1Issue 1 | September 2024

Zakat-liable Sources of Funds Zakat-liable Sources of Funds for Zakat payers engaged in financing activities can be categorized as follows: Internal Sources of Funds, including: 1. Internal Sources of Funds These include equity, such as capital, retained earnings, statutory reserves, and any other reserves required to be recorded by a regulation, law, or accounting standard, such as cash flow hedge reserves, foreign currency translation reserves, fair value reserves for investments, and other reserves. Internal sources of funds may also include rules required to be recorded by a regulation, legislation, or accounting standard by the Zakat payer, such as the provision for expected credit losses (ECL) for loans and financial guarantee contracts appearing within liabilities in the Zakat payer’s financial statements. 2. External Sources of Funds These include the Zakat payer’s liabilities due for payment, or a portion thereof, after one year or more (whether classified as short-term or long-term), such as term deposits, savings deposits, or deposits held as guarantees against facilities granted to customers; balances of banks and financial companies in the form of current accounts; money market deposits; and debt instruments such as bonds and Sukuk issued by the Zakat payer to finance its financial activities, regardless of their structure (Mudaraba/partnership, Murabaha/cost-plus financing, financing, etc.). 3. Other Sources These consist of the (negative) fair value of financial derivatives used by the Zakat payer to cover financial risks (known as hedging), which takes specific forms, such as hedging against fair value change risks and hedging against cash flow change risks. However, due to unfavorable market conditions, these financial derivatives result in a financial liability for the Zakat payer. Examples of financial derivatives include: y Swaps y Futures contracts y Forward contracts y Put and call options y Derivatives acquired for trading purposes y Derivatives acquired for hedging purposes These are considered sources of funds if they are payable after one year or more. There may also be positive fair values for financial derivatives; in such cases, they are classified as assets in the financial statements due to favorable market conditions resulting in a financial asset for the company. After identifying sources of funds under the categories mentioned above, Zakatable and non- Zakatable assets are calculated and classified for the purpose of applying the Zakat base calculation formula for financing activities. 4. Net assets attributable to unit holders in direct and indirect financing funds. These consist of the fund’s internal sources of funds attributable to unit holders, represented by what is known in accounting as equity .elements or the net asset value attributable to investment unit holders in the fund 5. 5. Except for banks and financing companies licensed by the Central Bank, all sources of funds for direct and indirect financing funds are considered equivalent to sources of funds subject to Zakat, except for liabilities due within less than one year.