of funds due to the delayed payment feature within a loan contract.

Sale based ribaa on the other hand is related to exchange transactions of commodities of different quality grades. It involves the unequal exchange of an underlying commodity (e.g. wheat) due to the varying qualities of the commodity. This is a far less common form of ribaa, especially in our present day and age, given that most sale based transactions are marked-to-market, where direct exchange of the underlying commodities (of varying degrees of quality) is uncommon.

 

Islam, one of the world’s largest religions, is one of the most misunderstood unfortunately. A lot probably has to do with the fact that the religion started in the far away lands of Arabia. More recently however, the religion has been tainted by many violent groups that have used the name of the religion to wreak havoc in order to attain their own personal and corrupt objectives.

This is most unfortunate when it happens in the name of Islam or any other religion. The same has been done throughout the ages, where groups would claim to act on behalf of a specific religion to do God’s work!

Islam is one of the world’s three largest monotheistic religions (religions based on the concept of one God), the other two being Judaism as well as Christianity. By way of numbers, of followers Christianity (with it’s various denominations) ranks first , followed by Islam, and then Judaism.

The word Islam itself is an Arabic word, and it roughly means wholehearted self giving to Allah. Allah is the Arabic word for God.