Zakat

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The Nature and Importance of Zakat

Zakat is recognised as a pillar of Islam and an essential condition of the faith. It carries dual rights: the right of Allah and the right of the recipients of the wealth. Rather than being viewed merely as money given in charity, Zakat reflects the principle that wealth is never truly owned by an individual but is a trust to be distributed according to Allah’s commands. Consequently, it is not accurately described as a tax, even though some translations may use that term; its significance is much deeper.

Zakat offers both philosophical and practical benefits. It serves to reduce attachment to wealth and discourages hoarding, while simultaneously purifying wealth when it is distributed.

Historical accounts indicate that after the death of the Prophet, one of the first actions taken by Abu Bakrؓ was to address those who refused to pay Zakat, thereby establishing it as a criterion for identifying believers. Moreover, Zakat connects the community, reinforcing the notion that Muslims form one body whose members are united by mutual responsibility towards those in need.

Qur’anic Guidance on Wealth and Piety

The Qur'an emphasises that true piety is attained only when one is willing to spend from what is most cherished, often symbolised by wealth. This guidance illustrates that genuine piety requires giving up that which is most loved, and it underscores that Allah is fully aware of every expenditure. Allah’s command to give Zakat is presented as both an obligation and a blessing, with the assurance of reward for those who comply. For instance, the Qur'an states, “Establish the prayer and give Zakat; and whatever good you put forward for yourselves, you will find it with Allah” (Qur'an, 2:110).

The Prophet ﷺ further clarifies that wealth extends beyond the mere accumulation of tangible assets such as savings, investments, or property. True wealth is described as the wealth of the heart and soul. Umar ibn Khattabؓ stated that “the greatest richness one can possess is contentment”.

This concept is further illustrated in an example involving the Prophet ﷺ and his wife Aishaؓ. When asked about the distribution of meat in the house, Aisha replied that she had given away the entirety of it and kept only the shoulder, to which the Prophet ﷺ remarked that, in reality, what she had truly kept was what she had given away (Jami` at-Tirmidhi 2470). In contemporary society, where individuals are often judged by their net worth, Zakat refocuses the measure of wealth on the power and generosity of giving.

Linguistic Insights and the Deeper Meaning of Zakat

The term "Zakat" is linguistically derived from a root that implies both purification and growth. Riba, the term for usury (interest), also means to grow but is detested by Allah. This contrast highlights that, although Zakat might seem to reduce wealth, its true purpose is to foster growth. As the third pillar of Islam—following the Shahada and Salah—Zakat represents the financial form of worship. The Qur'an frequently links the performance of Salah with the giving of Zakat, indicating that both are integral to fulfilling one’s obligations to Allah.

This relationship reinforces the idea that genuine wealth is measured not by what is hoarded, but by what is given in service to others. Each act of worship, whether through prayer or the giving of Zakat, reflects the return of what Allah has provided. While missing acts of worship such as Salah or Zakat can have lasting consequences, scholars consistently stress the importance of fulfilling these obligations to maintain one’s spiritual and financial integrity.

The Consequences of Not Paying Zakat

The failure to pay Zakat carries severe consequences. Abu Hurairah (RA) reported that the Prophet ﷺ warned:

“If any owner of gold or silver does not pay what is due on him, when the Day of Resurrection would come, plates of fire would be beaten out for him; these would then be heated in the fire of Hell and his sides, his forehead and his back would be cauterized with them. Whenever these cool down, (the process is) repeated during a day the extent of which would be fifty thousand years, until judgment is pronounced among servants, and he sees whether his path is to take him to Paradise or to Hell.” (Sahih Muslim 987a)

In essence, the wealth that is perceived to be an honour is transformed into a means of punishment if not used according to Allah’s directives. When wealth is not spent in the prescribed manner, it becomes a burden, and some hadith even liken Zakat to a snake that inflicts punishment on those who neglect it.

Time and wealth are among the most valuable resources; time once lost cannot be regained, and wealth is ultimately a trust from Allah. This trust is meant to be used for self-purification, nearness to Allah, and the betterment of the community. The Qur'an warns:

“Woe to those who associate partners with Allah, and those who do not give Zakat. These are the disbelievers in the hereafter.” (Quran, 41:7)

This warning serves as a reminder that wealth is granted by Allah and must not be misused. Moreover, failure to fulfil the rights of those eligible for Zakat on the Day of Judgement will result in dire consequences. Nevertheless, Zakat is also one of the greatest honours bestowed by Allah, forming the foundation of all further charitable acts (sadaqah). A deficiency in Zakat often leads to a deficiency in subsequent charitable efforts, while adherence to its guidelines ensures a harmonious and balanced financial practice.

Calculating Zakat: Principles and Practical Methods

Zakat becomes obligatory when specific conditions are met, including Nisab (minimum threshold), Hawl (one-year holding period), full ownership, growth potential (Nama’), and freedom from debt. It applies to wealth that exceeds daily living needs and is held for a full lunar year (354 days).

Productive vs Non-Productive Wealth

Productive wealth includes assets with growth potential, such as investments, rental income, and business assets. Non-productive wealth refers to stored wealth that remains idle, such as cash savings, which may discourage economic circulation. Zakat is primarily applicable to non-productive wealth that has been retained for one lunar year, with a standard rate of 2.5% (or 2.577% for solar-year calculations).

What Is Included as Zakatable Wealth?

Zakatable assets include:

• Gold & Silver – Whether in bullion, coins, or jewellery (not regularly worn).
• Cash & Cash Equivalents – Including bank balances, savings accounts, and stored cash.
• Investments – Such as stocks, ETFs, Sukuk, and other financial assets.
• Business Assets – Trade goods and cash reserves held by businesses.

Note: The method of Zakat calculation varies based on the asset type, and interpretations may differ based on scholarly opinions.

Understanding the Nisab

The Nisab threshold for Zakat was established by the Prophet Muhammad ﷺ and is equivalent to:

• 87.48 grams of gold or 612.36 grams of silver(Some scholars reference 85g of gold and 595g of silver.)

As per Wahed’s Shariah Supervisory Committee (SSC), the gold standard is used for Nisab calculations. This is in line with contemporary practices, as gold more accurately reflects true wealth thresholds. However, some scholars consider the silver standard safer, as it benefits more recipients by lowering the threshold.

Important: If an individual's overall wealth exceeds Nisab, Zakat is due on the entire Zakatable wealth, including the Wahed portfolio.

Methods of Calculating Zakat

Zakat is typically due after one lunar year (354 days) from when an individual's wealth first meets Nisab. To accommodate modern financial systems, both lunar and solar year calculations are used:

• Lunar Year – 2.5% Zakat rate (354 days)
• Solar Year – 2.577% Zakat rate (365 days) or 2.5775% for leap years (366 days)

Many individuals choose Ramadan as a fixed date for Zakat calculation, while others prefer a consistent lunar calendar date annually.

Considering Debts in Zakat Calculation

Deductible Debts:

• Short-term debts (due within 12 months) can be deducted if they reduce total wealth below the Nisab threshold.
• Long-term debts – Only the portion due within one year is deductible.

Receivables: Money owed to an individual is included in their Zakatable wealth.

Zakat on Investments: How It’s Calculated

For Wahed portfolios, Zakat is calculated based on investment type and intention:

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Understanding Investment Intentions:

• Trading (Short-term): 100% of the investment is Zakatable.
• Wealth Preservation (Long-term): A 30% proxy is applied to calculate Zakat.

Sukuk Funds: Due to mixed asset classifications, a 50% Zakatable proxy is applied, as approved by Wahed’s Shariah Supervisory Committee (SSC).

Note: These calculations are reviewed annually and may be subject to change.

How We Calculate Zakat At Wahed

We are excited to announce the launch of Wahed's Revamped Zakat Calculator, an easy-to-use tool developed in collaboration with our Shariah Supervisory Committee (SSC). This calculator is specifically designed to calculate Zakat on the investments held within your Wahed portfolios – including ETFs, stocks, sukuk funds, gold and cash. Please note, it does not cover overall Zakat obligations on other personal assets such as jewellery, real estate, personal savings, or business holdings. For a complete calculation of your Zakat obligations, please consult a qualified Shariah Scholar.

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Final Thoughts

This comprehensive discussion demonstrates that Zakat is far more than an act of charity; it is a fundamental financial obligation that purifies wealth, reinforces faith, and strengthens community ties. Whether viewed through a spiritual lens or examined via its detailed calculation methods, Zakat serves as a reminder that all wealth is ultimately a trust from Allah, intended to benefit the entire ummah. It is hoped that this obligation is fulfilled in the best possible manner, ensuring that wealth benefits not only individual needs but also the broader community.

For precise calculations considering all your personal wealth, we recommend consulting a qualified Islamic scholar.

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Disclaimer: Shariah compliance at Wahed is based on the certification and guidance of our Shariah governance body, the Shariyah Review Bureau (SRB). Interpretations may vary. The Zakat amount provided in the calculator is an indicative calculation specific to your Wahed portfolio's valuation as of a given date, based on the methodology approved by our Shariah Supervisory Committee (SSC). This calculation assumes your portfolio's original asset allocation at the time of assessment. Portfolio rebalancing, market fluctuations, or changes in asset composition over time may slightly affect the final Zakat amount. Additionally, other fiqh-based approaches may apply, considering factors such as completion of a full lunar year (Hawl), your personal financial circumstances, Nisab thresholds, or alternative scholarly views—any of which could ultimately influence your Zakat obligation. Therefore, while we offer this indicative calculation as guidance, we strongly recommend reviewing and understanding our calculation methodology, applying it according to your personal circumstances, and, where necessary, seeking advice from a qualified Islamic scholar or professional. For further information on how this calculator works and comprehensive details on Zakat calculation, please refer to this document. You may also consult the latest Zakat guidance fatwa issued by our SSC here.

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