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Issues Concerning Zakah and Interest 

Adil Salahi

Arab News, 9/1/03

Q.1. Zakah is payable once a year in a particular month. May I ask whether zakah is payable on the capital amount or on the profit derived from it. Suppose a person invests his money with a bank and receives something like 8 percent profit annually: should he pay zakah on both the original amount and the profit, or on the profit only?

Q.2. Although there is substantial differences between riba and interest, they are both pronounced forbidden as though they are the same thing. Today, banking is an industry, and banks play an important role in the economy of every country. When a person deposits money with a bank, the bank gives that person a profit at a fixed rate. The money is used to finance projects and industries, which generate profit. Thus, the depositor or investor receives a little share for his money.

V.O. Khusrou

A.1. Zakah is normally payable on both capital and profit. Thus, if a shopkeeper who invests, say, 100,000 in stocking his shop and generates profits should pay his zakah on his zakah date. He calculates the value of the goods he has in addition to other assets he has, together with his net profits, and pay zakah on the total amount. He does not pay any zakah on the capital assets, such as the value of the shop if he owns it, or on the rent he pays for it, if it is rented. Nor does he pay zakah on the value of the necessary things he needs to run his business. Thus, a person who uses ten computers in his office to provide a service to his customers does not pay zakah on the value of these computers. The fixtures and fittings of the shop are also exempt. The goods in stock are not exempt. What he owns of these is zakahable. As for the profits, he pays on his net profits. Obviously a person runs a business in order to earn his familyís living. What he uses throughout the year for his living and his familyís expenses is not entered in his zakah liability. It is the profit that remains with him after he had met his needs that is zakahable.

A condition for liability to zakah is that the money or the property in question should be liable to grow. Money that is not liable to grow is not zakahable. This is the reason for exempting from zakah what is essential for a person to conduct his business.

Taking all this into account contemporary scholars have ruled that when a person invests money with an Islamic bank, the money invested forms his assets. As such it is not liable to zakah, but the profits he receives are zakahable at the rate of 10 percent, not the normal rate of 2.5 percent.

They say that the higher rate is charged here on the basis of comparability with zakah required when agricultural land is irrigated only by rain water, requiring no effort or expense by the farmer. This means that if a person invests 100,000 and receives profits at the rate of 8 percent, he pays in zakah one-tenth of his profits, making his zakah liability 800 only. This makes things much easier for people, because had such a person been required to pay for both capital and profit at the normal rate, he would have had to pay 2700. This would have left him with little over 5 percent net profit for his investment.

A.2. Riba is the Arabic name for usury, and it is very strictly forbidden in Islam. Perhaps no human practice, other than associating partners with God, comes for stronger censure than usury. It is not difficult to determine the reason for such strict prohibition. Usury is a deliberate attempt to exploit the needs of the poor in order to amass wealth in the hands of the rich. As such it is a clear act of terrible social injustice. It has been condemned in all human societies and money lenders were always despised in human society.

When modern banking was started, it was keen to dissociate itself from the old practice of money lending. Hence, it used its own terminology. Today, banks do not lend to the poor, exploiting their needs. Banks lend only to those who are in a position to pay back what they borrow. When you request a loan from a bank, the first thing the bank does is to ascertain whether you can make the repayments necessary to settle the loan within the agreed period.

Recognizing all these points, we cannot overlook the fact that there remains similarities between interest charged on bank loans and the increase used to be imposed by old usurers who exploited the needs of the poor. Hence, scholars have maintained that interest is a form of riba or usury and pronounced it forbidden.

A small number of scholars have looked at it differently and returned a verdict of permissibility. Some of these were economists who studied Islamic law, while others were religious scholars who looked at the question in depth. Unfortunately, a few of these were put under considerable pressure by governments which wanted them to find ways to make interest sound permissible in Islam. Hence, their verdict came under much criticism. Those governments would have spared themselves and their communities much trouble if they had asked those scholars to point out what sort of adjustments were needed to bring the banking system in line with Islamic teachings. They should have encouraged research in this area, and they would have had good results because Islam has a flexible approach, and the aim of all its rules and legislation is to ensure what serves the interests of the community.

Over the last few decades several banks have been established. They have functioned in different parts of the world and their work has been largely successful. They often pay returns on investments that are better than the interest paid by ordinary banks.

The money remains safe with them, as it is with other banks. This should be encouraged so that all Muslim countries would implement a banking system that is compatible with Islamic law and ensures good returns for investors, particularly the small investors who place their life savings with a bank, hoping for a reasonable rate of return.

 



 

 
Earth, a planet hungry for peace

 

The Israeli apartheid (security) wall around Palestinian population centers (Ran Cohen, pmc, 5/24/03).
The Israeli apartheid (security) wall around Palestinian population centers in the West Bank (Ran Cohen, pmc, 5/24/03).

 

 

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