A Review of Zakat Practices of Islamic Financial Institutions in

Malaysia

Moutaz Abojeib, Burhanuddin Lukman, Mezbah Uddin Ahmed and Mahadi Ahmad

International Shari’ah Research Academy for Islamic Finance (ISRA), Malaysia

Keywords: Zakat, IFIs, Malaysia, Islamic Bank, Takaful.

Abstract: The practice of Islamic social finance components needs to be strengthened for the revival of Islamic social

finance in the contemporary time. In this regard, zakat as the most important component and Islamic financial

institutions (IFIs) as the payers of zakat deserves an immediate attention. The research has examined the

financial reporting disclosures of 16 Islamic banks and 10 takaful operators. The research found that the IFIs

in Malaysia have adopted a diverse range of zakat calculation methodologies, the applicable zakat rates are

different, application of 2.5% lunar rate for solar calendar year, application of 2.5% in statement of profit or

loss approaches, a mixed understanding of zakat on business or on shareholders, some do not pay zakat, and

overall there is a lack of disclosures on zakat policy. Based on the above observations of financial reporting

disclosures as well as discussions with market observers, the study has identified and elaborated on 11 related

issues. The recommendations put forward by this research opens the avenue for further discussion among the

industry players, regulators and academia. Further research needs to be conducted in addressing each of the

identified issues.

1 INTRODUCTION

Malaysia is a pioneer of global Islamic finance

industry with its well-developed infrastructure,

regulatory frameworks, governance and supervision

systems. It has undertaken several initiatives in the

standardisation of zakat calculation practices of the

Islamic financial institutions (IFIs). For instance,

Malaysian Accounting Standards Board (MASB) has

issued a technical release on accounting for zakat on

business in 2006. Jabatan Wakaf, Zakat dan Haji

(JAWHAR – Department of Waqf, Zakat and Hajj)

has published a manual on zakat calculation in 2007.

JAWHAR has issued another manual specifically for

the banking industry in 2010. Each of the fourteen

states of Malaysia also has their own guidelines for

zakat calculation.

Despite the standardisation efforts, the calculation

of zakat of IFIs remain an area of debate. This might

be due to major changes in the financial reporting

standards since the issuance of the guidelines, and it

may not be practical anymore to adhere to the

guidelines fully. The Shariah committees of the IFIs

may have their own resolutions on zakat calculation,

which may also result in different practices.

With this background, this research aims to

review the current practices of zakat calculation of the

IFIs in Malaysia. This research focuses on the

applications of zakat calculation and its distribution

in the IFIs in Malaysia. The findings of this research

will open the avenue for further research on the

identified issues.

2 LITERATURE REVIEW

Several bodies are involved in issuing fatwas or

guidelines for zakat calculation in Malaysia. In 2006,

MASB has issued Technical Release-I 1: Accounting

for zakat trading businesses. The issued standard was

based on the decision of the National Fatwa Council,

the Zakat Guide for 2001 issued by the Islamic

Development Department of Malaysia (JAKIM) and

the Zakat Accounting Standard No. 9 issued by

AAOIFI among others. The board suggested two

approaches, namely; the adjusted working capital

approach and adjusted growth approach.

The adjusted working capital approach calculates

zakat based on net current assets; then the amount is

adjusted in accordance with items that do not meet the

136

Abojeib, M., Lukman, B., Ahmed, M. and Ahmad, M.

A Review of Zakat Practices of Islamic Financial Institutions in Malaysia.

DOI: 10.5220/0010115900002898

In Proceedings of the 7th ASEAN Universities International Conference on Islamic Finance (7th AICIF 2019) - Revival of Islamic Social Finance to Strengthen Economic Development Towards

a Global Industrial Revolution, pages 136-144

ISBN: 978-989-758-473-2

conditions of zakat assets or liabilities. The adjusted

growth approach calculates zakat based on long-term

equity and liabilities, excluding the one related to

land, plant and equipment and non-current assets, the

amount is then adjusted in accordance with items that

do not meet the zakat assets and liabilities as

determined by the relevant zakat authorities. The

adjusted working capital approach and the adjusted

growth approach are generally similar to AAOIFI’s

(a) net assets method, and (b) net investment assets

method respectively.

In 2007, JAWHAR has published a manual on

Zakat calculation, followed by a comprehensive

manual on Zakat management for banks, along with

some selected Shari’ah opinions chosen by

JAWHAR. JAWHAR uses the same two approaches

and terminology used by the MASB. The manuals

and opinions published by JAWHAR are in line with

AAOIFI. However, there are still some differences

regarding the zakatable assets such as the sukuk and

shares for sale.

Malaysia consists of fourteen thirteen states and

three federal territories. According to the Malaysian

law, the collection and distribution of zakat in each

state are under the authority of the Islamic religious

council of that state. It is found that each of the

Islamic religious councils has its own guidelines on

how to calculate zakat. For example, the Islamic

Religious Council of the Federal Territory - Zakat

Collection Centre (Pusat Pungutan Zakat that is

known by PPZ) offers three ways of calculating Zakat

in commercial companies. Two of them are in line

with the approaches issued or used by MASB,

JAWHAR and AAOIFI, while the third approach is

quite different. The third approach is the profit and

loss approach (PPZ, n.d.). According to this

approach, the company is required to pay zakat only

if the company receives a net profit at the end of the

fiscal year. Otherwise, no zakat is due on the

company. This issue will be discussed in more detail

later.

It shall be noted that the Islamic Religious Council

of the Federal Territory has a very important and

influential position in Malaysia. This is because most

of the IFIs’ headquarters are in Kuala Lumpur, which

is a federal territory.

The research adopts a qualitative method

supported by simple data collection and analysis. The

secondary data extracted from the annual reports are

used to identify the zakat methodology adopted by the

IFIs. This is also supported by semi-structured

discussions with the industry practitioners. The

findings include the issues and challenges in zakat

calculations as well as the proposed solutions are

highlighted and presented before the industry players,

scholars and academicians during the 13th

International Shari’ah Scholars Forum and the

MUZAKARAH-12 in 2018.

This section identifies the zakat calculation

practices of IFIs in Malaysia, based on financial

statements and disclosures of 10 takaful operators and

16 Islamic banks. This will allow identification of

issues related to zakat calculation practices.

3 ANALYSIS MODEL

The research has identified 11 issues related to zakat

calculation practices of IFIs in Malaysia. These are

provided below.

3.1 Inadequate Disclosure about Zakat

Calculation

The disclosures provided by the Islamic banks and

takaful operators in Malaysia is inadequate. The

information provided in the annual reports is not

enough to allow a third party to reliably estimate the

acceptability of the zakat calculation practices of

these IFIs. For example, the classification of current

and non-current assets in relation to zakat calculation

are not disclosed.

3.2 Diverse Zakat Calculation

Methodologies

Table 1 identifies a variety of zakat calculation

methodologies adopted by the IFIs in Malaysia. A

few have adopted a statement of profit or loss-based

approach, whereas the majority have adopted a

statement of financial position-based approach. The

extent of similarity or differences among these

methodologies cannot be established based on the

very minimal disclosures the IFIs have provided.

Table 1: Zakat calculation methodologies.

Methodology

No. of

takaful

operators

No. of

Islamic

banks

Total

Statement of

profit or loss

approach

Profit before tax 2 - 2

Net profit after

tax

- 1 1

Profit and loss

method

- 1 1

A Review of Zakat Practices of Islamic Financial Institutions in Malaysia

137

Table 1: Zakat calculation methodologies (cont.).

Methodology No. of

takaful

operators

No. of

Islamic

banks

Total

Statement of financial position approach

Working capital 1 1 2

Adjusted working

capital

1 - 1

Net asset method 3 1 4

Current assets

method

1 - 1

Growth method - 1 1

Asset growth

method

- 1 1

Adjusted growth

method

1 2 3

Capital growth

computation

method

- 1 1

Growth capital

method

- 1 1

Opening reserve

method

- 1 1

Mixed

approach

Higher of:

Growth model

method, and

Profit before tax

- 1 1

No method

identified

1 4 5

Total 10 16 26

Source: Financial statements and related disclosures of IFIs

Three approaches for zakat calculation can be

identified from the presented table. There may or may

not be any significant difference between “working

capital” and “capital growth” approaches, but

certainly “net profit” approach significantly differs

from the other two. Furthermore, the details of the

first two approach are not clear due to the lack of

necessary disclosures.

3.3 Net Profit Approach for Corporate

Entities

The Islamic Religious Council of the Federal

Territory – Zakat Collection Centre (Pusat Pungutan

Zakat known as PPZ) is the only authority that adopts

the Net Profit approach to calculate zakat. However,

PPZ mentions that this approach is only suitable for

small enterprises/businesses that do not have

accounts or financial data. Its website states that “this

approach is appropriate for businesses with no

accounts or financial data like small shops, retailers,

wet markets, night markets, bazars, restaurants, Food

and beverages kiosks and other related businesses

(PPZ, n.d.). This advice seems to be neglected by at

least two takaful operators who are surely not small-

businesses. Some re-takaful operators use this

approach as well.

Application of net profit approach for corporate

entities has essential shortcoming and raise important

Shariah issues. For instance, this may entail that an

entity will not be a subject of zakat if it reports a loss.

It has been observed that out of 14 instances of non-

payment of zakat by the takāful operators, in 7

instances profit before tax method was applied.

From Shariah perspectives, three questions need

to be discussed: (1) Is this approach accurate and does

it fulfil the requirements and objectives of business

and properties zakat? (2) Does the person/legal entity

still have to pay zakat if the net profit is negative? (3)

What is the rate of zakat that should be used with this

approach?

While the third question represents an

independent issue that will be discussed separately,

we try to answer the first two questions in the

following few paragraphs. It is well established in

Shari’ah that a trader has to pay zakat for his trading

by calculating his capital and profit together. As far

as the sum of his wealth exceeds the nisab, then

he/she is obliged to pay zakat. Even if a businessman

who invested RM 100 million, losses a RM 99 million

due to a devastating fire, he still has to pay zakat as

he has RM 1 million left. This is because his net

wealth is still exceeding the nisab. Therefore, losing

99% of capital does not necessarily make zakat

undue.

Similarly, if the businessman lost all his properties

in a robbery for example, he would still need to pay

zakat if he has savings more than nisab. This is

because he is a wealthy man from an Islamic

perspective. The presented arguments are also

supported by AAOIFI. In fact, its standard no 35

clearly stipulates that the statement of profit or loss

should not be the base for calculation of zakat

whether the zakat is due or not, even in the event of

loss, zakat is still applicable except when the

liabilities absorb all the assets (AAOIFI, 2015, p.

872).

It shall be highlighted that the impact of following

net profit approach on Zakat amount is found to be

significant. Taking one of the takaful operators who

use Net Profit approach as a case study for instance.

The operator reports a loss of RM 15.8 million, and

hence reported zero zakat payment based on net profit

approach. However, the operator still has equity of

RM 99.4 million. This equity can be in forms of cash

or current assets or other forms of zakatable assets.

Therefore, despite the losses, using the Working

Capital approach (Net current assets approach) or

Equity approach will probably oblige the operator to

7th AICIF 2019 - ASEAN Universities Conference on Islamic Finance

138

pay zakat because still there are zakatable assets that

exceed the nisab.

3.4 Different Zakat Rates

Table 2 identifies that the majority of the IFIs do not

disclose the rate they have applied for zakat

calculation. Among the disclosed, most of the IFIs

apply 2.5% for zakat calculation. One IFI applies

2.5775% and one other applies 2.575%.

Table 2: Zakat rates applied by IFIs.

2.5% 2.5775% 2.575%

Not

identified

No. of

takaful

operators

6 - - 4

No. of

Islamic

banks

4 1 1 10

Total 10 1 1 14

Source: Financial statements and related disclosures of IFIs

Among 26 Islamic banks and takaful operators in

Malaysia as mentioned earlier, only one uses the

2.5775% rate. Both AAOIFI and JAWHAR

mentioned that zakat rate of 2.5% shall be used only

if the lunar (Hijri) year which may have 354 days is

used. Otherwise, if the solar year which may have 365

days is used, then a modification should be done to

count for the differences in the number of days. The

modification implies using a rate of 2.5775% to

account for the extra days in the 365 days solar year

usually used in Malaysia. In fact, while AAOIFI

requests 2.577%, the MASB and PPZ mentioned only

the rate of 2.5% per annum according to the

resolution of National Fatwa Council (AAOIFI, 2015,

p. 874; JAWHAR, 2011 and MASB, n.d.). As such,

the issue of using 2.5% seems to be not only an issue

at practice, but more of an issue at regulatory and

standard-setting level.

The 2.5% rate is suitable for a lunar calendar year.

Whereas, the financial statements of IFIs are prepared

following a solar calendar year. Hence, applying

2.5% for a solar calendar year results in a lower zakat-

payable amount due to 10 days difference between

the two calendars (i.e. number of days in solar

calendar is ten days more than in lunar calendar).

This application of 2.5% is following the

requirements of PPZ. Whereas, international standard

setters like AAOIFI requires 2.5775% if an entity

calculates zakat based on a solar calendar year.

3.5 Application of 2.5% in Statement of

Profit or Loss Approach

The 2.5% zakat rate is applied irrespective of

statement of profit or loss approach and statement of

financial position approach. This may entail that an

entity will not be a subject of zakat if it reports a loss.

Appendix 5 shows that out of 14 instances of non-

payment of zakat by the takaful operators, in 7

instances profit before tax method was applied.

As highlighted before the net profit approach in

calculating zakat is not allowed by AAOIFI, Zakat

House in Kuwait, Malaysian standards or religious

councils of Malaysian states except for PPZ.

Therefore, none of the mentioned standards can be

used to answer the question regarding the rate that

shall be used to calculate zakat if the net profit

approach is adopted. Only the opinions that allow

using the mentioned approach shall be used.

Suppose that Abdullah is a trader. He has a capital

of RM1 million. He spent RM900,000 to buy goods

and spent RM100,000 for rentals, transportation and

other expenses. If Abdullah sold the goods after one

year with 1 million RM, his total revenue and capital

would still be RM 1 million. However, the net profit

of Abdullah’s business is zero because the income

was just equal to the total expenses. Yet, as far as the

zakat is concerned, Abdullah is still considered

wealthy because he owns more than the nisab for a

one ḥawl. The rate of 2.5% then shall be applied to

the total value of his wealth (goods sold mixed with

unsold goods if any).

Alternatively, considering the net profit approach,

the calculation could be as follows. Since he sold the

goods by RM1 million, then the zakat payable will be

RM1 million × 2.5% without deducting expenses and

costs. If Abdullah has sold his goods for RM2

millions, then he would have had an RM2 million for

one year; hence, the zakat payable would have been

RM2 million × 2.5% regardless of the expenses and

costs paid before in the process (al-Qaradawi, 2000,

pp 332-339). In other words, the rate of 2.5% is

applied to the total revenue; not on the net profit as

suggested by PPZ.

The other option is to use 5% to 10% as zakat rate

— this suggestion is found to be applicable for

service-based businesses. According to scholars like

Yusuf al-Qaradawi and Muhammad al-Ghazali

(1917-1996), these rates can be used for the employee

who earns a salary from his employer. It is also

applicable for a freelance who provides services and

gets a fee in return. These persons should pay zakat

between 5% to 10% without waiting for the ḥawl (one

lunar calendar year used in calculation zakat). This

A Review of Zakat Practices of Islamic Financial Institutions in Malaysia

139

opinion is found to be supported by the practice of

some companions of the Prophet (SAW) like Ibn

Abbas and Ibn Masoud and Muʿawiah and Umar bin

Abdul Aziz among others (al-Qaradawi, 2000, pp

499-503 and al-Qaradawi, 2006 v. 1: 480; 485). The

practice also resembles the zakat of plantations and

fruits, which is a percentage of the total revenues

from selling the crops. The percentage is 10% if the

crops are irrigated by natural rain water without

incurring irrigation expenses and 5% if the crops are

irrigated otherwise. However, it is important to keep

in mind that 5% or 10% are paid normally from the

gained proceeds, not from the net profit. As an

exception, al-Qaradawi approved deducting costs and

expenses and daily basic needs if the farmer has no

other source of income (al-Qaradawi, 2000, p. 517).

However, if the farmer or service provider has

another source of funds or savings; then he/she should

pay both types of zakat, namely; the zakat al-māl al-

mustafād (the wealth that newly acquired) which is

5% to 10% from the received return, and zakat of

savings which is 2.5%. As such a commercial or

service company (i.e. a lawyer) shall pay 5% to 10%

as zakat of return and 2.5% as zakat of savings.

3.6 Muslim and non-Muslim

Shareholders

Most IFIs calculate zakat according to the percentage

of Muslim shareholders. In other words, the initial

zakatable amount calculated is multiplied by the

percentage of Muslims equity before multiplying it

with the zakat rate. This approach of calculating zakat

depending on the religious status of the shareholders

is found to be used by PPZ.

Zakat is a pillar of Islam, and Muslim is the one

who should pay zakat. Being a Muslim is a condition

for zakat payment; therefore, if Muslims participate

with non-Muslims in a company, only the part related

to the Muslim partner is the zakatable. This seems to

be a reasonable argument. However, it raises many

questions in implementation. Institutions have an

independent legal entity with sometimes a

complicated ownership structure. The following are

just a few questions referring to some examples. How

to get the Muslim shareholders’ percentage for a

public listed company? What would be the zakat for

an institution owned by government or by a private

party and a government subsidiary? What would be

the zakat of an Islamic bank that is owned by a

conventional bank?

Let us take the example of PruBSN takaful in

Malaysia. The company is owned by Prudential PLC

(49% of the shares) and BSN Bank (51% of its

shares). While Prudential PLC is a conventional

insurance company, BSN is owned by the

government. Taking the approach of differentiating

between Muslim and non-muslim shareholders as

suggested by PPZ and others, shall the government be

considered a Muslim party? Does it have to pay

zakat? Shall Prudential PLC, being a conventional

insurance company, be considered as a non-Muslim

entity; and hence no zakat on it or shall we check the

religion of its shareholders?

Another example is Etiqa takaful. Etiqa is owned

by Malaysian Banking Berhad that is a Shari’ah non-

compliant corporation, where 20% of its shares are

owned by PNB, a governmental investment agency

that uses Muslim funds. According to PPZ approach

for zakat calculation, what is the zakat rate that should

be used by Etiqa takaful?

3.7 Zakat of Shares, Sukuk and other

Securities

The approach that is followed in Malaysia regarding

the zakat of shares, sukuk and other securities is based

on differentiating these securities according to their

purpose. Therefore, if the purpose of acquiring them

is trading within the same financial year, then they are

considered a zakatable asset. On the other hand, if

they are acquired to be sold after more than one year

or for getting dividends or return attached with them,

then they are not considered zakatable assets and no

zakat of any amount will be paid for them. JAWHAR

mentioned in the guideline of zakat of banks: “the

certificates of shares in other companies, bonds and

investment certificates, shares, allowances, goodwill,

patents and other securities are considered as a

performing fixed asset if they are not intended for

trading as merchandise (JAWHAR, 2011, p. 30).

The above statement implies that no zakat will be

paid on a “share held to maturity” by the company or

IFI as it is viewed like a building or any other type of

fixed assets. This view differs from AAOIFI view.

According to AAOIFI, if shares are bought for

purposes other than trading, then one needs to refer to

the assets of the company issuing the share to

investigate what the share is representing. Shari’ah

standard no.35 issued by AAOIFI mentions that: “For

investments in shares with the aim of retaining them

(Nama’): If it is possible to know through the

company what is the exact amount of Zakatable assets

(cash, articles of trade and repayable debts) per share,

zakat can be levied on that amount, otherwise Zakat

is to be levied on the portion of zakatable assets per

share, which has to be reached through estimation. If

the company has no zakatable assets, Zakat is

7th AICIF 2019 - ASEAN Universities Conference on Islamic Finance

140

obligatory on the remaining part of the net income at

the end of the year.” As far as the shares for trading

purposes are concerned, the Malaysian approach is in

line with AAOIFI. Both would consider such shares

as zakatable current assets (AAOIFI, 2015, p. 875,

879).

Similar to shares, Malaysian practices seem to

differentiate between the sukuk held for investments

and sukuk held for liquidity purposes in calculating

the due zakat. Islamic banks may hold Sukuk either

as a long-term investment or as a short-term asset to

satisfy Basel requirements for liquidity management,

for example. While Islamic banks seem to exclude the

long-term investment instruments including sukuk in

calculating the zakat, someone may ask why not to

apply zakāt al-mustaghallāt on them? As such, at least

zakat would be imposed on the yields upon

liquidation or in each financial year like rentals of a

building. On another hand, investigating the types of

sukuk before applying any rule could be important.

Zakat on sukuk murābahah for instance might not be

the same as sukuk muḍārabah or ijarah.

Discussing the Shari’ah views regarding zakat on

shares, sukuk and other securities requires a separate

research, but apart from the mentioned above issues,

an important implication attached with the Malaysian

approach that considers the purpose of holding the

shares as a sole factor to differentiate between

zakatable shares and non-zakatable shares. This

approach opens the door widely for manipulation and

zakat evasion.

3.8 Different Standards of Zakatable

and non-Zakatable Assets

There are differences among the local and

international standards regarding some types of assets

whether shall be considered zakatable assets or

otherwise. Examples of such assets include, but are

not limited to, the raw materials used in

manufacturing, the semi-manufactured goods or

under-manufacturing goods, various reserves and

provisions especially in IFIs. For instance, for

manufacturing goods, JAWHAR, PPZ and Selangor

Zakat Council agree that these raw materials should

not be considered as zakatable assets. “The final

goods are considered zakatable asset, while the

inventory of raw materials and works under

processing are not” (SZC, n.d.). On the other hand,

AAOIFI considers them zakatable assets.

Furthermore, in calculation, AAOIFI clarifies that

current assets including finished goods, goods under

manufacturing process and raw materials shall be

valued at market price. The cost could be considered

only if it is impossible to get the market price.

“commodity stocks prepared for Trade, raw materials

in their different forms, and goods for sale in their

original form or after being manufactured by adding

them to other materials: To be valued for Zakat

purposes at selling market price… Goods in process:

To be valued for Zakat at their current market price

on the day of Zakat accrual, and if it is not possible to

know their market value, they could be valued at

cost” (AAOIFI, 2015, p. 880-881).

As far as reserves and provisions are concerned. It

is found that they are highly controversial issues and

each IFI in practice seems to have its own opinion,

application and justification regarding this.

3.9 Zakat of Assets in Takaful

Operators

Regarding the zakat on Takaful and particularly the

zakat for takaful participants (takaful certificates

holders) on investment funds under takaful, many

questions could be raised.

For instance, if the approach of intention or

purpose of ownership is used to differentiate between

zakatable and non-zakatable assets, what are the

purposes to be considered in such cases? Moreover,

can the intention of the participants be used although

they may not have full control over the participant

investment fund? In other words, do the participants

have full ownership that obliges them to pay zakat on

the funds or otherwise?

Participants have no right to dispose with the

money in the fund until maturity or termination of

contract. Usually, investment funds are managed by a

fund-manager under the takaful operator or the

program similar to ordinary investment fund units.

These funds may contain cash, banks current

accounts, shares, ṣukūk and other Shari’ah-compliant

securities. For long-term products (such as life

Islamic insurance), the intentions of takaful

participants and intentions of fund manager may

differ. Participants intend to save money and invest

the funds to multiply their savings for their coming

years. So, the purpose for them could be perceived as

non-trading. On the other hand, fund-managers may

purchase assets on behalf of participants for trading.

Normally, they trade them to obtain gains or maintain

the fund’s net asset value. Shares and securities are

purchased for selling them and add value to the fund.

Following JAWHAR, paying zakat is required on the

proceeds from assets only as far as they are purchased

for long-term saving purpose, and that’s after the

passage of the ḥawl. On another hand, AAOIFI

clearly stated that “Investment Funds in their different

A Review of Zakat Practices of Islamic Financial Institutions in Malaysia

141

forms: Zakat has to be paid on the basis of the

underlying assets of the fund, and as indicated in this

Standard” (AAOIFI, 2015, p. 878).

3.10 Disbursement of Zakat

The study found that most of IFIs in Malaysia have

no fixed rules regarding the disbursement of zakat

funds. Methods of disbursement and distribution are

mostly done by a suggestion from those in charge,

and then approved by the Shari’ah committee of the

same institution. Since almost all IFIs’ head-offices

are in KL, one particular issue in Malaysia is to decide

whether to priorities Kuala Lumpur federal territory

in the disbursement of zakat or to disburse the due

zakat to all states through the respective state

religious councils or otherwise. Furthermore, what

would be the best approach in deciding the relevant

proportions?

The research found one relevant rule of

distribution is followed by at least one of the Islamic

banks. The bank divides zakat funds among all zakat

management offices in the 14 Malaysian states

according to the deposits received by the branches of

the bank in those states within the same financial

year. This is based on the idea that the income for the

bank comes from those states, and therefore, zakat

funds should go back to those states as channels. This

opinion is based on a hadith of the Prophet

Muhammed (SAW) saying: “Let them know that

Allah (SWT) imposed on them a charity that is taken

from their wealthy to their poor”.

3.11 The Roles and Duties of Shari’ah

Committees

Many financial statements of IFIs show that the zakat

calculation approach was approved by the Shari’ah

committee of the IFI, without mentioning the details

of calculation approach.

As accounting rules are not easy, accounting

approaches and terminologies differ significantly

from Shari’ah approaches and methods. Thus, there is

a concern that Shari’ah committee may not

understand what has been approved entirely,

especially regarding its financial impact. According

to a study conducted on the zakat calculation in IFIs,

one weakness point of some Sharia committee is

limited accounting knowledge; hence, they leave the

issue of accuracy of the used approach to the

accountants (al-Khulaifi, 2017). Though the research

did not perform a survey to confirm such result in

relation to the Shari’ah committees of IFIs in

Malaysia, the initial investigation tends to indicate

that there is a worldwide need to enhance the

knowledge of Shari’ah committees on accounting.

4 CONCLUSIONS

This research investigated the existing international

and national standards and guidelines in relation to

zakat of IFIs. It is further investigated the practices of

IFIs in Malaysia. Eleven issues are found to be

unresolved. While some issues require actions to be

rectified, other issues are found to require

comprehensive dedicated researches to be resolved.

Overall, the study concludes that the status of

zakat in Malaysia generally and within the IFIs

especially needs urgent tackling and corrections. It

suggests to the relevant authorities to form a special

committee consisting of highly skilled and

experienced persons from Shari’ah, accounting, law

and finance backgrounds to tackle the

abovementioned issues. As mentioned in the

introduction, this study represents initial findings for

the current studies, and some findings require further

research and to be tested practically.

In addressing the identified issues, the research

recommends the following:

(i) Stipulating minimum disclosure requirements

by standard setters and regulators.

Standard-setting bodies like MASB and

religious authorises can set a minimum

requirement for the information and data that

should be disclosed within the annual reports in

relation to zakat calculation. In addition, Bank

Negara Malaysia can enforce IFIs that operate

under its supervision, like Islamic banks and

takaful operators, to adequately disclose

information about zakat calculation. This is in

line with the Value-Based Intermediation (VBI)

which is conceived to be the strategic position

of IFIs in the near future to ensure the proper

fulfilling of religious and social duties by these

institutions.

(ii) Establishing a national committee comprising

Shariah and industry experts.

Like taxation that is normally clear and unified

in any country, zakat’s standards and rules

should be clear and unifies as well. Zakat is a

financial obligation that should be paid to the

authorities, or at least, it is paid under the

supervision of authorities. Therefore, regulators

can form a special committee to look in details

on the basic rules of zakat calculation which are

applied worldwide. This committee shall issue

clear and detailed standards to be approved and

7th AICIF 2019 - ASEAN Universities Conference on Islamic Finance

142

checked by the relevant authorities and then

enforce the IFIs to follow it. It is important that

these standards are tested by IFIs before the final

endorsement. Besides, the committee should

consist of eligible and well-educated Shari’ah

experts that have wide experience in accounting,

next to accounting, legal, banking and takaful

experts. Some member with zakat practices

should also be there. Moreover, this committee

should be given adequate time (not less than one

year) to conduct field experiments.

(iii) Calculation of zakat of IFIs applying 2.577% or

2.5775% rate.

This study argues that the more accurate and

Shari’ah-based zakat rate is based on the lunar

(Hijri) year, and thus, it is 2.5%. In fact, using

the solar year opens the door for many

differences in the calculation. For example, the

person who owns the nisab of zakat for 354 days

is eligible to pay zakat. However, there is a

possibility that he may have less than the nisab

before reaching the 365th day if he used the 365

days solar year calendar. In other words, if he

followed the lunar year, he should pay zakat

because he has already reached nisab and ḥawl.

However, if he followed the solar year, he is not

obliged to pay zakat because he does not own

enough nisab when the ḥawl is reached. This

case is the opposite of another case where the

person does not have the nisab of 354 days, but

in the 365th day, he is already acquiring the

nisab. Therefore, if he follows the lunar year, his

due zakat is zero, but if he follows the solar year,

he is obliged to pay zakat because he reached the

nisab. If nisab was RM14,772, then it should be

multiplied by 2.577% and thus he is obliged to

pay not less than RM380.

As such, it would be recommended to stick

to the lunar (hijri) calendar in calculating zakat.

Nevertheless, in the context of IFIs in Malaysia

which follow the regular financial cycle that is

based on solar year (usually 31st Dec or 30th

Nov or 31st March of each year), such

recommendation would be difficult to be

applied. Therefore, IFIs in Malaysia have no

option other than using 2.577% or 2.5775%.

Using 2.5% will result in paying less zakat than

should be. In fact, using 2.5% for the currently

used solar calendar year implies that in 36 years,

those institutions will miss paying zakat for a

full one year. That is because every 36 solar

years are equivalent to 37 lunar years.

(iv) Avoiding net profit approach in zakat

calculation of IFIs.

The research argues that net profit approach is

not appropriate for IFIs. It also raises Shari’ah

concerns. It is highly suggested to revise the

approach and strongly advise IFIs to avoid using

it. The supporters of net profit approach argue

that the company assets shall be preserved in

value to ensure running of the business. In case

of loss, any zakat payment would imply

reducing their values as well as the capital that

shall be preserved to meet the supervisory

requirements. The reply to this argument is the

fact that zakat is required according to the type

of properties. If the company owns any

zakatable property, it should pay the zakat on

that asset regardless of its purpose. An owner

who has money more than the nisab is

considered wealthy even though his business

was not profitable.

(v) Revisiting the zakat rules of net profit approach.

If the profit approach is to be adopted as the.

Shariah allows it in certain cases, the rate and

the method suggested by PPZ needs to be

revised for it to be suitable for IFIs.

(vi) Enhancing expertise of Shariah committee

members.

Shari’ah committees play a significant role in

ensuring compliance of different zakat

calculation approaches with Shari’ah rules. It is

highly recommended to encourage Shari’ah

committee members to attend trainings on

accounting.

REFERENCES

AAOIFI. (2015). Shariah Standard No. (35) on Zakah. In

AAOFI Shariah Standards (pp. 866-904). Manama.

Al-Khalifi, R. (2018). A Standard for Accounting

Companies' Zakah. Kuwait: Kuwait Accountants &

Auditors Association.

Al-Khulaifi, R. (2017). The Reality of Zakatin Islamic

Banks. Kuala Lumpur: International Shari'ah Research

Academy for Islamic Finance (ISRA).

Al-Qaradawi, Y. (2000). Fiqh al-Zakat. Jeddah: King

Abdulaziz University.

Bouheraoua, S. (2012). Zakah Obligations on Islamic

Financial Institutions. Kuala Lumpur: International

Shari’ah Research Academy for Islamic Finance

(ISRA).

JAWHAR. (2011). Manual Pengurusan Zakat Perbankan.

Retrieved April 8, 2019, from

http://intranet.jawhar.gov.my/penerbitan/p_admin/file

_upload/JAWHAR-Zakat%20Perbankan.pdf

MASB. (n.d.). Technical Release i -1 Accounting for Zakat

on Business. Retrieved April 7, 2019, from

A Review of Zakat Practices of Islamic Financial Institutions in Malaysia

143

http://www.masb.org.my/pdf.php?pdf=Accounting%2

0for%20Zakat%20TRi-1.pdf&file_path=uploadfile

PPZ. (n.d.). Zakat Perniagaan. Retrieved April 7, 2019,

from http://www.zakat.com.my/info-zakat/jenis-jenis-

zakat/zakat-perniagaan/

Selangor Zakat Council. (n.d.). Zakat Perniagaan.

Retrieved April 7, 2019, from

http://www.zakatselangor.com.my/jenis-jenis-

zakat/zakat-harta/zakat-perniagaan/

Zakat House Kuwait. (2016). Zakat Rulings and Fatwas.

Retrieved April 7, 2019, from

https://www.zakathouse.org.kw/Files/%D8%A7%D8

%AD%D9%83%D8%A7%D9%85%20%D9%88%D9

%81%D8%AA%D8%A7%D9%88%D9%89/Fatawa2

016.html#p=1

7th AICIF 2019 - ASEAN Universities Conference on Islamic Finance

144