zakat for accountant

EditorialZAKAT - As a tool for Poverty AlleviationAbdul Rahim Suriya, FCA

President’s MessageS. M. Shabbar Zaidi, FCA

ZakatQuestions and Answers on ZakahJustice Maulana Taqi Usmani

Zakat & Ushr in Modern TimesSadia Kaleem, ACA

Rudiments of ZakatIrfan Ahmad Khan, ACA

Zakat Self Assessment FormContributed by School of Business Studies

General Rules Governing Calculation of ZakatContributed by Ishaque Noor

Islamic Economic SystemIssues in Islamic BankingKamran Akhtar, ACA

The Basic Principles of Islamic Economy andTheir Effects on Accounting Standards-SettingMohammad R. Taheri

M u r a b a h aContributed by Yasin Zairy, FCA

Financial ReportingIAS 17 - Changing FacemaskYasir Khan, ACA

Internal AuditingPre-payment checks, compliance audit or risk-basedaudit what is the most effective role for internal auditAndy wynne

Institute NewsObituariesMoosa Yousuf Lulat, Abbas Mohamed PeerbhoyMohsin Mustafa and Syed Iftikhar Ali

VCD of CPD Activities Conducted by SRC

Health NewsMedical Experiment Miracles with WaterContributed by Dr. Khawaja Amjad Saeed, FCA

That’s Life‘Me Deaf’Altaf Noor Ali, ACA

Students’ SectionCollective Zakat SystemNadia Wahid

P U B L I C ATIONS COMMITTEE

Chairman Abdul Rahim Suriya, FCA

Vice-ChairmanAhmad Saeed, FCA

MembersSalim Chamdia, FCA

Faisal Habib, FCATausif Ilyas, FCAAsif Jamal, FCA

Fazal Mahmood, FCAShakil Akhtar Qureshi, FCA

Abdul Rashid, FCAM. Arshad Siddiqui, FCA

Sophia Ahmed, ACAJehan Zeb Amin, ACA

Muhammed Amin Bhimani, ACAFaisal Imran Hussain, ACA

Muhammad Mahmood Marfatia, ACAAdnan Ahmad Mufti, ACA

Ahsan Ghaffar Mehanti, ACARahil Rafiq, ACAHena Sadiq, ACA

Junaid Haji Zikar, ACA

THE COUNCIL

Council and Office Bearers

PresidentSyed Mohammad Shabbar Zaidi, FCA

Vice PresidentsImran Afzal, FCA

Ahmad Saeed, FCA

MembersRafaqat Ullah Babar, FCA

Dr. Tariq HassanShahzad Hussain, FCA

Nasimuddin Hyder, FCASyed Shahid Husain Jafri, FCA

Farrukh Viqaruddin Junaidy, FCA

Dr. Faizullah KhiljiArif Mansur

Shaikh Saqib Masood, FCARashid Rahman Mir, FCA

Asad Ali Shah, FCA

Abdul Rahim Suriya, FCA

Mohammad Abdullah Yusuf, FCA

Executive Director: Moiz Ahmad, FCA

Secretary:F. H. Saifee, FCA

Publications Coordinator: Asad Shahzad

EDITORIAL OFFICEThe Pakistan Accountant

Chartered Accountants Avenue Clifton Karachi (Pakistan)Phone: 9251636-39 Fax: 9251626 E-mail: [email protected]

Website: www.icap.org.pk

Vol # 38 Issue # 4Ac c o u n t a n t

July - August 2005

Pakistan Accountant can be downloaded from Institute’s website at www.icap.org.pkThe views expressed here do not necessarily represent the official policy of the Institute.

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July - August 2005The Pakistan A c c o u n t a n t 03

EditorialZAKAT - As a tool for Poverty Alleviation

Although Pakistan’s economy has grown at anappreciable rate over the last few years the povertylevel in the country has not reduced. Despite thegovernment’s poverty reduction program, it is believedthat roughly one-third of the population currently livesbelow the poverty line. The situation is indeed prettygrim, and radical measures are required to redress thesituation.

Of the many options available to the economicmanagers of the country, Zakat – one of thefundamental pillars of Islam - has the potential toprovide a quick fix solution to the problem. Its potentialcan be gauged from the spate of advertisements in theprint and electronic media by the NGOs andCharitable Organizations for collection of Zakat as theholy month of Ramadan approaches. Why do peopleprefer to pay to these organizations rather than thegovernment? The answer is pretty simple. People haveconfidence in them. They share information with thedonors - how much Zakat did they collect and how didthey utilize it. Furthermore, the work that theseorganizations do or not do is physically evident to thepeople.

Although the Zakat and Ushr Ordinance have been onthe statute books for many years now, the governmenthas not realized the full potential of this levy.U n f o r t u n a t e l y, the system suffers from a lack oftransparency, and the public has no trust in it. No oneknows how much is collected by the state as Zakat, andhow it is spent. As a first step to restore confidence inthe system the government should make public theaccounts of the Central Zakat Fund.

Apart from paying to the government and thecharitable organizations people pay zakat directly tothe needy. While this practice ensures that the money

reaches the needy, the drawback is that the Zakat isused for satisfying their immediate needs, and notmuch heed is paid to strengthening their economicbase on a long-term basis. As a result they becomedependent on Zakat for survival from year to year. Thiscertainly is not an objective of Zakat. The endeavorshould be to make the needy self-reliant as soon aspossible.

As this issue was going to the press, the countrysuffered its worst natural disaster. A massive earthquakehit the Northern areas of the country, and A z a dKashmir. There is death and misery all over. Thousandshave perished, many more have been injured, millionshave been rendered homeless, cities, towns, andvillages have been wiped out, the communicationnetwork has been badly mauled. Our heart goes out tothe bereaved families, and we offer our profoundsympathies to them.

The whole nation has risen to the challenge. Donationsin cash and kind are pouring in. Indeed so much hasbeen donated in kind that transporting these goods tothe affected people is becoming a logistical nightmare.The Institute too is cognizant of its responsibilities inthis regard, and has launched an appeal to its membersto donate funds. I would urge the members tocontribute generously to this noble cause.

Finally, I pray to Almighty Allah to protect us all.Aameen!

Abdul Rahim Suriya, FCA

Chief Editor

July - August 2005The Pakistan A c c o u n t a n t 04

President’s MessageThe newly elected council has taken charge on September

12, 2005. I reiterate the comments made in the council's

meeting whilst taking charge as the President for the term

2005-2006 that I consider this office as a responsibility for

maintaining the high standards set by my predecessors; and

the trusteeship bestowed upon us by the members.

Accounting is not the end but a mean to attain the end of

economic prosperity and development. All of our members,

whether in practice and industry have to acknowledge and

demonstrate that we are engaged in providing 'service' to

businesses. This includes our role as accountants as well as

'auditors'. There is no place in the modern world for

'Inspectorial' role.

Development of the profession is directly linked with the

economic development, that too in organised and

documented sector, therefore, the first priority of the

profession has to act as a facilitator, and 'service provider' to

businesses which leads to overall economic development of

the country.

There cannot be any sustainable reduction in unemployment

and poverty unless there is a creation of wealth by

businesses and its reinvestment. The role of governments has

changed. Private sector is now the only player in this field.

Accountants, specially those, in practice, have to act like

'Umpires' rather than 'judges' whilst rendering their services.

An umpire will only interfere if someone plays against the

rules of the game.

The new council would endeavour to bring about awareness

for change in the paradigm of the role of accountants in the

economy. In the forthcoming issues, I will describe in detail,

the strategy for the growth of the profession as envisaged by

your new council.

Main theme of this issue viz Zakat in my view relates to

subject of social responsibility. Objective of such obligations

is to remove disparity in the distribution of wealth; however,

it would be a restrictive interpretation if we keep the same to

one fortieth (1/40th) of net increase in wealth only. This

threshold is the minimum responsibility only.

Philanthropy has played a vital role in promotion of health

and education in development of economies. All big

r e s e a rch and educational institutions in the developed

economies are being financed by endowments. In our

country, there are misapprehensions in respect of utilisation

of sum so collected, including zakat. In the recent past,

trends have changed and now institutions like Aga Khan

Hospital, Shaukat Khanum, SIUT, Shifa Hospital etc. are

receiving substantial sums on that account. This trend should

be continued as the overall shortfall is immense.

Nevertheless, it is important to note that all these institutions

are related to 'health services' sector where there is an

immediate need in this country, however, unless

philanthropy in our country, which includes zakat, is used

for development of modern education, including science

and technology, the objective of sustainable economic

development cannot be achieved. Education of masses on

modern lines is imperative for survival in the present world.

Members are requested to improve their role in social

services including proactive participation in the financial

management of non-profit organisation.

I will dilate further on the matter discussed above in the

following issues.

Syed Shabbar Zaidi

The Pakistan A c c o u n t a n t July - August 2005 05

Zakat

Questions and Answers on Zakahby Justice Maulana Taqi Usmani

How to Calculate Zakah on Business?

Q.1 Is zakat payable on business? If so, how does onecalculate the amount? I have overdrafts and loans inbusiness too, as well as receivables outstanding.

Q.2 Is zakat payble on stocks? I have stocks from variousperiods starting from 30 days to over 365 days. Thereare certain stocks which are not sellable anymore.

A. First of All, you should set a particular date of a lunarmonth for the valuation of your assets for the purposeof zakah. Better you choose the first of Ramadaan forthis purpose, because this is the date on which thegovernment also collects zakah from all the citizens.This date will be your zakah valuation date for eachyear as long as you remain sahib-e-nisab (the one onwhom zakah is obligatory).

Then, you should calculate the value your zakatableassets as it stands at that valuation date. The zakatableassets are the following:

a) Cash (including the balance of your bank deposits)at that date.

b) The market value of the shares of joint stockcompanies of NIT units or mudaraba certificatesheld at that date.

c) Face value of the financial papers, like bonds,KDCS, NDSCS etc.

d) The whole-sale value of the balance of stock-in-trade (including raw material) at that date,irrespective of the period of their retention.

e) Receivable amounts (book debts) as on that date.From the total amount of the aforesaid assets, thefollowing amounts may be deducted:

i) Amounts payble to the suppliers of stock(including raw material)

ii) Amounts payable at that date a rent to the landlord

or to the lessor if equipment is acquired on lease.

iii) The Principal amount of loans borrowed from

financial institutions and employed in acquiring

zakatable assets, or any personal loans.

iv) The amounts deducted by the government at source

as zakah.

After the deduction of these amounts from the total

value of the zakatable assets, as mentioned above, the

balance will be your zakatable value. 2.5 percent of

this zakatable value is payable as zakah.

The period of retention of the stock is not material. The

balance standing at the date of valuation shall be

valued, no matter whether some stocks are acquired

some month ago, and some are acquired just one day

earlier. The completion of one year is needed only for

the minimum amount of nisab. If somebody has been

owing the minimum amount of nisab for the most parts

of the year, he has to pay zakah on the balance

remaining with him, on the date of valuation.

'Retention for one year' is not necessary in respect of

each and every item. Therefore, whatever comes or

goes during the year has no bearing on the calculation

of zakah. It is only the balance remaining on the

valuation date which is subject to zakah.

You have also asked about the stocks which are not

"sellable any more". If you mean that these stocks are

kept for personal use or for charitable purpose, they

shall not remain zakatable any longer. But if you mean

that they are available for sale, but nobody comes

forward to purchase them, they are still zakatable.

However, it should be remembered that zakah can

also be paid in kind, therefore you can pay their zakah

from those assets themselves i.e. you can give 2.5 % of

those stocks in kind to a person entitled to receive

zakah.

Zakat


Payment of Sadaqatul-Firto a Non Muslim

Q. Can the Sadaqatul-fitr be paid to aneedy non-Muslim?

A. According to Imam Abu Hanifah,the Sadaqatul-fitr can be paid to aneedy non-Muslim resident in anIslamic country if he does not ownthe nisab (a surplus amountequivalent to the value of 52.5totals of silver).

Paying Zakah to anIndebted Person

Q. A businessman suffered a loss in hisbusiness. He sold all his propertiesand paid his debts. He hired ahouse on rent and shifted from aposh locality to an ordinary localityin a far off area of the city andjoined a service. From appearancehis standard of living still looks likehis previous one (although he iswithout a car, telephone and otherluxuries). He is still under the debtof approximately Rs. 2 million. Hepays some amount every monthfrom his salary to his creditors.Now, the question is:

(a) Can his debts be cleared by Zakahmoney?

(b) If it is permissible, should we payhis debts directly to his creditors, orshould we pay him first and thenask him to pay off his debts?

Please also note that thisbusinessman has to receive aboutRs. one million from other peoplewhich is being received by him inparts and after long intervals.

(c) Is it necessary to tell him that it isthe Zakah money, or can we payhim without any reference toZakah, because he may feel

humiliated if we tell him that it is azakah money?

(d) If he pays some or all of his debts byzakah money, then he againbecomes a rich man, should hereturn the money of Zakah to itsoriginal owners, or can he pay it toother poor people, or he need notdo it? (Ibid)

A. (a) The principle is that if the debts of a

person are equivalent to his surplusassets (including his receivables) orare more then that, he is entitled toreceive Zakah. Likewise, if hissirplus assets are sufficient to clearhis debts, but after paying his debts,his remaining surplus assets do notreach the quantum of nisab he canalso receive Zakah. However, if hissurplus assets are such that evenafter clearing all his debts, they areequivalent to or more than thenisab, he cannot receive Zakah.

It is worth mentioning that the term"surplus assets" includes moneyand all those household goods andproperties which are not requiredfor his day-to-day needs.

In the light of this principle, thebusinessman under question canreceive Zakah, because his debtsare 2 million while his surplusassets (including his receivables)are less than that. Therefore, onecan help him in clearing his debtsout of the Zakah.

(b) If his debts are intended to be paidout of Zakah, the creditors shouldnot be paid directly. Instead, moneyshould be given to the indebtedperson who will pay it to hiscreditors, if he so wishes.

(c) It is not at all necessary to tell thebeneficiary of Zakah that he isbeing helped out of Zakah. Onecan give him the amount as a gift or

as a persent without referring toZakah. The only condition is thatwhile giving it to him, one shouldhave a clear intention in his heart topay Zakah. Even if a person gavemoney to the beneficiery as a Qardor a loan, while in fact he intendedto pay zakah and never intended toget it back from him, the obligationof Zakah is discharged. How- ever,if he comes thereafter to repay theloan, he should refuse to accept it.

(d) Once a person has received Zakahwhile he was entitled to receive it,he is not required to return it to theoriginal payer, how rich he maybecome late...Therefore, if thatbusinessman becomes rich onceagain, he is not required to payback the Zakah, neither to theoriginal owners, nor to other poorpeople. However, he will berequired to pay this own zakahaccording to his assets owned byhim at that time.

Zakah on Unquoted Shares

Q. "How is zakah calculated and paidon the unquoted shares whichcannot be sold through stockExchange?"

A. Zakah is obligatory on the marketvalue of the shares of every jointstock company. Although themarket value of the unquotedshares cannot be determinedthrough the stock Exchange, yetthere are two ways to determinetheir value.

1. Some unquoted shares are sold andbought through "over the counter"transactions i.e. by mutualagreement of the buyer and sellerand without the meditation of astock Exchange. These "over thecounter" transactions maydetermine the market value of theunquoted shares.

Zakat


2. If the market value cannot beascertained in this way for somereason, then the value of theunquoted shares should becalculated on the basis of thebalance sheet of the company.

It has already been explained inAlbalagh (June 1990 p.20) that ashare holder can deduct from theZakatable value a proportionequivalent to that of the fixed assetsof the company. The sameprinciple is applicable to theunquoted shares also.

Zakah on Trust Fund

Q. "Instead of our managing aportfolio of ahares, we haveinvested some spare cash in sometrust funds i.e. private ones andalso those set up by thegovernment. The price of the fundis closely linked with the index ofquoted shares and the price isgiven each day. Dividends are alsodeclared and given each year.

Do we have to treat this as cashand pay zakah on its market valueor only on its dividents? In this casethe dividends should be enough tocove rfor the zakah of 2.5 % oftotal market value, therefore, itwould not cause undue hardship aswe do not have to sell the capitalportion to pay the zakah."(Ibid)

A. A "Trust Fund" is a mutual fundwhere a portfolio of the shares ofdifferent listed companies ismaintained. The share of aparticipant in such a fund isrepresented by a negotiableinstrument usually called a 'unit'.These 'units' represent theirholders' proportionate share in theportfolio, and ultimately aproportionate share in differentcompanies, as well as a

proportionate share in the capitalgain the portfolio earns. Thus, aunit of a "Trust Fund" does notrepresent cash only, like the bonds,but it represents a proportionateshare in the assets of the releventcompanies also.

Therefore, it will be treated like ashare of a quoted company for thepurpose of Zakah, and all the rulesmentioned with regard to theshares of a company are alsoapplicable to the 'units' of a TrustFund. Therefore, zakah will bepayable on the market value of thesuch units, irrespective of theamount of divident declared onthem. It is like the stock in trade onwhich zakah is payable on thebasis of its market value,irrespective of the rate of profitearned on it.

Zakah on the EmployeesProvident Fund

Q. In Malaysia, 20% of monthly salaryis paid to the Employees providentFund which keeps and manages thefunds for us until retirement age. weare not allowed to take the moneybefore retirement except in the caseof death of the employee where it ispaid to the heirs. How do we treatthis asset in the payment of zakat?( I b i d )

A. If 20% of the salary is deducted atsource without giving this amount

to the employee, zakah is notpayable on the amount kept in theemployees' Provident Fund until

the same is received by theemployee. When an employee

receives it on his retirement, theamount so received shall from partof his zakatable assets of that year

only, and such part os it as is notspent before the valuation date

shall be subject to zakah, and

zakah will be payable on theaggregate balance of his assets

(including the balance of theamount received from the Fund) onthe valuation date.

Who is Entitled to ReceiveZakah?

Q. Can you tell precisely who isentitled to receive zakah? Can wespend the zakah money for thefollowing purposes:

(a) In building a religious school whichis a profit making concern for theoperator?

(b) In buying a computer or anairconditioner for a religious or asocial body?" (Ibid)

A. Zakah should always be given to apoor person who does not own thenisab. The nisab is 613.35 grams ofsilver. Any person whose surplusbelongings do not reach the valueof 613.35 grams silver can receivezakah. Zakah can be paid in cash orin kind, but in both cases theownership of the property given inzakah must be transferred to aparticular real person (and not afictitious person) who is entitled toreceive zakah. So, the constructionof the building of a charitableinstitute is not a valid way of thedisbursement of the zakah money,becuase in this case the property isnot transferred to a particular realperson. Likewise the donation of acomputer or an airconditioner for areligious or a social organizationcannot be made out of the zakahmoney. However, if these things aregiven to a poor person (entitled toreceive zakah) by making him theowner of a computer, or of thebuilding, the obligation of zakah isdischarged.

Zakat


Zakah on AgriculturalProduce

Q. "There is no need to pay zakah onsalary unless there is a saving leftfor a period of one year, whereas10% of the farm produce is payablebased on the current value of theproduce irrespective of whetherproduce is sold or not. The Zakahin such circumstances is paidupfront whereas the salary earnerhas the liberty of choosing how touse his earnings without having todeduct a certain portion first forzakah. It means that if he choosesto spend all his earning then thereis no need to pay zakah. Would itnot be a dis-incentive to the farmeras compared with the salary earner?Perhaps you can clarify thisfurther". (Ibid)

A. Let me first clarify somemisconceptions found in yourquestion:

1. The rate of zakah levied on theagricultural pruduce is normally5% and not 10%. The rate of 10%is confined to unirrigated landso n l y. The majority of cultivatedlands are irrigated by canals, wellsetc. The rate of Zakah on all theselands is 5%.

2. The zakah of the agriculturalproduce is payable in kind.Although it may be paid in cash,yet it is at the option of the owneronly. It means that if the produce issold, he can pay the zakah in kind.

3. The agricultural produce should notbe compared with personalsavings. It should be comparedwith the stock-in-trade, becausetrade and agriculture are bothproductive activities. So, both ofthem are subject to the sameprinciple. Zakah is payable on thestock-in-trade at the current market

value irrespective of whether it hasor has not been sold. Similarly, theagricultural produce is subject tozakah, even before it is sold. But inboth cases the obligation is fulfilledby paying zakah in kind. The rate ofzakah on agricultural produce is nodoubt, double the rate of zakah onstocks, but the reason is obvious.

The initial input in the case ofagriculture is lesser than the initialinvestment in stocks, and the rate ofoutput is greater in agriculture thanin stock. There may be someexceptions to it, but the rules arealways framed according to thenormal conditions and not on thebasis of exceptions.

A salary-earner has an advantageonly when he does not invest hismoney in any type of trade, nordoes he keep the surplus with him.This can only be imagined wherethe income is so little that he canneither save it nor invest it in aprofitable business, and his salarysuffices only for his personal needs.Zakah is not payable in suchc i rcumstences. He cannot becompared with a farmer whocultivates land for productivepurposes. However, if the produceof a farmer is so little that there isno surplus after providing food forhis family, zakah is not payableaccording to the majority of theMuslim jurists.

Change in FinanacialStatus and Zakah

Q. "Mr."A"is Sahib-e-Nisab and payszakah regularly. Say, in 1989 hepaid his zakah, and when thevaluation date came in 1990, hisfinancial condition becameadverse. Consequently, he did nothave the minimum wealth which isliable to zakah. In other words, on

the valuation date, he againbecame Sahib-e-Nisab. Now, thequestion is, whether Mr. "A" shouldpay the zakah of the wealthaccumulated on his previousvaluation date when it comes in1992 or by virtue of his becom- ingSahib-e-nisab after a gap of twoyears, he should let one year passon his new wealth and then pay thezakah?"

A. In this case, the previous valuationdate will not be applicable for the

purpose of calculation of zakah. He

will be liable to pay zakah after one

full lunar year will pass on his

newly acquired nisab of zakah.

The principle is that the valuation

date, for the purpose of zakah, is the

day on which the person acquires

the amount of nisab for the firsttime. This valuation date will

remain applicable as long as he

remains Sahib-e-Nisab and he shall

calculate his zakah on the basis of

the valuation of his assets on thatdate each year. For example, Mr.A

became Sahib-e- Nisab for the first

time on the 1st of Muharram in

1408 A.H. Now, he shall calculate

his zakah on the 1st of Muharram in1409 A.H. if he is still Sahib-e-

Nisab on the that date. Thus, the

first of Muharram is his valuation

date for all the following years as

long as he remains Sahib-e-Nisab.He will calculate his zakah on the

first of Muharram each year.

If he does not remain Sahib-e-Nisab

on the first of Muharram in any ofthe following years then the first of

Muharram will case to be his

valuation date. Therefore, if he

acquires the nisab once again, the

zakah will be subject to the newvaluation date i.e. the date on

which he acquires the nisab second

time.

Zakat


on which he, for the first time,acquired the ownership of thenisab (minimum quantum) ofZakah, i.e. the value of 613,35grams of silver. For example, youhave acquired the ownership of613,35 grams of silver for the firsttime on the first of Muharram. Thefirst of Muharram is yourvaluation date for the purpose ofZakah. You should calculate thevalue of your zakatable assetsowned by you on that date everyyear. The amount spent beforethat date need not be included inthe zakatable assets. Only thebalance remaining with you onthe valuation date is subject toZakah. If you do not rememberthe exact date on which youbecame the owner of the nisab forthe first time, you can estimate thevaluation date. Therefore, themonth of Ramadan is not thevaluation month for everybody,the valuation date differs fromperson to person. However, oncethe amount of zakah is calculatedon the basis of correct valuationdate, it may be paid any time afterthe valuation date. But thepayment should not be delayedunnecessarily.

Q. 8We pay income tax and wealth taxregularly. The rate of wealth taxoften corresponds to the rate ofZakah. Can we deduct theamount of such taxes from zakah?

A. The payment of government taxescannot discharge you from theobligation of Zakah. However, ifyou have paid the taxes prior toZakah valuation date, asexplained in answer to theprevious question, the amounts oftaxes so paid need not beincluded in your zakatable assets.But if you have not paid the taxesupto the 'Zakah' valuation date,even though they have becomedue, you cannot deduct theamount of taxes from thezakatable assets.

Various Zakah Questions

Q.1 (a) Is 'Zakah' payable on aBungalow/House irrespective ofhow big it may be, which isoccupied by us? If 'Zakah' ispayable, should it be on cost oron the Market Value?

(b) If any loan is taken against theBungalow or House, should Loanamount be deducted beforecalculating 'Zakah' Amount?

A. (a) Zakah is not payable on theBungalow/House which you ownand utilize for residentialpurposes. However, if theBungalow/House is purchased orbuilt with the intention of resale,then Zakah will be payable on it'smarket value.

(b) A loan taken against theBungalow/House can bededucted from the Zakatableamount.

Q. 2 Is 'Zakah' payable on Furnitures,Fixtures, such as ElectricEquipment, A i rc o n d i t i o n e r s ,Carpets, Crockery, etc.? Ifpayable, should it be on the costor on the market Value?

A. Zakah is not payable on furniture,electric equipment,airconditioners, carpets, crockery,and their items that are forhousehold utilization.

Q. 3 Is 'Zakah' payable onBungalows/Houses or Flats whichare given on rent or which remainvacant. If payable, should it be onthe original cost or on the marketvalue?

A. Zakah will be paid only on therent accrued from the propertiesowned. Zakah will not be paid forvacant property, unless ifprocured for resale purposes;more specifically, for the sale ofsuch assets.

Q. 4 Is 'Zakah' payable on the cost orthe market value of an investmentmade in open land (Residentialplot)?

A. If the residential plot is purchased

for the purpose of resale then

Zakah will be liable at the market

value, but if the plot is acquired

for purposes other then being

resold then Zakah will not be

payable.

Q. 5 JEWELLERY

(a) Is 'Zakah' payable on jewelleryand Diamonds? If so, on thepurchase value or on the marketvalue?

(b) Is 'Zakah' payable on Gold/Silverjewellery in use by wife, daughteror kept as investment-If so, iszakah payable on the purchasevalue? or the market value?

A. (a) Zakah will be payable on goldand silver jewellery, if suchjewellery exceeds the minimumweights:

For Silver: 52.2 Tolas / 613.35 Grams

For Gold: 7.5 Tolas / 87.479 Grams

Zakah will be paid as follows :[Number of Tolas / Grams x costof 1 Tola / Gram (Silver / Gold)]multiplied by 2.1/2 % = Zakahamount

Zakah is not payable ondiamonds, despite their value.

(b) Zakah is not payable on jewelleryof Gold / Silver even if it is usedby your wife or daughters (Hanafiview).

Such Zakah is calculated on themarket value of the gold or silverused in the jewellery.


Zakat

Zakat and Ushr in Modern Times

About 1,400 years ago Zakat was imposed as a compulsorylevy on all Muslims. A lot has changed since then - our waysand standards of living, economic systems, nature and scopeof wealth, means of making livelihoods. A glance at theschedule of rates in Hadith shows that it contains items likecattle, animals, agriculture, gold and silver. Today, thecomposition of assets has changed and comprises items,such as: Plazas, buildings, plots, shares, insurance, factories,fleet of vehicles, ships, aeroplanes, bank balances, etc

However, while computing zakat, numerous problems anddifficulties are encountered. This article attempts to describethese difficulties and suggest practical solutions toovercoming them.

1. Liable to Zakat

According to the Holy Quran and Hadith, an individual isliable to Zakat. Firms, companies and association of personsare not natural persons and are, therefore, not liable to zakat.Individuals' interest in such organisations is surely liable tozakat. However, valuation of such interests is altogether adifferent matter.

2. Nisab

Nisab is defined as net assets equal in value to 87.48 grams(seven tolas) of gold or 612.36 grams (52.5. tolas) of silverwhichever is less. These days value of 87.48 grams goldtezabi is Rs.62, 102 and of 612.36 grams pure silver is Rs.5,878. The rates of these metals are changing. Who knows infuture, silver being in high demand, and might be morevaluable? As such, the minimum nisab (exempt limit) shouldbe lower of the two.

Usher is not payable annually. It is payable on production,which may be twice a year or even more frequently.

3. Valuation Date, Time & Year

a. Zakat is payable after an asset (savings) has remainedwith an individual for one year. In this day and age of

frequent changes it is quite difficult to calculate Zakat

exactly after one year of each transaction. Theintervening events, losses and even bankruptcy may

change the situation and lot of assets may escapeZakat. Since the transaction of Zakat is between manand Allah, and its main objective is that the rich should

help the poor, one must exercise caution in calculatingit. It is proposed that the day for valuation should be a

date of the current year, and not of the last one. Nodoubt, in such a case, earnings and savings of less thanone year shall also be subject to Zakat, but it is prudent

to err on the higher side in this case.

b. Valuation Time: In this modern age, an individual'stotal wealth in the morning and in the evening may bedifferent. As such, it would be better if with the date,

the time of valuation were also given, e.g. the time ofappearance of Ramazan moon.

c. Year: It will not be solar (Christian) year of 365 days,but the Lunar (Hijri) of 354 days.

4. Amwale Batina

a. Valuable kept in bank locker and safe deposit vaultsshould also be included in Amwale Batina. Eventhough being in bank, these are not considered as

deposit in banks.

b. Zakat on Amwale Batina and current deposits shouldnot be compulsorily collected, but be payablevoluntarily. The Return of Zakat must show the details

of such Amwale Batina.

c. SAVINGS CERTIFICATES

i. Rate of zakat on government savings certificates should

be 2.5% per year of the accumulated value.

ii. The issuing agency should transfer zakat to zakat fundevery year, rather than piling it up till redemption andthat also 2.5% once only for 3 or 10 years.

Sadia Kaleem, ACA

Zakat


d. SHARES

i. Shares quoted on the stock exchange should be valuedat their market values. In case of private company, itshould be face value or break-up value.

ii. There is an additional interest in owning the controllingshares and the persons holding such shares should addthis. For example, if a limited company's share isquoted at par on the Stock Exchange but a family isholding 51% of the equity, it will not sell its holding atpar because they are availing a privilege of managingand ownership of the concern. Therefore, in such casesthe persons holding the interests should add a premiumfor the holding the privilege.

e. LIFE INSURANCE POLICY

Zakat on life insurance policy @ 2.5% on maturitydoes not appear reasonable. Premiums paid are a sortof savings. As such the rate of Zakat should be 2.5%per year on premiums paid plus bonuses added to thepolicy or surrender value which ever is lower. LifeInsurance Companies should transfer such 2.5% everyyear to the Zakat Fund.

f. PROVIDENT FUND

Employees' contribution plus profit on it is his savingsand so is liable to zakat @ 2.5% per year. After aperiod of service, employee gets entitlement toemployer's share also. From this date 2.5% zakat peryear should be calculated on both the employer andemployee contribution plus accumulatedinterest/profit on both the balances.

It may be added that this measure will not involve anyundue hardship on poor employees (or poor insurancepolicy holders), as the interest on provident funds (andbonus on insurance policies) is generally higher thanthe Zakat of 2.5% per year. Furthermore, if a personfiles a declaration of being under Nisab, no deductionshould be made.

g. STOCKS

All sorts of business stocks are liable to Zakat.Therefore, along with the raw material and finishedgoods, material in process should also be included.

5. Other issues

a. If a loan is taken against an asset, such loan should bededucted from that asset up to the value of that veryasset.

b. Zakat paid in excess should be carried forward to thenext year.

c. Dues of Zakat, in case of deceased, can be recoveredfrom the wealth after death upto 1/3rd of his totalwealth. It should have priority over and above otherclaims.

d. Recovery of Zakat shall be affected at a place nearerand convenient to the payer.

e. Zakat on animals in Pakistan would not beeconomical to collect in view of scattered and smallfarms.

6. Exempted Assets

Keeping in view the basic spirit of Zakat, vehicles and housein personal use, household effects, and all other assets inregular and personal use should be exempted from Zakat.

7. List of Assets Liable to Zakat

Followings should also be added in the list of assets liable toZakat.

a. TRANSPORT VEHICLES

It is said that because few camels of a Companion ofthe Holy Prophet (Sahabi) engaged in transportationwere exempt from zakat, trucks, buses, wagons,rickshaws and other means of transportations shouldalso be exempt. If this rationale is accepted, atransporter, despite increasing his fleet over time, andbeing a millionaire will not be paying zakat. On theother hand a petty shopkeeper would be liable toZakat on his stocks. This situation is patently unjustand unfair, and cannot be approved.

b. PROPERTY ON RENT

Several individuals rent out buildings and plazas. Theyearn their livelihood through this business. 1,400 yearsago, this business of renting property was not existing(Land was free, construction cost was negligible) sothe question of zakat on rented property has not beendiscussed in Hadith. In the modern days, rent is asource of business income, so such property should beliable to zakat. The question will remain how to valuethe building, because the actual market value due tooccupation by tenants is reduced to much lower level.According to occupied buildings market rates, thevalue should be 9 years net rental income for zakatpurpose. Zakat as such comes to about 2fi monthsrent. Landlord gets 9fi months rent plus any capitalgain in the value of such properties.

Zakat


c. Plant and Machinery

It appears to be quite lubricious that plant andmachinery worth millions of rupees owned by anindividual or individuals should not be liable to zakat.It is business wealth and must be added for zakat. Itmay be noted that those who considers it to beexempt, should also bear in mind that grossproduction is liable to Zakat @ 2fi %, which shall bemuch more than the two and a half percent paid onthe value of plant and machinery.

d. INTEREST IN PARTNERSHIP FIRMS

It is exactly similar to a share of a company. Similar toRule 8(8) of the Wealth Tax Act, to ascertain marketvalue of the assets of the Firm, beyond the book value,some additions must be made for the hidden reserves,rise in fixed assets value and goodwill. In other words,present value of interest in a Firm should be the capitalin books plus something to arrive at market value ofownership of the Firm.

8. Ushr

a. Not only gross agricultural or forest produce, but alsomining and fishing are also liable to Ushr on the basis ofgross production.

Ushr is calculated on the Gross Product while Zakatis determined on the Net Assets of a person at a givendate. However, its proceeds are subjected to the same useas Zakat, and in Hadith its discussion is clubbed withZakat. Therefore, its merger with the Zakat Fund is quite

in order.

It may further be noted that fishermen, agriculturists,and mine owners, are liable to Zakat even after paymentof Ushr because ZAKAT IS ON THEIR SAVINGS. Thissituation is similar to income tax wherein; agriculturistincome to the tax-free limit is liable to Wealth Tax.

b. LEVY OF USHER

i. Honey is also liable at 10% on the gross product.

ii. Vegetable, grass, dry fruit, firewood are exempted according to Hadith

iii. Fishing and sea products are also subject to Usher ongross product.

iv. Amber & pearls are liable to 20%

9. Recovery of Ushr

Ushr may be recovered both in kind or cash. Pakistan has

four major cash crops: cotton, sugar cane, wheat & rice.

Cotton is generally procured by ginning factories; wheat by

the Food Department and local markets, sugar cane by sugar

mills and rice paddy by the rice mills. If it is made

compulsory for these organisations to recover 5% of the

price from the gross proceeds, the recovery would be easier

and leakage would be more difficult and complicated.

Similar steps may be taken for recovery of Ushr on mining

and sea products.

1 0 . Check on Evasion

a Honesty, integrity & intention of both the payers &

collectors are also different from what it was 1,400 years

ago. For instance a week before Ramzan there is a heavy

demand for prize bonds while bank deposits decline

sharply. This phenomenon occurs year after year because

the public knows that two and a half percent will be

deducted as zakat on their saving deposit balances on the

first day of Ramzan.

To check evasion it is proposed that technology should

be fully utilized. Records of vehicles, houses, current

deposits, postal savings and deposits, shares, debentures,

NIT units, provident funds, life policies, agricultural

lands, fruit farms and similar other investments can easily

be kept on computers and counter checked. Benami

assets on Power of Attorney will come to light very easily.

b. A provision should be made that the Government can

acquire the asset on a declared value plus 10% of the

declared value. It will enforce zakat payer to declare the

values much nearer to the amount on which an

individual is willing to dispose these off.

About the Author:

Mrs. Sadia Kaleem ACA is also Chartered Secretary (UK).

She has also completed Final Exam of CIMA (UK). She is

also finalist of ACCA.


Zakat

Rudiments of Zakat

Zakat is one of the pillars of Islam. Allah describes the takingof zakat in the following manner.

"Take alms from their wealth in order to purify them and

sanctify them with it." [Soorah at-Tauba 103].

The payment of Zakat becomes obligatory on every sane and

mature Muslim and Muslimah whenever there is an

economic activity resulting in the net increase in their

wealth. The following are the categories of production.

Profit, investments and savings are subject to Zakat.

1. They produce of land. The rate is one tenth of the produce

of the unirrigated and undeveloped land and one

twentieth of the produce of the irrigated and developed

land.

2. Pure economic profit business.

3. Inheritance, once for all.

4. Cash, investments, food, merchandise, jewelry, gold and

silver kept in the inventory for full one year and above the

certain value defined as Nisab.

The rate of Zakat on each of the above categories is different.The rate of Zakat and the amount of Nisab can be decided

by the Islamic State taking into consideration the prevailing

standard of living and the risks and uncertainties of different

modes of productions.

For the articles in category four the rate of Zakat is two and

half percent on the amount which is more than the Nisab.

If the individual items in category 4 do not come up to the

Nisab but the combined value of all the items is more thanNisab, Zakat is obligatory.

It should be kept in mind that these rates of Zakat are the

minimum rates and the Muslims have been urged by Allah

and the Prophet time and again to pay as much as they canafter providing for their legitimate needs.

Thus the rate of Zakat and the amount of Nisab is dynamicwith a given minimum, but the maximum amount is left to

the Ijma of Ummah.

Who is deserving of Zakat

The Holy Quran describes the following eight categories

who are entitled to receive Zakat:

1. Fuqara: the people who have some money but not enough

to meet their needs. They live in precarious circumstances

but do not ask for help.

2. Miskins: these are a very miserable people who do not

have anything for food, clothing and shelter. The Khalifa

Umar ibn al-Khattab also included in them those who are

fit to earn but do not have means to earn.

3. Aamileen (Collectors of Zakat): the officials engaged in

the collection and distribution of Zakat are paid from the

Zakat fund.

4. Muallafat-ul-Qulub (Those whose hearts are to bereconciled): this includes the new Muslims, to strengthen

them in Islam, as well as those for whom it may be

necessary to give Zakat to win their heart.

5. Fir-riqab.(Emancipation of slaves): this means the personwho wants to free himself from the shackles of slavery

should be given Zakat so that he can pay to this category

(those persons who are imprisoned for nonpayment of

fines).

6. Al-Gharimeen: this means the people who are in debt,

which is more than the assets so that after paying the debt,

their wealth that is left is less than the Nisab.?

7. Fi Sabeelillah (in the cause of Allah): this is a commonword used for all good deeds, but in the case of Zakat it

means rendering help to an endeavor to serve Islam such

as the propagation of Islam, Jihad, etc.

Irfan Ahmad Khan, ACA

Zakat


8. Ibn-us-Sabil (the wayfarer): a

traveler, if he is in need of money

while traveling , is entitled to Zakat .

Some essential Points

about Zakat

1. A person who qualifies to pay Zakat

is not eligible to receive.

2. It is not permissible to pay Zakat to

your husband, wife, parents,

grandparents, and the children and

grandchildren.

3 Expenditure to Zakat fund is not

permissible on the construction of

mosque.

4. It is preferable to pay Zakat to

deserving relatives.

5. The Zakat of every locality should

be spent on the poor inhabitants of

the same community except if there

is a calamity in other parts of the

country or the world.

6. Any one who qualifies to receive

Zakat, can be given it as assistance

or a gift, without telling him that it

is Zakat.

7. All articles of household use and

properties given on rent are

exempted from paying Zakat.

8, Zakat money of a particular year

could be spent during the same

year in advance, could be given all

at once or in installments.

The collection of Zakat

In the Islamic state, it is the

responsibility of the state to collect and

distribute Zakat.

The Prophet (PBUH) says: I have been

commanded to collect Zakat from the

rich among you and distribute it to the

poor among you.

In case an Islamic society does not

exist or in a non-Islamic society, the

local organization of the Muslims

should make arrangements for the

collection and distribution of Zakat.

Wherever such arrangements exist,

every Muslim is required to pay Zakat

to this organization and conform to the

rates and the amount of Nisab decided

by the organization.

Allah has made Zakat one of the pillars

of Islam and has often mentioned it in

the Quran immediately after the

Prayer, saying, "And perform Prayer

and give Alms ".

The Prophet (PBUH) said, "Islam has

been built on five [pillars]: testifying

that there is no god but Allah and that

Muhammad is the Messenger of Allah,

performing the prayers, paying the

Zakat, making the pilgrimage to the

House (Hajj), and fasting in Ramadan"

(Bukhari, Muslim).

Allah has warned those who do not

give Zakat that they will face dire

consequence. He says, "O you who

believe! Verily, there are many of the

rabbis and the monks who devour the

wealth of mankind in falsehood, and

hinder (them) from the way of Allah.

And those who hoard up gold and

silver, and spend it not in the Way of

Allah-announce unto them a painful

torment (Quran 9:34).

To d a y, how many Muslims in the

world honestly, sincerely and properly

pay zakat to purify their wealth and to

help their Muslim brethren. Is it any

surprise that:

So many Muslims are starving and in

need today.

So much Muslim wealth is wasted on

luxury.

So much Muslim wealth is spent on

forbidden items.

So little Muslim wealth is spent on

jihad and sacrificing for the sake of

Allah.

The Messenger of Allah (peace be

upon him) was ordered to fight the

people until they made the shahada,

established prayer and paid zakat.

Hazrat Abu Bakar (RTU) continued that

teaching after him. What does that

mean for us today? Does that mean

that if they were alive today, we would

be from those who would be fighting

alongside them or would we be from

those whom they would be fighting?

About the Author:

M r. Irfan Ahmad Khan is an

Associate Member of ICAP,

currently working as Financial

Controller of Descon Engineering

Qatar-L.L.C, Doha, Qatar.

Readers are welcome to contact

him at : [email protected]


Zakat

Zakat Self Assessment FormName of Assessee : Assessment year

Lunar Date on which Zakat has become due

ZAKATABLE ASSETSNISAB: 52.5 Tolas or 612.36 grams of Silver or its equivalent value

Details of possessions on this date, which qualify for Zakat: Valuation for Zakat

1. Value of Gold (in whatever form or for whatever purpose)

2. Value of Silver (in whatever form or for whatever purpose)

3. Cash:

a. In hand or at bank or with someone else for safeguarding or in the form of Prize Bonds or inforeign currency.

b. Cash deposited for some future purpose, e.g. for Hajj, cash paid in an insurance policy.

c. Money given out on loan, as long as the borrower accepts it as a loan lent and not as a grant, money deposited in as “Bachelors Committee” (BC) or “Voluntary Committee” etc.

d. Money invested in business (Partnership or Shares, etc.) All forms of saving certificates, NIT, FEBC, Shares, etc. All cash that has been invested in Provident Fund of any organization etc. through ones own choice. (Investment as per employee’s advice).

4. Goods, Property, shares, raw material, etc. bought for resale/trade.

a. Money due for goods already sold. (Credit Sale)

b. Value of any item obtained in exchange of Trade goods or in lieu of any rent due on them.

Total Zakatable Assets

LIABILITIES:1. Loans (Borrowed money, Goods bought on credit, Wife’s Mehr (if there is an intention to pay),

remaining amount due in a Bachelors Committee (BC).

2. Wages due to employees as at this date.

3. Taxes, rent, utility bills, etc., due at this date.

4. Any Zakat due for previous years.

Total Liabilities

Circulated by SBS – School of Business Studies. Karachi, to facilitate the correct calculation of Zakat.Please e-mail your comments for improvement to [email protected]

X

_

=

=Value of Total PossessionsQualifying for Zakat

Liabilities

2.5%Amount of Zakat Payable

Net Amount on whichZakat is due

Net Amount on whichZakat due


Zakat

General Rules Governing Calculation of Zakat

A VERSE FROM THE HOLY QURANAnd be steadfast in Salat (prayers) and give Zakat. And whatever good you send forth for yourselves, you will find it with Allah.

From Surah (No. 2) om Al BaqarahVerse 1 erse 110 10

A SAYING OF THE HOLY PROPHET (peace be upon him)

The Holy Prophet (peace be upon him) said, Islam is based on five things: bearing witness that there is one God and Mohammad (peacebe upon him) is his messenger, to establish salat, pay zakat, perform Haj pilgrimage to Allah's house and fasting in the month ofRamadhan.

Sahih Bukhari & Muslim Hadith

IMPORTANCE / BLESSINGS• Zakat is Ibadah (worship) not a tax.• Giving Zakat is one of the signs of Taqwa (obedience of Allah).• Payment of Zakat attracts Allah's blessings.• Zakat purifies and protects wealth.• Payment of Zakat causes ones sins to be forgiven and Paradise is promised for him/her.

PUNISHMENT FOR NOT PAYING ZAKATAs for those who accumulate gold and silver and do not spend it in the way of Allah, give them the 'good' news of a painful punishment,on the day it will be heated up in the fire of Jahannam, then their foreheads and their sides and their backs shall be branded with it:"This is what you had accumulated for yourselves. So, taste what you have been accumulating."

From Surah (No.9) om Al-T Taubah aubahVVerse 34 and 35

METHOD OF ZAKATCALCULATION

ITEMS OF ASSETS

Equities- (shares of all companies, banks,insurance companies whether publiclyquoted or private)

Properties including real estate, vehicles,yachts etc. for personal use

GENERAL RULESOPINION OF JUSTICE (Rtd.) MUFTI MOHAMMAD TAQI USMANI

Dividend on SharesInvestment in shares of banks and insurance companies is not permissible. Hence allincome on these should be given in charity. However, if specific permissible activities inbanks and insurance companies can be identified then zakat would be payable on suchportion(s) and the balance to be paid as charity.

Income from all other equities is zakatable.

Value of Shares - zakatable.

Acquired for trading purposes - zakat is payable on market value.

Acquired for dividend income (long term investment) - at break-up value if known,otherwise on market value. However, whether at break-up value or market value, in bothcases, the value of shares so determined would be reduced by percentage of non-zakatable assets included in the total assets of the Company e.g. if the total assets of thecompany is 100 including nonzakatable assets of 25, then the value of shares sodetermined would be reduced by that ratio (e.g. 25%) to arrive at the zakatable value.

Note: Investment in shares of bank and insurance companies is not permissible and oneshould not retain these. However, if at Zakat date this is included in the assets, theamount of zakat should be paid on it as above in order to lessen one's liability towardsAllah.

Real Estate and other assets acquired for the purpose of residence or personal use isnonzakatable. Any loans taken to acquire such non - zakatable assets will also beexcluded from calculation of net zakatable assets.

Zakat


Real Estate acquired for Leasing (for renting out)

Properties acquired for trading purpose

Cash in Hand & at Banks

Gold held for trading purpose

Gold held fo for personal use by family

Loans given to independent third party Cos.

Treasury and other corporate bonds / bills

Mutual funds

Other funds (such as Hedge funds)

Is Zakat calculated on the individualcompany assets or on the consolidatedGroup assets.

Can losses in one company be offsetagainst profits in another company throughconsolidation.

If Zakat is calculated on the assets of theoverall company, would there be a furtherliability forZakat on the individualshareholders once theyreceive thedividends in their hands because they holdshares in that company, or is there amechanism for a setoff.

Non Zakatable

Zakatable - at Market value

Zakatable

Zakatable - at Market value

Zakatable per Hanafi School. Non-zakatable per Hanbali, Maliki and Shaafie School.

Zakatable on the face value of the loan amount. However, it is allowed to exclude suchloan amount from zakatable assets and defer zakat on it until the loan is received back.But once such loan is received back then one will have to pay zakat for all the past yearsthat this amount was excluded from the zakatable assets.

Zakatable on the principal amount paid to purchase them or market value if it is lowerthan the principal amount (because the difference represents the loss of the assets).Interest or capital gain accrued thereupon, being impermissible, should all be given incharity.

Zakatable. Subject to rules relating to underlying investments.

Hedge Funds will be subject to same rules as the bonds, that is, the principal will besubject to zakat and not the gains. The entire amount of gains is to be paid as charity.However, if thereare Hedge Funds of commodities then it will depend on the nature ofunderlying contracts as specific activities may be acceptable from a Shariah point ofview.

If all the companies of the group belong to the same owners, and there is no difference

in shareholding of any one of them, then Zakat may be calculated on consolidated basis.Therefore, if the liabilities of one company exceed its zakatable assets, these liabilitiesmay be deducted from the aggregate zakatable assets of the whole group. But if there isa company with a different shareholding, it should not be included in consolidatedcalculation.

If Zakat is paid by the company as a corporate entity and all the zakatable assets havebeen included in the calculation on their fair value, the shareholders do not have topay zakat on their shares. However, the dividends they receive will be included intheir cash, the balance of which at the zakat valuation date is zakatable. The amountsspent during the year need not be calculated.

Other question with regard calculation of Zakat for a Group of Companies

WHO IS TO PAY ZAKAT (NISAB OF ZAKAT)Any one who has a 'net worth' above 87.48 grams of gold or 612.36 grams of silver or its cash equivalent (Dh.4,310*) as of his/her zakatdate has to pay Zakat. The 'net worth' for this purpose will be arrived at after deducting any loans and all items retained for personaluse or consumption like residential house, transport, utensils in use, clothes and furniture all ofwhich are non-zakatable.

* as per market value of gold (US $ 417 per oz) on 4th October 2004.

RATE OF ZAKATZakat is 2.5% per Lunar Year. If for any reason Zakat must be calculated at Gregorian year it should be adjusted proportionately forexcess number of days i.e. if one is paying on the basis of Gregorian year, the rate of zakat would be 2.578%.

PAYMENT OF ZAKATZakat is payable every year on the Zakat date.

Zakat can be paid in advance and thereafter adjusted at the Zakat date.

Zakat of one year should preferably be paid before the next Zakat due date.

In the Holy Quran (Surah No. 9, Al - Taubah, Verse 60) Allah has Himself determined the recipients of Zakat.

In general, Zakat should be paid to poor persons who do not own the Nisab and preference should given to the one who is the closesti.e. close relatives followed by neighbours, fellow countrymen and then people in other countries.


Islamic Economic System

ISSUES IN ISLAMIC BANKINGKamran Akhtar, ACA

Islamic Banking has seen tremendous growth in Pakistanwith opening of new banks as well as Islamic bankingbranches being opened by commercial banks. The banks areoffering a number of financing and investment products,which are claimed to be shariah compliant while being verycompetitive in the market as well.

Islamic banking products have been designed with the aimof eliminating Riba and providing Riba-free and shariahcompliant substitutes to the conventional banking solutions.These products have been built on the basis of transactionsthat are considered “halal” in Islamic jurisprudence and thetransactions have been structured in a way to make themappear “halal” transactions but a deeper study of thosereveals that in some cases the substance of the transactionsappears different from their legal form.

It is a well-understood principle of Islam given by a Hadithof Holy Prophet PBUH:

“Actions are judged according to their intentions”

It is interesting to note that a similar concept has beenembodied in IASB Framework for the Preparation andPresentation of Financial Statements as a principle of‘Substance over Form’ as a qualitative characteristic ofFinancial Statements. This principle of ‘Substance over Form’has been explained in para 35 of the Framework and extractof which is reproduced below for reference.

“If the information is to represent faithfully thetransactions and other events that it purports to represent,it is necessary that they are accounted for and presentedin accordance of their substance and economic realityand not merely their legal form”.

Since IASB framework and the financial reporting standardshave been designed without any religious bias so they can beconsidered a reliable reference point to evaluate thesubstance of transactions.

Now let us analyze the Islamic banking products tounderstand the underlying substance of the transactions andreal intention behind the legal form of these transactions.

Trade Financing - Murabaha

The basic concepts of Murabaha in brief are:

l It is a kind of sale in which seller discloses its cost andmarkup to the buyer.

l Murabaha can be on cash as well as credit (or deferredpayment basis), which is called Bai Muajjal. In a BaiMuajjal transaction, the seller may charge price higherthan cash price.

l Originally, Murabaha is a particular type of sale and nota mode of financing, however considering the practicaldifficulties in Mudarabah and Musharaka instruments,contemporary scholars have allowed the use ofMurabaha on deferred payment basis.

The following issues arise when Islamic banks adoptMurabaha as a mode of financing.

Since Allah SWT says in AlBaqarah verse no. 285

“And Allah has permitted trading and prohibited Riba”.

This means that Allah considered trading something clearlydistinct from lending based on Riba. Lets analyze some basisaspects of trade and trader and analyze these in Islamicbanks perspective.

l Trader is a person who trades in one or more identifiedcommodities and possess knowledge about its marketand secrets of trade. A trader is not a trader of all or anycommodity.

l Trader is person who buys goods, and assumes risk beforeselling it in the market. The risk of holding the commodityincludes risk of loss due to damage to goods as well therisk of loss due to fall in value of goods after purchase bythe trader.

l Trader sells goods in cash as well as on credit. There canbe traders who sell goods only in cash but it is hard toimagine a trader who sells only on credit.



Islamic banks when undertakeMurabaha transactions, they actuallyassume the role of trader. However, ifwe analyze the Murabaha undertakenby Islamic banks, it is devoid of typicalcharacteristics of trade or trader.

l Bank does not have any set ofcommodities in which it specializesin trading, and is willing to do trade(Murabaha) of any commodity forwhich a customer comes and wantsto obtain financing.

l Bank does not assume any risk ofthe commodity as it only purchasesa commodity when it already has abuyer who is willing to buy it frombank at a fixed margin over cost.When banks margin over cost isfixed, how it can be said that bankis assuming the risk of holding thecommodity.

l Bank is willing to sell a commodityonly on credit and not on cashbasis. If a person is selling goodsonly on credit and people arecoming to buy goods from thatperson at a higher price becausethey do not have means to purchaseit on cash basis, isn’t it obvious thathe is providing a financing facilityand any markup on cash price he ischarging can not be called as a“halal” trading profit or “Ribafree”?.

In view of above is it justifiable toequate the murabaha transactionundertaken by Islamic banks to be atrade transaction or it is merely afinancing tool.

Car Financing - IjarahIjarah is a term of Islamic Fiqh and itmeans to give something on rent. Thisterm Ijarah is used in two situations,one in case of hiring some person’sservices against wages and secondlywhen hiring some asset or propertyagainst rent. This second type of Ijarah,which is also called lease, is used byIslamic banks for fixed asset financing.

The basic concept of Ijarah (lease) inIslamic Fiqh can be summarized asfollows:

l The asset remains the property ofthe owner or lessor and its usufruct‘right to use’ is transferred to thelessee.

l All risks and rewards incident toownership remain with the lessorwhile the risk and rewards relatingto the use of the asset are with thelessee.

l Ijarah allowed in Islamic Fiqh issimilar to rental agreements such asrenting a car, apartment, machineryetc for use and it is NOT AFIANCING TOOL.

l The rental paid during Ijarah isagainst the consideration of usingthat asset and it is never considereda payment against the purc h a s eprice of the asset.

l Leasing as practiced by a number ofbanks and financial institutions as amode of financing is called‘Finance Lease’ which is strictly notallowed in Islamic Shariah whichallows only ‘Operating Lease’.

Islamic banks are mainly involved inIjarah Financing of cars. Let’s analyzethe Ijarah Financing being done byIslamic Banks in the light of aboveprinciples.

l The individual who comes to theIslamic bank for obtaining a car hasa clear intention of buying a car andwants to obtain financing for it fromthe bank. Bank has also the sameintention that it wants to ultimatelysell the car to the lessee and neverwants to keep it for further Ijarah.This defeats the first principle ofIjarah that the asset remains theproperty of the owner.

l Risk and rewards incident toownership of car are also not with

the bank as it is not at all interestedin how the lessee is maintaining thecar but rather it is interested only intimely payment of lease rentals.

l Rentals paid in Ijarah are not onlyfor the use of that asset but alsoincludes a principle repaymentportion. At the end of the lease termassets are sold to the lessee at aprice, which is usually significantlylower than the original cost. This issame in case of leasing by aconventional bank and Islamicbank with the only difference thatin case of conventional banks,p u rchase option is usuallystipulated in the lease agreementt h a t ’s why it is considered a“Finance Lease”, however in caseof Ijarah by Islamic banks thisoption is not explicit in the leaseagreement but is in the form of aunilateral promise by the bank tothe lessee that the bank will sell thatasset at a particular price to thelessee.

l Since the price which is set by theIslamic bank for the ultimate sale tothe lessee is significantly lower thanthe cost as well as expected marketvalue of the asset, it is reasonablycertain that lessee will exercise thisoption. Since this intention ispresent at the start of theagreement, doesn’t it become“Finance Lease” right from the start?

Below is an extract from Mr. TaqiU s m a n i ’s book ‘An introduction toIslamic Finance’, Chapter Ijarah, pg174-175.

“Another important feature ofFinance Leases is that after theexpiry of the lease period, thecorpus of the leased asset is usuallytransferred to the lessee. …. Leasedasset is generally transferred to thelessee at the end of the lease,either free of any charge or at anominal token price…..This c o n d i t i o nw h e t h e r e x p r e s s o r i m p l i e d



is not in accordance with theprinciples of Shariah. It is a wellsettled rule of IslamicJurisprudence that one transactioncannot be tied up with anothertransaction so as to make theformer a pre-condition for theother. Here the transfer of the assetat the end has been made anecessary condition for thetransaction of the lease, which isnot allowed in Shariah”.

In case of Ijarah financing by Islamicbanks, ultimate sale of the leased assetis clearly connected with the leasetransaction and although not expresslymentioned in the contract. Is lease aprecondition for the sale? Islamicbanks usually argues that these twotransactions are not linked as one is ofa lease transaction through Ijarahagreement and other is a saletransaction through a separateunilateral promise to sell to the lesseeand they are not linked. If we acceptthis argument then following questionarises.

l If the transactions are not linked,why is the bank only willing to sellthe asset to the lessee and why notany other person who also is willingto buy that asset at that price.

l If the transactions are not linked,would the bank still honor itsunilateral promise to sell the asset ifthe lessee terminates the leaseagreement earlier than the term andwithout payment of all rentals.

The answers to above questions arevery obvious and that makes it a clearcase of Finance Lease that is notallowed in Shariah. Besides theprinciples of Shariah, if we apply aneutral yardstick of InternationalFinancial Reporting Standards toanalyse the transaction of Ijarah aspracticed by Islamic banks, it will fulfillat least the following two criteria ofFinance Leases as per IFRS 17 Para 8:

b) The lessee has the option topurchase the asset at a pricewhich is expected to besufficiently lower than the fairvalue at the date the optionbecomes exercisable such that, atthe inception of the lease, it isreasonably certain that theoption will be exercised;

d) At the inception of the lease thepresent value of the minimumlease payments amounts to atleast substantially all of the fairvalue of leased asset;

House FinancingDiminishing MusharkaHouse Financing is being done byIslamic banks through diminishingmusharka. It is based on the concept ofShirkatul Milk, which means jointownership of property. In this case,bank and client jointly purchase aproperty say with 80% bank’s shareand 20% client’s share. Clientoccupies the property and gives rent tothe bank and also gives some amountto gradually purchase the share of thebank in the ownership. As bank’s sharein the property reduces and client’sshare increases, the amount of rentalso reduces accordingly.

Lets analyse this transaction from theconcept of Shirkatul Milk.

Under the concept of shirkatul Milk orjoint ownership, both partners wouldshare the risk and reward incident tothe ownership. Risk includes decline inthe value of property and rewardincludes an appreciation in the valueof the property. If we analyse the housefinancing transaction by Islamic banks,we see that the price of property isfixed at the time of purchase and clientis bound to repay the bank’s portion init irrespective of actual increase ordecrease in the value of the property. Ifthe value of the property increases, it isthe client who would be happy andnot the bank as it will be receiving itsfixed portion.

In view of this how can it beconsidered a joint ownership, whenonly one partner is bearing the risk andreward of ownership? It appears thatthe client merely has a financialobligation towards bank and it isdischarging it with an element of Ribain it.

ConclusionIt appears from the structure of theabove mentioned products that theseIslamic Finance products have beendesigned by contemporary Islamicbanks as an easy alternative to Ribabased lending while in most cases theunderlying substance of thesetransactions differ from the legal form.The main issues in each product canbe summarized as:

l Murabaha is a mode of tradeallowed in Shariah while MurabahaFinancing is being used in place ofworking capital financing and inpractice it is devoid of basic spirit oftrade while contains closerproximity to Riba based lending.

l Ijarah is an operating leasetransaction allowed in Shariah,while the Ijarah Financing is thename given by Islamic banks to apurely Finance Lease transaction.The underlying substance of thetransaction makes it a FinanceLease; however it is called anIjarah.

l Shirkatul Milk is a mode of jointownership of property allowed inShariah. This concept is being usedby Islamic banks to develop ahouse-financing instrument basedon diminishing musharaka, whichlacks the basic concept behind ajoint ownership i.e. joint sharing ofrisk and reward. The customer ofthe bank is concerned with thechange in the value of the propertywhile the bank is only concernedwith its income stream that hasbeen determined on the basis ofinitial price of the property.

Hope this would be a food for thoughtfor researchers and scholars in Islamicbanking.

About the Author:

M r. Kamran Akktar is an A s s o c i a t eMember of the Institute of CharteredAccountants of Pakistan, currentlyworking as Finance Manager of AlliedEngineering & Services Ltd. - R e n t a lDivision. Readers are welcome to contacthim at: [email protected]



The Basic Principles of Islamic Economy and Their Effects on Accounting Standards-Setting

Mohammad R. Taheri

AbstractThis paper examines the basic principles and other salientfeatures of Islamic economy, such as the principles of multi-faceted ownership, economic freedom within a defined limitand social justice. Then their effects on users of financialstatements and objectives of financial statements have beenconsidered.

This paper compares the British- American model with anIslamic model in term of financial statement users, objectivesand theoretical concepts of financial accounting.

The theoretical concepts of accounting in the British-American model are self-evident statements or axioms thatrepresent the nature of accounting entities operating in freeeconomy characterized by private ownership of property.Whereas behind them there are hidden basic principles ofeconomies which have not been written in accountingliterature because they are assumed as axioms. The mostimportant attribute in Islamic economy is social justice. Oneof the most important elements for establishing social justiceis zakat. Another important element is Riba [Interest]. Riba isforbidden in Islam and people are not allowed to makemoney by lending their capital on interest. In the Islamicv i e w, State has responsibility to create a suitableenvironment to implement Shari'ah [Islamic Teaching] ins o c i e t y. An Islamic accounting model is based onMacroeconomics. While the British-American, accountingmodel is based on Microeconomics.

Key Works: Basic Principles of Islamic Economy; An IslamicAccounting Model; Standard-Setting.

Introduction There is a little attention about the basic principles ofeconomic in the accounting literature. Generally, accountingstandards setters start their discussion from needs of users orobjectives of financial statements though the assumptions ofeach economic community have strict considerations forcharacterize in various dimensions of accounting.

Cultural, social, economical, and political factors haveconsiderable effects on the kind of financial statements to beprovided. However, these factors are not similar in allcountries and each country uses an accounting system,which fits its own specifications.

In western countries with regard to basic principles of

economy the most important users of financial statements areinvestors and creditors. Thus, other groups such asgovernment, social authorities, and people are in the secondsteps.

The theoretical concepts of accounting in the British-American model are self-evident statements or axioms thatrepresent the nature of accounting entities operating in freeeconomy characterized by private ownership of property.Whereas behind them there are hidden basic principles ofeconomies which have not been written in accountingliterature because they are assumed as axioms.

The concept of " Basic Principles of economy " in accountingstandard setting has been mostly ignored in spite of itspotential to provide a more systematic appreciation of thestandard setting process.

In the west, however, ever since the eighteenth century theeconomists such as Smith, Ricardo, Marshal, and Mill beganto write about the significance of amassing wealth and theimportance of economic activity. Economics becamegradually both a scientific discipline and a distinct activity ofits own and in many areas, it became divorced from ethics.

It must not be forgotten, however, that classical economics,which arose in the eighteenth century and which wasbrought to the new world by the Puritans was related to acertain aspect of Protestant ethics which emphasized thevirtue of hard work and the amassing of wealth in contrast toCatholic ethics. But very soon the religious roots of capitalisteconomics become more or less eclipsed and there arose, asa result of the excesses of this type of economics based onlyon the importance of the incentive to amass wealth, thereaction to capitalism by socialism which was espoused byMarx and other socialists. Nasr (1993, 205).

The Basic Principles of Islamic Economy Before to explain the basic principles of Islamic economy,the basic principles of economic of liberalism from anIslamic view is expressed, because it is useful forcomparison. Then some of the salient features of basicprinciples of Islamic economy and their effect on accountingstandards setting will be consider.

According to Holton (1992, 54-69) the basic principles ofeconomics of liberalism as outlined here, represents anamalgam of ideas derived and adopted from a range ofsources. These include the 18th century economist AdamSmith, the neo- classical school of economics and morerecent post-war economists such as Milton Friedman. Thebasic principles of this tradition include the following:



Private Property Rights,

Individual Sovereignty,

Self-interest,

Rationality,

Self- Regulating Market.

Needless to say, economics as that partof man's activity which, deals with theproduction of goods, the amassing ofwealth, labor, work, trade andexchange of material objects, etc, hasbeen important in every civilization.

From Islamic view, as in othertraditional civilizations, economicswas never considered as a separatediscipline or distinct domain ofactivity. Consequently, there is no evena word for economics in classicalArabic. The term of Iqtisad (economic)being a fair recent translation of themodern term "economics" in Arabicand having a very different meaning inclassical Arabic. Where it meansprimarily moderation and keeping tothe golden mean as witnessed by thefamous book Ihya Ulum-id-Din,Gazzali. (1971,265).

According to Sadr (1994,51-55), theIslamic economy is composed of threebasic components, according to whichits theoretical content is defined. Thusit is distinguished from other economictheories in terms of the broad lines ofthese components, which are:

The principle of multi-facetedownership;

The principle of economic freedomwithin a defined limit;

The principle of social justice.

Islam differs essentially from capitalismand socialism in the nature of theprinciple of o w n e r s h i p , which itacknowledges.

Capitalist society believes in theprivate individual form of ownership,i.e. private ownership. It allowsindividuals private ownership ofdifferent kinds of wealth in the countryaccording to their activities andc i rcumstances. It only recognizespublic ownership when required bysocial necessity and when experiencedemonstrated the need for

nationalization of this or that utility.Socialism society is completelycontrary to that. So commonownership is the general principal,which it is applied to every kind ofwealth.

However, the basic characteristic ofboth societies are not applicable toIslamic society because Islamic societydoes not agree with capitalism in thedoctrine that private ownership is theprinciple, or with socialism in its viewthat common ownership is a generalprinciple. Rather it acknowledgesdifferent forms of ownership at thesame time. Thus it lays down theprinciple of multi-faceted ownership.That means from Islamic viewpointownership is accepted in a variety offorms-instead of the principle of onlyone kind of ownership, such as, privateownership, public ownership and stateownership.

For this reason, it would be a mistaketo call Islamic a capitalist society, eventhough it allows private ownership of anumber of kinds of property and meansof production, because in its viewprivate ownership is not the basic rule.In the same way it would be a mistaketo use the term "socialist society" forIslamic society, even though it hasadopted public ownership and stateownership for some kinds of wealthand property, because in its view thesocialist form of ownership is not thegeneral rule.

According to Quaranic verses, everything in this universe belongs to Godalmighty. "Whatever is in the heavensand whatever is in the earth belongs toAllah." [Al-Baqarah, 2:284]. He is thereal owner of everything "And Allah'sis the kingdom of the heavens and theearth, and Allah has power over everythings." [Al- Imran, 3:189].

Sadr (1994, 98-114) make clear thatindividual ownership, state ownership,and public ownership are threeparallel forms in Islamic law. Realownership belongs to Allah, man holdsproperty in trust for which he isaccountable to Him, in accordance

with rules clearly laid down in theShari'ah Islami'iah [Islamic Teaching]underlined above.

According to Siddiqi (1981, 191-209)acquisition of property as well as itsuse and disposal are subject to limitsset and should be guided by the normslaid down by Allah. A b s o l u t eownership of man is a concept alien toIslam, as it belongs to Allah alone.There are definite obligations towardsothers attending upon the individualrights of ownership. The respectivescopes of the three kind of ownershipare not rigidly defined but left to bedetermined in the light of certainprinciples, depending on the needsand circumstances.

The principle of economicfreedom within a definedlimitThe second of the components of theIslamic economy is to allowindividuals, at the economic level, alimited freedom, within the bounds ofthe spiritual and moral values in whichIslam believes.

The execution of this principle in Islamwas performed in the following way:

1. The sacred law, in its generals o u rces, provided the textualstipulation to forbid a group ofsocial and economic activities,which hinder, in the view of Islam,the realization of the ideals andvalued adopted by Islam, such asusury, monopoly and the like.

2. The sacred law laid sown inprinciple the supervision of theruler over general activities and theintervention of the state to protectand safeguard public interestthrough the limitation of freedom ofindividuals in the actions theyperform. Regarding s e l f - i n t e r e s t,Islam emphasizes that the successof both the individual and thesociety depend a balance betweenthe spiritual and the material needsof man. Based on principle of



limited ownership which is derivedfrom the Qur'anic text thatmentioned above, man is neitherthe absolute owner nor the totalpossessor of the earth and itsresources. He does not have theright to possess as much as hedesires or to obtain material wealthin any way he may choose. Indeed,because vicegerency belongs to allpeople, each individual is aguardian of the public trust. Inaddition, his ownership should belimited for the public welfare.

According to Maudoodi (1973, 87-98)It must sustain a right balance betweenthe needs of the body and of the soulso that its personal interests as well asthe welfare of the society might beprotected. In addition, this must not beignored that human progressnecessarily depends on the successfulcoordination of and the essentialharmony existing between the spiritualand material aspects of life. When thespiritual life is detached from theeconomic struggle of man, therequired dominant balance will beupset. Of course, the prevalence ofsuch a constructive balance is verycrucial to the maintenance of stabilityin the economic structure. In respect toRationality, various views and differentsenses often exist in reference to thedefining meaning of it. According toWeber (1970, 56) rational action isexplicitly defined as a delimitingcharacteristic in terms of which theways adopted to reach the ends arespecified. As a matter of fact, values oremotions in this respect are not inthemselves considered rational. Islamhas its way of thinking of life accordingto which the life of a Muslim in thisworld is a temporary phase in hiseternal life Hereafter. "But seek theabode of the Hereafter in that whichGod has given you and neglect notyour share of the world." [Qasas28:77]. According to Islahi (1978, 122-128) his success in the Hereafter isdependent on the utilization of theresource of this world in the best andright way.

On the subject of s e l f - r e g u l a t i n gm a r k e t , Kamali (1994, 25-36) has

stated that Suq [Market] enjoys havinga distinctive place in the history ofIslamic economy. Markets areregulated by price mechanism. Theessential feature of the pricemechanism is its capacity to regulateand bring into equilibrium the demandfor and the supply of commodities.According to Chapra (1980,126) withrefer to Islamic principles, the force ofsupply and demand has been wellrecognized on market. People are leftfree to transact and exchange goodsand services and the state can onlyintervene if a Dhulm [transgression] isunlawfully committed against oneparty. According to Beheshti (1992,126) the Shari'ah calls for fair and freetrading, fully complying withprinciples. Besides, price controlmerely as a means of vindicating thisfreedom and fighting corruption isreasonably validated. In fact, althoughIslam has recognized the marketsystem because of the freedom it offersto individuals, it is not to be consideredsacred and inalterable. It is the goals ofthe Muslim society, which are moreimportant, i.e. Ihtikar [hoarding andprofiteering] of people's urgent needfor particular commodities areabsolutely prohibited.

The principle of social justice

The third component in the Islamiceconomy that is the most importantattribute in Islamic economy is theprinciple of social justice. This isembodied in Islam by the elements andguarantees which, Islam provided forthe system of the distribution of wealthin Islamic society.

The Islamic image of social justicecontains two general principles eachone of them has its own lines andparticularities. The first of them is theprinciple of general mutualresponsibility the other is the principleof social balance.

Islam permits difference in wealthwithin reasonable limit but does nottolerate this difference growing sowide that some people spend their life

in luxury and comfort, while the greatmajority of people are left to lead a lifeof misery and hunger.

According to Tabatebaei (1980, 94-105) the key social justice of Islamiceconomy lies in man's relationshipwith Allah, his universe and hispeople, and the nature and purpose ofman's life on earth. Ta w h i d[monotheism] defines Man-Godrelationship. If a man believes in God and Day of Judgment, he is fullyconscious of his duty andresponsibility to God and his creatures.Thus, the success of man dependsupon following His commands andcreating harmony between moralityand the material aspect of life.

The second element after Tawhid forexecution of social justice is Ijithadaccording to Enayat (1991, 217) Ijtihadmeans independent legal judgment,effort, or ability to deduce rules fromsources. It is true that principles givenby the Holy prophet were given in aparticular age, under particularcondition, and were applied to aparticular society under entirelydifferent conditions from today.Hussain (1992, 260) points out thatthese days Muslims society is facingnumerous political, economical andsocial problems which can be solvedonly through Ijitihad, particularlyissues in regard to which, no clearinjunction is available in the Quran, orSunnah [The Prophet's act or saying].

The third element for enforcement ofsocial justice is ethics. It is important tomention here that in the West amongthose who have sought to relateeconomics to ethics, itself is mostlyconsidered in a purely humanistic veincreated by man. In contrast, in Islam,economics is considered to be relatedto ethics and ethics in turn is related toreligion. Therefore, it is really theShari'ah Islami'ah within which whatis called Islamic economic socialjustice must function and find itsmeaning. Zakat, Riba [Prohibition ofInterest], Stability on the Real value ofMoney, and State Responsibility forincome distribution are the Originaltools to carry out social justice insociety.



ZakatOne of the most important elements forestablishing social justice is zakat.According to Rahman (1986, 318-462)zakat is not a general tax but is aspecial tax which levied upon theMuslim members of the state only andis paid by them as a religious duty andact of worship to please the GodAlmighty. The importance of zakat canbe judged by the fact that it has beenincluded among the pillars of Islam,second only to prayers. The obligatoryduty to pay zakat is emphasized in theQuran, but the types of assets that aresubject to zakat are not determined.Thus, properties in the early days ofIslam on which are applicable forzakat are not same as today properties,because the type of properties arechanged during two period. There aredifferent opinions about the properties,which are applicable for zakat amongjurists. According to Sadr (1994, 237)instances of zakat and Nisb[exemption limit] and their amount ineach period are determined by Ijitihadwith regard to the condition of timeand place.

Riba The Holy Quran used the word Ribafor interest. According to Maududi(1973, 92) riba is earned when a manlends his money to another on thecondition that after a certain time hewill be charged a fixed amount ofmoney in addition to his money.Interest is forbidden in Islam andpeople are not allowed to make moneyby leading their capital on interest. It istherefore probable that they will investtheir capital in productive manner, andthereby increases their profits. Keynes(1936,154) has noted that "interest hasnothing to do with influencing thevolume of savings. Practically, it is therate of return on investment thatdetermines the rate of saving". Islamprohibits interest but encouragesinvestment.

Stability on the Real value of MoneyAccording to Chapra (1980, 152)honesty and justice in all measures ofvalue have been absolutely stressed inthe Quran, for instance, "And give full

measure and weight with justice"[An'am 6: 152]. The verse of Quranshould not be applied only toindividuals but also to social and thestate and should not be confinedmerely to conventional weights andmeasures but should also encompassall measures of value. It may hence beconsidered obligatory for the Islamicstate to resort to healthy money, fiscalpolicies and appropriate controls whennecessary, to minimize erosion in thereal value of money.

State ResponsibilityThe most important of an Islamic StateResponsibility is to provide a suitableenvironment for implementation ofIslamic rules in society. The Islamicrules [Shari'ah], the "broad path" canbe described as the entirety of Divinecommands concerning human actions,for God is the Sole Legislator.

There is a difference of opinion amongMuslim scholars regarding the use offorce in taking over the surplus of therich. Some of them remark that thestate can take the surplus only bypersuasion or with the consent of therich. Others such as Shari'ati (1987,124-128) have argued that Abu Zar, afamous companion of the HolyProphet, believed that the surpluswealth of the rich must be taken overby the state with or without theirconsent for meeting the needs of thepoor and the helpless. According toQutb (1977, 43) the Islamic state isresponsible for the provision of basicneeds to its members.

In fact, the foundations of correct andjust economy based on Islamic ruleswithout establishing Islamic State isimpossible.

Islamic Economy andAccounting Standards-SettingAn Islamic Accounting Model is basedon Macroeconomics. While theBritish-American, accounting model isbased on Microeconomics. In this latter model, the focus is on the enterprise asan economic entity that affects theeconomy through its operations inmarket.

There are many other countries whosetheir economy is based onmacroeconomics. The Islamiceconomy based on macroeconomics isnot similar to other countries such asEastern Europe or even like Sweden.On the other hand the opinion aboutIslamic economy even among Muslimscholars are different. Therefore,macroeconomics is not only the mainfeature for establishment of an Islamicaccounting model. Hence the mainsource for development of an Islamicaccounting model is to takeadvantages of Shari'ah Islami'iah, orIslamic laws. The motion of law in theWest economical subjects in the life ofmodern world is differ from the Islamicviewpoint. In the west law isconsidered to be an expediency basedon current social exigencies.

The concept of law in Islam is verydifferent. In the Islamic view, lawcomes from God (Allah) and humanbeings can only apply and extend it todifferent situations. In the west, lawsare passed to accommodate existingsituations while, in the Islamic view,existing situations must be transformedto conform to Divine Law. Mutahhari(1993, 206).

Islam, like all the major worldreligions, requires people to exerciseethical behavior in their dealing witheach other and with the resourc e savailable to them.

Users and objectives offinancial statement Private ownership of property is one ofthe most important basic principles ofliberalism economy, which effect onaccounting system. Its basic theme isthat accounting should focus on theentity and provide financialinformation for investors and creditors.Whereas concerning Islamic basicprincipal economy public ownershipand state ownership are moreimportant than private ownership.Therefor accounting should focus onthe state and provide financialinformation for government andsociety.



For an Islamic accounting model,primary user of financial statement isthe government. Because collection oftax such as, zakat and other state taxesand spent of them are in the IslamicState authority.

Financial accounting statements mustbe useful for:

Relevant for social economic decisionand judging management's ability andall of employee's efficiency to use fromenterprise resources with regard toIslamic norms to achieving the primaryenterprise and social goals. Evaluatingthe efficiency of management in thedistribution of income to achieve theeconomical justice.

Financial statements for achievingabove mentioned purposes to providefull disclosure of enterprise activities inaccordance with principles enshrinedin the shari'ah. In other words, all ofthe business activities, which areunlawful (haram), should be revealed.

The accountability and decisionusefulness contexts that have beenused for development of financialaccounting statements from an Islamicview meant to provide information forprohibition of interest in thefirms.According to Baydoun andWillett, (1997, 12-19) accountingimplication of the shari'ah includesfour titles. The need to properlycompute zakat, the prohibition ofinterest, the concept of socialaccountability and the concept of fulldisclosure.

The Theoretical Conceptsof Accounting and TheirEffect on FinancialStatement The British-American model is basedon the Entity Theory. Under the entitytheory, the net income does not belongto the proprietors or owners, but to theentity, which is regarded as separate

and distinct from providers of capital.In the Islamic view, everyone isanswerable for his actions. All theindividuals but not entities arepersonally responsible for theircommission or omission in religious aswell as economical affairs andfinancial worship. The Islamicaccounting model is based on theProprietary Theory. According toBelkaoui (1993, 233) in the proprietarytheory, the proprietor is the center ofinterest. Under the proprietary theory,assets are assumed to be owned by theproprietor and the liabilities and debtsowed; expenses are decreased inproprietorship and revenues areincreased. This theory is balance sheetoriented.

In the British - American model, theprimary focus is on the incomestatement and then balance sheet isconsidered. Income statement basedon microeconomic assumptions islimited to the exchange of transactionsbetween economic entities. In thismodel until recently, the social effecthas ignored. In addition, incomestatement is based on revenue -expense approach. In the IslamicAccounting model, primary focus is onthe balance sheet. The impact ofexchange between a firm and its socialenvironment is considered anddistribution of income in the firm andsociety are noticed. In this modelincome is based on asset - liabilityapproach. Income, which is in theform of comprehensive income, maybe used by the combination ofsocioeconomic accounting and value-added statement for presentation. In the British - American model, the

classification of assets and liabilitiesare based on the going - concernassumption. While, Gambling and

karim (1991, 84) have argued that:from an Islamic perspective, no reason

is relevant, they suggested theclassification should be based on zakatorientation.In the British - American model, asset

valuation is justified basically by theconcept of conservatism. While,Gambling and Karim (1991, 88-99)have argued that the concept ofconservatism is not related by Islamicteaching. Valuations basis of wealth,which is liable for religious taxes,should be based on current exit price.

Summary and ConclusionThis paper examines the basicprinciples and other salient features ofIslamic economy, and then their effectson users of financial statements andobjectives of financial statements havebeen considered. Some aspects ofaccounting such as asset valuation,theoretical concepts have beennoticed. The similarities anddifferences accounting elements instandard setting for an Islamicaccounting model versus British-American model are summarized intable 1.

There is no doubt that the use of theBritish-American model in Islamiccountries, according to Choi andMuller (1992, 57) is not for itssuperiority, but for its political andeconomic reasons. Today in the West,as well as in the Islamic world itself,there is a need to study both values andnorms of Islam from its own point ofview and their effects on accountingpractices. Mueller, Gernon and MeekIn third edition of their book (1994, 12)have stated that Islamic accountingmodel is emerging model, and wroteone paragraph about it. But in thefourth edition of their book (1997),they eliminate even that paragraph.

In short, without application Shari'ahIslami'ah setting of Islamic AccountingStandards are impossible. Elementswhich should be considered include:Islamic economy elements the mostimportant of which is social justicethrough application of prohibition ofriba, zakat, and Islamic ethics. Otherfactors such as Environmental andInternational elements which influenceMuslims community and adoption ofthese elements are possible based onIjtihad through application of "Time"and "Place".



F o r t u n a t e l y, Financial A c c o u n t i n gOrganization for Islamic Banks andFinancial Institutions (FAOIBFI) wasestablished in 1991and its namechanged to Accounting and AuditingO rganization for Islamic FinancialInstitutions (AAOIFI) to set accountingstandards based on the Islamicshari'ah. At present, the AAOFI has nopower to enforce its standards. Thebest way for implement of AAOIFIstandards in the various Muslimscountries is depending on thecooperation of Muslims accountant'sscholars. States of the IslamicOrganization Conference (IOC) mustbe supports financial resources fordevelopment researches for Islamicaccounting standards and authorizedthem for enforcement in the Muslimscountries.

References:Baydoun N and Willett R, (1997). Islam andAccounting: Ethical Issues in the Presentation ofFinancial Information; Accounting, Commerce &Finance: the Islamic Perspective; Vol. 1, No. 1,June, pp. 15-19.

Behesh'ti, S.M. (1992). Islamic Economic, FajarPress Tehran.

Belkaoui, A.(1993). Accounting Theory. DrydenPress, NY.

Chapra, Umar (1980). The Islamic Welfare Stateand its Role in the Economic Studies in IslamicEconomics, UK, Redwood Burn limited.UK.

Choi, F D S and Mueller G G, (1992).International Accounting, 2nd Edition, PrenticeHall international.

Enayat H. (1991). Modern Islamic PoliticalThought, Macmillan Pub. London. 1991.Gambling T E and Karim R.A.A, (1991). Businessand Accounting Ethics in Islam, Mansell,London.UK.

Gazzali, I. M.(1971). Ihya Ulum-id-Din, Englishtranslation by Al-Haj maulaana Fazlur Karim,Sind Sagar Academy, Lahore, Pakistan.

Holton, R. (1992). Economy and Society,Routledge, UK. The Holy Quran, text, translation andcommentary by A. Yusuf Ali, (1983). AmanaCorp.,

Hussain. Z. (1992). The Reconstruction ofIslamic Society, Ferozsons Ltd. Lahore. Islahi. S.D. (1987). Islam at a Glance, Call to Islam andHow the Prophets Preached, Lahore, Pakistan.

Kamali. M. H. (1994). Tas'ir (Price Control) inIslamic Law, The American Journal of IslamicSciences. Vol.11 No.1. Spring, pp. 25-36.

Karim. R.A.A, (1996).Economic Consequencesof Accounting Standards and Islamic Banks,Research in Accounting Regulation, Vol. 10, pp.111-138.

Keynes, J. M. (1936). The General Theory ofEmployment, interest and Money New york:Harcourt, Brace and company.

Maududi, Abul Ala, (1973). Economic Problemof Man. Lahore, Pakistan.

Mueller, G. Gernon, H. and G.K. Meek, (1994).Accounting An International Perspective,RichardD. Irwine Inc. USA.

Mutahhari. M. (1993). Islamic Economic, SadraPub. Tehran, Iran.

Nasr. S. H. (1993). A Young Muslim's Guide ToThe Modern World, Cambridge. UK.

Qutb. M. (1973). Islam The MisunderstoodReligion, Beassat . pub. Tehran, Iran.Rahman, A f z a l u r. (1986). MuhammadEncyclopedia of Seerah, seerah foundation.London, UK.

Sadr, Muhammad .B. (1994). Iqtisaduna (oureconomic). 2nd Edition, Tehran, Iran.

Shari'ati A. (1987). Abu Zar , (Companion of theProphet ) Ershad Pub. Tehran, Iran.

Siddiqi M. N. (1981). Muslim EconomicThinking: A survey of Contemporary Literature,The Islamic Foundation, United Kingdom.

Tabatebaei. M. H. (1980). Understanding IslamicSocial Economy, Anteshar pub. Tehran, Iran.

Weber. M. (1970). 'The Prophet' in personalityand Religion: The role of religion in personalitydevelopment, Sadler W (ed), SCM Press Ltd,London.

Elements British-American Model An Islamic Model

Economic Approach Micro Macro

Primary Users Investors and Creditors State, Management, People

Accounting Policy Goal Oriented Value Oriented

Asset Valuation Historical Cost Price Current Exit Price

Income Determination Revenue-Expense Approach Asset-Liability Approach

Time Value Money Yes No

Time Period Yes Yes

Primary Focus Income Statement Balance Sheet

Theoretical Concept Entity Theory Proprietary Theory

Going Concern Postulate Based on Income Based on Islamic Law

Fixed Interest Yes No

Legalistic Orientation Common Law Religious Law

Accounting Rules Technical Ethical

Accounting Ethics Professional Ethics Religious Ethics

Stock Exchange Market Yes Yes

Bonds Yes Yes with request condition

Accounting Approach Value Approach Event Approach

Dichotomy of Business Yes Noand Private Morality

About the Author:

Mr. Mohammad R. Taheri is anAssociate Professor of ShahidChamran University of Iran.



MURABAHA

MURABAHA is in fact, a term of Islamic Fiqh and it refers toparticular kind of sale having nothing to do with financingin its original sense.

If a seller agrees with his purchaser to provide him a specificcommodity on a certain profit added to his cost, it is calleda murabahah.

The basic ingredient of murabahah is that the seller disclosesthe actual cost he has incurred in acquiring the commodity,and then adds some profit thereon. This profit may be inlump sum or may be based on a percentage.

The payment in the case of a murabaha may be at spot, andmay be on a subsequent date agreed upon by the parties.,therefore, murabahah does not necessarily imply the conceptof deferred payment, as generally believed by some peoplewho are not acquainted with the Islamic jurisprudence andwho have heard about murabaha only in relation with thebanking transactions.

Murabahah, in its original Islamic connotation, is simply asale. The only feature distinguishing it from other kind of saleis that the seller in murabaha expressly tells the purchaserhow much cost he has incurred and how much profit he isgoing to charge in addition to the cost.

MURABAHAH is a particular kind of sale where the sellerexpressly mentions the cost of the sold commodity he hasincurred and sells it to another person by adding some profitor markup thereon.

The Profit in Murabaha can be determined by mutualconsent, either in lump sum or through an agreed ratio ofprofit to be charged over the cost.

Murabahah is valid only where the exact cost of acommodity can be ascertained.

In order to secure the payment of the price, the seller mayask the buyer to furnish a security whether in the form of amortgage or in the form of a lien or a charge on any of theexisting assets.

The buyer can also be asked to sign a promissory note or abill of exchange, but the note or bill of exchange cannot besold to third party at a price different from its face value.

Sale in ShariahSale is defined in Shariah as the exchange of a thing of valueby another thing of value with mutual consent.

The subject of sale must be existing at the time of sale, thusa thing which has not yet come into existence cannot besold. If a non existent thing has been sold, though by mutualconsent, the sale is void according to Shariah.

The subject of sale must be in the physical or “ConstructivePossession” of the seller when he sells it to another person,“Constructive Possession” means a situation where thepossessors has not taken the physical delivery of thecommodity, yet the commodity has come into his control,all the rights and liabilities of the commodities are passedon to him, including the risk of destruction.

The sale be must instant and absolute. Thus a sale attributedto a future date or a sale contingent on a future event is void.

The subject of sale must be a property of value. Thus, athing having no value according to the usage of trade cannotbe sold or purchased.

The subject of sale should not be a thing which is not used,expect for haram purpose, like pork, wine etc.

The subject of sale must be specifically known andidentified to the buyer.

The delivery of the sold commodity to the buyer must becertain, and should not depend on contingency or chance.

The certainty of the price is necessary condition for thevalidity of a sale, If the price is uncertain, the sale is void.

The sale must be un conditional, a conditional sale isinvalid, unless the condition is recognized according to theusage of trade as a part of the transaction,

Scripts from the book Islamic Finance written by Hafiz Mufti Taqi UsmaniContributed by Yasin Zairy, FCA


Financial Reporting

IAS 17- Changing Facemask

Liven a’ big machine, IAS 17 “Leases” has ever been just asmall part but stimulated a sizeable debate since its birth.IASB has finally revised the standard in the harmonizationprocess of financial reporting standards for the new era of2005.The harmonization and revision process by IASBportrays not only the refined reporting but also the redefinedreporting in many areas. However IAS 17 is beingconsidered a good example of more refined reporting amongreporting gurus. The changes in IAS 17 are numerous andIASB has just succeeded to verbalize many undefinedprinciples embedded in the superseded standard. However,the old and golden rule of nothing’s perfect still plays.

The changes in the IAS 17, pursuant to its revision, may wellbe categorized into two types. The first type changes are theinclusion and refinement of definitions. While the secondtype changes are the inclusion of new accounting andreporting issues, which had not been addressed by IASBeven after their very presence in local reporting frameworks(like FRS, SFAS, AASB etc). All these changes can be studiedunder the following heads:

Inception Vs Commencement of lease termThe new definition introduced by IAS 17 is for “Commencement of lease term”. The superseded standard onlyattended to the term “Inception of lease” and theaccountants all over the world were still unclear about thetiming of the recognition of financial elements (asset,liability, income & expense). This matter wasn’t of muchimport as the framework provides a comprehensiveguideline for this. The words “ I n c e p t i o n ” a n d“Commencement” surrogate each other but they may not bethe representatives of the same date. The new IAS 17 clarifiesthe matter that the recognition stage of financial elements isnot necessarily the time of inception of lease. These elementsare to be recognized pursuant to the fulfillment ofrecognition criteria defined by the framework. Moreover, thechanges in the lease terms between the date of Inception oflease and commencement of lease would be regardedapplicable from the date of inception. (ibid: paras 5 & 13)

The situation may arise where the lease agreement, evenafter being entered into, may not complements thecompletion of transaction owing to prospective acquisitionor construction of asset by the lessor. This problem may arisein case of manufacture’s lease. In such circumstances, the

recognition criteria for financial statement elements are notfulfilled until the actual acquisition/construction of asset bythe lessor and its transfer to lessee for subsequent use takesplace.

Moreover, the inclusion of the term “Commencement oflease term” doesn’t change the date of lease classification forsubsequent accounting and reporting. It remains the actualdate of inception when the agreement is entered into bylessor and lessee. In addition, the adjustments to MLP duringthe intervening period of inception and commencementwould be deemed to have taken place at the date ofinception. Such adjustments are normally anticipated andprovided for in the lease agreements under escalationclauses.

The classification of lease is to be made at the inceptionrather than on the commencement date. The situation mayarise where the classification changes on thecommencement date but it still have to be accounted for inaccordance with the classification at the inception.

w Singora Lessors plc enters into an agreement with a lessee.At the inception, the present value of MLP over the leaseterm equals the fair value of the leased asset. But the assetis still to be imported by Singora Lessors plc. During theintervening period of inception and commencement, thefair value of the asset increases reasonably. At thecommencement of the lease term, the present value of MLPequals 65 % or say 70 % of the fair value.

w Singora Lessors plc enters into an agreement to lease out anasset, which it has to be constructed first. All the principalprovisions along with the MLP are agreed upon prior to theconstruction of asset. And the lease term covers thereimbursement of cost to be incurrent together with areasonable return. Subsequently, on account of recessionin market, the fair value substantially falls during theconstruction period. Consequently the profitable contractturns into a loss at the initial stage of sale recognition.

This new requirements included in IAS 17 (for classificationof lease at the inception and the effect of escalation clausesto be taken effective form the inception date), in the opinionof IASB, better reflect the true economic considerations thatentered into agreement.

Yasir Khan, ACA

Financial Reporting


Such an opinion is in parity with the long establishedstandard developed by FASB (Financial Accounting Standard

Board) of USA in 1978 as an amendment to AmericanAccounting Standard SFAS 13 (Accounting for Leases).

Classification of leasesThe second type modifications lies in the section namedclassification of leases. The criteria defined by revised IAS 17are no different from those defined by earlier standard.

However the loopholes in the old standard are still therewhich caused a huge debate among the accountants but still

not addressed even by the new standard. These factors are asfollows:

l Interest rate implicit in the lease

l Contingent rentals

l Joint lease arrangements for land and building

l Leases in respect of investment properties

The interest rate implicit in the lease has been defined as thediscount rate that, at the inception of the lease, causes the

aggregate present value of (a) the minimum lease paymentsand (b) the unguaranteed residual value to be equal to the

sum of (i) fair value of the leased asset and (ii) any initialdirect cost of the lessor. Whereas the definition of MLPspecifically excludes contingent rentals to be payable over

the lease term. The definitions of implicit interest rate and theMLP fail to encompass the two facts; viz

a) the use of probability theory is the basic part ofaccounting estimates. The leasing arrangements where

the contingent rentals are the major part of the leaserentals pose the problem of inappropriate classification

of the lease term. Moreover, this has ever been regardedas a gateway to creative accounting; the reportingstandards have been developed as a cure of.

b) The implicit rate is the same for MLP and unguaranteed

residual value where the differences in risk factorsabout their estimation are quite apparent.

However, the new standard also clarifies the estimationtechniques which may be used by lessee at par with lessor

for the recognition of interest element on finance lease overthe lease term. The old standard gave the option to the lessorto use simplified method of apportioning interest income

over the lease via sum of digit or any other method. Whilethe same option was not prescribed for the lessee. (ibid: para 26)

The clarification of accounting treatment for contingentrentals over the lease term is pretty good step, though theimplied accounting treatment was evident in the oldstandard. The contingent rents are to be recognized in theincome statement in the period in the period of incurrence.(ibid: para 25)

Joint Lease Arrangements for Land andBuildingIn additional, an explicit guideline has been provided by thenew one about the classification of leases in respect of singlerental agreement of land and building. The additionalguideline is the result of a long debate about the recognitionprocess of long-term leases of land and buildings quitecommon in many countries. The classification of such leasesas either the finance lease or operating lease has been welldefined by other accomplished reporting frameworks all overthe world. The new IAS also defines the quantitativetechniques for the classification of lease, which serves as agood back support in complex areas.

In the financial reporting aspect of leases, its is well definedrule among the accountants all over the world that IAS 17prescribes the qualitative characteristics a primary test for theidentification of finance leases. The same primary tests areto be applied for the identification of lease type for land andbuilding elements separately.

Qualitative Questions1. Does the lease transfer ownership of the asset to the lessee

by the end of the lease term? (ibid: para 10-a)

2. Does the lease give lessee the option to purchase the assetat less than open market value? (ibid: para 10-b)

3. Does the lese contain terms that result in the gains orlosses from fluctuation in the residual value of the assetaccruing to the lessee? (ibid: para 11-b)

4. At the inception of the lease, is it reasonable to assumethat the lessee and lessor either (a) expected to lease termto be for the major part of economic life of the building or(b) that the residual value on expiry of the lease termwould be negligible? (ibid: para 10-c)

5. Has the payment structure of the lease been derived withreference to specific interest rates and returns on risk,which would be required by the lessor?

6. Does the lease allow the lessee to cancel the lease and ifso does the lessee have to bear the lessor’s losses, aspredetermined in the lease term? (ibid: para 11-a)

7. Is the building of such a specialized nature that only thelessee can use without major modification? (ibid: para 10-e)

8. Whether lessee has option for secondary lease period withpeppercorn rent? (ibid: para 11-c)

Financial Reporting


In addition, the following judgmental qualitative factorsaffirm the presence of operating lease.

1. Are the full repairing and insuring covenants in the leaseand clauses to ensure the asset is reinstated, at theexpense of the tenant, to its original condition at the endof the lease?

2. Does the lease provide for significant contingent rentvariations during the term by reference to the openmarket turnover?

3. Were the initial passing rent and other aspects of the leaseset at prevailing market rate?

4. Is the lease free of contractual terms, which might obligethe lessor to continue the lease at substantially less thannormal market terms?

5. Is lessee default the only grounds on which the leasereverts to the lessor?

6. If the lessee wishes to sublet or sell (or assign) their leaserights, are there terms in the lease that allow the lessor tocontrol the key terms of the sublet/sale?

The embedded principal in IAS 17 is to use above-mentioned qualitative measures to identify the lease type,whereas the other quantitative criteria have been defined toaccount for the lease transactions in the books of accounts.However the quantitative test may also be used to identifythe lease type and the most prominent one is the comparisonof present value of MLP with the fair value of the asset. (ibid:para 10-e)

The new IAS 17 introduces something special for identifyingthe lease type of where the lease involves the jointarrangements for land and building. The standard alsoprescribes the accounting treatment for leases involvinginvestment properties.

The IAS 17 prescribes the same accounting treatment andidentification of lease for separate contracts of leasing landand building as prescribed by the old standard. However, thejoint lease arrangement is the new concept for IAS 17 whichis no different from those prescribed by SFAS long ago.However in this case also, the dealing of the leasing for landand building has been defined in the separate manner.

The entire myth, as embodied in IAS 17, may be classifiedunder four different situations.

a) where the leasing arrangements involve the leasing ofeither land or building alone, they are to be dealt within normal way. The only criteria for leasing of land to

be treated as finance lease is the transfer of title at theend of the lease term owing to its infinite useful life.While the criteria for identifying lease type of building(and other assets within its scope) have been clearlyprescribed by IAS 17. (ibid: para 14)

b) where the leasing arrangement involves the leasing of

land and building as a composite unit and the lease

rentals are defined in composite term, the both items

have to be accounted for separately unless they fall

under the same classification. In case, both items falls

under operating lease, they have to be accounted for

compositely as operating lease unit. The lease rental are

to be allocated to the both elements if necessary

pertaining to quantitative criteria defined by IAS 17

which may also be of great help for classification. This

classification is to be based on the leasehold interest in

the land and building element. However such a

quantitative exercise may not necessary in all

situations. Where interest in both elements is of

operating nature, the separate accounting may not be

necessary and both elements can be treated as a

composite unit.

For a long time, there has been the confusion whether

value apportionments of land and building and residual

values at lease inception, needed to be obtained as a

precursor to the determination of lease classification.

But there also has been a well-developed conclusion

that this is unnecessary whilst a purely qualitative

assessment is being made (ibid: para 16 & 18).

c) where the leasing agreement arranges for land and

building element but the leasehold interest in the land

element is immaterial, both land and building elements

are to be treated as a single unit and is to be treated

under finance or operating lease accounting. In this

situation, the economic life of the building is to be

treated as the economic life of entire lease unit. In this

situation, the composite unit accounting treatment, in

substance, ignores the land element and the operating

or finance lease accounting would be applicable. (ibid:

para 17).

d ) where the headlease of both land and building is subject

to further sublease as an investment property and fair

value model adopted, the bifurcation and separate

identification is not required. We discuss this matter

under the following paragraphs. (ibid: para 18 & 19. )

Financial Reporting


Leases in respect of Investment PropertiesThe accounting treatment for Investment Properties taken onoperating lease is just a drastic move that IASB takes in IAS 17.In the opinion of reporting gurus, this move seems to providemuch better presentation to companies involved in long termsubleasing of headleases as investment properties. Under the new standard, the investment properties taken onoperating lease are permitted to be accounted for as propertiesheld under finance lease provided that fair value model underIAS 40 is used. This change in IAS 17 is the consequence ofcorresponding change in IAS 40 in this regard.

This accounting treatment provides the opportunity ofrecognizing assets to companies involved in rather long termlease of land and buildings as investment properties. Thesecompanies were unable to recognize the assets on account ofoperating lease agreements. However, the adoption of such anoption would also give rise to the corresponding liability in thebalance sheet and consequently affecting the company’sgearing. This lack of off-balance sheet financing may hinder theapplication of such an accounting treatment by companiesinvolved in letting out of buildings. On the other side, thecompanies involved in this business and exposed to low gearingmay opt this treatment to enhance asset backing.

The normal accounting treatments defined by IAS 17 and IAS 40are fine enough to present all transaction by a business notinvolved solely in investment properties. But the business ofletting out of long term commercial warehouses is notuncommon in the countries like Britain and USA. In such abusiness, the leased out investment property is normally

acquired on operating lease which are normally renewable forlong enough to make them little different from finance leaseagreements. Now a company having freehold investmentproperties and the company having only leasehold investmentproperties reflect the entire different positions of asset,liabilities, income and expense. However, the long termoperating lease agreement in respect of investment properties, ifclassified under finance lease standards of IAS 17, may not posesuch a huge comparison mismatch.

M o r e o v e r, the permitted accounting treatment for suchinvestment properties is the result of worldwide insist ofaccountants for such kind of a business. IASB has just taken afine step to make it optional for such businesses that areinterested to make their financial statements better forcomparison at parity with other companies having freeholdinvestment properties portfolio.

The separate accounting treatment for land and buildingelement is not necessary for above mentioned investmentproperties.

Singora Enterprise enters into a leaseagreement to acquire a commercial unit for itsadministration office in the locality ofLancashire, consisting of land and building, onlease from Simon Lessors plc. The fair marketvalues of the land and building, in the vicinitySingora Enterprise operates, have beenestablished after due consultancy of BritishProperty Valuers (BPV) and which come to be:

Land £ 5,000,000Building £ 4,500,000

The lease term agreed with Simon Lessors plccovers 10 years after which the SingoraEnterprise would be liable to pay only groundrent while no other payment is to be made forthe lease of building. Singora Enterprise wouldcontinue to operate from the same office fornext years to come.

Singora Enterprise is liable to pay 1,200,000 atthe end of each year for 10 years of lease.Thereafter Singora Enterprise is liable to pay400,000 at the end of each year as a groundrent. The required rate of return on theinvestment in building is 12 % whereas therequired cost of capital for investment in landcomes to be only 8 % owing to no risk of fall

in value. Moreover, the economic life ofbuilding comes to be 20 years.

In the above case, the apparent leaseclassification for land element is of operatingnature as it reverts back to the lessor at the endof lease term, and for further occupation theground rent is to be paid annually. Whereas inthe case of building element, the leaseclassification depends on the guideline givenby IAS 17.

At the end of the lease term, no more paymentis to be made for further use of building. Theguidance given by IAS 17 refers to the financelease type for the building element ofcommercial unit.

The proper accounting and reporting of thelease unit requires the bifurcation of entireMLP into MLPs relating to land and buildingelements. The criterion given by IAS 17 is theratio of lessee’s interest in the leaseholdproperty.

The lessor just requires the annual cost ofcapital for investment in land and doesn’trequires the true investment to be reimbursedthrough leasing arrangement owing to infinite

economic life of land and its slipping back atthe end of the lease term. The normal marketrate of return in such case is 8 %. That’s theannual return (5,000,000 x 8 % = 400,000)relates to the land element while theremaining amount is to be allocated tobuilding element to be accounted forseparately.

The implicit interest rate is 12 % and thepresent value of MLP (5.650 x 800,000 =4,520,000) equals the fair value of building atthe inception of the lease. Thus, in effect, theMLP allocated to the building element notonly covers the entire capital cost but also areasonable market return over the investmentand constituting it a finance leasearrangement.

However IAS 17 requires such allocation inthe ratio of inertest in lease, the otherestablished frameworks including thatAmerican SFAS require the use of fair value ofland and buildings for such an exercise. In thisregard, IAS 17 still has logical superiority overthe other frameworks and this fine move byIAS 17 is a good example of giving priority themost logical solutions while working for theharmonization process.

About the Author:

Mr. Yasir Khan qualified Chartered Accountancy in June 2005.Presently he is associated with SKANS School of Accountancy.

He dedicate this article to his father Prof. Muzaffar M. Khan,from whom He inherited approaching every task with honesty,hard work and boundless zest!

Readers are welcome to contact him at : [email protected]


Internal Auditing

Pre-payment checks, compliance audit or risk-based audit what is the most effective role for internal audit?

Internal audit comes in all sorts of shapes and sizes. A widevariety of approaches may be adopted and the particular onewhich is used will differ from organisation to organisationand country to country. These approaches form a continuumfrom pre-audit, through regularity or compliance audit, torisk-based audit. This article introduces these three mainapproaches to internal audit, considers the relative merits ofpre-audit and compliance audit and introduces risk-basedaudit. Future articles will provide a more detailed outline ofthe risk-based approach to internal audit.

The origins of internal audit are as an internal check on theaccuracy and validity of all payments made by anorganisation. No payments could be made without themfirst being reviewed and stamped for payment by the staff ofthe internal audit section. Internal audit practice now formsa spectrum from this, original role of internal audit, to risk-based audit. The latter consists of internal audit reviewingthe organisation's risk management and internal controlsystems and processes with only limited testing of internalcontrols to ensure that they are actually applied as required.

The Combined Code of the London Stock Exchange requiresthe boards of all its listed companies to "maintain a soundsystem of internal control to safeguard shareholders'investment" and that "the directors should... conduct areview of the effectiveness of the group's system of internalcontrols". In most companies the directors will rely on thecompany's internal audit function to directly undertake thisreview of internal control.

Many people would agree that the objective of internal auditshould be to help to ensure that the internal control systemof an entity is adequate and effective. Adequate can beconstrued as meaning fit for purpose, so in the context ofinternal controls, that the controls are appropriate for therisks which the organisation faces and that they are actuallyimplemented on a routine basis. The term effectivenessdemands more than this and infers an interest in the actualoutcome of the controls, for example ensuring that thetransactions are actually appropriate, accurate and valid. Asa result, if internal audit is to conclude on whether the riskmanagement and internal control systems are effective, itshould undertake at least some substantive testing to confirmwhether or not the internal controls have operated asexpected and thus ensured that the transactions are accurateand valid.

In addition, external audit will often rely on internal auditand as part of this reliance, may expect internal audit toundertake a degree of substantive testing of at least a sampleof transactions that have been processed by the mainfinancial systems.

Pre-payment audit checks (or pre-audit for short) areexaminations of payment vouchers and other documentsbefore the associated payments are made. The objective ofpre-audit is to ensure that payments made are:

w valid

w necessary and accurate; and

w expenditure is in line with the approved budget.

The advantages of pre-audit are said to be that it can help to:

w ensure that all expenditure is necessary and appropriate

w ensure that all payments are properly authorised beforebeing made

w ensure that expenditure is in accordance with relevantlaws and regulations

w prevent management fraud

w reduce the incidence of fraud or irregularity

w confirm the accuracy of the classification and thecoding of expenditure

and

w ensure arithmetical accuracy of the transactions whichare checked.

The pre-audit approach to internal audit is found in manydeveloping countries, but also in France, Portugal, Spain andmany other continental European countries with a legaltradition based on the Napoleonic Code. In these countries,an emphasis is put on the controls that are exercised by athird party entity, at the centre of government, often an agency

Andy Wynne

This article was first published in Accounting & Bussiness, the professional journal of the Association of Chartered Certified Accountants.

Internal Auditing


Figure 2: Compliance checking and risk-based audit

compliance audit

actual practice official instructions amendments cost effective risk management

risk-based audit

Managers often expect internal auditors to identify breaches

in financial regulations and to inform them when staff are not

following established practice. This can be a relatively

minor outcome of an internal audit assignment, however,

and this approach overlooks the wider benefits that can be

achieved when internal auditors take on the more important

role of assessing the whole control environment and its

adequacy and reliability in managing risk. Under this latter

approach (the risk-based approach), internal auditors have to

determine whether compliance with financial regulations

and other instructions will be sufficient to adequately

mitigate the risks which the organisation faces to the

achievement of the organisation's objectives. If not, internal

audit may make recommendations to amend financial

regulations or other financial instructions.

There may also be circumstances, where staff are not

complying with financial regulations or other official

instructions, but where the revised practices that they have

adopted are actually more cost effective at reducing risks to

an acceptable level. In this case internal audit may

recommend that financial regulations etc are amended to

require these revised practices to be adopted. However, in

the short-term, until these amendments are introduced, staff

should follow the standing regulations or instructions unless

they are given official permission otherwise.

Effective internal control systems should not only includesuitable checks and other control procedures, but theyshould also include review processes to ensure that thechecks and controls are actually implemented and compliedwith. Managers who see internal audit's role in complianceterms believe that they can rely on internal audit to ensurethat controls are actually reliably followed in allcircumstances.

For example, bank reconciliations are a fundamental controlin almost all financial systems, but an effective internalcontrol system will also include a review of each bankreconciliation by a supervisor or manager to ensure that ithas been properly undertaken and completed promptly.Payment systems will include authorisation processes; theyshould also include checks that these have been completedfor each payment by authorised signatories. These reviewsinvolve line management in the internal control processindependent of any internal audit presence. Managersshould be responsible for implementing effective controlsystems. They should also be responsible for ensuring thatthese control systems are routinely complied with.

Compliance audit may be an appropriate activity in anunchanging world. A comprehensive set of instructors andregulations are developed and reviewed by internal audit toensure all existing risks will be avoided. All that is thenrequired is for a regular check that these instructions arefollowed by all staff at all times.

Figure 1: Compliance or risk-based audit?

compliance auditFinancial Regs & Procedures Actual Practice

risk-based auditRisks Actual Control Procedures


Institute News

ObituariesMr. Moosa Yousuf Lulat born on 22nd December 1924 at Surat, India. He had matriculated in 1946-47 from B.N.Cinwala High School, Ankleswar, India, Graduated in Commerce in 1951 from Maharaja Savajirao University ofBaroda, India and then migrated to Pakistan in the same year.

On having completed Articleship in September 1955 from Hashmi & Co. Mr. Lulat qualified as Registered Accountantin October 1955 under the Auditors Certificate Rules 1950, and commenced professional practice in January 1956.He was admitted to membership of the Institute on 01.07.1961 and became fellow member in August 1961.

Mr. Moosa Yousuf Lulat had been in professional practice eversince under the name and style ‘Moosa & Co.’eversinceJanuary 1956 which he continued till early June 2004.

He died on 12 August 2005 due to cardiac respiratory failure.

He left behind a widow and four sons.

Mr. Abbas Mohamed Peerbhoy born on 18 April 1929 in Calcutta, British India, did his Inter Commerce from SidharthCollege, Bombay (India) in 1947, underwent 5 years audit training with the then M/s Ashraf Sajun & Co. CharteredAccountants and passed Registered Accountants’ examinations in 1956 under the Auditors Certificate Rules in 1950.He was admitted to membership of the Institute on 01.07.1961 as an Associate member and became a fellow memberin February 1982. He initially commenced his own professional practice as Chartered Accountant but preferred totake up employment in 1956 in the Pakistan International Airlines (PIA), where he served for over 30 years and retiredas General Manager Finance in 1990.

He died on 13.08.2005 due to protracted illness.

He left behind a widow and two sons.

Mr. Mohsin Mustafa son of Muhammad Ghias Shaikh born on 04 November 1969 graduated in Commerce from theUniversity of Punjab in 1990, completed 4 years prescribed Chartered Accountants training with M/s Riaz Ahmad &Co., Chartered Accountants was admitted to membership with effect from 27 July 1998 of the Institute on having passedthe Chartered Accountants final examination held in Nov. 1997.

He worked as a qualified assistant with Riaz Ahmad & Co., for four Years 8 months and subsequently was admitted topartnership of the firm in April 2003. He was permitted to train students in Nov. 2003 He discontinued professionalpractice on 1st July 2005.

Mr. Mohsin Mustafa expired on 08 October 2005 in Muzaffarabad when the earthquake hit the area. He left behindhis mother, a sister and a brother to mourn his death.

Syed Iftikhar Ali son of Syed Zulfiqar Ali born on 18 Nov 1933, passed Matriculation Examination in 1948 from theBoard of High School and Intermediate Education United Provinces, India, Graduated in Commerce in 1952 from theAgra University, India, obtained Bachelors Degree in Law in 1956 from the University of Karachi and on havingcompeted prescribed CA Training passed the Chartered Accountants Final Examinations of the Institute held inDecember 1962. He was admitted to membership of the Institute on 27 April 1963, and became a Fellow Member inFebruary 1977.

In profession, Mr. Iftikhar Ali remained affiliated as partner in Gardezi & Co., and Rahim Jan & Co., CharteredAccountants, Lahore for 5 years and Manager-in-Charge in Ford Rhodes Robson Morrow (now Ford Rhodes SidatHyder & Co.,) Chartered Accountants, Rawalpindi Office for 5 years.

In industry he served as Chief Accountant / Company Secretary in Printing Corporation of Pakistan, Islamabad and Rawalpindi ElectricPower Company Limited. His longest tenure was in Fauji Foundation where he served for almost 23 years working in different capacitiesand retired as General Manager Finance (Head Office).

He commenced professional practice in July 1999 under his own name and style M/s. Iftikhar A. Syed, Chartered Accountants. He died on13 October 2005 due to protracted illness.

He left behind a widow, a daughter and five sons.

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Institute News

VCD’s of CPD activities conducted by Southern Regional Committee ICAP

01. 27.12.2003 Workshop on ISA-700: The Auditor’s Report on Financial Statement Speaker: Mr. Asad Ali Shah, FCA (Karachi) 3 Rs.150/-

02. 10.01.2004 Workshop on ISA-210: Terms of Audit Engagements & ISA-203: Documentation

Speaker: Mr. Haroon Tabraze, ACA (Karachi) 2 Rs.100/-

03. 24.01.2004 Workshop on ISA-300: Planning & ISA-310: Knowledge of the Business

Speaker: Syed Mohammad Shabbar Zaidi, FCA (Karachi) 3 Rs.150/-

04. 21.02.2004 Workshop on ISA-320: Audit Materiality & ISA-520: Analytical Procedures

Speaker: Mr. Haroon Tabraze, ACA (Karachi) 2 Rs.100/-

05. 06.03.2004 Workshop on ISA-240: The Auditor’s Responsibility to Consider Fraud & Error in an Audit of Financial Statements &

ISA-250: Consideration of Laws and Regulations in an 3 Rs.150/-Audit of Financial Statements

Speaker: Mr. Shabbir Yunus, FCA (Karachi)

06. 20.03.2004 Workshop on ISA-400: Risk Assessment and Internal Control Speaker: Mr. Pervez Muslim, FCA (Karachi) 3 Rs.150/-

07. 08.05.2004 Workshop on ISA-500: Audit Evidence ISA-501: Audit Evidence-Additional Consideration for

Specific Items Speaker: Mr. Muhammad Asif Iqbal, ACA (Karachi) 3 Rs.150/-

08. 22.05.2004 Workshop on ISA-540: Audit Accounting Estimates ISA-550: Related Parties Speaker: Mr. Shahid Hussain, ACA (Karachi) 2 Rs.100/-

09. 12.06.2004 Workshop on ISA-545: Auditing Fair Value Measurements & Disclosures Speaker: Mr. Nadeem Yousuf Adil, ACA (Karachi) 1 Rs.50/-

10. 28.07.2004 Seminar on How to Employ Compensation Motivationally to Facilitate planned change for better productivity Speaker: Mr. Tariq Saeed Session Chairman: Mr. Zaheer Baig (Karachi) 2 Rs.100/-

11. 13.10.2004 Seminar on Business Success through Human Resource Management Speakers: Mr. Leon Menezes, Syed Nusrat Ali Session Chairman: Mr. Farooq Hassan (Karachi) 2 Rs.100/-

12. 29.11.2004 Seminar on Corporate Fraud-Responsibilities of the Board, Management and Auditors to Prevent and Deter Financial Crime. Speaker: Mr. Asad Ali Shah, FCASession Chairman: Mr. Kamran Mirza (Karachi) 2 Rs.100/-

13. 17.12.2004 Seminar on Application of Session 122 of the Income Tax Ordinance 2001 on Finalised Assessments of Repealed Income Tax Ord. 1979. Speaker: Mr. Shaukat Amin Shah, FCA (Multan) 2 Rs.100/-

14. 30.12.2004 Seminar on Leadership Qualities & Seeing Business Opportunities beyond the Financial numbers. Speaker: Mr. Zaheer Baig (Karachi) 3 Rs.150/-

15. 06.01.2005 Seminar on Treasury Management. Speakers: Mr. M. Rizvan Malik, Mr. Aezad Ata Session Chairman: Mr. Zafar Iqabl Sobani, FCA (Karachi) 3 Rs.150/-

S.No. Held on TopicCD’sQty

Cost of per CD Rs.50/-

Institute News


16. 27.01.2005 Seminar on Islamic Banking - A Complete Business Solution Speakers: Mr. Ahsan Saleem, Dr. Imran Usmani, Mr. Najam ul Hassan Session Chairman: Mr. Ebrahim Yacoob Sidat, FCA (Karachi) 4 Rs.200/-

17. 03.02.2005 Seminar on Mutual Funds & Investments in Capital Market Speaker: Mr. Nasim Beg, FCASession Chairman: Mr. Tariq Iqbal Khan (Karachi) 2 Rs.100/-

18. 24.02.2005 Seminar on Audit: Adding Value Across the Board Speaker: Ms. Huma Pasha, FCASession Chairman: Ahmed Dawood Patel, FCA (Karachi) 2 Rs.100/-

19. 10.03.2005 Seminar on Auditing in a Computer Information Systems Environment Speaker: Mr. Yazdi R. Sidhwa Session Chairman: Mr. Ahmad Saeed, FCA (Karachi) 3 Rs.150/-

20. 19.03.2005 Workshop on ISA-600: Using the Work of Auditor ISA-610: Considering the Work of Internal Audit ISA-620: Using the Work of an expert

Speaker: Mr. Pervez Muslim, FCA (Karachi) 2 Rs.100/-

21. 30.03.2005 Seminar on Strategic Management - A must for Successful Business. Speaker: Mr. Masoud Ali Khan Session Chairman: Ms. Uzma Bashir (Karachi) 3 Rs.150/-

22. 02.04.2005 Workshop on ISA-260: Communication of Audit matters with those charged with governance.

ISA-560: Subsequent Events ISA-220: Quality Control for Audit Work

Speaker: Mr. Haroon Tabraze ACA (Karachi) 2 Rs.100/-

23. 07.04.2005 Seminar on Basel II - An Evolutionary Approach Speaker: Mr. Ayaz Ahmed (Karachi) 2 Rs.100/-

24. 16.04.2205 Workshop on ISA-505: External Confirmations ISA-570: Going Concern

Speaker: Syed Faraz Anwer (Karachi) 2 Rs.100/-

25. 26.04.2005 Pre-Budget Seminar 2005-2006 Speaker: Syed Mohammad Shabbar Zaidi, FCA, Mr. Ather Saeed (Karachi) 3 Rs.150/-

26. 30.04.2005 Workshop on ISA-710: Comparatives ISA-720: Other Information in Documents containing

Audited Financial Statement ISA-580: Management Representations

Speaker: Mr. Nadeem Yousuf Adil, FCA (Karachi) 2 Rs.100/-

27. 06.05.2005 Inauguration SAFA 2005 Speech: Mr. Abbas Mirza 1 Rs. 50/-

28. 25.05.2005 Seminar on Implementing SBP Guideline using COSO Framework on Internal Control Speaker: Asad Ali Shah, FCA, Syed Liaquat Ali FCASession Chairman: Mr. Jameel Ahmad (Karachi) 3 Rs.150/-

29. 02.06.2005 Seminar on Critical Factors for Successful I.T Project Speaker: Mr. Rasool Hoodbhoy Session Chairman: Mr. Ahmed Saeed, FCA 3 Rs.150/-

30. 13.06.2005 The Federal Budget Seminar 2005-2006 Speakers: Syed Masoud Ali Naqvi, FCA, Mr. Ebrahim Yacoob Sidat, FCASyed Mohammad Shabbar Zaidi, FCA, Session Chairman: Dr. Salman Shah 4 Rs.200/-

31. 22.06.2005 Seminar on Recent Development at IFAC Education Committee Speaker: Mr. Abdul Rahim Suriya, FCASession Chairman: Mr. Khaliq-ur-Rahman, FCA 1 Rs.50/-

S.No. Held on TopicCD’sQty

Cost of per CD Rs.50/-

Note: Please contact Directorate of Continuing Professional Development (CPD) at 9251636-39 Ext 301 or [email protected]


Health News

MEDICAL EXPERIMENTMIRACLES WITH WAT E R

Japanese Sickness Association has published the

following experiment with WATER. They claim

100% success for curing old and new diseases, as

follows:

(1) Headache, Blood Pressure, A n a e m i a ,

Arthrosis Paralysis, Palpitation, Epilepsy and

Obesity.

(2) Cough, Bronchitis, asthma and tuberculosis.

(3) Meningitis and any other diseases connected

with Urine and Liver.

( 4 ) H y p e r- a c i d i t y, gastritis, dysentery, constipation,

piles and diabetes.

(5) Any other disease connected with eye, nose

and throat.

METHOD OF TREATMENT

(1) Wake up early morning and drink 4 glasses of

water (160 ml. Each) in any empty stomach.

Thereafter, no solids or liquids should be

taken upto 45 minutes.

(2) Normal breakfast can be taken after the 45

minutes elapsed.

(3) Nothing either liquid or solid should be taken

for 2 hours after breakfast, the same as within

lunch and dinner.

(4) After dinner, nothing should be taken before

bedtime or sleep.

Sick and old people will find it difficult to drink 4

glasses of water at an instant, in the beginning but

can increase gradually to the following diseases

have been cured on treatment of water for the

period shown below:-

A) Hypertension -- 30 days

B) Gastric Problems -- 10 days

C) Diabetes -- 30 days

D) Constipation -- 10 days

E) Cancer -- 06 months

F) Tuberculosis -- 03 months

Those who are suffering from arthritis should try

this experiment three(3) times a day for one (1)

week and there after reduce to once in the

morning, for the first few days you may experience

to pass urine more than the normal but no side

effects.

Contributed by Prof. Dr. Khawaja Amjad Saeed, FCA


That’s Life

‘Me Deaf?’Altaf Noor Ali, ACA

Three cheers to my stars for not being a deaf; but what is onesuppose to do when too many people - known and unknown– who happen to be in my life do not apparently think so.

Afterall, how would you explain why my fellow drivers honkso incessantly? Granted that safe driving and good drivingmanners is no criterion for granting of a vehicle by my Lord(bank balance and good credit is). Its as if most drivers do nothave their hands on the steering but on the honk, makingliberal use of their inherent right! Why do it? Ask them andthey will tell you that its for your own safety.

My kind hearted caring fellow drivers, more fit to flying an F-16 or equivalent fighter jet by virtue of their driving, arehowever no match for silencer less rickshaws: if you haveever seen one or more in a grand prix. Once at a traffic light,I asked the one next to me for a direction. No response, noteven a glance. Said it again and saw him smiling instead ofresponding. Said it again and he says, ‘What’s that?’

That’s not all! Every other rivals for being in ‘Top 10’in abuseof cellular technology. No problem if service levels have hitthe ground and still drilling, the national vision of each onehaving a mobile is yet to be realised. Strange, that aconnection comes with countless ringtones but not a wordon etiquettes. And, that would not debar us from beinglouder and louder every time if we are not clear to the otherside (or someone’s making a monkey out of us?). Easy to takeall around you to be deaf, even if you happen to be in anelevator on your way to the top floor (that’s where my officeis).

I do not have any experience of oil drilling but the soundssometimes emanating around my office appear to besomewhat similar. I will figure out one day why all suchdevelopment activity takes place during the office hours butit makes me believe that our GDP must be rising by thatfabulous figure the economists quote.

Reaching home, I can often tell while parking that my familyis hooked to Star Plus, watching one of its many rubbish soapoperas. My apologies to the offended sensibilities, consensusbeing that its merely for fabric and jewellery shopping ideas.If so, how about doing so on a ‘mute’? Revolutionary!!

Next, I visit a library frequently where right within an eyeshotof the sign ‘silence’many literates chat loudly and freely (theheight of delight being standing right beneath the sign and doit). Tell me if the speaker (or speakers because I hear morethan one voice at the same time) takes me for a deaf or theone being addressed?

Whatever said, none of the above however beats theexcitement of being in a stadium watching a cricket match ora music concert or a disco (MMA lovers: sleep well, nonearound my vicinity).

Its fair if you were to conclude that I love graveyard-likesilence and should consider to have an abode in a jungle.Sure, but talking of graveyards take it from me that even theyare not to be spared; my recent experience is that of antearful mourner taking a call at a funeral. Doing so at prayersonly surprises the skeletons!

How about landing in a jail if I insist on staying within city?Not difficult at all given that being a criminal is no conditionto be there. Upside? Its tranquillity has turned many into bestselling authors!

The fact is that not all sounds are undesirable ones. Forinstance, its fortunate to be up at the time of morning call forprayers and responding to it; following it with a walk,attending to the uttering of birds is as tranquil as it gets.

The endangered specie of literates in this age have given upthe habit of reading, not appreciating that it can be donealmost without shrieking but involves some effort.

So, am I out to change the deep disgusting personal habits ofexcessive honking, raising personal volume, etc. through thispiece that would not move a hair on its own? Not really, justloathing the day when I too will find those around me to bedeaf.

About the Author:

Mr. Altaf Noor Ali is Chartered Accountant practicing inhis own name. Readers are welcome to contact him at: altafnoorali @yahoo.com


Students’ Section

Collective Zakat System Nadia Wahid

In the Holy Quran, Allah has mentioned:

“ Of their goods take alms, that so thou mightiest purify and

sanctify them and pray on their half verily thy prayers are a

source of security for them and Allah is one who heareth and

knoweth. (9/103).”

In simple language “ Take from their wealth and clear them,

pray to them, your prayer is prosperity for them. Allah listens

and knows all”.

In the days of our Prophet ( P B U H ), he was the chief of

religion, head of the Government and Commander in Chief

of the army. The above order of Allah was for him to take and

so also these orders are for every proper Muslim

Government.

From the beginning of Islam till 7th century i.e. the days of

Abbasi Caliphate, zakat was collectively received. It is a

popular belief that Hazarat Abu Bakar announced to declare

war against defaulters of Zakat. It is a clear proof that Zakat

was received centrally. After the fall of Baghdad to Central

Asian non-Muslim warriors, the system of Zakat became

disturbed and no one was willing to pay Zakat to non-

Muslim invaders. Even in those days it was unanimously

decided by scholars that in the countries ruled by non-

Muslims, a Muslim Ameer should be selected and pool the

Zakat with him.

Preliminary

1. In Islam, we can see that Salat, i.e. Namaz and Hajj are

performed collectively and not individually. No doubt,

Salat can be offered individually but priority and

preference is for collective prayers.

2. In our family or friendly circle, whenever the payment of

Zakat and Ushr comes under discussion, almost everyone

says, “Yes, I pay.” If they are in very close terms, fit to ask

how much and to whom, then the reply is generally,

“That’s all I paid and to those who approached me.” It is

not a correct answer to a fundamental Islamic directive.

First of all Zakat should be calculated in detail in black

and white presuming that not the Income tax officer but

Allah is looking at it. It is individual Zakat payment system

which is prevailing in most of the Muslim society

throughout the world for the last few centuries. Under the

collective system several questions would come up which

have been tried to be discussed and solved here.

3. Molana Abul Kalam Azad about a century ago, started

delivering lectures on Collective Zakat System. According

to him, Friday prayers are subject to Imam and have not

been discontinued in the non-Muslim Empire / rule. So

how can Collective Zakat system be discontinued? He

was also of the view that individually paid to poor can be

anything but not Zakat.

4. After seven centuries of Islam, alongwith many other

social and economic changes, Zakat also changed from

collective to an individual basis. Then it was for each and

every Muslim to decide himself to ascertain and distribute

Zakat. The actual purpose of distribution of Zakat should

not be only maintenance of needy individuals but should

also be their rehabilitation and self-dependence, and not

to make them beggars. There is a school of thought,

which claims that Islamic Government must be prevalent

for Collective Zakat System. If it is considered to be

correct even, then it cannot be an excuse for clear-cut

directions of Collective Zakat System, which has been in

practice for seven centuries.

5. The needy in such a condition will not feel ashamed that

he is getting Zakat from so and so. It should be kept secret,

otherwise such people will feel degraded in the

community or society.

Students’ Section


6. In the practical life, we see manycollective Zakat units, which aretrusts, NGOs, associations,societies, welfare funds,anjumans, mosques, madrassahs,Jamiat, etc. They are working onlyfor voluntary collection andconsumption is for their ownobjectives. The main flaw is thatneither the Zakat is collectivelyreceived from every citizen, liableto pay nor it is received in full andnot also used for the benefit of thepoor in general.

7. Beggars are a stigma on our civiclife. All the beggars need not becompulsorily poor. In severalpress reports, we have seen thatsome of them have mobile phonesand come in a taxi and evenreturn in a taxi after a full days’earning. They also share theirincome in a very low ratio withthe administrative staff on theroads, markets and posh areas.

8. It is the duty of the Governmentand especially when compulsoryCollective Zakat and Ushr isintroduced, that should behelped in a reasonable way, andthat beggary is eliminatedthroughout the country.

9. Since the late Gen. Zia-ul-Haq’sintroduction of Zakat beggarsand Ushr, we heard rumors, newsand observations of a lar g enumber of malpractices in thisfield. Similar to many othermalpractices, Allah and HisProphet (P.B.U.H.) have warnedof severe punishment formisusing Zakat money but still,people of our society, in general,do not hesitate in pocketingZakat money or indulge in itswrong distribution to their kithand kin.

1 0 .H o w e v e r, this does not mean that

we should not support theCollective Zakat System, whichis still in practice in manyMuslim countries not as a nationas a whole but among families,societies, groups or even villagesand towns. As for example, inSaudi Arabia, some of suchcollection is used to pay off thepenalty of the prisoners and getthem released.

11 . Even today in NWFP there is atradition that if a person becomesbankrupt or is in need offinancial help, he invites knownand unknown persons to “DaalRoti”. He puts a large earthen jarcovered with a cloth in thecenter and the visitors put somemoney in it.

No one can know who has givenhow much. It would have beenbetter if the receiver is also notmade public. It is possible onlywhen Zakat and Ushr is collectedand distributed by two or threesenior respectable citizens. Onlythey would know who has beenhelped but the receiver wouldnot come to light, except in thefiles. No doubt, every one wouldpoint out dozens of defects andshortcomings but with the pass oftime, defects would surely beremoved and time would teachus how to implement it properlywith the fear of Allah and HisProphet (P. B . U . H . )

P r a c t i c a l

1. RETURN FORM:

A detailed form to fill up everyyear by every individual shouldbe designed, showing assets withdescription liable to Zakat, withpresent market value. Ushercalculation, exempted assets lessliabilities, Zakat & Usher figure,balance brought forward, paid &

balance carried forward, Debit orC r e d i t .

2. O R G A N I S AT I O N A LS T R U C T U R E :

a. No doubt there is dearthof honest, incorruptible andunapproachable persons.

Proposed A d m i n i s t r a t i o nC o m m i t t e e ’s photos may be

published for public opinion& objections, if any. Event o d a y, every department,

business community, NGOshave one or more persons

who have these qualities andare fit for this purpose.

b . Keeping in view the generalreputation of revenue staff in

the public, much care isrequired in the appointmentas well as in making out the

rules, regulations andprocedure for their working. It

would be better if the DistrictAdministration side andGovernment officials are not

taken in Councils andCommittees, otherwise public

members, living in the samedistrict, will feel difficulty andwould be reluctant to

disagree with District andother Officials.

c . Oath taking from the staffshould be an annual featurein which each individualshould say on Holy Quranthat he has neither acceptedany gift or facility in cash,kind or service from the Zakatpayers and shall also notaccept the same in the nextcoming year, nor anydistribution was unjustified.

d. Unit of Collective Zakat maybe city, town, district but notl a rger than district.

Students’ Section


3. USHR:

a. Produce means not only gross

agricultural or forest produce liable

to Ushr. Mining and fishing are also

liable on gross production.

b. Usher no doubt is different from

Zakat but in Hadith it is in the same

Chapter of Zakat and since its use is

exactly similar to Zakat. Its merger

with the Zakat Fund appears to be

quite in order. The only difference

is that Usher is on the Gross

Product while Zakat is on the Net

Assets of a person on a given date.

c. It is further clarified that fishermen,

agriculturists, mine owners, etc.,

even after payment of Usher are

liable to Zakat ZAKATIS ON THEIR

SAVINGS.

d. Ushr is not payable yearly or on an

annual basis, but it is payable on

production, which may be twice a

year or even more frequently or on

regular actual production such as

in case of mining and fishing.

4. RECOVERY OF USHR:

a. It may be both in kind or in cash.

Pakistan has four major cash crops:

viz. cotton, sugarcane, wheat &

rice. Cotton is generally procured

by ginning factories; wheat by the

Food Department and local

markets, sugar cane by sugar mills

and rice paddy by the rice mills. If

a compulsory condition is made to

these organisations to recover 5%

of the gross proceeds, the recovery

would be easier and leakage would

be difficult. Similar steps may be

taken for recovery of Usher on

mining and sea products.

b. Apart from the main consuming

mills and markets, some wheat,

s u g a rcanes, rice, etc., are

consumed or sold privately. To

encircle these types of utilisation,

patwaris and agriculture

department, keeping the record of

crops and production can provide

reasonable estimates. If all these

are computerized, as is being done

in Punjab, then obtaining such data

for levy, collection and check on

evasion of Ushr will be much

easier.

5. RECOVERY OF ZAKAT:

a. Payment of Zakat is at source and

v o l u n t a r y. There should be

provision to recover it, if not paid

voluntarily.

b. For the recovery of income tax, we

have the condition to pay the tax in

advance at the time of filing the

return. Why should not the Zakat

also be paid immediately with the

return? If Zakat is not recovered

and subsequently the assets have

reduced, the benefit goes to the

payer and as such it should be the

duty of the Government to recover

the Zakat immediately without any

concession, or installment.

6. PREFERENTIAL BENEFICIARY:

Those who are paying Zakat and

Ushr at the moment know some of

the beneficiaries personally or by

verification determine that they are

really entitled to the help. Under

the collective system, Zakat payer

should be entitled to assign a

percentage of his contribution for

them say 30-50% of the Zakat paid

can be assigned to particular

institutions or individuals. It is a

good idea. Apart from the

institutions, several individuals

would also be on the list of Zakat

payers, who were being benefited

in the past.

7. NON-MUSLIMS:

In every Muslim country, there is a

population of non-Muslims, maybe

in minority. Every religion has a

lesson on charity with good results,

here and there. As for example,

Christians have to pay 10% of their

income, while Muslims have to pay

2.5% of their savings. In other

words, religion will not affect Zakat

or charity.

To make it more logical separate

funds for separate non-Muslims

(Christians, Catholics, Protestants,

Jews, Hindus, Parsi, Qadiani,

Buddhists etc.) be maintained by

their own priests and the rate may

be as applicable to Muslims but

with an audit by Muslims and

supervision of Government. It shall

be for social welfare of their own

religious poor.

About the Author:

Ms. Nadia Wahid got 8 As in O

Level. After passing A Level in six

months, she graduated in

Commerce from Karachi University.

She has completed ACCA (UK) and

is a CA finalist.