Zakat on Islamic Home Purchase Plan

In the name of the Allah, The Beneficent, The Merciful

 Summary on Zakat on Islamic Home Purchase Plan

Summary

This fatwa primarily assesses whether Islamic Home Purchasing Plans, namely Ijarah, Murabahah and Diminishing Musharakah are considered debts for zakat purposes.

The fatwa specifically addresses the following:

Whether Shari’ah compliant home purchase plans are considered debt (no they are not except for Murabaha schemes)

  •  Whether the customer is able to deduct any future rental instalments due to the bank for from their zakatable assets (Only the amount of rent incurred by the zakat anniversary can be deducted.  One month is a maximum for rent that is paid monthly in arrears.  Rent paid in advance is not deductible.)
  • Whether zakah is payable on the value of ‘on account’ payments (Ability to effect increase is the actual criterion which requires access.)
  • What the Shari’ah position is with regards to deducting all the monies due under a Murabaha arrangement from knew zakatable assets  (the preferred view is to only deduct twelve months not the full amount)

The fatwa states that with regards to the Murabahah scheme, ownership is vested in the client at the time of contract with the individual incurring a debt for the balance of the purchase price which will be paid according to an agreed schedule.

With the Ijarah and Diminishing Musharakah purchase plans, the debt incurred by the client is only that of monthly rental payments.

The fatwa does not allow the deduction of future rental instalments from zakatable assets, but allows those payments to be deducted which have already been incurred.

 

With regards to the ‘on account’ payments which are made on a monthly basis in addition to the rental payments in the Ijarah and Murabahah schemes, the fatwa states that despite having ownership of these ‘on account’ payments, as the individual has no access to the wealth and, therefore, has no ability to effect increase on the ‘on account’ payments, zakah will not be payable on the value of the payments.

In regards to zakat payments due on the the Murabaha scheme, the fatwa holds that as the client incurs a debt for the balance of the purchasing price, normal rules regarding long term debts will apply. The individual will therefore need toexclude the outstanding sum of payments for the remainder of the lunar year from his/her zakatable assets as an exercise in staving off punitive measures from creditors.

With regards to Zakah on Ijarah and Diminishing Musharakah purchase plans, the ruling is the same, that being that as the client incurs a debt only to the extent of the monthly rental payment, if the client’s zakah date arrives before the monthly debt payment is settled, only the month’s payment will be deductible from his/her zakatable assets.

الجواب حامدًا و مصليًا و منه الصدق و الصواب

  1. Under the Murabaha home purchase plan the client purchases the desired property on a deferred payment basis from the financier.  Ownership of the property is vested in the client at the time of contract and in return the client incurs a debt for the balance of the purchase price payable to the financier according to an agreed schedule.  Under the Ijarah and Diminishing Musharakah home purchase plans the only debt incurred by the client is that of the outstanding monthly rental payments subsequent to his use of the property.  This debt is then settled on a monthly basis by virtue of the rental payments.

  2. The client cannot deduct rental payments for future periods from his zakatable assets.  Only those payments that have fallen due on account of using the property may be deducted.

  3. Ownership of the on account payments, both under the Ijarah home purchase plan and the Diminishing Mushakah home purchse plan, remains vested in the client and does not transfer to the financier until the on account payments are utilised to purchase the property or a portion thereof respectively.  However, as the client does not have access to the on account payments, his ownership is deemed to be incomplete as ‘complete ownership’ is defined as ownership that comprises both proprietorship and [actual or constructive] possession characterised by the ability to benefit through effecting increase.  Zakat is liable on only what is termed ‘productive’ wealth – al-maal al-naami.  Wealth may be intrinsically productive – khilqi, such as gold and silver, or productivity may result as a consequence of one’s action – fi‘li, i.e., acquisition with the intent of trade.  Productivity may be either real – haqiqi, by way of breeding or profit through trade, or constructive – taqdiri, on account of having the ability to effect increase through one’s possession or that of one’s agent. Thus, despite ownership of the on account payments, as the client is unable to effect actual or constructive increase as a consequence of not having access, zakat is not payable on such funds due to absence of the condition of productivity.  For a detailed discussion please refer to the following link: http://www.alqalam.org.uk/Shariah+Resources+%26+Edicts/43/

  4. Under the Murabahah home purchase plan the client incurs a debt for the balance of the purchase price that is payable over an extended period [typically 25 years as mentioned].  The normal rule, as discussed in jurisprudential texts, is that outstanding debts are deductible from one’s zakatable assets.  The rationale provided for this rule is that to settle one’s outstanding debt is a basic necessity in order that one may protect oneself from punitive measures from one’s creditors.  However, it is the opinion of the Al-Qalam Shariah Panel [alongside many other contemporary scholars] that the entire sum of outstanding debt incurred under the Murabahah home purchase plan will not be deducted from one’s zakatable assets in order to arrive at one’s liability of zakat.  Rather, only the outstanding sum payable for the coming lunar year will be deducted. The basis of this opinion is that it is only the latter sum that is being demanded until the next potential zakat liability date, and payment of which provides safeguard from any punitive measure from one’s creditors. Settlement of the remaining outstanding amount is not from one’s basic necessity, as there is no demand for payment of the latter for the coming lunar year.  For a detailed discussion on the liability of zakat on long term liabilities please refer to the following link: http://www.alqalam.org.uk/Shariah+Resources+%26+Edicts/43/

  5. Under the Ijarah home purchase plan the client incurs a debt only to the extent of the outstanding monthly rental payments subsequent to his use of the property.  This debt is then settled on a monthly basis by virtue of the rental payments.  However, if the client’s zakat date arrives before such debt has been settled, it will be deductible from his zakatable assets.  Funds that have built up as a consequence of the on account payments are not subject to zakat as mentioned in no. 3.

  6. Under the Diminishing Musharakah home purchase plan, the client again incurs a debt only to the extent of the outstanding monthly rental payments subsequent to his use of the property.  Again, this debt is then settled on a monthly basis by virtue of the rental payments.  However, as in the Ijarah home purchase plan, if the client’s zakat date arrives before such debt has been settled, it will be deductible from his zakatable assets. Funds that may have built up as a consequence of the on account payments, as is the case with some providers, are not subject to zakat as mentioned in no. 3.

    And Allah knows best.

    Mufti Muhammad Zubair Butt

    Chair, Al-Qalam Shariah Panel

    Originally Answered:

    5th Ramadan 1429   27th September 2008

    Revised upload:

    9th Rabbi Ul Awwal 1435  10th January 2014