In ancient times, the primary forms of storable wealth were property, livestock such as goats, sheep, cows, and camels, and commodities like gold, silver, diamonds, and precious stones. In modern economies, new forms of storable wealth have emerged, such as fiat currency notes, financial investments, foreign exchange, and intangible assets like trademarks, patents, and licenses.
Furthermore, significant changes have also occurred in the modes of production. In ancient times, primitive agriculture and the trade of labor-intensive manufactured goods were common. Nowadays, industrial manufacturing and the services sector have eclipsed agricultural production in almost every economy, regardless of their state of development.
When the Islamic jurisprudence of Zakat was developed in the period soon after Prophet Muhammad (pbuh), contemporary investments, modes of production, and organizational forms such as limited liability corporations were not present. Naturally, Islamic jurisprudence could not take the current context into account. Now, if we aim to institutionalize Zakat at the governmental level more formally, it is important to extend the rules to encompass new forms of wealth and production to avoid anomalies and discrepancies.
This article outlines at least six challenges in institutionalizing Zakat and discusses potential solutions.
1. Multiple Nisab on Different Forms of Wealth
The existence of multiple Nisab thresholds for different forms of wealth presents a significant challenge. For example, if a person has a diversified wealth base but the wealth in each form is less than the value of Nisab, this might result in Zakat exemption despite the person holding a sizable aggregate value of wealth. For instance, if someone possesses 500 grams of silver, 4 camels, 29 cows, and 39 sheep and goats, they would still be exempted from Zakat because their wealth in each category is below the respective Nisab. However, the aggregate value of the wealth held by that person could be quite significant.
Even within liquid wealth, multiple Nisab thresholds exist in the classical view—one for silver and another for gold. In the case of silver, the Nisab value is approximately 612.36 grams, while for gold, it is around 85 grams. In some countries, such as Malaysia, the gold Nisab is used, while in others, such as Pakistan, the silver Nisab is applied.
The conversion rate between silver and gold has changed drastically over the last 1,400 years. If the silver Nisab is used, it represents only 10% of the value of the gold Nisab. Thus, the Nisab in gold is almost ten times the value of the Nisab in silver. These vastly different thresholds lead to differing numbers of Zakat payers and recipients. If the silver exemption limit is applied, individuals with relatively lower wealth are obligated to pay Zakat. Conversely, if the gold exemption limit is applied, only relatively wealthier individuals are required to pay Zakat.
2. Exemptions May Result in Avoidance and Inconsistent Impact
Certain exemptions in Zakat rules may lead to deliberate avoidance or inconsistent application. For instance, Zakat at a rate of 2.5% applies to the value of gold and silver, even if they are not held for trade. However, the classical view exempts other minerals, like diamonds, from Zakat if they are not held for trade. Therefore, just before the Zakat due date, a person could convert cash or gold into diamonds, significantly reducing their Zakat liability. As there is no Zakat on diamonds and other precious stones not held for trade, regardless of their value, these exemptions create inconsistencies.
Furthermore, under the traditional understanding, assets held for trade—including real estate— are subject to Zakat only if the following two conditions are met: i) There is a definite intention to sell the asset at the time of purchase, without any ambiguity. ii) This intention remains intact from the time of purchase until the Zakat due date arises, without any uncertainty.
This opinion leaves the determination to the Zakat payer’s discretion. Their intention, which is invisible to others, becomes the deciding factor for whether the asset is subject to Zakat. If the payer changes their intention to sell at any point from the time of purchase to the Zakat due date or even expresses uncertainty about whether to use the asset or sell it, the asset would not be considered subject to Zakat.
3. High Value-Added Production Exempted from Production Levy
In classical Islamic jurisprudence, production from agriculture was subject to Zakat at rates of 5% or 10%, depending on the nature of the production process. However, agriculture is no longer the dominant mode of production in terms of value-added activities. In comparison, there is significantly greater value-added production in the manufacturing and services sectors. The list of top corporations and billionaires illustrates that they are primarily engaged in the IT sector or industrial manufacturing.
Profit margins in agriculture are very low due to the competitive nature of the market. Agricultural markets are among the closest to purely competitive markets, with a large number of buyers and sellers trading in undifferentiated goods.
Agricultural produce is subject to Ushr (a 10% fixed-rate levy) or half-Ushr (a 5% fixed-rate levy) on its value. But what about value-creating activities in the industrial and services sectors? In these sectors, there is more value addition and significantly higher profit margins. A major portion of invested capital in the economy lies within manufacturing and services, and much of the business profits also stem from these two sectors.
The agriculture sector remains the primary source of employment for poor farmers in developing countries. If that sector is subject to a 10% or 5% flat production levy on output, why should the same treatment not apply to industrial and services sector outputs and other value-creating activities?
Under the current understanding in mainstream Islamic jurisprudence, industrial output is subject only to wealth Zakat of 2.5%, provided the industrial output is held for trade on a specific date in a year. However, on that specific date, the stock of inventory could either be very high or very low, depending on various circumstances. Moreover, if a person is aware of the date in advance, they could liquidate the asset and convert it into one that is exempt from Zakat under the classical view.
4. Inconsistency in Incidence Based on Different Nature of Business
There is also inconsistency in the incidence of the Zakat levy based on the different nature of businesses. In typical production processes 1,400 years ago, supply chains were simple. Now, we have global value chains. A single finished good is produced through different stages of production completed in various regions. Finally, when the product is ready for the retail market, it becomes part of the finished goods inventory. If only the retailer is required to pay wealth Zakat on their inventory, what about those involved earlier in the supply chain? Their profit margins are usually higher than those of retailers who operate in a more competitive retail segment.
Expensive consumer durables and specialized capital goods for firms often have lower inventory turnover ratios. Manufacturers with streamlined, efficient, and short production processes may adopt just-in-time inventory systems, resulting in high turnover ratios. In contrast, businesses in the services sector may not have inventory at all, as they do not sell tangible goods. Consequently, the level of tradable inventory varies across businesses, and the intensity of Zakat payments depends more on the nature of the business rather than its size (invested capital in production infrastructure) or net profits. Capital-intensive businesses will face a greater incidence of Zakat on tradable inventory if they are unable to adopt just-in-time inventory systems due to high production costs and customization requirements.
Businesses that are more profitable will typically have higher sales and inventory turnover ratios. Struggling businesses, on the other hand, will experience lower sales and inventory turnover ratios. While the former category of businesses might have earned higher profits and thus possess a greater capacity to pay Zakat, the latter category, with unsold inventory, will comparatively bear a higher Zakat burden. These businesses are required to pay Zakat on the entire value of their inventory, regardless of whether their eventual net income is positive or negative.
5. Treatment of Debt for Zakat on Businesses
Hanafi jurists allow all debts to be deducted against the Zakatable value of assets. Considering the balance sheet of a typical manufacturing entity, the asset side consists of current assets and fixed assets. Generally, the value of fixed assets exceeds the value of current assets. If all debts are allowed to be deducted from the Zakatable current assets, most corporations will end up with a negative net Zakatable base, as current assets minus total liabilities will likely result in a negative number for many corporations. In such cases, there would be no Zakat chargeable on shares.
Given that almost 75% of all invested wealth is held by corporations and that most bank financing is directed toward them, allowing all debts to be deductible from Zakatable assets would effectively exclude 75% of invested wealth from the Zakat net.
In contrast, Shafi’i jurists have a different perspective. They do not allow debts to be deducted against the Zakatable value of assets, leading to a different outcome. These juristic differences create challenges in standardizing the institutionalized system of Zakat. They also affect the potential for Zakat collection and its socioeconomic impact.
Some Hanafi jurists, such as Maulana Mufti Muhammad Taqi Usmani, have proposed that not all debts should be deductible against the value of Zakatable assets. Only those debts that have been taken to purchase Zakatable assets should be deductible.
6. Condition of Strict Tamlik Limits Usage beyond Asset Transfer
The condition of Tamlik (ownership) implies that the receiver of Zakat must become the owner of the value of Zakat, enabling them to use it as they desire, with full financial autonomy. This condition has a positive aspect, ensuring financial independence and preventing misuse or exploitation. Nonetheless, the requirement of “ownership transfer” to an individual in Zakat limits the usage of Zakat funds for providing indirect benefits.
Indirect benefits include building schools, hospitals, water filtration plants, communication infrastructure, and transport systems, which benefit not just individuals but entire communities or societies. If we take the position that Zakat funds cannot be used to provide public goods or build institutional infrastructure benefiting the poor indirectly, it may introduce rigidity in how Zakat funds are utilized for broader social welfare.
Reassessing Zakat Administration in Modern Economies
The challenges discussed above necessitate revisiting Zakat administration in the context of modern economies. If we have guidance from the Nusus—i.e., the Quran and Sunnah, including Hadith—these should serve as our primary sources when redesigning the system of Zakat administration in contemporary economies.
In some cases, Ijtihad bil Qiyas (reasoning by analogy) from the Nusus is possible and has been employed in Islamic jurisprudence. For instance, horses were initially exempted from Zakat but were later included. Similarly, forest production was not part of the initial Zakat administration but was subsequently brought into the Zakat net.
Initially, the state was responsible for complete Zakat collection. However, due to administrative difficulties, it was decided that only Amwal-e-Zahira—forms of wealth easily discoverable, monitored, and collected—would be subject to state collection. Meanwhile, for Amwal-e-Batina —forms of wealth not easily discoverable—individuals were allowed to pay Zakat privately. These decisions were based on the administrative convenience of that time. With advancements in technology and improved documentation of the economy, some exclusions or exemptions may no longer be necessary.
From an economic perspective, there is a need to revisit contemporary forms of wealth, business organizations, modes of finance, and institutional operations to develop consistent rulings for Zakat on new forms of wealth, production, and income-generating activities.
Extending Zakat to New Forms of Wealth and Income
Zakat is intended to purify wealth, as stated in the Quran (9:103). In his magnum opus, Fiqh-uz- Zakat, Yusuf al-Qaradawi references the Nusus and juristic opinions to emphasize the need for consistent extensions of Zakat to new forms of wealth. From an economic perspective, any asset (real or financial) that serves as a store of value beyond regular personal use can be classified as wealth subject to Zakat. The divisibility of investments, securitization, and financialization of assets allow wealth to grow (نمو) directly or through exchange. This framework can guide the institutionalization of wealth Zakat.
For value-creating activities, the principle of Ushr (10% levy) and half-Ushr (5%) applied to agricultural produce can be extended to contemporary industries. In most economies today, manufacturing and services sectors constitute approximately 80% of GDP. Unlike agriculture, value-creating activities in the services sector do not result in tradable inventory, requiring a reevaluation of how Zakat applies.
The essence of Ushr—Zakat on value-creating activities resulting in production or income—can be extended to manufacturing and service industries. For instance:
Zakat on Shares: From an investor’s perspective, income from stock investments arises from the employment of capital, not labor. Thus, stock investment income could be subject to Ushr rules rather than wealth Zakat. Ushr is applied to agricultural production where water is not provided by the producer, imposing a 10% rate when fewer factors of production are involved. A similar principle could apply to investment income. For administrative convenience, the Shafi’i view allowing Zakat payment at the corporate level can be adopted. This approach is already followed in countries like Malaysia and Saudi Arabia. Income from Professionals: Salaried professionals, royalty earners, and consultants should also fall under the Zakat net. It is important to assess whether they contribute labor alone or capital as well. Income from labor-only professions, such as doctors or consultants, could be treated under Ushr rules, with deductions made at the source.
The Issue of Tamlik
On the issue of Tamlik, Allama Yusuf al-Qaradawi argues in Fiqh-uz-Zakat that Shari’ah requires Zakat funds to benefit the Mustaheqeen (those eligible for Zakat). The funds can be spent on their welfare. Maulana Amin Ahsan Islahi cites Ibn-e-Munir, who writes in Al-Intisaf, a footnote of Kashaf: “Only the view that Zakat shall be spent for the Mustaheqeen is consistent with the word ‘fi’ as well as ‘laam’ simultaneously in Chapter Tauba, Verse 60.” Malaysia, Indonesia, and many other countries have already adopted this view, emphasizing beneficial ownership rather than absolute ownership.
Conclusion
It is crucial to ensure that Zakat administration has no loopholes and does not exempt significant amounts of wealth invested in certain activities while disproportionately taxing poor farmers in agriculture at the market value of production without adequate debt adjustment or exemptions. Extending Zakat principles to align with contemporary economic realities and ensuring equitable distribution of the Zakat burden are essential for its effective institutionalization and the socioeconomic welfare of society.