Fiqh Al Zakah by Dr. Yusuf al Qardawi

Stocks, shares, and bonds are forms of financial assets that were not known in the past. Many taxation specialists call for imposing certain taxes on these assets or at least on their returns.1

Shares or common stocks represent ownership of a certain part of the capital of a corporation. Bonds are certificates of loans borrowed by a corporation, government, or municipality. A Bond is usually paid back at a certain future point of time, and the loan it represents carries interest. The basic difference between a share and a bond is that the first represents a contribution to the capital and carries profits or losses, while the second is only a borrowing instrument that carries predefined terms of interest and series of repayments. Usually, bond holders do not have authority of controlling of administration on the corporation. When issued, both shares and bonds may have a market value that is different from the face value. They are traded in the exchange markets, like other commodities in their respective markets. Their prices go up and down according to different factors that affect their supply and demand, including the success of the corporation that issues them and the local and international economic and political situation.2

The issuance, holding and circulation of shares--in their common form--is permissible in Shari’ah, except when the very activity of the issuing corporation is prohibited in Islam, such as alcoholic beverage breweries or interest-based financial corporations. On the other hand, bonds are interest-bearing instruments, and interest is prohibited in Islam. But regardless of the matter of lawfulness of holding bonds, they represent capital owned by people and their zakatability must be discussed. Two broad opinions are formulated among contemporary scholars on this issue.

One view distinguishes between shares and bonds and deals with shares in accordance with the nature of the economic activity of the corporation whose capital they represent.

Shaikh 'Abd al Rahman 'Isa, in his book al Mu'amalat al Hadithah wa Ahkamuha [Modern Transactions and Their Shari’ah Rulings] represents this opinion:

Some people who own corporation shares may not know the Shari’ah ruling on their zakatability, or think that zakah is obligated on all corporations' shares, and this too is wrong. It is imperative to distinguish between shares in accordance with the nature of economic activity of the corporation itself. The shares of purely industrial corporations that do not practice any trade activities, such as a corporation dealing with refrigeration, hotels, advertising, public transportation, shipping, and airline industries, are not zakatable, since the capital of these corporations and the shares which represent it is invested in machinery, offices, and buildings, that are not zakatable. But dividends distributed on these shares are added to the other assets of the shareholders and are zakatable at the end of the year, according to the rule of zakah.

Trading corporations that deal only with the purchase and sale of commodities, such as import/export dealers and retail trading, along with corporations that have a mixture of trading and industry, such as corporations that transform raw materials, extracted by the same corporation or purchased elsewhere, and sell their final products, are zakatable as far as their shares are concerned. Thus, the criteria for the zakatability of shares is whether the corporation is zakatable and that depends on the use of its assets. Shares are evaluated at their present value. A deduction is made for the percentage of capital used in buildings, machinery, and tools owned by these corporations. After deducting this percentage from the present value of the share, the residual is zakated.3

This opinion of Shaikh 'Isa is based on the well known view that factories, machinery, and buildings are not zakatable, neither on capital and profit together as with trade assets, nor on profit alone, as with agricultural land. Because of that, he differentiates between industrial and trading corporations. This means that people who own different shares, even of the same value, may be zakated differently according to whether these shares happen to be of a trading`or industrial corporation.

In chapter eight of this part, the zakatability of buildings and factories was analyzed, and it was concluded that there are three opinions in addition to the traditional one of non-zakatability:

1. Treating them like trade assets and estimating zakah at the rate of 2.5% on their total net value at the end of each year.

2. Subjecting the return of factories and buildings to zakah like money, on the basis of being earned income.

3. Drawing an analogy with agricultural land and imposing zakah at ten or five percent, on their gross or net profit.

In chapter three, I selected this last view as being the most appropriate. Here I must add that the distinction between trade and industry has no foundation, or evidence from Qur'an, Sunnah, ijma, or sound analogy. There seems to be no sense in imposing zakah on the shares of trading corporations, while at the same time leaving exempt the shares of industrial corporations. Both kinds of shares are growing capital that earns annual renewable returns, which may in fact be higher in industries than in trade.

If such a distinction is to be made, I suggest that we treat corporations like individuals, whereby zakah is imposed at the rate of ten percent of the dividends of industrial shares, while it is imposed at the rate of 2.5 percent on the market value of trading shares, certainly after deducting the percentage invested in fixed assets, i.e.

treating trading shares like we treat trade inventory.

Zakah on bonds Regarding bonds, Shaikh 'Isa continues, "Since bonds represent a loan made by companies or the government of definite amounts at definite interest rates, the holder of a bond is like the creditor of a deferred debt. At the due date, when it is paid, it must be zakatable for only one year if it remains in the holding of its owner for one year or more, according to Malik and Abu Yusuf. Until the bond is redeemed, or if it is not in possession for one year,, it is not zakatable."4

It was sown earlier5 that the most acceptable opinion about hopeful debts is that they are zakatable every year. This is the view of the majority, and the choice of Abu 'Ubaid and others, because hopeful debts are like assets on hand. Accordingly, bonds, being specific forms of debts that have legal assurances in addition to the interest they earn, must be zakatable every year. The fact that interest is prohibited is no reason for exempting these bonds from zakah, because a person who commits what is prohibited must not be given any privilege. It is known, for example, that jurists unanimously agree on subjecting prohibited jewelry to zakah, although they disagree on the zakatability of lawful jewelry.

This opinion treats all shares and bonds alike, regardless of the economic activity of the issuing corporation. Professors Abu Zahrah, 'Abd al Rahman Hasan, and Khallaf believe that shares and bonds are used in circulation, like commodities, purchased and sold, usually at a market value that is different from its face value. They are thus like commodities that are purchased for resale at a profit. Like any other business inventory, they must be zakated.6

This means that zakah is calculated on shares and bonds on the basis of their current market value plus all their dividends and interest, provided the totals equals at least nisab, or if added to other funds owned by the same holder, they make up at least nisab.

The rate is 2.5 percent, and deductions for essential needs or minimum cost of living is applied in the case where shares are the only source of income. It seems to me that this opinion is more suitable to zakah payers, because it is simply and easy to know the market value and add earnings to it on all kinds of shares. This is as long as individuals are asked to make their own calculations, but if an Islamic state adopts the laws of zakah, it may be advisable to collect zakah directly from corporations, on the basis of the first opinion, that of Shaikh 'Isa.

If shares are treated like trade inventory and subjected to zakah, is it lawful to impose zakah on the earning of the corporations themselves, in additions to the zakah on the shareholders?

Professors Abu Zahrah and his two colleagues consider that since shares are treated like commodities owned by shareholders, corporations are zakatable on their own activities, because their assets are growing assets invested in business and industry, while shares for those who trade shares and hold them are merely trade inventory.7

According to this opinion, the corporations should pay zakah on their earnings before distribution, and shareholders must also pay another zakah on their shares, including earned dividends. This means that the shareholders are zakated once on the earnings of the company and once on their own assets and distributed profits. This kind of duplication in zakah is prevented in Shari’ah. I believe that only one of these two zakahs must be applied in order to avoid such duplication.

It may be useful to give some examples from jurists' writings that can shed some light on this matter. We studied in chapter two that zakah is obligated on pastured livestock unanimously, and when livestock is obtained as business inventory by livestock merchants, it is only zakated either at the rate of livestock or at the rate of business inventory, but definitely not twice as business inventory and pastured livestock at the same time.

Ibn Qudamah discusses the difference in their treatment as following:

Malik and the new opinion of al Shafi'i say this livestock must be zakated at the rate applied to livestock on the grounds that zakah on livestock is stronger, being unanimously agreed upon and mentioned by name in the sayings. On the other hand, Abu Hanifah, al Thawri, and Ahmad say it must be zakated as trade assets because this zakah gives more benefits to the zakah recipients in addition to being proportional. If the number of livestock held by the merchant reaches, in value, nisab of business, but does not reach in number the nisab of livestock, zakah on trade assets applies indisputably.8 . . but it is impossible to obligate the two kinds of zakah together, because this leads to duplication, which must be avoided in accordance with the saying of the Prophet (p), "No duplication in sadaqah."9

If nisab of livestock (40 sheep) is fulfilled, while the nisab of business assets (200

dirhams) is not, zakah becomes obligated at the rate applied on livestock, as if they were not being held for trading.

The author of al Mughni gives another example, the case of palm trees or land purchased for resale, but while held as inventory, the land was farmed, or the trees harvested. If the zakah year of business ends at the time of harvest, and the value of the land and/or trees equal nisab, then zakah on crops and fruits must be paid at the rate of ten percent or five percent, and zakah on the lot and trees must also be paid at the rate of 2.5%. This is according to Abu Hanifah and Abu Thawr. Al Qadi and his Hanbalite colleagues say that land and crops must totally be zakated at the rate of business assets, because all are considered business inventory. Ibn Qudamah argues that the first opinion gives more proceeds and is thus better for the poor and claims that this case is different from the case of livestock as inventory, since the rate of livestock is anyway below that on trade inventory.19 One can reply that increasing the proceeds of zakah is not reason enough since zakah aims at providing a just and bearable burden on payers as well. The justice of Islam is featured in applying the high rate of one-tenth only on the return, while when zakah applies on the principal, the rate is 2.5 percent, as in business assets.

It is not known that two rates can be applied together on the same principal and on its return. It is imperative to select one of the two forms of zakah in order to avoid duplication or payment of more than one zakah in the same year.

The argument that in the above-mentioned examples there are two reasons for zakah, namely, trade and agriculture, is not valid, because only one of them was originally intended. The other came incidentally, but only one form of zakah must apply. This is taken up by the author of Sharh al Ghayah, a Hanbalite, who says "A person who owns nisab of pastured livestock for the purpose of trading only is subject to zakah on trade assets alone, even if the year of nisab of livestock ends before nisab of business is reached, since the intention of holding inventory removes the description as holding livestock." By the same token, he argues that land held as inventory for trade is zakatable along with its crops or fruits at the form of zakah applied to trade assets, because crops and fruits at the form of zakah are clearly an increase in the inventory the owner had. But if the total does not reach 200 dirhams, while the fruit alone reaches their own nisab, or the livestock reaches its nisab, they must be subject to zakah applied on their own cases, so that zakah may not be waived at all.11

Ibn Hazm quotes al Hasan bin Hay, "What is farmed for business is subject to zakah on business, and nothing else."12 Al Kasani says that "Our colleagues, the Hanafites, say 'ushri or kharaji land purchased for trade is only subject to 'ushr or kharaj, and zakah on trade may not be obligated at the same time as kharaj or 'ushr. This is their well-known opinion. Muhammad is said to have obligated 'ushr or kharaj along with zakah on trade, i.e. zakah of trade on the value of the land, and 'ushr on the crops, assuming these are two different properties. The rationale behind this is that trade's zakah is obligated on the land while agriculture's zakah is obligated on the crops; thus no two zakahs are charged to the same asset.13

I believe only one of the two forms of zakah must be applied, and that it is not correct to allow duplication in zakah, as is the common view of the Hanafites and others. As for which of the two forms of zakah should be selected. I think this should be left to the zakah administration or the zakah payer, each of these two alternatives has its reasons. We must recall that the bulk of Muslims jurists, perhaps all of them, do not approve of any duplication of zakah on the same asset, although in certain instances, we find some 'who disagree, such as the above-mentioned case of Muhammad.