ISLAMIC ECONOMICS MEF 3043

1. ISLAMIC ECONOMICSMEF 3043 Topic 10 Compulsory Re-Distribution & Economic Development in Islam

2. LEARNING OUTCOMES In this topic students will know the following, Definition of Zakat, its objective and categories of recipients Zakat verses riba View of Muslim thinkers on zakat as taxation. Objectives of Jizya and Kharaj View of Muslim scholars on Kharaj Definition of Ghanimah/spoils of war

3. CONTENTS Definition, role and function of zakat as perceived in Islam. Zakat and riba Definition, role and function of Jizya, Kharaj Ghanimah/Spoils of war. View of early Muslim scholars on taxation

4. RE- DISTRIBUTION OF WEALTH Non-Muslim (living in Muslim country) Compulsory Muslim (through halal means) Jizya Kharaj Voluntary Compulsory Zakah Others Awqaf Takaful Sadaqah .

5. SPENDING IN THE WAY OF ALLAH (infaq fi sabil Allah) “And those whose wealth is a recognized right. For the (needy) who asks and the deprived.”(Al-Ma’arij, 70:24-25) Re-distribution of wealth in the form of sadaqah can be compulsory in the form of zakat, kharaj, jizya, ‘ushur, ghanimah and fai’.

6. WHAT IS ZAKAT? Literal meaning Zakat means clean and pure. 3rd Pillar of Islam and compulsory It purifies and protect our soul; from miserliness, selfishness and greed. It cleans our wealth from evil of this world. As Allah (s.w.t) says “Take alms of their wealth, wherewith thou may cleanse and purify them” (At-Taubah 9:103). “Establish regular prayers and give the Zakat” (An-Nisa 4:77) “And establish regular prayers and give the Zakat and obey the Messenger so that you may received mercy” (An-Nur 24:56) Zakat means growth Whoever pays zakat, his property will grow. Allah (s.w.t.) says “who will give his wealth that he may grow (in purity)” (Al-Lail 92:18). Technical meaning An act of worship through expenditure of Muslim’s property or wealth upon the full possession and above a certain limit.

7. WHAT ARE THE CLASSES OF ZAKAT? • Zakat al-Fitr (Fitrah) • It is performed in the time of Ramadhan and obliged to all living Muslims, including a newly born baby from a Muslim family. • Zakat al-Mal • It is zakat based on reliable property of Muslims that exceeds the limit (nisab).

8. Conditions of the Obligatory Zakat al-Fitr? Giver is a Muslim, mukallaf, a free man, and able to pay the zakat al-fitr: Ibn `Umar said: “The Prophet (s.a.w.s) enjoined the payment of one sa’ of dates or one sa’ if barley as zakat al-fitr on every Muslim slave or free, male or female, young or old, and he ordered that it be paid before the people went out to offer the 'Id prayer” (Bukhari, vol.2, bk.25, no.579, 588) He is living during or before the sunset on the eve of Eid al-fitr on he last day of Ramadhan. If a child is born after the sunset on the even of Eid al-fitr, zakat is not obligatory on him since the eve is at the start of the 1stShawal.

9. What is a Sa’? Narrated Abdullah ibn Umar: “The Prophet (s.a.w.s.) said: ‘(The standard) weight is the weight of the people of Makkah, and the (standard) measure is the measure of the people of Medina.’” (Abu Dawud 22:3334) Weights (derived from Mecca whose inhabitants were traders); 1 dinar = 1 mithqal = 4.25g 1 dirham = 2.975g 10 dirham = 7 mithqal (dinar) by weight (1 dinar = 1.43 dirham) 10 dirham = 1 mithqal (dinar) by value of exchange Measures (derived from Medina whose inhabitants were farmers); 1 ratl = 1 handful 1 mudd = 2 ratls, or a double handful for wudu 1 sa’= 5 ⅓ratls of foodstuffs, or 8 ratls (4 mudds)for water 1 sa’ = 4 mudds for ghusl 1 wasq (1 camel load) = 60 sa’ According to Yusuf al-Qardawi (Fiqh az-Zakat, p.239) 1 ratl = 408g of grain thus 1 sa’= 2.176 kg for grain (4.8 lbs), or 2.75 litres of water MUIS: 2.73kg for rice (6 lbs) or equivalent value.

10. What is a Sa’? According to Abu Ubayd (2003:472-481), the sa’ is equivalent to 4 mudds or 5 ⅓ratls Hence each mudd equals 1 ⅓ratls And each ratl weighs 128 dirhams Since each dirham weighs 2.975g Then a sa’ equals 5.333 x 128 x 2.975 = 2,031g Or 2.031 kg or about 4 1/2 lbs for wheat.

11. What is the Function / Benefits of Zakat? Zakat purifies the property of the people with means and clears it from the shares which do not belong to it any more, the shares which must be distributed among the due beneficiaries Zakat also purifies the heart of Muslim from selfishness and greed of wealth. In return, it purifies the heart of the recipients from envy and jealousy.

12. What is the Function of Zakat? (Cont.) Zakat will minimize the suffering of the needy and poor people in the society Zakat is a healthy form of internal security against selfish greed and social dissension and against the intrusion and penetration of subversive ideologies. Zakat is a vivid manifestation of the spiritual and humanitarian spirit of responsive interactions between the individual and society.

13. ECONOMIC DEFINITION OF ZAKAT Since it refers to the purification of a Muslim's WEALTH and SOUL. Wealth purification denotes the mobilization of assets for the purpose of financial growth and justified distribution. Purification of the soul implies freedom from hatred, jealousy, selfishness, uneasiness and greed. Hence this will result in a healthy and a pure society free from all diseases and from poverty and starvation.

14. STATE TO ADMINISTER THE ZAKAT Anas narrates that “a man asked the Messenger of Allah (p), If I give zakat to the person you send, would I be fulfilling it as far as Allah and His Messenger are concerned?' The Prophet answered, 'Yes, if you give it to my messenger, you are freed from that obligation as far as Allah and His Messenger are concerned. You deserve its reward, and if it is tampered with later, the sin is on whoever changes it.”(Ahmad, cited by Yusuf al-Qardawi, Fiqh al-Zakat, part 5, p.115)

15. Criteria of Zakatable Wealth… Hawl: The assessment period for the Zakat. Hawl means a year i.e. lunar year. Zakat is payable if he owner owns it for twelve (12) lunar months. Nisab: Nisaab is the minimum amount upon which Zakat is due or the exemption limit. If the wealth does not meet the minimum amount than the stipulated nisaab, zakat is not obligatory (wajib). Milkut Ta’amm. Milkut Ta’amm means full ownership.

16. Zakat Recipients The alms (zakat) are only for the poor (faqir) and the needy (miskin), and those who collect them (amil), and those whose hearts are to be reconciled (mualaf), and to free the captives (fi riqab) and the debtors (gharimin), and for the cause of Allah (fi sabilillah), and (for) the wayfarers (ibnu sabil); a duty imposed by Allah. Allah is knower, Wise. (Surah at-Taubah 9:60)

18. 1. THE POOR (FAQIR/FUQARA) Those without any means of livelihood and material possessions. These are those people who do have some money but not sufficient to meet their needs. They live in straitened circumstances and do not beg from anybody.

19. 2. THE NEEDY (MISKEEN) Those without sufficient means of livelihood to meet their basic necessities. They may have job but their income is below the minimum requirement. These are the very miserable people who have nothing with them to fulfil the needs of their body. Hadrat 'Umar had also included those among the needy who are fit to earn but do not get employment.

20. 3. THE ADMINISTRATORS OF ZAKAH (AMIL / MANAGER) These are the people who are appointed by an Islamic government to collect and to distribute the zakat. They are to be paid from zakat fund. Group of people who go out to the society and determine those who fall under the eightcategories of recipient of zakat.

21. 4. THE RECONCILIATION OF HEARTS (MUALLAF) Those who are inclined to enter or have already converted to Islam. Zakat is paid to new or prospected converts to Islam in order to strengthen the sense of belonging to the Islamic faith in the converts.

22. 5. TO FREE SLAVES (RIQAB) This means that a person who wants to free himself from slavery he should be given from Zakat so that he may release himself by giving money to his master. People, who are undergoing imprisonment for their inability to pay the fine imposed by courts, can be helped to secure release with the money of Zakat. People who were put in jail for political reasons or under any sorts of imperialism such as the current circumstances in Palestine.

23. 6. THOSE WHO ARE IN DEBT (GHARIMIN) Zakat can be used to those in financial difficulties e.g. those who guarantee a loan that became due, causing financial strain to them. Those whose funds do not sufficiently cover their debts. Those who incur expenses in solving disputes between people. It also includes those who indulged in a sin and repented from it.

24. 7. FOR THE CAUSE OF ALLAH (FISABILLILLAH) This is a common word used in relation to all good deeds but, in particular, it means rendering help to all good deeds towards Allah. The Holy Prophet (s.a.w.s.) said that it is not permissible for any wealthy person to take Zakat but if a wealthy person requires help for the sake of Jihad, he must be given Zakat because a man may be wealthy by himself he is unable to defray from his own pocket all the extraordinary expenses entailed in Jihad. It is necessary to help him in this work from Zakat.

25. 8. THOSE WHO ARE STRANDED DURING A JOURNEY (IBNUS SABIL) A wayfarer may have any amount of money in his home but if he is in need of money while traveling, he must be given Zakat. Zakat can also be used to help a traveler facing difficulties in continuing his journey due to reasons such as loss of money or the break down of his vehicles, the repair of which he cannot afford.

26. WHAT ARE THE TYPES OF ZAKAT MAL? (Property) 1. Agricultural produce 2. Livestock 3. Gold and Silver 4. Merchandise, Income, Wealth

27. Zakat on Agricultural Produce (‘Ushr) “Nozakat is to be paid on (a herd of) less than 5 camels, nor less than 40 sheep and/or goats, nor less than 30 oxen, nor less than 20 mithqals of gold, nor less than 200 dirhams (of silver), nor less than 5 camel-loads (of agricultural produce). And (a zakat of) 10% (is to be paid) on dates, raisins, wheat and barley. And crops watered by natural means (i.e. rainfall, rivers etc.) are subject to a zakat of 10%. And crops watered with well water are subject to a zakat of 5%”.(Bukhari) The distribution of agricultural produce is the most essential feature of the zakat system. Zakat on produce is paid upon its harvesting: “Eat of the fruit thereof when it ripens, and pay the due thereof upon the day of harvest”(Al-An’am 6:141) “No alms are to taken from less than 5 awaq of silver coins, and no alms are to be taken from (a herd of) less than 5 camels and no alms are to be taken from less than 5 camel-loads of dates”. (Muslim)

28. Zakat on Agricultural Produce (Cont.) “Rasulullah (s.a.w.s.) sent Mu’adh ben Jabal (r.a.) to Yemen, he commanded him to levy (as zakat) 1 dinar on every 40 dinars and 5 dirhams on every 200 dirhams. And no alms (i.e. zakat) were to be taken from less than 5 camel-loads (of agricultural produce) nor from a (a herd of) less than 5 camels. And they (the Muslims) were not to pay zakat on fresh vegetables.”(ad-Darqutuni) Agricultural produce is zakatable on a staple crop such as cereals (wheat, barley, beans, rice, grains and seeds used for food), olives, dates and grapes (incl. currants, raisins or sultanas), but excludes all other fruits, herbs, vegetables, honey and animal fodder. Zakat is taken upon harvesting by the farmer. Distributors whom buy crops wholesale and sell retail, then crops are trade goods (rotational merchandise) and zakatable at 2.5% once nisab and haul reached (Reliance of Traveller, p.254) The nisab set for agricultural produce was 5 camel loads (wasqs) representing a reasonable year’s supply of essential food for a family, based upon food-grains and dates. One camel load of dates was worth 40 dirhams – thus 5 camel loads cost 200 dirhams, hence the nisab of silver was also set at 200 dirhams, which was the sum obviously meant to represent a potential year’s provisions of essential food-stuffs.

29. Zakat on Livestock “Nozakat is to be paid on (a herd of) less than 5 camels, nor less than 40 sheep and/or goats, nor less than 30 oxen…”(Bukhari) Zakat of an existing herd due once their nisab and haul is reached, along with newly acquired or inherited animals (even if their haul has not elapsed). Abu Hurayra (r.a.) related that the Rasulullah (s.w.a.s.) said. “AMuslim does not have to pay any zakat on his slave or on his horse”(Malik, Muwatta) Cattle (cows, bulls, oxen, water-buffalo) <30: no zakat 30: one 1yr old cow 40: one 2yr or 3yr old cow Sheep (goats) <40: no zakat 40-120: one ewe 121-200: two ewes 201-300: three ewes 301+, for every 100: one ewe

30. Zakat on Livestock “…no alms are to be taken from (a herd of) less than 5 camels…”(Muslim) Camels 1-4: no zakat 5-24: one ewe for every 5 camels 25-35: one 1yr old female camel 36-45: one 2yr old female camel 46-60: one 3yr old female camel 61-75: one 4yr old female camel 76-90: two 2yr old female camel 91-120: two 3yr old female camels 121: three 2yr old female camels 121+: for every 40: one 2yr old female camel for every 50: one 3yr old female camel

31. Zakat on Gold and Silver If gold is kept idle, the zakat rate is 2.5% per lunar year: 0.5 dinar or 5 dirhams, hence 10:1 x-rate silver:gold for zakat. The nisab for gold is 20 mithqals or 85g This is based on a mithqal or dinar of pure gold weighing 72 grains of barley or 4.25g The nisab for silver is 200 dirhams weighing 50.4 grains of barley being 7/10ths of a mithqal dinar of 2.975g of pure silver, or 595g In the case of jewelry, the majority opinion including Imam Shafi’i (r.a.) is that zakat is not due on jewelry that is worn, only kept; whilst Imam Hanafi (r.a.) is of the opinion that its is due on all jewelry whether worn or kept. Unminted gold from mines - 2.5% Treasure (rikaz) - 20%

32. Zakat on Paper & Copper Money Classical opinion is reflected in a fatwa from Shaykh Muhammad `Illish (1802-1881), the Maliki jurist at the University of Al-Azhar, whom was asked, “ ‘What is your judgment in respect to the paper with the stamp of the Sultan that circulates like the dinars and the dirhams? Is it obligatory to pay zakat as if it were a coin of gold or silver, or merchandise, or not?’ I responded exactly in the following way ‘Praise be to Allah and blessing and peace upon our Master Muhammad, the Messenger of Allah. Zakat is not to be paid for it, because zakat is restricted to the flocks, certain types of grains and fruits, gold and silver, the value of rotational merchandise and the price of the goods withheld. What is referred to previously does not belong to any of these categories. You will find an explanation by comparison with copper coin or fulus with the stamp of the Sultan which is in circulation and for which no zakat is paid since it does not belong to any of the categories mentioned…unless it is used as rotational merchandise. Then it should be treated as if it were merchandise’ ” Hence, historically, unlike gold & silver, copper coins and paper money were not deemed currency, and their value taken only if used as rotational merchandise.

33. Zakat on Merchandise Iman Malik, says in his Muwatta that “`Umar ibn `Abd al-`Aziz wrote to a governor in Damascus about zakat saying, ‘Zakat is paid on three things: the produce of cultivated land, gold and silver, and livestock.’” (17.1) “`Umar ibn `Abd al-`Aziz wrote to [Zurayq ibn Hayyan, who was in charge of Egypt] saying, ‘Assess the Muslims [for zakat] that you come across and take from what is apparent of their wealth and whatever merchandise is in their charge, 1 dinar for every 40 dinars…’ ” (17.9) Trading Merchandise: 2.5% on unrealized value of traded, rotational merchandise (not raw materials), i.e. business goods, calculated on net current assets = net working capital (current assets less current liabilities), once haul and nisab (that of gold & silver) is reached.

34. Early Modern Discussion • Some scholars argue that income is not zakatable, because a salary does not reach the haul of one year. • Al-Qardawi relates in Fiqh az-Zakat p.304, to a conference on zakat in Damascus 1952 involving; • Abdur Rahman Hasan; Muhammad Abu Zahrah; Abdul Wahab Khalaf • They concluded that, • Income and professional fees are zakatable after a lunar year. • Historically, there was no zakat on tools of craftsmen, but productive capital involving industrial equipment, plants & machinery should be zakatable. • Residential property is not zakatable, but buildings for rental purposes (investments) are productive growing capital and should be zakatable.

35. Current Opinions… Many scholars are of the opinion that any business activity that brings any return to the entrepreneur or investor should be assessed for Zakat. Zakat literature now covers all types of business activity, be it cash or risk investments. If the business activity is analogous to commerce, it should be assessed the same rate as commerce.

36. Zakat on Income Personal Income Salary, Commission etc Business Income Sole proprietorship Partnership Private limited companies Public Companies Cooperatives Banks/Unit Trusts/Takaful

37. Zakat on Wealth Some jurisdictions, such as MUIS stipulate zakat harta (zakat on wealth) as 2.5% on savings, gold, business, CPF, shares and insurance assuming nisab & haul is reached: Zakat on savings = lowest bank deposit balance x 2.5% Zakat on gold investments & jewelry not intended for use = weight of gold x market value x 2.5% Zakat on business = (Current Assets – Current Liabilities +/- Adjustments) x 2.5% x % of Muslim Ownership Share Zakat on CPF = CPF monies received x 2.5% Zakat on shares = value of shares on date haul is reached x 2.5% Zakat on (endowment) insurance = surrender value once haul is reached x 2.5%

38. Zakat on Business The Malaysian Dept. of Islamic Development (Jakim) published Panduan Zakat Malaysia (Malaysian Zakat Guide) in 2001 recommending two types of business zakat accounting. Urfiyyah method involving adjusted growth capital: Equity + Long Term Liabilities - Fixed Assets - Non-Current Assets +/- Adjustments Syariyyah method involving adjusted working capital, or net current assets: Current Assets - Liabilities +/- Adjustments Each equation will generate the same zakatable income, since; Equity + Long Term Liabilities - Fixed Assets - Non-Current Assets = Current Assets - Current Liabilities These also reflected in AAOIFI FAS No.9 proposes the Net Asset method (or Net Current Assets) and the Net Invested Funds (or Net Equity) method. MUIS calculation also based on the working capital model (Syariyyah) that considers current assets and deducts current liabilities and makes the necessary adjustments at year end.

39. Zakat on Business: Net Current Assets

40. THE ROLE OF ZAKAT IN ECONOMIC DEVELOPMENT Solve numerous economic problems that faces societies such as unemployment, poverty, debt and the enormous economic gap between different societal groups It discourages hoarding of money and encourages investment and expenditure.

41. Zakat can play a vital role in economic growth: • Zakat and proverty Zakat contributes in finding solutions for societies and resolve the problems like proverty When zakat is given to the needy, it will increase the level of income. So the increasing of level of income will give chances to them to invest and grow their wealth through using their potentials and creating new job opportunities

42. Zakat and consumption One of the main effects of zakat at the macro level is increasing the purchasing power of zakat recipients through zakat distribution Theoretically the MPC of the poor is greater than the MPC of the rich This means if the poor receives this extra financial aid, a big part or even all of it can be used for consumption

43. Zakat and distribution of income The main objective of zakat is to redistribute wealth of the society among the poor Zakat can play an essential role in development through redistribution of income and wealth for the benefit of poorest Zakat improves the volume of production When collected and distributed among the needy people, it also spent on various consumer goods which is likely to increase the demand of different products of industries which enhance production of goods

44. ZAKAT AND ECONOMIC GROWTH The added marginal propensity to consume derived from the poor post-zakat, will improve consumption and aggregate demand (AD) which equals aggregate expenditure (AE), and since AE equals GDP, hence zakat grows national income and thus the wealth of the economy. Consumption does not shift it rotates given the proportional distribution of zakat. Adapted from Ataul Huq, Development and Distribution in Islam, pp.13-14

45. RE- DISTRIBUTION OF WEALTH Non-Muslim (living in Muslim country) Compulsory Muslim (through halal means) Jizya Kharaj Voluntary Compulsory Zakah Awqaf Takaful Sadaqah Others

46. JIZYA AND KHARAJ Non Muslims who live in a Muslim country have to pay: Jizya Kharaj

47. 1. JIZYA Jizya: the root meaningis compensation. A poll-tax levied on those who did not accept Islam, but were willing to live under the protection of Islam, and were thus willing to submit to its ideals being enforced in the Muslim State. Under the Islamic state Christian and Jews were exempted from military service, but they were given the concession that the Islamic state would guarantee their security of and their property in exchange of the payment of Jizyah. Based on a direct injunction of the Holy Quran, paying of Jizya is compulsory among non-Muslims who live in a Muslim country.

48. JIZYA IS COMPULSORY “Fight those who believe not in Allah nor the Last Day, nor hold that forbidden which hath been forbidden by Allah and His Messenger, nor acknowledge the religion of Truth, (even if they are) of the People of the Book, until they pay the Jizya with willing submission, and feel themselves subdued.”(Al-Tauba 9:29)

49. JIZYA The jizya (tribute) tax was not a fixed rate but a means tested poll tax on the dhimmis under Islamic protection, thus levied according to their ability to pay, and would have also taken into account the market exchange rate between dinars and dirhams. Ibn Rushd notes that `Umar imposed 4 dinars on the rich in Egypt and Ash-Sham, 2 dinars on the middle class and 1 dinar on the poor; in Iraq he imposed 48 dirhams, 24 dirhams and 12 dirhams, respectively (Ibn Rushd, 2003 1:484; also Abu Ubayd 2003:37).

50. 2. KHARAJ Kharajis imposed to all lands conquered by force and not to be divided among the army as ghanimah/anfal, but declared by `Umar al-Khattab (r.a.) as a kind of fay’ or endowment for the benefit of all Muslims, and left to the original non-Muslim owners. The kharaj would still have to be paid if the land was subsequently acquired by a Muslim, or its non-Muslim owner converted to Islam (no longer having to pay the jizya) because as a system of rent, the rent still has to be paid. `Ushr would then have be paid as zakat on the produce. Kharaj is of two kinds: Proportional: kharaj muqasamah is imposed as a share of the total agricultural produce of the land, e.g. one-fourth, one-fifth etc. The proportional Kharaj is variable with output and charged on each crop. Fixed: kharaj wazifah is a fixed tax on the land which is collected once a year. `Umar surveyed 36 million jaribs (Abu Ubayd, 2003:66 & Al-Mawardi 2002:190) and collected 100 million mithqal dirhams per year (Abu Yusuf, 1969:107).