Financing Activites

Zakat base for financing activities(5) The Rules for Calculation of Zakat for Financing Activities have defined the Zakat base as the sources of the Zakat payer’s funds used in its Zakatable assets. Zakat base is calculated by dividing the Zakatable assets over total assets and then multiplied by sources of funds according to the following formula: Zakat Basis for Financing Activities = Sources of Funds X (Zakatable Assets / Total Assets) This guide will discuss in detail the elements of the above formula in the following sections. 3.2.1. Concepts relating to Zakat base for financing activities As indicated in the previous section, the method of calculating the Zakat base of financing activities is based on computing all sources of funds subject to Zakat as defined in the relevant rules and multiplying the result by the proportion of Zakatable assets to total assets. Sources of funds for Zakat payers conducting financing business can be limited to: 1. Internal sources of funds: Equity, such as (capital, retained earnings, statutory reserves and any other reserves provided for in a regulation, law or accounting standard such as a cash flow hedge reserve, a foreign currency translation reserve, a change in the fair value of investments reserve and other reserves). Certain sources of internal funds may also include provisions provided for by a Zakat payer regulation, regulation or accounting standard such as the provision for anticipated credit loss for loans and financial guarantee contracts, which are included in the liabilities in the Zakat payer’s financial statements. 2. Sources of external funds: Obligations payable by the Zakat payer which are due in whole or in part after one year or more (whether short-term or long-term), such as time deposits, savings deposits or deposits held as collateral against facilities granted to customers, bank and financial institutions balances in the form of current accounts, money market deposits, and debt instruments such as bonds and sukuk issued by the Zakat payer to finance their financial activities of whatever structure (Modaraba, Murabaha, financing, etc.). (5) Item third, the Rules for Calculation of Zakat for Financing Activities 3. Other sources: The fair value (negative) of derivatives used by the Zakat payer to hedge financial risks (hedges) which have certain types, such as hedging against the change in fair value and hedging against the change in cash flows, but due to unfavorable market conditions, such derivatives are financial obligation on the Zakat payer. Examples of derivatives include: Swaps Futures Forwards Buying and selling options Derivatives held for trading purposes Derivatives held for hedging purposes It is considered a source of funds if it is due after a year or more. There may also be a fair value (positive) for derivatives, but in such cases they are classified as (assets) in the financial statements due to favorable market conditions in favor of the company, as such derivatives resulted in a financial asset to the company. After calculating the sources of funds in the above categories, Zakatable and non-Zakatable assets are calculated for the purpose of applying the Zakat base calculation formula for financing activities as it will be explained after in this guide.