Ramadan is in the air!
Hoarding ice cream pops and munching fried foods every sunset are (thankfully) not the only thing I do these weeks. When Ramadan comes around, so does the duty to annually donate 2.5% of my (net) income.
I have two objectives in writing this article. For fellow Muslims, hopefully, this article can help you compare notes on your own calculation. Also, if you think I can correct something, please let me know.
For non-Muslims, I’d like to familiarize you a financial practice that you might seldom hear coming from our religion. It’s an annual compulsory donation by Muslims – something that directly benefits the society at large.
What is Zakat?
First of all, Zakat, or a compulsory charitable donation, is one of the five pillars that every Muslim must practice as part of the religion. The others are the verbal pledge to God (shahadat), daily prayers (salat), Ramadan fasting, and the pilgrimage to Mecca.
There are two kinds of Zakat: Zakat Fitr, the most basic one that involves giving out 5.5 pounds or 2.5 kg of staple food, grain, or dried fruit. Every Muslim, including children via the parents, has to donate before Ramadan ends. The second type is Zakat Maal or the wealth Zakat. It is the 2.5% cut of net wealth, with a more sophisticated rules and maths to be done than the food donation.
Two things in common between the two Zakat:
Both Zakat are compulsory to every Muslim except those that don’t have the means. There are many different ways a Muslim can donate. For instance, buying or crowdfunding a plot of land for building an orphanage will fall under another donation category, Wakaf, which is awesome but not mandatory.
Both proceedings have to be given within the eight categories of eligible recipients and no one else. The categories are:
- People that have no income and cannot support themselves (i.e. extremely poor)
- People that have income but insufficient to support basic needs (i.e. poor)
- People that have crippling, life-threatening debt. Medical debt, for instance.
- People that are traveling or migrating but doesn’t have sufficient means to reach their destination, such as refugees of war.
- Slaves, to help them free themselves. Obviously, this is back in the day when slavery was rampant worldwide, and the only way for slaves to be free is to “buy back” themselves from their owners.
- People that have recently become Muslims. This is to strengthen the communal bond and lift their spirits since it is not uncommon that they face backlash from their families or friends due to the decision.
- People or firms that help the “path of God” (this is a literal translation), such as building mosques, advocating for Muslims in the media, or getting religious education.
- People or firms that organize the collection and distribution of Zakat
Accomplishing the Zakat Fitr is pretty straightforward. In Indonesia, Zakat Fitr kiosks are widely available in malls, or we can also transfer the money online to specific foundations account dedicated to this type of zakat. These foundations would convert the money into rice bags and distribute them to eligible recipients before the deadline. In the US, you can buy 6 pounds of rice or bread and donate it to a homeless shelter, and that will do it.
Now, let’s talk about the second category, which is why we are here.
Zakat Maal – The Poor’s Portion of Our Wealth
Among the reasons Zakat Maal exists is that for every Muslim that has been blessed with sufficient income to live comfortably, there is a portion of their wealth that belongs to the poor and underprivileged.
The act is also meant to “cleanse” the wealth – such that the wealth accumulated is helping the person to achieve a good life and gratitude.
This portion is due every lunar year and goes to the eight categories we described earlier. For me, it comes every month of Ramadan.
The 2.5% percentage is the cut common for monetary income, especially for salaried employees. Agricultural products, mining ores, oils, some other types of earnings have a different set of rules.
In a nutshell, this is how I calculated my portion:
Zakat this year = (Liquid asset – Debt due soon) x 2.5%
The Excel is available here for you to play with. To download, go to File > Download As > Excel. These are dummy numbers for obvious reasons 🙂
More specifically, the sum of liquid assets accumulated up to the day of calculation.
Liquid assets are cash, stocks, bonds, and precious metals that are just sitting there, getting accumulated. Houses, cars, electronics or other assets that are being used on a daily basis are exempt, unless you are in the business of selling houses, cars, or electronics. In this case, the selling price will fall under “income” and would need to be included.
I also handle some zakatable shared accounts with the husband, hence what your see as the first line item.
For my personal chunk, I have to deal with two different currencies – IDR and USD. Considering that I distribute the zakat in Indonesia, I use the Transferwise exchange rate to convert the dollars into rupiahs. Transferwise is my go-to, proven way to transfer money abroad easily, and thus becomes my benchmark.
For precious metals, I converted into rupiah using the buyback rate available on the website of the place where the metal was purchased. In this case, it is Antam.
For stocks and bonds, I would use the valuation that was registered at the day of the calculation for simplicity’s sake. If my brokerage account says that my total portfolio value is 550 dollars that day, 550 dollar it is. The amount is then converted into rupiah using the Transferwise rate.
The rates I use in the above calculations are the day rate of the calculation.
I subtracted the amount of significant debt due in the month or near future in the calculation, such as the money for closing a house payment. Other examples would be tuition that is due soon or car purchase that is essential for your livelihood.
If the debt-subtracted liquid asset is more than the wealth threshold (Nisab) of 3 ounces/85 grams of gold, then we have the zakat obligation. Otherwise, we can skip the year’s zakat. I use the gold standard for the threshold, but there is also a silver standard of 21 ounces or around 613 grams.
Distributing the money
Personally, I always try to distribute the zakat money to help extended family members or the closest neighbors first. Actually, it is advised to do so, since it also strengthens relationships. Of course, the family members have to be among the eight categories mentioned.
However, family members that are in direct lineage – parents and grandparents upwards, kids and grandkids downwards – and your own spouse are not eligible, even though they are among the eight categories. The money given to them cannot be considered “charity”, but rather a financial responsibility or a gift, depending on the intent.
If there is some excess from helping family and family friends, then I turn to foundations that have dedicated zakat account. That way, we know that the money will be 100% distributed among the 8 categories members.
And that’s it!
It takes a good one or two hours to track different accounts and calculate zakat, but I enjoy it through and through. Not only I have the peace of mind of fulfilling my obligation, but also I feel the joy of helping others and get the opportunity to evaluate portfolio strategy every year.
This has to be said…
My way of calculating zakat is not the only way out there. There are different opinions between Islamic scholars about the details of the practices. I know that there are some people that take the percentage out of their gross income, or prefer to use the silver standard.
For my fellow Muslims, I suggest you do your research, educate yourself, and ask questions. This practice is routinely done every year, so spending some time to learn is definitely worth it.
Happy calculating your zakat this year!