SS 35 · Islamic social finance

SS 35: Zakah

What this standard is about

Zakah is the obligatory charity in Islam: every Muslim who holds wealth above a minimum level (nisab) for a full lunar year must give 2.5% of it to the poor and other eligible groups. It is one of the five pillars of Islam.

For individuals the rules are ancient and well known. For modern companies they are not. A bank is a legal entity with shareholders, depositors, reserves, and subsidiaries — whose wealth is it, and who pays? This standard answers that. It defines the zakah base for Islamic financial institutions, including Islamic insurance companies, subsidiaries, and parent companies: which balance-sheet items count as zakatable wealth, which liabilities can be deducted, what rate applies, and how the collected zakah is distributed among the eight categories of recipients named in the Quran.

Why it exists

Islamic banks handle other people's money at scale. Without a standard, each bank would calculate zakah differently, and shareholders would not know whether their obligation was met. The standard creates one method so zakah on institutional wealth is calculated consistently and reaches the right people.

The key rules, simply put

Zakah is due on zakatable assets — mainly cash, trade goods, and receivables — not on fixed assets like buildings and machinery.
Short-term liabilities (debts due within the year) are deducted before calculating.
The rate is 2.5% for a lunar (Islamic calendar) year, or 2.577% if the institution uses the solar (Gregorian) calendar year, to account for the extra days.
Zakah is only due if the net amount reaches nisab, the minimum threshold (the value of 85 grams of pure gold or 595 grams of pure silver).
The standard covers the parent company, its subsidiaries, and Islamic insurance companies.
A bank may pay zakah on behalf of shareholders if they ask it to act as their agent.
Collected zakah must go to the eight eligible categories of recipients named in the Quran, which include the poor, the needy, and those in debt.

An everyday example

An Islamic bank ends its financial year with $100 million in zakatable assets (cash, financing receivables, trading stock) and $20 million in short-term debts. Its zakah base is $80 million. Using the lunar calendar, it pays 2.5% — $2 million — distributing it to eligible recipients such as the poor and the indebted.

Words to know

Zakah — the obligatory annual charity: 2.5% of qualifying wealth held for a lunar year, given to eligible recipients.
Nisab — the minimum wealth threshold above which zakah becomes due.
Halal — permissible under Islamic rules.

Source

AAOIFI Shariah Standard No. 35 — https://zuscholars.zu.ac.ae/works/4781/
Zakah rates and nisab reference (citing AAOIFI SS 35) — https://github.com/aadilzbhatti/zakatable