Page 1 of 17

Journal for Studies in Management and Planning

Available at http://internationaljournalofresearch.org/index.php/JSMaP

e-ISSN: 2395-0463

Volume 01 Issue 07

August 2015

Available online: http://internationaljournalofresearch.org/ P a g e | 446

Towards Alternative Approach on Zakat Investment

on Pension Funds

Sheriff Muhammad Ibrahim; Hassan Sheriff El-Hassan

Universiti Sains Islam Malaysia (USIM) Bandar Baru Nilai, Negeri embilan Malaysia

Mohammed Goni College of Legal and Islamic Studies Maiduguri

Abstract

Pension is a system in which the

employer contributes savings for the

employee after his retirements, through

this system a very big amount of assets

are saved and invested, either by the

employee or the employer, pension helps

a lot of retirees to attain a sustainable

life after their work age. Pension system

is a new concept in the Islamic

economics timeline, but Muslim scholar

accepts it as permissible transactions, if

it is saved or invested in line with

shariah principles. Recently, scholars

have shown concern over the zakatabilty

of funds allocated in pension savings, to

help Muslims employers observe their

religious obligation. Zakat is a

compulsory alms ordained by Allah on

every Muslim who owns wealth or

property that meets the conditions of

zakatabilty, the conditions includes; the

ratio of amount in which zakat is paid

called (nisab), the passage of year

(al-haul), right of ownership, and free

from debts. It is clear that an employee

could meet these conditions under some

pension plans. This study discusses the

classifications of pension plans with a

view to find pension plans suitable

Islamic economic principles, and

suggests the appropriate ways of

investing pension funds using Islamic

investment portfolios. Finally the paper

recommends the establishment of Islamic

pension managers where it’s not

available and strengthening them to

cover all financial services offered by the

conventional pension managers and

investors. Doing this will help Muslims

achieved the joy of their pension funds

without falling under the temptations of

illegality.

Introduction

During of the Prophet, zakatable items

were very familiar since the sources of

wealth were well known. Zakat is levied

on camels, sheep, cows, goats, gold,

silver, agricultural products and trade

goods (Qardawi 2006). A property

exempted from zakat in the life of the

Prophet includes properties for personal

use such as living house, clothes and

furniture.

In the early Muslim epochs, the zakat

collection was carried by the state as a

tax imposed by shariah and distributed

among the needy (Marshal 1985). Zakat

as an Islamic welfare system, was not

only seen as a mere spiritual charity, but

was enforced on the power and

autonomy of the state so as to affirm the

sustainability and the wellbeing of the

Page 2 of 17

Journal for Studies in Management and Planning

Available at http://internationaljournalofresearch.org/index.php/JSMaP

e-ISSN: 2395-0463

Volume 01 Issue 07

August 2015

Available online: http://internationaljournalofresearch.org/ P a g e | 447

community through redistributing

wealth.

Lately, Muslim scholars have shown

serious concern over the change in the

concept of wealth as it differs drastically

from the traditional concept. They have

been debating on the possibility of

ijtihad over the newly emerging fiqhi

issues related to zakat collection and

distribution (Mahmud and Shah 2008).

Other scholars concluded that inability

of the zakat funds to serve as an

effective fiscal tool against poverty is

mainly due to the inefficient zakat

collection and distribution (Chapra

1992). Among the major indications of

fewer zakat funds observed by the

scholars is the issue of narrowing

interpretation the lifetime of the zakat

and its principles. This leads to limiting

the chances of application of ijtihad to

enhance the methods of zakat. This study

aims to examine the shariah provisions

over the investament and zakatabilty of

pension funds. to achieve this, this study

gives a brief introduction to zakat and

the criteria for zakatabilty of wealth,

with emphasis on the nisab (zakat ratio),

al-haul (passage of a year), full right of

ownership, and free from debts. This

gives way to understand that pension

funds are zakatable whenever these

conditions are achieved then zakat is

imposed. The study also examines the

concepts and classification of pension

funds with a view to find pension plans

suitable Islamic economic principles,

and suggests the appropriate ways of

investing pension funds using Islamic

investment portfolios. Finally the paper

recommends the establishment of

Islamic pension managers where it’s not

available and strengthening them to

cover all financial services offered by

the conventional pension managers and

investors. Doing this will help Muslims

achieved the joy of their pension funds

without falling under the temptations of

illegality.

The Criteria for Zakatability

Early jurists had looked at the

application of zakat from the traditional

sources and had identified zakat as a

duty imposed on all properties that are

likely to grow or bring profit to the

owner. They concluded that only the

natural growing assets could be

subjected to zakat (Tabrizi 741 H).

Growth and profitability are further

explained as; something that provides

profit or benefits the owner; something

that grows surplus; newly acquired item

like business for profitability; or the

livestock reproduction.

(Al- Kasani 1986) maintained, “The

meaning of zakat is growth and growth

in general does not exist except there is a

growing wealth. We do not mean that the

wealth automatically grows, but we

mean is that such wealth is prone to

grow by any means, such as grazing,

trading etc. Grazing becomes the source

of milk, reproduction and meat, while

trading is the root of profits”.

It must be observed that this view may

have negative effects on zakat collection

in the corporate sector. This is due to the

cause that zakat will only be charged on

the circulating wealth, and not the fixed

Page 3 of 17

Journal for Studies in Management and Planning

Available at http://internationaljournalofresearch.org/index.php/JSMaP

e-ISSN: 2395-0463

Volume 01 Issue 07

August 2015

Available online: http://internationaljournalofresearch.org/ P a g e | 448

assets of the company.

Al-Shaukani (1250 H) maintained that

zakat is legislated to help the poor and

relieve them from poverty without

impoverishing the rich. And clearly this

is done by taking from their surplus.

Therefore, if zakat is imposed on the

wealth that does not grow, it is irrational,

since zakat is paid annually in addition

to the living expenses.

It is clear, that the classical scholars were

of the view that; assets meant for

personal use, assets that do not grow are

not subjected to the obligation of zakat;

and only growing, and profitable assets

are drawn to the category of Zakatable.

The implications of this view could be

portrayed as following:

Items subjected to zakat are:

i. The key wealth types known at the

time including; livestock, inventory of

trade, gold and silver

ii.Part of income concomitant to the major

kinds of wealth or income, saved in form

of wealth, regardless of its sources

iii.Agricultural products

iv.Natural resources

Items exempted from zakat include:

i. Human skills and resources

ii. Income used for consumption

iii. I

tems meant for personal and family

use such as houses, horses, furniture

etc.

Petty things not meant to be trade

inventories such as laborers’ tools.

The Nisab (Rate) (Sheriff, 2014)

Classical jurists considered the

traditional sources of zakat to be the

Quran and Sunnah. They agree that there

is no zakat imposed on any property,

unless it reaches the nisab, laid by

shariah. The limit of nisab was

institutionalized by the Prophet S.A.W.

The Prophet determined nisab for

zakatability as follows: five camels and

above; forty sheep and beyond 200, 2.5

for silver dirhams and five wasq (653

kilograms) for grain.

Khan (1995) further relates that

whenever above properties reach the

nisab, the following four types of rates

are imposed:

i.2.5% from the business capital

ii.10% or 5% from the farm produce

iii.According to the detailed codes of

livestock

iv.20% of the found treasures

Abu Saud (1988) quoted Ibn Taymiyah’s

support for the rationale behind the

differences in the rate. He believed that

the effort required for diverse wealth

types differ according to their nature,

and as a result, the nisab must vary.

The Condition of Alhaul (Passage of

a year)

Majority of the scholars agree that a

complete lunar year has to pass over a

zakatable possession after its ownership.

This condition is only applicable to the

capital assets, such as money, business

stock and livestock.

Arguments arose concerning the time

allocated for determining the passage of

a year. Shafi’iyyah and Hanabilah for

instance, maintained that the nisab must

be constant throughout the year. While

Hanafiyyah believed that the nisab is