Ameen Hassen
Most Muslims around the world pay their compulsory tithe, known as Zakaat, during Ramadaan. When undertaking this religious calculation and significant act of worship, it's important to fully understand how to calculate Zakaat accurately.
Many customers are currently engaging Standard Bank to ascertain the value of their savings and investment accounts, and to obtain the value of their Zakaat contributions.
In reflecting on our financial positions to conduct this religious calculation and obtain the value of Zakaat owed, it is also an excellent opportunity to calculate your yearly cash flows and set out your savings goals for the year ahead.
What is the institution of Zakaat?
Zakaat is a religious duty that all adherents to Islam must perform. It is one of the five cardinal pillars or foundations upon which Islam is built.
Hassen explains that completing the obligation of Zakaat is just as significant as fulfilling the remaining four pillars or obligations of Islam: proclaiming that there is no true god but God (Allah) and that Muhammed is the Messenger of God, fasting during the month of Ramadaan, embarking on the pilgrimage known as the Hajj once in your lifetime, and offering the five daily prayers, known as Salah.
Why do we pay Zakaat?
While it feels like you are losing money when paying Zakaat, Allah and the Noble Prophet Muhammad (PBUH) repeatedly state that paying Zakaat is a means to increase and purify one’s wealth.
Paying Zakaat is a means to purify the soul and obtain salvation in the hereafter. As the famous saying goes, ‘The more you give, the more you get.’ The act of generosity increases one’s blessings from God Almighty. The 2 billion Muslims across the world can bear testimony, from experience, of this.
Recipients of Zakaat
The wording in chapter 9, verse 60 of the Qu’ran specifies that the following individuals are the only ones to receive the obligatory charity of Zakaat:
- Those who are in extreme poverty.
- Social welfare organisations act as Zakaat collectors and distribute the charity to eligible recipients on behalf of the Muslim community.
- Those dealing with deep-rooted conflict that requires financial support to be resolved.
- Those who are captured by war, prisoners of war, or slaves.
- Those who are in a debt spiral and are unable to get out of that debt.
- Religious practitioners who actively work to spread the word of God Almighty.
- Stranded travellers who are unable to complete their journey due to lack of access to funds.
Zakaat calculation methodology
A common misconception is that Zakaat is calculated on one’s income. It is crucial to remember that Zakaat is calculated against one’s balance sheet. The 2.5% ratio that must be paid in Zakaat is determined by subtracting current liabilities from Zakaat-able assets rather than by looking at your income.
One must therefore first calculate the total value of Zakaat-able assets, which include:
- Cash on hand (physical cash or money in the bank)
- Debtors (anyone who owes you money)
- Investments, shares, or equities in listed or unlisted companies
- Cryptocurrencies held for investment purposes
- Voluntary pension funds (a retirement fund to which you voluntarily contribute)
- Physical gold or silver market values
- Vehicle market value
- Rental income received from an investment or buy-to-let property
Non Zakaat-able assets include:
- The capital value of your physical property, whether this is the property you are currently living in or an investment property
- Diamonds or precious gems
- Cryptocurrency held to trade
- Corporate pension funds, since one does not have full ownership of a compulsory corporate pension fund
When the value of your Zakaat-able assets has been determined, subtract any current liabilities, such as amounts owed for rent, bonds, or car payments, as well as an estimate of your monthly expenses for groceries and utilities. What you have left after calculating is what will determine your Zakaat contribution.
Let's say I have R1 million in Zakaat-able assets and monthly instalments and liabilities – expenses I have to pay to live and meet short-term obligations – amounts to R100 000. This leaves me with a Zakaat-able amount of R900 000, which is what the 2.5% is calculated against. Therefore, the net nominal value of Zakaat I must pay will be R22 500.
When do I need to make the Zakaat payment?
Although many Muslims calculate their Zakaat during Ramadaan, the money does not necessarily need to be given out at this time. Zakaat must be paid within the Islamic year and for as long as this obligation is not discharged, it is recorded as a liability against your estate.
Use a reputable calculator
Many people find calculating their Zakaat an overwhelming process. Fortunately, many reputable institutions make calculators or templates available. It's advisable to still check this calculation with your local scholar who is knowledgeable on Zakaat.
Pay up instead of rounding down
We should aim to be the best at calculating Zakaat, just as we would with the other pillars of Islam.
Pay up rather than rounding down. If you believe that the Almighty is All-Powerful and All-Knowing, then there is no place to hide. Compromising on the obligations to God will lead to one's detriment in life and the hereafter.
An opportunity to structure your finances for the year
As we go through our finances to calculate our Zakaat dues, it’s the perfect opportunity to create an annual budget. When calculating your liabilities, take a hard look at your monthly expenses.
Perhaps you are spending on unnecessary purchases. It’s possible to extract monthly savings if you examine expenses and find areas where money is being spent needlessly. This is the ideal time to consider monthly expenses and become more financially wise for the future.
* Hassen is the head of Shari'ah Banking at Standard Bank South Africa.
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