Zakat on Bank CD Certificates

<QUESTION>

My parents have a CD (a bank treasury certificate), what is the zakat on it? We cannot touch this CD for six years. They have heard conflicting opinions, one is to pay 10% of the income, and the other said 2.5% of the principal. What should they do?

<ANSWER>

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

A bank treasury certificate known as the certificate of deposit (CD) is an investment in a financial institution. A fixed amount of money is deposited, for a specified period of time, at a predetermined interest rate, which generally does not change over the term of the investment. Its money in the bank, like a savings account, only you’ve agreed how long you’ll leave it and the bank has agreed not to change the interest rate. 

In other words, when a deposit is made for a specified period and at a specified rate of interest, and is evidenced by a bearer certificate, this is called a certificate of deposit (CD). The certificate represents an obligation on the part of the debtor to pay the bearer a given amount at maturity.

From an Islamic perspective, the first aspect to note here is that, obtaining such certificates is unlawful (haram), for it is a pure usurious transaction. Depositing money in a savings account or fixed deposits where interest is gained on the actual premium is considered to be unlawful by the contemporary scholars. 

The International Islamic Fiqh Academy consisting of top major scholars of the world unanimously issued a resolution that, any returns on bank deposits (since they are loans) is a form of the unlawful and prohibited Riba. (See: Qararat wa Tawsiyyat, Majma’ al-Fiqh al-Islami, p.22)

Thus, depositing money in a fixed or savings account and then accruing interest (riba) is decisively unlawful. Anyone involved must abstain at once and repent to Allah Almighty sincerely. The same is with CD certificates, for (as mentioned earlier) they represent the depositing of a sum in the bank for a specified period, at a predetermined interest rate. Therefore, it will be necessary to repent from the sin of Riba and abstain from such practice in the future.

As far as the Zakat on the investment is concerned, one must first keep a very important principle in mind with regards to unlawful and interest money.

The ruling in the Hanafi School with regards to Haram and wrongly-acquired money is that the money must be returned to its owner(s). If this is not possible, such as bank Interest, then one must give it all away to the poor with the intention of removing the burden and getting rid of this unlawful filthy money, whilst seeking Allah’s forgiveness for disobeying Him in a matter He deems most hateful. (See: Radd al-Muhtar, al-Fatawa al-Hindiyya and Ahsan al-Fatawa).
Therefore, the extra amount gained on the principle investment (i.e. interest) will be considered filthy and unlawful. It will be necessary to get rid of it by giving it all away to the extremely poor and destitute without the intention of reward. Thus, the question of Zakat on this extra amount does not arise.

That leaves us with the question of Zakat on the principle amount invested in this CD. This takes us to the question of “How is Zakat paid on cash at bank?” Money deposited in bank accounts is Islamically (according to the majority of the contemporary scholars) classified as a loan forwarded by the depositor to the bank. The reason being is that, the money deposited into the bank accounts is secured and guaranteed (madhmun), and the bank is responsible to return it to the depositor. Thus, a deposit can not be termed as a normal trust or deposit in a fiqhi sense (amanah), for that is not considered to be guaranteed. 

Moreover, the bank is at liberty (conditionally or customarily) to make use of this money in various different investments and projects. A simple trust is safeguarded and not used, whilst a loan is something that is given with the permission of using and investing it, under the condition that it is returned safely to the one giving the loan.

Thus, money deposited in the various bank accounts, whether it is the savings account, current account or a fixed deposit account is considered Islamically to be a loan (qardh). (See: Buhuth Qadhaya Fiqhiyya al-Mu’asira, p. 351)

Now, due to the fact that one is able to withdraw cash that is kept in the current and savings account whenever one desires, Zakat will be obligatory on this amount each year and one must include it in one’s annual calculation.

One will be considered to have possession (qabdh) over this wealth, for one is able to withdraw it from one’s account whenever one wishes. 

It is stated in the famous Hanafi fiqh reference, al-Fatawa al-Hindiyya:

“(One of the conditions for Zakat to be obligatory) is that one has complete control of the wealth, which is ownership and possession. If one has ownership and not possession or vice versa, then Zakat will not be obligatory. As far as the commodity that is not yet delivered is concerned….it will be part of the Nisab and Zakat will be obligatory on it according to the correct opinion.” (al-Fatawa al-Hindiyya, 1/172. Also see: Fatawa Mahmudiyya, 17/108)

In other words, physical possession is not a necessary requirement for the obligation of Zakat, rather, if one has full control over the wealth and it is redeemable whenever one desires, then this will be considered to be sufficient.

As far as the cash which can not be withdrawn over a specific period (such as fixed deposits and CD in our discussion) is concerned, the ruling concerning it is similar to that of other loans that are given for a specific period and duration.
The Hanafi jurists (fuqaha) have categorized loans into three types. Without going into the details, the following is a simple and brief explanation with regards to it.

If gold, silver or cash has been given as a loan or an article of trade is sold and payment has not as yet been received, then it is preferable that you include it in your possessions (total) and pay Zakat from it annualy. The ruling, however, is that payment of Zakat will not be obligatory until the debt is recovered, but when it is received, Zakat for the previous years will also have to be paid.

For example, I had given a loan of £1000 to various people and received it after five years. Now, although Zakat was not obligatory on this sum of £1000 during the course of the five years, at present I will have to take out Zakat for the previous five years. Giving Zakat at once for the previous years at times causes difficulty in paying as well as in calculation. It is therefore advisable and preferable to take out Zakat annually.

If a woman has not received her dowry or one has not yet received his salary or inheritance has not as yet been distributed, then Zakat will not be obligatory. Its calculation will commence from the day of receiving, meaning there will be no Zakat for the previous years. (See: Bada'i al-Sana'i, vol. 2, p. 90-91)

In light of the above, Zakat on fixed deposits will not be obligatory annually, although one will have to pay Zakat from it for the previous years when it is withdrawn from the account.

In conclusion, a certificate of deposit (CD) is considered to be similar to giving money as a loan on interest, thus unlawful. The excess amount received must be all given away to charity, and Zakat will be obligatory on the remainder. It is better that one pays its Zakat annually but it is not necessary. If one did not pay its Zakat annually, then one will have to pay it for the previous years when it is cashed and redeemed.

And Allah Knows Best

[Mufti] Muhammad ibn Adam
Darul Iftaa
Leicester , UK