Economics and Business

A Zakat Accounting Standard (ZAS) for Malaysian Companies

Abstract : This paper focuses on the need to harmonize the practice of zakat on companies throughout Malaysia by implementing a zakat accounting standard (ZAS). The objectives of this paper are fourfold: (1) to highlight the current practice of zakat on companies in Malaysia; (2) discuss the usefulness of AAOIFI FAS 9, MASB FRS i-1, and MASB TR i-1 as guidelines for developing a ZAS; (3) suggest a collaboration by various parties designed to pool initiatives, knowledge, and skills to develop a useful and favorable ZAS; and (4) to demonstrate that without proper education and a strong political will, there is a little hope of making any ZAS a reality.


The lack of an applicable standard for corporate zakat has contributed to its diverse practice in Malaysia.1 This diversity is also partly due to the Malaysian setting of zakat practice that each state governs its own zakat affairs. The absence of an applicable standard may not be noticeable right now, but it may become significant soon, especially when a cursory examination reveals that more companies are becoming aware of and more interested in fulfilling their zakat obligation. The problem is further exacerbated by the fact that the recently announced 2005 Malaysian government budget indirectly included zakat as part of the fiscal system through the tax deduction given to those companies that pay corporate zakat.

Given the above scenario, I argue that there is an urgent need to develop a zakat accounting standard (ZAS) that companies can adopt and apply nationwide. Several people concerned with this issue are Abdul Rahman,2 Amin,3 and Nasir and Hassan.4 Thus, I detail the benefits and advantages of having a ZAS in place and contribute to the literature by providing some suggestions and insights to the responsible parties who should take charge of making such a standard a reality. While I recognize the importance of standardizing zakat for other types of wealth, I do not elaborate upon this subject here.

My analysis and discussion of the above issues starts by describing the background of Malaysia’s zakat practices, with special reference to the constitution. Next, I elaborate upon zakat’s conceptual and practical dimensions as regards a company’s wealth, focusing primarily on the Malaysian context for the latter. I then discuss the zakat system’s dynamism as being in accordance with Islam; explain the applicability and usefulness of AAOFI FAS 9, MASB FRS i-1, and MASB TR i-1 in developing the standard; and spell out the standard’s objectives and merits. After commenting on which constituencies need to be involved in developing a ZAS, I conclude with the challenges of making such a standard a reality.

The Background of Malaysia's Zakat Practices

All aspects pertaining to the administration of zakat are handled by the states through their respective Majlis Agama Islam Negeri (State Islamic Religious Councils [SIRCs]). This is attributed to the fact that the ninth schedule of the Malaysian federal constitution recognizes religious affairs as state, rather than federal, matters. Thus, zakat administration comes under the jurisdiction of the respective state or the prerogative of its ruler (sultan). The only exception is the Federal Territory, where the zakat law and administration are governed by the federal government.5

In all other states, the federal government’s role is restricted to coordinating zakat matters among the states; in no way can it intervene in their religious or, more specifically their zakat, matters. Thus, ultimate power rests with the state government under its respective SIRCs. Even though the Federal Territory did establish a Department of Islamic Development (i.e., JAKIM) under the Prime Minister’s Department to coordinate and bring some uniformity to administering Islam in Malaysia, its function remains purely advisory in nature. In addition, the recently established Department of Zakat, Waqaf, and Hajj, which is a unit under the Prime Minister’s Department, has a very limited role as regards monitoring the country’s zakat practices.6

As a result, the practice of zakat varies according to the state’s “will.” Each state has its own zakat centers.7 In most states, even the collection and distribution units are separated in order to uphold their independence. A zakat center would normally operate based on the advice and fatwas issued by each SIRC’s fatwa council. These fatwa councils also become the point of reference for these zakat centers in carrying out their operations. In addition, each state has its own zakat law, which is considered part of the state enactment. Accordingly, each state formulates its own policy on zakat matters, including the method of collection, disbursement policy, administrative aspects, execution, and the degree of enforcement.

Such a degree of divergence has numerous drawbacks that affect all types of zakat. Therefore, the states need to harmonize their policies for the benefit of the country’s Muslim population. In essence, this is my paper’s central thesis. However, it has to be stressed here that this paper only focuses on the need to standardize the zakat practice for corporate wealth, although it does recognize that the disadvantages stemming from the lack of harmonization of zakat practices actually applies to all types of zakatable wealth. These drawbacks will be addressed indirectly while elaborating upon the benefits of harmonization.

Zakat on Corporate Wealth: Its Concept and Malaysian Practice

Zakat, one of Islam’s five pillars, literally means “increase, growth, and purification” as well as “blessings.”8 Its origin is found in Qur’an 9:103: “Of their goods, take alms, so that you might purify and sanctify them.” Spiritually, paying zakat purifies and cleanses one from greed, selfishness, and arrogance.9 Economically, at least in theory, paying zakat will enhance economic prosperity by transferring surplus wealth to the poor. This will increase their purchasing power and, hopefully, lead to a higher demand for goods.10 Thus, zakat acts as a wealth-distribution mechanism to help close the gap between the rich and the poor.11 Ideally, it could help establish a more prosperous society.

According to Nasir and Hassan,12 paying zakat on one’s business wealth is based on the Islamic concept of wealth being bestowed by Allah, the real owner of all wealth, as a trust.13 In 17:26-27, 29-30, Allah enjoins proprietors to fulfill their financial obligations toward their fellow citizens and be moderate in their private spending. According to Abdalati, the owners of wealth are not free to spend their wealth as they please; rather, rules related to spending as well as to earning income and wealth must be followed.14 Thus, zakat enables those who have sufficient funds to play an important role and fulfill a sacred mission.

More specifically, in the context of corporate wealth, Abdul Rahman points out that Muslim companies are obliged to pay zakat as a contribution to social well-being and to fulfill their social accountability and ultimate accountability to Allah.15 Bakar states that zakat is due on all valuable items and that the `illah for zakatability is the richness.16 The basic principle of zakat on corporate wealth is based on merchandise goods (`urud al-tijarah),17 namely, anything obtained for the purpose of trading to gain a profit.18 The wealth becomes zakatable once it exceeds the nisab, which is calculated as the equivalent monetary value of 85 grams of gold. Once this requirement is met, zakat needs to be paid each year at the rate of 2.5 percent.

Based on an exploratory study conducted through interviews by Nasir and Hassan,19 with zakat officers working at two zakat centers in Malaysia, zakat centers were found to have recommended at least five assessment methods for companies to calculate the amount of their corporate zakat: the net assets (or working capital), net equity (growth model), net profit after tax, combined methods, and dividend methods. These methods have been derived mainly from different interpretations of the relevant Shari`ah provisions. To help them assess this amount, most companies that want to pay it seek advice from the state zakat officers to help them calculate it based on their disclosed financial information.

With regards to recording and presenting this amount, Malaysian companies have also adopted diverse practices.20 For example, some treat it as part of their non-operating expenses, some treat it as an exception item in the allinclusive rule, and others regard it a as a form of distribution to their shareholders. Given these diverse practices, Malaysian companies need a ZAS. As Nasir and Hassan correctly point out,21 there must be a standardized method to calculate the zakat base, classify the zakat items, and disclose them in corporate financial statements.

The 2005 Malaysian government budget is one of the contributing factors highlighting this need. For example, the budget document proclaimed that any corporate zakat paid to a SIRC will be considered an allowable deduction. According to the Income Tax Act 1967, Section 44 (11) (A), only 2.5 percent of the aggregate income can be deducted. The percentage of this deduction is not our main concern; rather, our focus here is on the fact that the zakat collected has been indirectly integrated into Malaysia’s fiscal system by means of this special deduction. It follows that being part of the country’s fiscal system, although in a very nominal and indirect way, zakat becomes more important. Thus, a proper zakat regulation and monitoring system is required, as is the case with any other component of the fiscal system. Given this orientation, I propose that a ZAS be developed, as a starting point, to serve as an appropriate medium and mechanism for regulating this particular divine system.

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