Zakah on stocks: some unsettled issues

Issues relating to zakah on equity shares are far from being settled if one considers the available fatawa and observed practices in many Muslim countries. The most basic questions pertain to the correct method of valuation of equity shares for the purpose of estimation of zakah liability. This paper reviews alternative methods of valuation and argues in favour of marketbased valuation. It also raises serious questions on the permissibility of exemption of fixed assets from zakah liability in the accounting based framework, notwithstanding its actual use in some Muslim countries. A market-based valuation framework is rooted in the notion of market efficiency, which dominates modern finance theories for over a century. The paper seeks to push forward the concept of "average price" as the basis of valuation as also of estimating zakah liability. It argues that the concept not only follows logically from the efficient market theory, but also is backed by sound Shari'ah evidence

Enhancing food security with Islamic microfinance: insights from some recent experiments

Purpose – Islamic microfinance institutions (IsMFIs) have used diverse models and tools, as they seek to provide financial and non-financial support to the farming communities. A majortity of IsMFIs focus on provision of micro-credit to farmers alone as a means to enhance food security, following an approach similar to that of the conventional microfinance institutions. Others adopt a “finance-plus” approach and provide support in a multitude of areas other than finance, such as, technology, production, marketing, business development, capacity building, and thus, ultimately steering the project to success. The purpose of this paper is to examine the models and tools of Islamic agricultural finance for the rural poor that display major variations and draw lessons from a policy perspective. Design/methodology/approach – The study undertakes a comprehensive review of the principles, modes and models of Islamic agricultural finance targeted at small-holder farmers. It uses a case study method to review several winning initiatives by IsMFIs across the globe. It highlights the various risks and challenges confronting the projects and how the same are sought to be mitigated. Findings – Islamic agricultural finance for the rural poor involves a range of modes, mechanisms and institutional structures. Credit-based and sharing-based modes work well under specific conditions and there is no one-size-fits-all solution for financing the rural poor. Case studies of successful initiatives reveal that composite models involving the integration of philanthropy-based, not-for-profit as well as for-profit components may provide ideal solutions. Additional factors critical for success include provision of safety nets, involvement of community, non-financial support in a multitude of areas other than finance, such as, technology, procurement, production, marketing, business development and institutional capacity building. Originality/value – The paper addresses a fundamental issue in financing the poor farmers in Muslim societies – whether to opt for a credit-based approach that would ensure greater outreach or to go for a holistic intervention involving financing of the entire value chain. The findings are based on personal interaction of the author with professionals directly involved in the projects. </jats:sec

Revisiting estimation methods of business zakat and related tax incentives

Purpose Available zakat accounting standards as well as the laws governing business zakat suggest that the adjusted net working capital or the adjusted growth capital of a business may be regarded as the base for computation of its zakat liability. The apparent consensus follows from the fiqhi prescription of imposing zakat on urud al-tijarah or the inventory of goods available for trade. Some contemporary scholars however question the rationale underlying this method and argue that the objectives of the Shariah are better met by seeking recourse to alternative methods of zakat determination for business organizations. There is therefore a need to revisit the issues and subject them to fresh scrutiny in terms of economic rationality and consistency. Design/methodology/approach The paper examines the arguments of the “orthodox” school as well as those of some contemporary scholars on alternative methods of computing business zakat. It also undertakes a comprehensive review of the laws of zakat as they are related to businesses and the related accounting pronouncements along with their underlying rationale. As the issue of incentivizing zakat payment is an important one, and it is often linked to provision of tax benefits, the paper examines a few suggestions in this regard. Findings On examination of specific suggestions – specifically, of treating earnings as zakat base – to scrutiny in terms of economic rationality and consistency, the authors argue that the “orthodox” position is not only consistent but also makes enormous economic sense. Further, the issue of incentivizing zakat payment and that of lack of harmonization between business zakat accounting and taxation need not be and should not be resolved by making changes in the former because the same has a sound Shariah basis. It can be easily resolved, if need be, by making changes in methods of taxation (tax deduction or tax rebate) and base them on specific items in the balance sheet or the income statement. Practical implications The paper provides useful insights to policy makers who are concerned about the huge gap between actual and potential collection of zakat and are considering tax reforms for incentivizing business zakat mobilization. It highlights the diversity in practices relating to zakat computation and related taxation across Muslim countries. Originality/value The paper searches for and observes consistency and compatibility between the orthodox Shariah-legal position and several accounting and taxation-related policies relating to business zakat. The policy prescriptions are expected to rejuvenate and strengthen the global zakat sector. </jats:sec