Islamic Finance: Zakat - a religious duty relating to one's wealth

In this blessed month of Ramadan, most Muslims give zakat which is a mandatory charity. In today's column we will examine the definition of zakat and various matters related to it.

Definition

Zakat stands for 'purification' in Arabic. It is also used with the meaning of growth, in the same sense as pruning a plant helps the new growth. Zakat is one of the five pillars of Islam and the only one directly involving finance.

What is the philosophy of zakat?

The Quran and Hadith (sayings of the Holy Prophet, PBUH) convey that the payment of zakat purifies and cleanses an individual's wealth and makes it grow as God blesses it for compliance with His commandment. It is, therefore, an act of worship relating to one's wealth.

The institution of zakat aims not only at alleviating the financial hardships of the less privileged in the society through sharing a small part of one's wealth, but also building a society on higher moral and spiritual values.

What is Nisab?

It is the eligibility for the zakat payer and is equivalent of approximately 85 grams of pure gold or about 595 grams of pure silver. The Nisab of other kinds of investment, money and currency should be compared to the current market price of 85 grams of pure gold or 595 grams of pure silver.

The Nisab of cash on the day of the payment of zakat is the equivalent of the prevalent price of 85 grams of 999 quality pure gold. Any Muslim who has had a minimum of that amount throughout the year is liable to pay zakat.

Zakat is an obligatory yearly levy on every sane Muslim adult who can afford it, to be paid by him/her for the uplift of the poor and destitute. Zakat is also due on the wealth owned by minors/orphans provided it is deployed for productive purposes, getting them some income. In that case, the guardian of the minors/orphans is responsible for distributing zakat.

Who should receive zakat?

Any Muslim who does not hold the status of Nisab is eligible to receive zakat. Zakat can be paid to the individual, including orphans, widows, the poor, needy travellers, genuine beggars and insolvent debtors. It can also be spent on students or for the purpose of spreading the message of Islam. It is important to note that zakat is mandatory and is different from charity, which is voluntary.

When and how often should one pay zakat?

Zakat is due upon completion of one Hijri (lunar) year, starting from the day a person had acquired the status of Nisab. Alternatively, it will become due on the anniversary of his last zakat payment. If a person genuinely loses the status of Nisab before the anniversary, he is not liable to pay zakat. However, if he subsequently regains Nisab, the countdown will start all over again from that date.

How should zakat be distributed?

Every Muslim is directly responsible for discharging this obligation and must take care of it every year. It is his/her duty to reach out to the needy and poor and to offer them zakat in a humble manner.

In certain Islamic countries, zakat is collected by the government and distributed to the needy. In Gulf countries, this function is efficiently carried out by several well-trusted and high reputed NGOs.

Can relatives receive zakat?

Yes, provided they are not dependents, such as wife, children, parents, grandparents and grandchildren.

As they say, charity starts at home. In fact, it is preferable to donate zakat to poor relatives first. This is because the payer may be aware of their plight and hence the purpose of zakat is well served. Interestingly, a wealthy wife can give zakat to her poor husband but it is forbidden the other way round.

Can zakat be paid in kind rather than cash?

Yes, zakat can be paid in kind provided it is based on the cost of goods rather than the market price.

Is there a fixed time of the year to pay zakat?

No, zakat can be paid at any time during the year. It can be paid in one lump sum or in instalments, provided that the amount is exhausted before the next anniversary. The majority of Muslims prefer to pay zakat during the fasting month of Ramadan, as good deeds are rewarded manifold by God in this month.

The writer is head of the risk management at Dubai Islamic Bank