Zakat is an essential part of Islam, and is considered the third of the five Islamic pillars. However, finance has changed quite a lot since the time of the Prophet Muhammed (PBUH). Today, many Muslims are making money on stocks, shares, bonds, cryptocurrencies and NFT’s. That’s why today’s young Muslims must prepare for Zakat in the digital age.
This year, Zakat will be more important than ever, as the Bank of England has warned that this may be the worst recession ever to hit the UK. The rate of Muslims falling into poverty is up to 10 times higher than the rest of the population. If there was ever a time to take your Zakat seriously, it is now.
So what exactly is Zakat?
Zakat requires that you pay 2.5% of your liquid wealth to charity. However, it cannot be any charity, it has to be a specific charity that meets the sharia requirements. That’s why when you donate online, you have to be careful to tick the box entitled ‘Zakat’.
You only have to pay when your total amount is above the Nisab threshold. The Nisab threshold demands that if you have more than £360 a year, then you are required to pay Zakat on that.
Another point to note is that you do not have to pay Zakat in one fell swoop. With internet banking making finances so much easier to handle these days, you can set up a direct debit and pay it over the course of the year. Of course, that doesn’t mean you can’t pay it during Ramadan for increased rewards.
So what assets do you have to pay Zakat on? Of course, traditional assets like cash, gold, and silver are all Zakat payable, unless you wear the gold or silver on your person.
When it comes to Zakat within your business, you need to be paying Zakat on your cash, your receivables, and the works in progress. You don’t need to pay Zakat on your fixed assets.
If you are buying stocks with the intent to sell very quickly, then you need to pay Zakat on the full amount of the stock. If you are buying to hold, you need to pay Zakat on the underlying asset.
If you hold a pension that uses funds from a variety of different stocks and shares, then calculating Zakat on this can be very daunting. What you should do is assume 25% of the total investment is zakatable (based on National Zakat Foundation research) and pay 2.5% of that.
With property, if you are buying to flip, then you need to pay Zakat on the value of the house. If, however, you are buying it to live in or rent, then you do not need to pay Zakat on that property.
Now, we head into some of the more emerging considerations for Zakat; payments on cryptocurrencies.
Many current scholars argue that you should play it safe, and pay Zakat on the full amount. Some argue that Zakat is actually an asset and not a currency, meaning that you are not eligible to pay Zakat. At IFG, we have sympathies for the latter view, but if in doubt we would encourage you to play it safe, and pay the full amount.
Now we come onto an even more emerging asset, and that is NFT’s. An NFT, or a non-fungible token, is a means by which anyone can mint a piece of digital information. NFT’s shot to fame recently after Beeple sold an NFT for $69 million. However, the same principle applies, you only pay your Zakat on an NFT if you intend to sell it on shortly, or mint it for profit.
When it comes to debts, you are eligible to pay Zakat on the debts that you expect to receive in the not too distant future. However, you can deduct some of your outgoings like rent and bills, which can bring down your total Zakat eligibility.
Finally, when considering which charity to donate to, the IFG recommends that you should not just look at a charity’s efficiency, you should look at their impact. The Quran allows for Zakat to be paid to those who administer charities. And this makes sense, for charities to be effective, they have to pay people to administer funds and run an efficient operation.
If you are concerned about where the money goes or how the money is spent within a charity, then the National Zakat Foundation is a good place to start, as their Zakat tracker can help you to digitally track your money from your account all the way to those who need it the most.
For dealing with modern finances, you need modern tools. That’s why at the IFG, we have created our own Zakat calculator, that can give you the peace of mind that everything really is covered. If you go through the effort of explaining your finances to us, then we’ll also throw in a free portfolio health check too.
We need Zakat in the 21st century more than ever. That’s why it is important to make sure you know what you owe, how to pay, and where it goes.