Loans and zakat

Loans and Zakat: How do We Calculate? 

Question #: 5260 

Date Posted: 20-04-2005 

<QUESTION>

My husband and I are opening a furniture and home accessories store. To purchase the merchandise we have been using credit cards that offer a 0% APR for a certain period. Some of the credits cards being used are mine and others are my husband’s. The monthly payment of these credit cards as well as the monthly expenses of the business will be paid from money that I have saved. Of course, we are hoping that the business will generate some kind of revenue to help out with its own basic monthly expenses (rent, utilities, etc.). At the end of the 0% APR if we haven’t been able to pay off the credit cards on the monthly basis due to the business not generating enough to cover its expenses (this will more then likely be the case since the 0% APR are only for 6-12 months) I will be responsible for paying off the full balance. 

The question is: how do we deal with deducting the loan for payment of the zakat? I ask this question because even though I am responsible for the loans some of the credit cards being used are my husband’s and that makes him liable for the loan to the credit card companies. This year my husband is not liable for zakat, I am. 

I had thought about placing the total dollar amount of the loans into the business account and then just claiming all the loans to the business. For one thing my husband doesn’t want me to put all the money into the business account. So far the way that it’s been done is that I deposit money into the business account and then the payments are made from that account. Also, even if my husband agreed to deposit the money into the business account I don’t know if that would be the best way to do it since the loans are in our names.

<ANSWER>

In the name of Allah, Most Compassionate, Most Merciful,

As a principle, one must always remember that when one becomes the owner of the fixed Nisab amount (which is 612.36 grams of silver) for the first time in one’s life, then that (Islamic) date should be kept in mind. Then the following year on the same (Islamic) date, if one is still the owner of Nisab, one will be considered as sahib al-Nisab hence Zakat will be obligatory at the rate of 2.5% on the total zakat-able assets. It makes no difference whether the wealth increases or decreases during the course of the year, neither is it necessary that every part of the wealth remains in one’s possession for the whole year. However, if due to some reason all the wealth is lost, then when one becomes the owner of Nisab once again, that will be the new date and zakat will be calculated thereupon. (See: Bada’i al-Sana’i, 2/96-98 & al-Lubab fi Sharh al-Kitab, 1/145) 

Thus, both you and your husband should have a fixed date for calculating zakat. If you have not, as yet, fixed a date, you need to fix a date as soon as possible, and then calculate your zakat on that specific date. If you are unsure as to when exactly you became the owner of Nisab for the first time in your life, then make a precautionary estimation, and from now on calculate your Zakat each year on that date. 

When calculating your zakat-able assets, you may subtract the various debts as of that date, for zakat is not obligatory on wealth that one owes to others. The debt will be deducted from the total wealth of the one who is responsible of paying it off. Thus, if you and your husband decide to share the responsibility of the debts on a 50-50 basis (regardless of whose credit-card was used), then each one of you may deduct the relevant amount from their total wealth. If one of you takes full responsibility of paying the debt off, then the debt will only be deducted from the total wealth of the one taking this responsibility.

In conclusion, it is not necessary that the debt be deducted from the wealth of the one whose credit-card was used; rather, one of you can pass on this responsibility to the other and the other can accept it. If this is the case, each one of you will be deducting the percentage of debt that they have taken the responsibility of repaying.

On a side note, you need to be careful not to fall into Riba (usury), for that is a major sin. Hence, if interest is charged in the case of you not being able to pay off the monthly payments on the credit-cards, then that will be unlawful and must be avoided. Using credit-cards is only permitted when the card-holder is sure they have the ability and will actually pay off the debt to the card-issuing company before any interest becomes due.

And Allah knows best

[Mufti] Muhammad ibn Adam
Darul Iftaa
Leicester , UK

Zakat and the Subtraction of Loans 

Question #: 6285 

Date Posted: 25-03-2004 

<QUESTION>

If someone has £5000 in his bank account and at the same time he is in debt of £6000. Is Zakaah farz on him/her?

<ANSWER>

In the name of Allah, Most Compassionate, Most Merciful,

Zakat is obligatory (fard) on certain types of wealth, which are: 

1) Gold & Silver

2) Cash

3) Merchandise (i.e. items for resale)

4) Agricultural products

5) Animals & livestock

When one adds all these Zakatable assets as one amount, one must see how much he/she owes to other people, and then subtract this amount from the total. Zakat will be paid from whatever remains after subtraction, if it reaches the value of Nisab (Zakat payable amount), at the rate of 2.5 %.

This has more or less been mentioned in the major Hanafi Fiqh references. See, for example: Radd al-Muhtar 2/260, al-Hidaya 1/186 & others.

The Fuqaha have explained these debts as that which is demanded and claimed by other people. Whether it is the right of Allah, e.g. Zakat demanded by the Imam, or the right of the servants of Allah, such as: debts, dowry, etc. 

The reason behind debts preventing the obligation of Zakat is (as the Fuqaha explain), that one of the conditions for the obligation of Zakat is that the wealth be in excess of ones personal needs. When one has debts that need to be paid off, the Zakatable assets will not be in excess of his personal needs, as he needs to pay all or some part of this wealth to the creditors.

However, a very important point with regards to loans has been mentioned by the great jurist and scholar of the modern era, Shaykh Mufti Taqi Usmani (Deputy Chairman of the International Islamic Fiqh Academy, Jeddah). He (may Allah preserve him) says that there are two types of loans:

a) Normal loans that are taken for personal and basic needs. These will be subtracted from the total.

b) Loans taken by major capitalists and businessmen for the purpose of production, business and importing. 

If a loan of this type is subtracted or deducted from the total, then not only will Zakat not be Fard on these capitalists, rather they will become eligible to receive Zakat. The reason being, that they have taken loans from the bank that is more in value than their possessions. Therefore, there is a different ruling regarding the subtraction of loans of this kind.

The ruling is that, if a person takes a loan for a business purpose and with this loan he purchases Zakatable goods (items on which Zakat is Fard) i.e. raw material, business goods, etc, then this loan will be subtracted. However, if he purchases non-Zakatable items, i.e. machinery, building, etc, then it will not be subtracted.

The reason for this is that, when he purchases items on which Zakat is Fard, it will already be included in his Zakatable assets, thus the loan will be subtracted. But if he purchased non-Zakatable items, they will not be included in his Zakatable assets, and thus he will have to include it in the total (Fiqhi Maqalaat, Vol.3, and P.155).

For more details regarding the issues relating to Zakat, please refer to my booklet titled Simplified Rules of Zakat (A Hanafi Perspective) which has been published and is available in the UK.

And Allah Knows Best 

[Mufti] Muhammad ibn Adam
Darul Iftaa
Leicester , UK